The advance estimate for real GDP growth fell at an annualized pace of 0.3 percent in the first quarter. All (plus more) of the decline can be attributed to a surge in imports in advance of tariffs. Importantly, core growth (final sales to private domestic purchasers, FSPDP) grew by 3.0 percent, showing that consumer spending and (especially) business fixed investment continued to be solid. This better measure of core growth strongly suggests that there was no recession in the first quarter, or even a slowdown in underling growth.
But all of this data was pre-tariff, although there clearly were spending changes in advance of the tariffs that were reflected in the numbers. The second (and third) quarter GDP data will take on added importance in the post-tariff months. The import figures will drop sharply in the second quarter (and perhaps the third), boosting reported overall GDP growth – but the key will continue to be FSPDP. Will that slow, or even turn negative? Or will solid growth be sustained? That will be the key to determining whether tariffs and other policy measures are pushing the economy into recession or not. Our projections are for a significant weakening in this measure of core growth, but it’s still too early to determine if the growth rate will turn negative (although it probably will, at least temporarily). How the tariff issue plays out will be the primary determinant of this, and it’s virtually impossible to know what will occur there.
The Federal Open Market Committee (FOMC) meets next week, and they will be subject to the same uncertainty with regard to tariffs and their impacts as all other economists. With underlying growth still solid and inflation not yet rising, the Fed is very likely to keep
David W. Berson, Ph.D., CBE
Chief Economist
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