Real GDP (Q1-2025, second estimate)

A surge in imports leaves a big mark on Q1 GDP 

• The second release of first quarter real GDP growth was left broadly unchanged, showing a very modest contraction of 0.2% quarter-over-quarter annualized (previously -0.3%) – a tenth below the consensus forecast. Recall, this is a notable deceleration from the 2.9% annualized rate of expansion averaged over the prior two quarters and is the first quarterly contraction in three-years.  
  • The slight upward revision to GDP reflected stronger investment which was partially offset by a downgrade to consumer spending. 
• Consumer spending rose 1.2% (previously 1.8%), or roughly a third of the rate of expansion in the prior quarter. The downgrade was largely due to softer services spending (2.2% from 2.7%).
• Non-residential fixed investment rose 10.4% (previously 9.8%), with a surge in equipment spending (24.7%) accounting for the bulk of the gain – reflecting companies ramping up purchases ahead of the tariffs. Investment in intellectual property products (+4.6%) was also healthy, rising at the fastest annualized pace in a year. 
• Residential investment was revised to a small contraction of 0.6% (previously +1.3%).
• The bulk of the pullback in GDP came from net exports. Imports surged by 42.6%, largely owing to a strong gain in goods imports (53.3%). Meanwhile, exports rose by a more modest 2.4%, resulting in net trade subtracting 4.9 percentage points (pp) from headline growth. Roughly half of the uptick in imports showed up in inventory investment, which added 2.6pp to Q1 GDP.  
• Government spending contracted by 0.7%, as outlays from both federal defense (-7.1%) and non-defense (-1.2%) declined. 
• Final sales to private domestic purchasers – the best gauge of underlying domestic activity – expanded by a healthy 2.5%. 
• Real Gross Domestic Income (GDI) also contracted by 0.2% in the first quarter. Corporate profits fell 11.3% annualized or $118 billion after accounting for inventory valuation and capital consumption adjustments. However, this was partially offset by another solid gain in employee compensation (5.4%), which accounts for roughly two-thirds of total national income.

Key Implications

• The second estimate of first quarter real GDP did not change the underlying narrative. Economic growth was heavily weighed down by a surge in import activity, as businesses scrambled to pull forward purchases ahead of the tariffs. Looking through the import shock, underlying domestic demand remained reasonably healthy, but this too likely captures behavior shifts related to tariffs in investment and consumer purchases, such as autos. 
• As of May 28th, the U.S. Court of International Trade struck down all of President Trump's tariffs related to the International Emergency Economic Powers Act, including the Canada/Mexico/China fentanyl tariffs, the universal 10% tariffs currently in effect and the delayed reciprocal tariffs that were slated to come back into effect as of July 9th. The court ruling has no impact on sectoral tariffs, including the steel & aluminum and auto related tariffs. While the administration has already said that they plan to appeal the ruling, timelines remain unclear. At the very least, yesterday's announcement weakens the U.S. position in trade talks that were underway with more than a dozen nations, most notably the EU and China. 
• Of the Q2 data released, there's only moderate evidence that domestic spending has slowed in response to heightened trade uncertainty. But the pullback in Q1 corporate profits – the largest quarterly decline since Q4'2020 – is a warning sign that firms were coming under pressure, and this was before the bulk of the tariffs had even come into effect. Tomorrow's release of the April personal income and spending will provide a more fulsome snapshot of how the consumer fared last month, and whether there's any evidence of a softening in discretionary spending trends.

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