The Tariff Rumble

The 2025 Q2 GDP initial estimate was released this week and came in at a robust 3.0%. Last quarter (https://www.derivzero.com/post/the-tariff-tumble) showed the significant decline in imports was the key driver in the weak Q1 growth. In the chart below, we can see how large that impact was.

(PCE = Consumer Expenditure, Govt = Government Expenditure, NonResFi = Non Residential Fixed Investment, ResFI = Residential Fixed Investment, Inv Inventories = Inventories)

This was expected to be temporary as U.S. businesses and households stockpiled items before tariffs increased prices in the US. As such, GDP was expected to bounce back in Q2. In the chart below, we can see GDP did bounce back and imports did just the opposite of Q1. Whereas imports contributed -4.66 percentage point to GDP in Q1, it contributed +5.18 percentage points in Q2.

What is interesting about this chart is the net import contributions will not remain this high in Q3 as the tariff distortions and the supply chain find new equilibriums. As we said in Q1, the economy was not as weak as the GDP number suggested, and we can say just the opposite in Q2. The GDP number is not as strong as suggested. If import contributions were half as strong, which is a reasonable estimate for Q3, GDP growth would have been less than 1%, and we would be having a very different conversation.

Moreover, consumer expenditure (PCE) makes up almost 70% of GDP and is by far the most import driver. In the chart below, we can see the PCE contribution to GDP pre Trump (blue) and during Trump (red). The PCE in the last two quarters has been relatively weak and if PCE does not rebound, we will likely see a weak GDP number in Q3.

When the import girations are done, what will the underlying economy look like? We already see PCE softening and the recent new jobs numbers have also softened. The early Q3 Blue Chip projection is under 1% while the GDP Now estimate is at about 2%. Those are not great numbers and make sense within the context of a weakened consumer. Hopefully the self-imposed smoke will largely disspate in Q3 se we can get a clean read of GDP.