U.S. Economy Shrank in First Quarter as Trump Tariffs Loomed
President Trump’s tariffs have roiled financial markets and upended global trading patterns. Now they are disrupting measures of economic growth as well.
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U.S. gross domestic product, adjusted for inflation, declined at an 0.3 percent annual rate in the first three months of the year, the Commerce Department said Wednesday. It was, on the surface, a stunning reversal from the strong growth at the end of last year, when the economy expanded at a 2.4 percent rate.
But the first quarter figure was misleading, the result of quirks in the way government data measured the surge in imports as businesses and consumers raced to get ahead of expected tariffs. More reliable data on consumer spending and business investment suggested that growth slowed in the first quarter but remained fundamentally solid.
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That strong foundation could be quickly eroding, however. The first quarter data showed early signs of the disruptions caused by Mr. Trump’s tariffs — and that was before the full extent of those policies became clear. Forecasters widely expect spending and investment to slow in the months ahead, as tariffs drive up prices and uncertainty keeps businesses on hold.
“There’s a lot of reasons to expect the underlying trends in the U.S. economy to soften,” said Ben Herzon, an economist at S&P Global Market Intelligence.
Consumer spending slowed in the first quarter, growing at a 1.8 percent annual rate, down from 4 percent at the end of last year. But economists said that was at least in part because of harsh winter storms that hit southern states in January, causing many shoppers to stay home. There is little sign, so far, that the steep drop in consumer sentiment that began shortly after Mr. Trump took office has yet translated into a pullback in actual spending.
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Likewise, business investment in equipment soared in the first quarter despite surveys showing that corporate leaders have become more pessimistic about the economic outlook.
Rather, the decline in G.D.P. in the first quarter was driven almost entirely by a huge increase in imports as consumers and businesses tried to front-run Mr. Trump’s tariffs. That surge shaved nearly five percentage points off G.D.P. growth in the first quarter.
To understand why the boom in imports led to a decline in G.D.P., it helps to understand a bit about how the numbers are calculated.
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G.D.P., as the name suggests, is meant to measure only goods produced domestically, not imports, which are produced abroad. But rather than measure production directly, the government counts all the goods and services sold in the country, and then subtracts the ones that were made overseas. (It also adds in exports, which are produced domestically but sold to foreign buyers.)
That means that, in theory, imports neither add nor subtract from G.D.P. Anything that is imported to the country should show up elsewhere in the quarterly data either as consumer spending or as an unsold product held in inventory — both of which are counted as additions to G.D.P.
In practice, though, the government is good at counting both imports and consumer spending, but often must rely on rough estimates for inventories, especially in preliminary data. The first quarter figures showed only an increase in inventories, but not a surge on par with the growth in imports, despite anecdotal reports of companies stockpiling products and materials ahead of tariffs.
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Economists predicted that the first quarter inventory figures will either be revised higher when more complete data become available or else inventories will jump next quarter, resulting in a mirror image of Wednesday’s report.
Beyond such quirks in the data, however, economists said the larger takeaway from the latest data is clear: Consumers and businesses began changing their behavior in response to Mr. Trump’s policies even before the April 2 tariff announcement that sent financial markets into a tailspin. The full effect of those policies won’t become clear for months, but economists warn that the damage could be substantial, especially if Mr. Trump continues to change his approach on a nearly daily basis as he has over the past month.
The U.S. economy has proved remarkably resilient in recent years, repeatedly defying predictions of a recession. Economists said there are still pockets of strength that could help it withstand the strains being put on it by Mr. Trump’s policies. But growth was slowing even before this year, leaving less of a cushion.
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“We keep putting weight on the economy instead of lifting weight,” said Diane Swonk, chief economist for the accounting firm KPMG.
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President Trump’s tariffs have roiled financial markets and upended global trading patterns. Now they are disrupting measures of economic growth as well.
U.S. gross domestic product, adjusted for inflation, declined at an 0.3 percent annual rate in the first three months of the year, the Commerce Department said Wednesday. It was, on the surface, a stunning reversal from the strong growth at the end of last year, when the economy expanded at a 2.4 percent rate.
But the first quarter figure was misleading, the result of quirks in the way government data measured the surge in imports as businesses and consumers raced to get ahead of expected tariffs. More reliable data on consumer spending and business investment suggested that growth slowed in the first quarter but remained fundamentally solid.
That strong foundation could be quickly eroding, however. The first quarter data showed early signs of the disruptions caused by Mr. Trump’s tariffs — and that was before the full extent of those policies became clear. Forecasters widely expect spending and investment to slow in the months ahead, as tariffs drive up prices and uncertainty keeps businesses on hold.
“There’s a lot of reasons to expect the underlying trends in the U.S. economy to soften,” said Ben Herzon, an economist at S&P Global Market Intelligence.
Consumer spending slowed in the first quarter, growing at a 1.8 percent annual rate, down from 4 percent at the end of last year. But economists said that was at least in part because of harsh winter storms that hit southern states in January, causing many shoppers to stay home. There is little sign, so far, that the steep drop in consumer sentiment that began shortly after Mr. Trump took office has yet translated into a pullback in actual spending.
Likewise, business investment in equipment soared in the first quarter despite surveys showing that corporate leaders have become more pessimistic about the economic outlook.
Rather, the decline in G.D.P. in the first quarter was driven almost entirely by a huge increase in imports as consumers and businesses tried to front-run Mr. Trump’s tariffs. That surge shaved nearly five percentage points off G.D.P. growth in the first quarter.
To understand why the boom in imports led to a decline in G.D.P., it helps to understand a bit about how the numbers are calculated.
G.D.P., as the name suggests, is meant to measure only goods produced domestically, not imports, which are produced abroad. But rather than measure production directly, the government counts all the goods and services sold in the country, and then subtracts the ones that were made overseas. (It also adds in exports, which are produced domestically but sold to foreign buyers.)
That means that, in theory, imports neither add nor subtract from G.D.P. Anything that is imported to the country should show up elsewhere in the quarterly data either as consumer spending or as an unsold product held in inventory — both of which are counted as additions to G.D.P.
In practice, though, the government is good at counting both imports and consumer spending, but often must rely on rough estimates for inventories, especially in preliminary data. The first quarter figures showed only an increase in inventories, but not a surge on par with the growth in imports, despite anecdotal reports of companies stockpiling products and materials ahead of tariffs.
Economists predicted that the first quarter inventory figures will either be revised higher when more complete data become available or else inventories will jump next quarter, resulting in a mirror image of Wednesday’s report.
Beyond such quirks in the data, however, economists said the larger takeaway from the latest data is clear: Consumers and businesses began changing their behavior in response to Mr. Trump’s policies even before the April 2 tariff announcement that sent financial markets into a tailspin. The full effect of those policies won’t become clear for months, but economists warn that the damage could be substantial, especially if Mr. Trump continues to change his approach on a nearly daily basis as he has over the past month.
The U.S. economy has proved remarkably resilient in recent years, repeatedly defying predictions of a recession. Economists said there are still pockets of strength that could help it withstand the strains being put on it by Mr. Trump’s policies. But growth was slowing even before this year, leaving less of a cushion.
“We keep putting weight on the economy instead of lifting weight,” said Diane Swonk, chief economist for the accounting firm KPMG.
