GDP contracts as import surge brings record drag from trade

Summary

The U.S. economy is at a greater risk of recession now than it was a month ago, but this 0.3% contraction in Q1 GDP is not the start of one. It reflects instead the sudden change in trade policy that culminated in the biggest drag from net exports in data going back more than a half-century.

Economy falls into the trade gap

The U.S. economy contracted at a 0.3% annualized rate in the first quarter (chart). If you look at this development through the lens of businesses and households trying to get ahead of the tariffs, many of the big pieces of today's report fall into line. For starters, trade lopped 4.8 percentage points off of first quarter growth. It is rare for a drag that large to come from a comparatively small component of GDP such as net exports. In fact, we haven't seen a drag of this size in data going back to the late 1940s (chart). This is not because trade activity was grinding to a halt, but rather because imports shot up as firms tried to pull forward needed industrial supplies and retailers stocked their shelves with consumer goods.

Consumers pulled forward demand somewhat as well with overall PCE growth coming in stronger than expected at 1.8% during the period. That stronger-than-expected outturn exerted a 1.2 percentage point boost to the headline number which kept the contraction in GDP from being a larger one. While it might be handy to point to pre-tariff spending to explain the stronger consumer numbers, that is not an entirely accurate way to characterize what is happening. While monthly auto sales and anecdotal comments from retailers suggest a jump in March spending, most of the strength in PCE was in service outlays which rose 2.4%, much stronger than the 0.5% gain in goods outlays.

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