And the verdict is...a slight drop in GDP

Well, we got the numbers on the GDP for the first quarter of Trump 2.0. And they were as wacky as we thought they might be.

So our final sales were even stronger than expected, but we had a drop in GDP? How does this happen?

Mostly because there was a lot of front-running of Trump's "Liberation Day" tariffs of April 2. Both in the surge of imports to avoid the cost of tariffs on the business side (which subtracts from GDP), and in a surge of non-residential business investment and inventories.

Imports dropped GDP by more than 5% but nearly half of that loss was recovered due to a large increase in inventories, likely related to that surge of imports not yet being sold. But what's the "non-residential investment" growth?

All computer/tech-related stuff.

Change in non-residential business investment, Q1 2025 (annualized)
Information processing equipment +$73.6 billion
Software +$16.1 billion
All other sectors -$8.8 billion

That could well be a tariff effect with technology components and foreign-made products in those 2 sectors, and it also likely includes purchases and investments for AI development (in a Bubble that's going to pop sooner than later) . Doesn't seem like an amount of growth that's going to be repeated for the future.

Also note that consumer spending growth got cut in half from the amount of boost it gave to economic growth in the last 3 quarter of 2024. We got indications that this might happen due to the bad retail sales and spending numbers we'd seen for the first 2 months of 2025. But March had a surge of retail sales that also got reflected in strong consumer spending figures released today, driven by a jump in (pre-tariffed) car sales.

While that might cause an upward revision in consumer spending when the next look at Q1 numbers comes next month, it also makes it less likely that March's spending increase sustains through Q2. I would guess the economic data for April and beyond will show what the new post-tariff spending baseline might look like, and it won't be as good as the numbers we had in March.

To me, there's one other big item in the GDP report that is going to have an effect on future numbers and policies.

Yeah, that higher inflation in the Fed's preferred index isn't going to lead them to want rate cuts any time soon. And much of that Q1 price increase has nothing to do with tariffs, since those products were already inside of the country before Trump imposed those duties. Sure, the same PCE number indicated prices flattened in March after 2 months of 0.4% increases to start the year, but do you think things will stay flat in April and the rest of Q2 with the tariffs taking effect (and businesses more than happy to blame tariffs to raise prices for extra profit)?

To me, the GDP report tells us that Trumpian chaos has already distorted Americans' spending choices for both consumers and businesses. The stage is set for a drop in demand from both businesses and consumers at the same time that there is more inventory to sell, and I can see a scenario where we see less economic activity and final sales dropping well below the 3% growth we saw in Q1, but we might not end up with a second straight negative number because the import surge ends and goes back to pre-2025 levels.

But make no mistake, it'll probably feel a lot more like recession than what we saw in a first quarter that had -0.3% for GDP. And there isn't going to be much in the real economy to change that direction once the layoffs and consumer cutbacks pick up.