Monthly economic data rarely provide confident clarity, and this week’s was no exception. But the story is a good one nonetheless…the economy is doing just fine.
The immediate good news Wednesday was that the Fed’s preferred inflation measure, the Personal Consumption Expenditure Index, showed zero inflation. While only one month, it was a good month.
This bit of good news was quickly forgotten as the first guess at first quarter GDP showed the economy contracting 0.3%, reinforcing the murmurings of a recession pending or already unfolding. The Resistance was ready to pounce.
The Resistance soon deflated, however, as the details told a different tale. For one thing, national defense expenditures cut 0.33% out of growth. Defense spending shot up in the second half of 2024, so the Q1 2025 figure represented a natural retrenchment. But for this normal pullback the economy would have tread water in the first quarter.
But the big story in Q1 GDP was that offsetting solid numbers for consumption and investment, a huge surge of imports cut reported growth by a full 5 percentage points.
Why did imports surge? Because importers anticipated President Trump’s “Liberation Day” tariff wave and wanted to get their stuff in country before the tariffs hit. Importers “pulled forward” their planned foreign shipments.