With the surprise decline in GDP reported this week, many are left wondering, “How can the economy shrink when the restaurants are packed and every open field around me is turning into a data center?” OK, fine, maybe not everyone is thinking that, but at least some people are, and that sentiment captures the whiplash perfectly. The Bureau of Economic Analysis said output fell at a -0.3% annual rate in Q1, the first down print in three years. Yet most of the real‑world anecdotes we’re hearing are about busy airports, surging tech investment, and consumers still willing to splurge—albeit a little more cautiously. So what gives?
A two‑minute refresher on GDP math
Economists tote up activity with the classic equation:
GDP = C + I + G + (X – M)
C is household spending, I is business investment, G is government outlays, X is exports, and M is imports. Imports get a negative sign because the items we buy from overseas are already embedded in C, I, or G; subtracting M simply scrubs out foreign production so we don’t count it as domestic.
Picture a family buying a Porsche SUV (not me, though, they’re not big enough for six plus luggage). The dollars show up in consumer spending, but the vehicle rolled off a factory line in Leipzig, Germany, not South Carolina. Subtracting that import keeps the accounting honest. In normal quarters, the import line is a modest tug on growth. In Q1, it was a Category 5 storm.
The biggest trade drag since Harry Truman
Goods imports exploded 50.9% in the quarter, part of a 41% surge overall—the biggest outside a pandemic since 1974. That alone lopped an eye‑watering ‑4.8 percentage points from headline GDP, the largest hit in records that go back to 1947. Why the buying binge? Companies and households were front‑running the anticipated tariffs, rushing everything from semiconductors to sneakers through customs before duties took effect. Some analysts were referring to it as “the private sector’s Walmart run” ahead of a price hike.
Not all of those imports piled up in warehouses—inventory build added only 2.3 points. Some landed in equipment spending, which leapt 23% and added a full point to growth as data‑center operators jammed server racks into new facilities before tariffs raised their cost of silicon. Still, a big chunk of the inbound tsunami showed up nowhere obvious, suggesting a pull‑forward in consumer goods that may leave a dent later.
Speaking of consumers, real spending grew a tepid 1.8 %, the slowest clip in almost two years. Durable‑goods outlays—cars, appliances, bikes—actually fell; you can almost hear households saying, “Let’s wait and see where prices land once the tariff smoke clears.” And government spending wasn’t there to pick up the slack either. Federal outlays dropped 5.1 %, shaving a third of a point from GDP as defense appropriations and the new “Department of Government Efficiency” mandate began to bite.
Under the hood, demand still hums
Here’s where the story gets less gloomy. Strip out the noise of trade and inventories and look at real final sales to private domestic purchasers—essentially C + I. That core demand metric rose 3.0 %, matching last year’s average. In other words, the private sector kept chugging; the headline contracted because the nation emptied shipping containers faster than statisticians could adjust.
Regional anecdotes back that up. The Fed’s Beige Book is awash in words like “uncertainty” and “tariffs,” but many districts also reported continued strength in tech capex and a burst of auto sales as buyers scrambled before import levies lift sticker prices. Even the much‑maligned April PMI crept back above 50 for factories, hinting that activity is cooling, not collapsing.
What happens next?
Because imports subtract from GDP only when they change, economists expect Q2 to get a mechanical boost as tariff‑swollen pipelines normalize—think of it as the hangover after the warehouse party. Inventories are also likely to bleed back out. The real debate is whether consumers and businesses retrench once the pulled‑forward spending is wrung out, or whether resilient job growth and loosening financial conditions keep demand on its previous 2 ‑3% trend.
We’ll have to give it time to see how it shakes out, but fresh hard data will start to trickle in soon for the post-tariff time periods. It will be very telling to see how consumer behavior is impacted given the negative sentiment and the perceived “pull-forward” effect. We’ll be watching.
In the meantime…
If you have 10 minutes to spare, have any interest in the rapid improvement in Artificial Intelligence (AI) based technologies, and want a little more information on Q1 2025 GDP, I would highly recommend listening to this “podcast.” I put this in quotes because this was generated using NotebookLM, a tool offered by Google. It is an aggregation of the articles and papers we’ve read this week about GDP, automatically synthesized into a digestible “podcast.”
Markets / Economy
- Markets continued to claw back from the depths of the tariff selloff. The S&P finished up 2.9%, the Nasdaq was up 3.4%, and the small-cap Russell 2000 was up 3.2%.
- The Conference Board Consumer Confidence Index® fell by 7.9 points in April to 86.0 (1985=100). The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—dropped 12.5 points to 54.4, the lowest level since October 2011.
- Core PCE, the Federal Reserve’s chosen gauge of underlying inflation, was unchanged from the previous month in March, in contrast to expectations of a marginal increase. The index rose by 2.6% YoY, the softest increase since March 2021.
- The U.S. economy added 177K jobs in April, a slowdown from the downwardly revised 185K in March, but significantly surpassing market expectations of 130K. This figure aligns closely with the average monthly gain of 152K over the past 12 months, despite growing uncertainty surrounding aggressive tariff policies.
Stocks
- U.S. equities were in positive territory. Industrials and Technology were the top performers, while Energy and Healthcare lagged. Growth stocks led value stocks, and small caps beat large caps.
- International equities closed higher for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield increased six basis points to 4.32% during the week.
- Global bond markets were in negative territory this week.
- High-yield bonds led for the week, followed by government bonds and corporate bonds.
