Weekly Economic Trends and Indicators

The Headline:

The U.S. economy contracted in the first quarter for the first time since 2022. According to the Bureau of Economic Analysis (BEA), real GDP decreased by 0.3% last quarter. The personal consumption expenditures (PCE) price index, a measure of inflation, increased by 3.5% over the quarter. However, in a separate report from the BEA, the PCE price index was unchanged during March, so the first quarter figure was more indicative of inflation pressure in January and February.

On Friday, the Bureau of Labor Statistics (BLS) reported that the economy added 177,000 jobs in April, and the national unemployment rate was unchanged at 4.2%. This was well above expectations of around 130,000 jobs.

The Details:

This GDP report was perhaps one of the most unusual reports in many years because of the way that the tariff announcements influenced trade. We knew that there would be more weakness in the first quarter than would have been expected at the start of the year due to the uncertainty caused by the announcement of tariffs. What was unknown until now was just how much “pull-forward” of imports there would be in the first quarter to avoid the tariffs that were to be imposed in April.

The data shows that there was a substantial amount of pull-forward. Imports of goods increased by 50.9% (all growth rates cited here are seasonally adjusted annual rates). In terms of its contribution to the overall GDP growth figure, the surge in imports reduced the growth rate of GDP by 5%. This was essentially balanced by the positive contribution from the increase in inventories (adding 2.25% to GDP), equipment (adding 1.06% to GDP) and consumption (adding 1.21% to GDP).

The Context:

Over the last few weeks, there has been much talk of how tariff uncertainty is increasing the risk of recession. With GDP actually contracting, could this be the beginning of a recession?

While the risk of recession is elevated, it is unlikely that we are actually in a recession now, despite the decline in GDP. Demand for final goods, while down slightly, is still well out of recessionary territory. Consumers are still buying, despite the recent fall in consumer confidence. Perhaps most telling of all is the fact that firms have pulled forward imports of intermediate goods to be able to meet future demand for their products.

While there will still be elevated import activity ahead of tariffs not yet in effect, the pull-forward effect will soon moderate and remove some of that headwind. The result could be a small second quarter rebound. Longer term consequences of the tariffs probably will not show up until the third quarter, but those effects could be mitigated if trade deals are reached by then.

Next week: Federal Reserve commentary on U.S. economic conditions