Was negative US growth actually negative?

On Wednesday, the Bureau of Economic Analysis (BEA) published its first estimate for Q1 US GDP growth, which at -0.3% was slightly worse than the Bloomberg consensus of -0.2% on a quarter-on-quarter (QoQ), seasonally adjusted, annualised basis. While the headline of the US experiencing negative growth looks quite bad, the detail of the report looks much better.

The Imports component of GDP was responsible for most of the negative figure, because Imports are accounted for through a negative entry in the GDP calculation. The idea is that if a US consumer purchases an imported good worth $100, that adds $100 to the Personal Consumption component of GDP. However, if those goods were imported at a price of $80, then the Imports component will show -$80. Therefore, the net effect on US GDP will only be $20, which is the value added in the US. As expected, in Q1 consumers and companies rushed to buy imported goods in anticipation of President Trump’s tariffs. This resulted in Net Exports (defined as Exports minus Imports) subtracting 4.8% from GDP, the largest negative contribution on record from Net Exports.

Some of these imports ended up on consumers’ and companies’ balance sheets. They might be recorded either as Personal Consumption, Gross Private Fixed Investments (in the case of fixed assets such as machinery that are imported) or Inventories. Personal Consumption and Gross Private Fixed Investments were up by a healthy 3% QoQ annualised in Q1, up slightly from 2.9% in Q4 last year. Inventories contributed 2.3% to growth, thereby partly offsetting the negative contribution from Imports. Changes in Inventories are difficult to forecast even under normal circumstances, and it is typically a somewhat erratic component of GDP. Given the huge surge in Imports in Q1, the Inventories number is subject to even higher uncertainty than usual. Consequently, the BEA made a one-off adjustment over and above what its calculation initially implied, to reflect the fact that its “normal” numbers were very likely underestimating the change. It would not be a huge surprise to see relatively large revisions when the BEA publishes its final Q1 numbers (Wednesday’s report was the first of three estimates).

Markets largely ignored the negative growth print, and we understand the lack of reaction for two reasons. First, the number is noisy with unusual moves in the components mentioned above, and with one-off adjustments by the BEA. Second, underlying trends seem to be in decent shape as of Q1. It is impossible to untangle how much of the growth in the consumption and investment numbers was down to front-running tariffs and how much was “real” underlying growth. But it is fair to say that given the information at hand, the US economy’s underlying trends do not look troubling as of the end of Q1. The impact of tariffs is still extremely uncertain, and much of it will depend on whether or not deals with multiple trading partners can be agreed.  A few strategists have downgraded their US growth expectations for 2025 following the release, however, despite the eye-catching headline, it seems that most market participants are not changing their assumptions too dramatically, which makes sense in the absence of clearer data.