The chaotic start to President Trump’s second term roiled the economy at the beginning of the year, as consumers and businesses scrambled to react to a constant stream of tariff announcements and policy shifts.
The policies, and the uncertainty they created, were enough to push economic growth into reverse in the first quarter. U.S. gross domestic product, adjusted for inflation, declined at an 0.3 percent annual rate in the first three months of the year, the Commerce Department said Wednesday, a stunning reversal from the strong growth at the end of last year.
The first quarter decline was largely the result of quirks in the way economic activity is measured. More reliable data on consumer spending and business investment suggested that growth slowed in the first quarter but didn’t contract.
But while the negative number was misleading, it reflected something real about the way Mr. Trump has upended the economy in his first months in office. Consumers raced to buy cars and other goods before tariffs took effect. Businesses did the same with equipment, parts and raw materials, laying in stores for the trade war to come.
Moreover, the first quarter figures were a glimpse at the past, before Mr. Trump announced even more sweeping tariffs in early April. That announcement, and the series of escalations and reversals that followed, caused chaos in financial markets and set off a full-blown trade war with China.
Stocks fell on Wednesday morning, as Wall Street remained fixated on the effects of Mr. Trump’s trade policies. The S&P 500 fell about 2 percent in early trading.
Mr. Trump, in a social media post on Wednesday, asked supporters to “be patient” and blamed his predecessor for handing him a bad economy, despite data showing that growth was strong when he took office.
Peter Navarro, an adviser to Mr. Trump and an architect of the administration’s trade policy, told reporters that the G.D.P. figures “really should be very positive news for America.”
Few economists agree. While the first quarter figures showed basically solid growth beneath the tariff-induced noise, forecasters widely expect spending and investment to slow in the months ahead, as tariffs drive up prices and uncertainty keeps businesses on hold.
“All of this is going to change,” said Kathy Bostjancic, chief economist for Nationwide, the insurer. “Once everything kicks in, we’ll have a slower economy, the labor market slowing. Hiring has already stalled, and we expect the unemployment rate to start to rise.”
Wednesday’s data did bring some good news on inflation, which cooled in March. The personal consumption expenditures price index — the Federal Reserve’s preferred inflation gauge — was up 2.3 percent from a year earlier, an improvement from the 2.5 percent growth in February and closer to the Fed’s 2 percent target. On a monthly basis, prices were flat.
The March data was from before the bulk of Mr. Trump’s tariffs took effect. Still, the slower increase in prices will be welcomed by policymakers, who are dealing with competing concerns of slower growth and higher prices.
But it is unclear how long that, too, will last. The longer tariffs are in place, the more pressure businesses will feel to pass along higher costs to customers, feeding into higher inflation, said Sarah House, an economist at Wells Fargo.
“Businesses can absorb some of that cost and try to wait it out and shield their customers for a period,” said Ms. House. But if tariffs stay on at elevated rates, “then at some point you have to think about your margins and your overall profitability.”
Americans have become increasingly worried about higher prices as a result of tariffs, leading to a sharp drop in consumer confidence in recent months. Still, there is little sign so far that their dim outlook has translated into a pullback in actual spending.
Consumer spending slowed in the first quarter, growing at a 1.8 percent annual rate, down from 4 percent at the end of last year. But economists said that was at least in part because of harsh winter storms that hit southern states in January, causing many shoppers to stay home. Spending rebounded in March, led by a big increase in car purchases before tariffs took effect.
Likewise, business investment in equipment soared in the first quarter despite surveys showing that corporate leaders have become more pessimistic about the economic outlook.
Rather, the decline in G.D.P. in the first quarter was driven almost entirely by a huge increase in imports as consumers and businesses tried to front-run Mr. Trump’s tariffs. That surge shaved nearly five percentage points off G.D.P. growth in the first quarter.
To understand why the boom in imports led to a decline in G.D.P., it helps to understand a bit about how the numbers are calculated.
G.D.P., as the name suggests, is meant to measure only goods produced domestically, not imports, which are produced abroad. But rather than measure production directly, the government counts all the goods and services sold in the country, and then subtracts the ones that were made overseas. (It also adds in exports, which are produced domestically but sold to foreign buyers.)
That means that, in theory, imports neither add nor subtract from G.D.P. Anything that is imported to the country should show up elsewhere in the quarterly data either as consumer spending or as an unsold product held in inventory, both of which are counted as additions to G.D.P.
In practice, though, the government is good at counting both imports and consumer spending, but often must rely on rough estimates for inventories, especially in preliminary data. The first quarter figures showed an increase in inventories, but not a surge on par with the growth in imports, despite anecdotal reports of companies stockpiling products and materials ahead of tariffs.
Economists predicted that the first quarter inventory figures will either be revised higher when more complete data become available, or that inventories will jump again next quarter, providing a temporary lift to G.D.P.
Beyond such quirks in the data, however, economists said the larger takeaway from the latest data is clear: Consumers and businesses began changing their behavior in response to Mr. Trump’s policies even before the April 2 tariff announcement that sent financial markets into a tailspin. The full effect of those policies won’t become clear for months, but economists warn that the damage could be substantial, especially if Mr. Trump continues to change his approach on a nearly daily basis as he has over the past month.
Still, the U.S. economy has proved remarkably resilient in recent years, repeatedly defying predictions of a recession. Unemployment remains low and incomes are rising, giving Americans money to spend. Tariff-induced swings in spending patterns may make economic data difficult to interpret in coming months, but many forecasters say that a more sustained downturn is unlikely as long as the labor market remains solid.
If companies start laying off workers, however, the economic situation could deteriorate in a hurry. Companies have already pulled back on hiring, and forecasters expected growth to slow this year even before Mr. Trump took office, leaving the economy with less of a cushion.
“We keep putting weight on the economy instead of lifting weight,” said Diane Swonk, chief economist for the accounting firm KPMG.
Colby Smith and Danielle Kaye contributed reporting.
Content Source: www.nytimes.com