During the first quarter, U.S. Gross Domestic Product (GDP) fell for the first time since we began emerging from the pandemic. It wasn’t a huge amount — just a 0.3% drop on an annualized basis — yet, it was a sharp contrast to the 2.4% gain observed during the previous quarter. Let’s dig a little deeper.
The formal definition of GDP is the market value of all final goods and services produced in a year. While certainly not perfect, it is the most common measure of economic performance, thus informing myriad public- and private-sector decisions.
It is typically calculated by adding consumer spending, investment, government spending and net exports (exports minus imports).
The primary reason for the decrease was a surge in imports as firms began to stockpile to beat the onset of tariffs. Note that trade statistics are often revised as more data is processed; thus, the numbers could change, but not the essential pattern.
Many retailers and manufacturers accumulated goods in anticipation of higher costs once levies were implemented. This increase in imports brought a corresponding decrease in overall GDP. A second, less significant factor was a drop in government spending.
These factors were almost offset by improvements in investment (partly spending for inventory as tariffs loomed), consumer spending and exports.
Fortunately, there remains some underlying strength in the economy despite this minor dip, reflected in both consumption and the job market. If the tariff malaise is not resolved soon, however, far bigger risks lie ahead. With pauses in place, some of the fallout is currently being mitigated, but if the threatened tariffs actually go into effect and are sustained, there will be significant harm. We have estimated that the proposed levies would, if maintained, cause losses of trillions of dollars in output and millions of jobs.
Signs of what could happen are already appearing, and disruptions are ongoing. Consumer and business sentiment have plummeted to historic lows, ports are seeing major drops in activity, U.S. debt is under pressure from investors and rating agencies, and reports of shortages and price increases are surfacing. The uncertainty is also detrimental, as there have been over 50 changes in tariff policies since January.
What the U.S. does best is produce high-quality, high-value, high-tech goods and sell them to the world. If we continue to break down supply chains, escalate costs and otherwise thwart that process, the inevitable result will be lower demand for U.S. goods on international markets and higher domestic prices.
One negative blip in GDP is not catastrophic, particularly given that we came into 2025 with significant strength, momentum and resilience.
Nonetheless, it’s a stark reminder of the importance of productive approaches to global trade policy. Stay safe.
