Economy Shows Resilience Despite Q1 GDP Contraction of 0.3%

The first quarter's economic output decline does not accurately reflect the true state of the economy. In fact, the economy performed reasonably well up until March. This decline also fails to capture the broader impacts of President Trump's tariff policies, federal government spending cuts, and crackdowns on illegal immigration. To understand these impacts, we must await the April data, starting with the employment and unemployment figures to be released this Friday.

These figures will be the first "hard" data since President Trump announced his tariff policies on April 2. The government efficiency department, led by Elon Musk, is actively implementing federal spending cuts, and deportations of illegal immigrants are underway, while the number of border crossings has significantly decreased. If the employment data is weak, Trump's critics may feel vindicated; if the data is strong, it will at least temporarily silence the critics.

However, I doubt that the April employment report, regardless of the data, will tell us much about the impact of Trump's policies. Businesses are indeed discussing tariffs, but so far, they have taken few actions to raise prices or change production plans. The scale of federal government layoffs and deportations of illegal immigrants may also be too small to have a significant impact on the macroeconomy.

However, the first quarter's GDP contraction of 0.3% on an annualized basis is not due to tariffs. This is due to some statistical anomalies. GDP is calculated by adding the expenditures of businesses, consumers, and the government, along with foreign expenditures on U.S. exports. Then, imports are subtracted from this total to obtain the expenditure on domestically produced goods.

Due to businesses stockpiling goods ahead of the tariffs, imports were indeed affected by the tariffs. This increase in imports was then subtracted in the calculation of GDP. Ideally, we should see the increase in imports offset by an increase in inventories, thereby canceling out the impact of tariffs on goods purchased in advance. Strangely, we did not see this, even after the Bureau of Economic Analysis assumed that March's inventory levels were higher than initially reported. An economist estimated that without this assumption, GDP would have contracted by 1.5%, not 0.3%.

Therefore, either domestic production is unusually weak, or the data is missing some factors. It is possible that pharmaceutical companies transferred high-value patented drugs from overseas factories to the U.S. ahead of the tariffs, and this was underestimated in the inventory data.

In addition to the anomalous impact of imports, the monthly pattern of economic activity also pulled down the quarterly total. Due to the severe winter weather and wildfires in Los Angeles, household consumption in January plummeted 0.4% from December. Consumption grew by 0.1% in February and 0.7% in March. The March consumption growth may have been due to consumers rushing to purchase cars and other goods ahead of the tariffs. Let's look at service consumption: it grew by 0.4% in March, up 2.4% year-over-year from December, consistent with the growth rate of the past two years.

Employment data also showed a similar pattern. Private sector job growth was weak in January, flat in February, and more robust in March. The monthly average growth rate was consistent with the average growth rate of the past two years. Overall, the impact of the president on the economy is usually smaller than they or their critics believe, and this was certainly the case in the first few months of Trump's presidency.

Will this change in April? Probably not. Despite the heated debate over tariffs, so far, very few costs have been passed on to consumers. Retailers are currently trying to keep prices stable, perhaps hoping that Trump (who has already announced a pause and exemption of multiple tariffs) will do more. If prices are not affected, consumer spending should not be affected either.

It is conceivable that the early implementation of tariffs and expectations of more tariffs may deter businesses from hiring. But so far, there is no indication that this is happening. The number of people applying for unemployment benefits has remained low, although it increased last week due to factors specific to New York. The online job advertising index maintained by Indeed's hiring lab has been declining since early January, with no significant acceleration in decline last month.

Wall Street economists predict that the number of jobs in April will increase by 133,000 from March, although this is a decrease from recent months, it is still quite substantial. A payroll processing firm estimated that private sector jobs increased by only 62,000 based on its own statistics. But this firm's predictions are often inaccurate. Moreover, even if this prediction is accurate, the weakness in employment is mainly concentrated in the healthcare and education sectors, which are less affected by tariffs and have a large number of job vacancies.

Therefore, while the market and the public are still looking for evidence of the impact of Trump's policy agenda on the economy, they may still not find it tomorrow.