After months of relatively strong economic data for President Donald Trump, the Bureau of Economic Analysis delivered a stunning bout of bad news across the board. Contrary to expectations that the economy would slightly grow during the first quarter of the year, the Commerce Department‘s preliminary estimate found that our gross domestic product actually shrank by 0.3% at an annualized rate in major part due to widespread uncertainty over the White House’s trade war.
And the personal consumption expenditures price index, a preferred inflation gauge for the Federal Reserve, rose by an annual rate of 3.6% in the first quarter of the year. That’s nearly twice the central bank’s maximum inflation target of 2% and a sharp increase from the 2.4% PCE inflation rate of the last quarter of 2024.
Part of the downturn is the result of a desired decrease in spending by the federal government. In part due to Elon Musk’s Department of Government Efficiency, federal outlays were down more than 5% on an annualized basis from the quarter prior, with defense spending down 8%. But the private sector proved less favorable.
Consumer spending decelerated while imports skyrocketed by 41.3% in anticipation of Trump’s sweeping tariff regime, the highest import increase since 1972. While exports rose by 1.8%, service exports, where the U.S. actually has a $300 billion trade surplus, decreased.
There are a couple of massive caveats to include here. All of this data comes before the White House’s messy rollout of the so-called reciprocal tariffs on “Liberation Day,” its subsequent walkback, and retaliation from major trade partners, primarily China. This is an incredibly minor contraction (just 0.1% from the quarter prior at an absolute rate) versus the expectation of an incredibly minor expansion. The BEA also estimates that the California wildfires from January destroyed nearly $200 billion in fixed assets at an annualized rate, less than half a percentage point of overall GDP, but a galling amount for a preliminary figure no less.
The autarkic faction of the Trump administration, namely Peter Navarro and Steve Miran, will likely deflect from this GDP print by blaming imports for dragging down the topline figure, as net exports are calculated by subtracting imports from exports. As the Washington Examiner has previously explained at length, this is because imports are already accounted for in the other three GDP inputs (private consumption, government spending, and business investment), and you don’t want to double-count imports in a measure of gross domestic product.
The real problem for the Trump administration here is that the total economic uncertainty created by the moving target of the White House’s trade threats has caused a decent amount of corporate doomsday prepping, the business equivalent of how ordinary consumers stockpiled toilet paper and canned foods at the start of the 2020 pandemic. But fixed business investment came in at a strong, nearly 10% increase. If, during the 90-day pause of the additional tariffs on top of the 10% universal tariffs, the Trump administration succeeds in securing zero-zero free and fair trade deals with allied trading partners, the fundamentals are strong enough that growth could bounce back in the second half of the year.
DEMOCRATS MUST STOP ABETTING ILLEGAL IMMIGRATION
But in order to do that, the White House must provide businesses with some level of certainty, both with a resolution to the trade war and an extension of Trump’s signature Tax Cuts and Jobs Act. Furthermore, the most foundational threat to the economy remains the elevated inflation created not by this president but rather by his predecessor. Trump can unilaterally negotiate the free trade deals that will bring the tariff threats to an end, but to truly resolve the damage wrought by Bidenomics, Trump needs Congress to codify mass spending cuts in its One Big Beautiful Bill.