In my last post, I talked about how Q1’s negative GDP reading was largely expected due to a surge in imports ahead of new tariffs — a phenomenon I flagged weeks ago. Now that I’ve had time to dig into the details of the report, it’s worth asking: Are things really as bad as the -0.3% headline suggests? Or is there more going on beneath the surface?
Here’s what I’m seeing.
1. The Headline: Real GDP -0.3%
Yes, real GDP shrank in the first quarter — just barely more than the -0.2% consensus forecast. But the story doesn’t stop there.
The main culprit wasn’t a drop in consumer spending or investment — it was a record-level drag from trade, specifically imports. The surge in goods coming into the U.S. ahead of tariff changes subtracted 4.8 percentage points from GDP. That’s the largest trade-related hit to GDP in any quarter going back to 1947.
Imports are subtracted from GDP even when they reflect healthy consumer demand or tactical business moves — which is what this was.
2. Core GDP: Still Solid
If we strip out the noise — like inventories, government spending, and trade — what remains is what some call “Core GDP,” made up of:
- Consumer spending
- Business fixed investment
- Residential investment (homebuilding)
These three grew at a 3.0% annualized rate, which is right in line with the trend over the past year. In fact, business investment in equipment surged at an impressive 22.5% pace. Those are not recessionary signals — they suggest firms are still optimistic about future demand.
3. Inflation Still Lurking
Another takeaway? Inflation may not be done with us just yet. The GDP price index rose 3.7% in Q1, and nominal GDP (real growth + inflation) increased by 3.5%.
Looking year over year, nominal GDP is up 4.7%, which is down from 5.4% a year ago. That, combined with slowing growth in money supply (M2), could give the Federal Reserve some room to cut rates later this year — modestly.
4. Labor Market Softening?
Today’s ADP report showed 62,000 private payrolls added in April — not a recession, but clearly cooling. Friday’s jobs report from the Labor Department is expected to show a gain of 145,000, down from the 6-month average of 181,000. Another data point to watch.
Bottom Line
The economy is slowing — but it’s not falling apart. The Q1 contraction is a trade distortion, not a collapse. “Core GDP” is telling us something very different: the economic engine is still running, just not at full throttle.
If you’re investing based solely on the headline number, you might miss the bigger picture.
Got questions about how this affects your portfolio or financial plan? Let’s talk.
The views stated in this letter are not necessarily the opinion of Cetera Advisors LLC. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.