Chart Source: Bureau of Economic Analysis
As we all know, GDP shrank at a 0.3 percent annual rate in the first quarter, the first decline in GDP in three years. The main factor from an accounting standpoint was a huge surge in imports which are counted negatively in GDP.
Many analysts were quick to dismiss the negative growth number and instead turn to the category final “final sales to domestic purchasers,” which grew at a respectable 2.3 percent annual rate, and pronounce all good. This is not serious analysis.
This category sums the growth of consumption, fixed investment, and government expenditures. While often this may give a more useful figure in underlying growth patterns, that is not the case here. It effectively acts as though the huge surge of imports in the first quarter had no effect on these categories. That is hard to accept.
I’ll pull out a few of the categories where the story seems pretty clear. Real investment spending on computers increased at 112.8 percent annual rate, adding0.51 percentage points to the quarter’s growth. The increase in the larger information processing equipment category was 69.3 percent, which accounted for 0.96 percentage points of the quarter’s growth.
From the third quarter of 2023 to the third quarter of 2024, real investment in computers grew by 27.7 percent. The growth in the larger information processing category was 9.8 percent. Does anyone want to say that the big jump in the first quarter in these categories was unrelated to the surge in imports?
Other areas are less striking but still likely affected in a big way by the surge in imports. Clothing consumption increased at a 6.7 percent rate, adding 0.12 percentage points to GDP growth. It had increased by just 2.0 percent in the year before people started worrying about tariffs in the fourth quarter of 2024.
I’ll also mention something not trade related, but certainly a one-time factor that will not likely recur. Real spending by households on utilities increased at an 18.9 percent annual rate, adding 0.18 percentage points to growth in the quarter. There is no upward trend in real spending on utilities. Real spending was the same in the fourth quarter of 2024 as in the fourth quarter of 2023 and less than in the third quarter of 2023.
The jump in utility spending was due to weather. It will not be repeated in the second quarter and will likely be reversed, thereby being a drag on growth.
To be clear, this is a messy report that is distorted in big ways by the huge surge in imports. It is also advanced data that will be revised, possibly by large amounts, in reports released in May and June.
But if we try to look at this seriously, it is a weak report. Even if GDP may ultimately turn out to be positive for the quarter, it was not a strong growth number. Pretending that consumption and investment were unaffected by the surge in imports is simply not serious analysis.
This first appeared on Dean Baker’s Beat the Press blog.
