April 30, 2025

QuickTakes

US Economy Is Tariffied

President Donald Trump's Tariff Turmoil (TTT) is certainly upsetting global trade relations and confusing financial markets. This is all having an effect on the US economy, as evidenced by today's Q1 GDP report. The S&P 500 fell sharply in the morning when the Bureau of Labor Statistics (BLS) reported that real GDP fell 0.3% (saar) (chart). By the end of the day, the S&P 500 was up slightly from Tuesday's close.

On closer inspection, there was quite a bit of strength in the GDP report. Indeed, real final sales to private domestic purchasers rose 3.0% during the quarter!

Consider the following:

(1) Imports. Imports of good and services in real GDP soared during Q1 as wholesalers and retailers scrambled to front-run tariffs (chart). GDP is the broadest measure of gross domestic production. Imports are subtracted from GDP.

(2) Inventories. The jump in imports was partly offset by a big increase of $140.1 billion (saar) in inventory investment during Q1 (chart). The increase was led by wholesalers’ adding $111.2 billion (saar) to their inventories, while nonauto retailers added $24.4 billion. Manufacturing inventories edged up very slightly. Retail auto inventories dropped for a second quarter in a row. Consumers are crowding auto dealerships to buy new and used motor vehicles before tariffs boost their prices.

(3) Consumption. Consumers continued to do what they do best last quarter. So real consumption rose to yet another record high (chart). Consumer spending rose 1.8% (saar) in real GDP, with services up 2.4%, nondurable goods up 2.7%, and durable goods down 3.4%. Unusually cold weather in January and February might have depressed the latter category, which should now get a big boost from buying in advance of tariff-related price increases.

(4) Capital spending. Business capital spending rose 9.8% during Q1, led by business equipment (up 22.5%), especially information processing equipment, which soared 56.3% (saar) (chart)! Spending on datacenters certainly boosted the latter. Onshoring is also boosting capital spending.

(5) Inflation. Today's quarterly GDP deflators were hotter than expected, which caused the bond yield to move slightly higher. However, the monthly data for the headline and core PCED inflation remained subdued at 2.3% and 2.6% y/y in March (chart). These series have been coming closer to the Fed's 2.0% target. However, they are about to be thrown off course by Trump's tariffs, which are likely to boost inflation in coming months.

Today's data suggest that the Fed should remain on hold. Stock prices should remain choppy.

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