Separating Wheat From Chaff in America’s Q1 GDP

Data unveiled early Wednesday morning showed US GDP fell -0.3% annualized in Q1, missing expectations for a 0.4% rise—and playing right into widespread fears.^[i] Most headlines cast this “weak” report as a sign of what lies ahead as tariffs’ teeth really start to bite. But slow down. While there are clear signs of tariffs’ effects here, there are also mitigating factors and underlying health in these data worth acknowledging.

First, let us get this out of the way: Tariffs did affect this report in all likelihood, but probably in ways that mask underlying health. The former was easy to see in Q1, as businesses trying to front-run tariffs drove a ginormous 41.3% annualized import surge.^[ii] Here is the thing: In calculating GDP, statisticians subtract imports from exports. So Q1’s boom detracted a whopping -5.0 percentage points (ppt) from the headline growth rate.^[iii] This math may be sensible enough if you want to tally only a single nation’s growth, but considering the value imports bring to businesses (as goods sold, component parts or supplies), it is one reason GDP isn’t synonymous with “the economy.”

Government spending was the other main drag, detracting a quarter percentage point from growth, but its economic role is always open to interpretation. Less government spending isn’t always bad—and vice versa.

Meanwhile, other, core categories of economic activity grew fine. Consumer spending, business investment and residential investment—the growth engines of America’s private sector—grew a combined 2.6%.^[iv] Exhibit 1 shows the cumulative contribution from these three categories—which has been consistently positive for all the last three years.

Exhibit 1: GDP’s Private Sector Contributors

Source: Bureau of Economic Analysis, as of 4/30/2025.

Exhibit 1 raises another point: Q1 2025 isn’t the first postpandemic dip—Q1 2022 also showed headline contraction alongside core categories’ growth. Looking further back, one-off quarterly contractions in 2014 and 2011 also show how outliers can skew results. One-off contractions happen. Extrapolating them to recession is too hasty.

Seasonal effects could also be in play. For nearly 10 years, we have documented the Bureau of Economic Analysis’s (BEA) struggles with seasonal adjustments to growth coming off the holiday season. The agency has long copped to its Q1 estimates undershooting reality repeatedly—and it is wholly unclear they have fixed them, especially with COVID-era wackiness adding further skew.^[v]

Now, the data show consumer spending slowed last quarter. But growth rate fluctuation is not unusual. And you shouldn’t overrate consumption’s broader economic influence. Yes, yes, it is over two-thirds of US GDP, as pundits often trumpet. But as we have covered before, it is typically quite stable and not a factor that drives shifts in business cycles. Business investment is usually more of a swing factor, and it rebounded nicely, up 9.8% annualized.^[vi] Some of this may be tariff front-running, but the upswing after a Q4 2024 dip can’t be dismissed as all about tariffs. Maybe some of equipment spending is (that rose 22.5% annualized) but investment in structures and R&D?^[vii] Much less likely—and both rose. Elsewhere, residential investment slowed too. But a positive contribution for this small category is still far better than recent years’ frequent contractions.

Imports’ jump, which parallels inventories’, pretty clearly indicates businesses’ frontrunning tariffs. We see two ways to interpret this: One, this is businesses attempting to once again anticipate a headwind to mitigate it. Businesses tried to manage tariffs’ additional costs by stockpiling ahead of time—a potential tailwind for their profit margins.

Two, it could leave an import pothole ahead. Tax hikes, which tariffs are, often pull demand forward and leave a gap behind. We saw this over the past 15 years, as a series of sales tax hikes in Japan repeatedly pulled demand forward ahead of the tax, only for them to plunge the month after. The effect could be very similar here. That said, markets likely know this and have already factored it in. Moving forward, we think the biggest question for investors is: Can businesses work through these inventories, or will supply stack up, forcing price cuts?

Mind you, nothing in Q1 GDP answers that—or any other forward-looking question. Efficient markets pre-price widely expected events, so they were very likely over Q1 long before today’s release. Heck, the Atlanta Fed’s GDPNow turned negative weeks ago, to much fanfare, as monthly import data jumped. Some was non-monetary gold. Some wasn’t, as these data show. Regardless, the widely watched nowcast remained in the red for weeks, even worsening before Tuesday’s revision. We highly doubt negative GDP was sneaking up on stocks—hence, US markets slightly rose Tuesday, showing little negative or positive influence from the report.

Yet even if US economic data remain weak, remember: Markets likely pre-priced this during early April’s swoon. That forward-looking feature is how markets work. Backward-looking, fairly wonky and quirky math is how GDP works. Don’t conflate the two.