Front-running tariffs led to a collapse in real final sales, the bottom-line estimate of GDP
Today the Advance Estimate of GDP from the BEA for the first quarter of 2025 is -0.3 percent at an annualized quarterly rate.
Real gross domestic product (GDP) decreased at an annual rate of 0.3 percent in the first quarter of 2025 (January, February, and March), according to the advance estimate released by the U.S. Bureau of Economic Analysis. In the fourth quarter of 2024, real GDP increased 2.4 percent. The decrease in real GDP in the first quarter primarily reflected an increase in imports, which are a subtraction in the calculation of GDP, and a decrease in government spending. These movements were partly offset by increases in investment, consumer spending, and exports.
Real Final Sales
The more important number is Real Final Sales (RFS) down 2.5 percent.
The difference between the base number and RFS is Change in Private Inventories (CIPI) that nets to zero over time.
Contributions to GDP
- Personal Consumption Expenditures (PCE) added 1.21 percentage points of which 1.10 percentage points was services.
- Gross Private Domestic Investment added 3.60 percentage points of which CIPI added 2.25 percentage points.
- Net exports subtracted 4.83 percentage points from GDP.
- Government subtracted 0.25 percentage points
Increase in Investment
The largest contributor to the increase in investment was private inventory investment, led by an increase in wholesale trade (notably, drugs and sundries). The estimates of private inventory investment were based primarily on Census Bureau inventory book value data and a BEA adjustment in March to account for a notable increase in imports.
Silver and Gold
Within imports of industrial supplies and materials in the National Economic Accounts (NEAs), BEA identified and removed an increase in imports of silver bars as a form of investment in the first quarter. Similar to nonmonetary gold, silver can be used for two purposes: for industrial use (as an input into the production of goods and services) and for investment (as a store of wealth and a hedge against inflation). BEA’s NEAs do not treat transactions in valuables, such as nonmonetary gold and silver, as investments and therefore purchases of metals as a form of investment are not included in consumer spending, gross private domestic investment, or government spending.
Had the BEA not subtracted gold and silver imports, the numbers would have been much worse.
Fred still has not updated its databases so I am unable to produce the charts I normally do. I gave up waiting.
Imports Don’t Subtract from GDP
Bear in mind that imports have no influence on GDP.
Wait a second you say. The BEA’s formula is: GDP = Consumption (C) + Investment (I) + Government Spending (G) + (Exports (X) – Imports (M))
However, the BEA only subtracts what should not have been counted in the first place. For example, when you buy a tool at Home Depot, no one knows what percentage is from China, Mexico, or the US.
Assume 75% made in China and 25% US. But 100% of that purchase was added to Consumption (C). To make up for what is counted in consumption but shouldn’t be, the BEA subtracts imports.
The BEA should make this clear but doesn’t. I will. Imports do not impact GDP because they are not domestic product.
New Record Goods Trade Deficit on More Tariff Front Running
Yesterday I noted New Record Goods Trade Deficit on More Tariff Front Running
The goods deficit is a record -162 billion for March.
How Long Will Front-Running Tariff Inventories Supply Shelves?
On April 28, I asked How Long Will Front-Running Tariff Inventories Supply Shelves?
I concluded about a month on average. Factoring in yesterday’s trade data add another few weeks. Click on above link for details.
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