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The Bottom Line:
Today’s Q1 GDP print gives us an idea of the health of the US economy ahead of tariff whiplash and policy uncertainty – and this starting point was broadly in line with expectations (-0.3% QoQ annualized vs. -0.2% consensus) for a weak start to the year. Of note, the print has some large pre-tariff distortions: a surge in imports drove the trade gap wider and this was only partially offset by a ramp up in inventories.
An important upside surprise: US consumer performed better than we expected and services spending appeared to hold up. As we’ve discussed, we’re monitoring for signs of a slowdown in high income households moving forward and a bleed from soft data into hard data.
Quarterly deflators are still too hot – with the GDP price index at 3.7% and core PCE QoQ at 3.5%, both upside surprises. Monthly PCE data will matter more, particularly as we go further into April, but the story is clear: inflation was too hot even before Liberation Day came into play.
The Details:
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Consumers, the primary driver of US growth, performed better than we expected. Q1 consumption (+1.8% QoQ annualized) was better than feared and added 1.2 ppts to headline growth. Spending on durables fell off the back of a strong Q4 print (reflective of tariff front running). Nondurables and services spending held up – a sign that high income US consumers were not spooked by market volatility.
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Government spending slowed in Q1 (and subtracted 0.3 from headline growth) and will likely continue to be of minimal support to growth moving forward as DOGE related pressures persist. That said, we are not baking in a meaningful decline in the deficit as of yet.
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Business investment added 1.3 to headline growth- resulting from an (expected) surge in equipment spending.
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Trade weighed on Q1 growth as a front-running of tariffs led to higher imports (reflective of a ramp up in automotive and parts imports alongside consumer goods). Still, a ramp-up in inventories did not fully offset the widening trade gap.
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