The Tariff Tumble

The latest GDP number is a little confusing. GDP was up over 2% last quarter and then down 0.3% in 2025 Q1. Expectations were for 0.4% growth so the GDP number was even lower than expected given the chaos over the last three months. Two negative quarters of growth is the general rule of thumb for a recession although the NBER makes the official call. The NBER is a non-profit, non-partisan research organization that has been tracking economic cycles in the US since 1978. Their Business Cycle Dating Committee is specifically tasked with identifying recessionary periods. 

The two big questions are why did it drop and is this just a blip or something we can expect to continue. Let's start with the why. I created a waterfall chart to show how each of the different sectors contributed to the drop. These sectors include Inventory Change, Business Investment, Personal Consumption Expenditure, Govt Expenditure and Investment, and Net Exports. From this chart, it is quite evident what caused the drop. This was the biggest Net Export drag on GDP since 1947. 

Can we expect more of the same in the next quarter? Are we headed for a recession? The reason for this large drop was due to imports spiking as businesses and households wanted to build their inventories and pantry's before prices rise. And since imports are subtracted from GDP, this spike in imports was the main reason why GDP went negative in Q1. Since this is just a temporary import boom, this large Net Export drop is not likely next quarter, but there are signs the economy is slowing. Consumer expenditure, which is about 70% of GDP, only contributed about about 1.2% to GDP and that number had been around 2% for the last year. 

If the tariff dance continues to bring uncertainty, it will continue to weigh on Consumer Expenditure and GDP growth. The consumer has kept the economy humming for the last several years. Economists kept expecting the consumer to slow as we transitioned away from Covid, but that never happened. This could be the tipping point but it does not look like it would be a significant downturn at this time. If we get hit with a Black Swan event, like a financial crises somewhere in the world, it could get significant pretty fast.

Thinking about grocery spend, food is a necessity and is typically less impacted than durable good and the more discretionary consumer spend. My expectation is the current administration is not going to let this go too far. Mid term elections are less than two years away, so they can't dig too big of a hole. If Democrats win either house, they will do what Republicans did during Obama and block any and all attempts at moving anything through Congress. Moreover, if they win either chamber, I would suspect that Democrats will slow Trump with investigations and maybe even another impeachment. Third time is a charm. As such, Trump has a lot of reasons why he can't let this tariff hole get too large so I suspect he will be wrapping up these negotations within the next 3-6 months and then focus on helping Republicans maintain their majorities.