“Final sales to private domestic purchasers” jumped by 3.0%, on strength in the private economy of businesses and consumers.
By Wolf Richter for WOLF STREET.
A massive spike in imports, by far the worst ever, on tariff-frontrunning subtracted 5.0 percentage points from GDP growth (adjusted for inflation), turning it negative. A decline in government spending subtracted another 0.25 percentage points, and turned GDP growth to -0.3%, despite decent growth in consumer spending (+1.8%) and a huge surge in gross private domestic investment (+21.9%), including a 22.5% increase in investment in equipment, as companies have begun ramping up investing in production in the US to avoid the tariffs.
We’ll start with “net exports” because they’re the stars of this show today. Net exports are exports minus imports. Exports are a positive in GDP, imports are a negative in GDP. Net exports, driven by an explosion of imports on tariff frontrunning, worsened to a seasonally adjusted annual rate of negative $1.37 trillion in Q1.
- Exports: +1.8% (goods exports +3.2%, services exports -0.7%). Exports added 0.19 percentage points to GDP growth.
- Imports: +41.3% (goods imports +50.9%, services imports +8.6%). This reduced GDP growth by 5.0 percentage points.
GDP dipped by an annualized rate of 0.3%, adjusted for inflation (“real GDP”), after growth rates of 2.4% in Q4, 3.1% in Q3, and 3.0% in Q2.
Exploding imports are not a sign of weakening demand. The Q1 2022 drop in GDP was also caused by a surge in imports after the shortages as supply chains recovered and backed-up goods began arriving in the US.
In terms of dollars, “real” GDP dipped to an annual rate of $23.5 trillion in Q1, according to the Bureau of Economic Analysis today.
The health of the private US economy: Growth of “final sales to private domestic purchasers” accelerated to +3.0%.
This metric is part of the GDP report, released today by the BEA, and tracks US private domestic demand from consumers and businesses, including fixed investments by businesses. It is GDP less exports, less imports, less government consumption expenditures, less government gross investment, less change in private inventories. It covers about 87% of GDP and presents the core of the private US economy.
Powell also mentions it from time to time as a purer indicator of private domestic demand from consumers and businesses – which is what monetary policy is trying to influence (not trade and government spending).
Adjusted for inflation, final sales to private domestic purchasers jumped by an annual rate of 3.0% in Q1, to $20.7 trillion, up from 2.9% Q4, attesting to the strength of private domestic demand and investments by consumers and businesses.
The blue columns show the growth rates (left axis), the red line shows the dollars (right axis), all in seasonally adjusted annual rates (SAAR):
Not adjusted for inflation, “current-dollar” GDP grew by an annual rate of 3.5% to $30.0 trillion, measured in current dollars, not inflation-adjusted dollars. This sometimes called “nominal GDP” represents the actual size of the US economy in today’s dollars and forms the basis for the Debt-to-GDP ratio (further down) and similar GDP-based ratios.
Consumer spending rose by an annual rate of 1.8% in Q1, adjusted for inflation, to $16.4 trillion, after three quarters of higher growth rates.
- Services: +2.4%.
- Durable goods: -3.4%%
- Nondurable goods: +2.7%.
Consumer spending along with business activities got “disrupted” by the wildfires in Los Angeles County (nearly 10 million population) in Q1, and the disruptions is included in the GDP data, but the BEA says, “it is not possible to estimate the overall impact of the California wildfires on first-quarter GDP.” So it’s in there, but it can’t be split out:
Private fixed investment jumped by 7.8% annualized and adjusted for inflation, the highest growth rate since Q2 2023, and the second highest since Q1 2022. Of which:
- Nonresidential fixed investments: +9.8%:
- Structures: +0.4%
- Equipment: +22.5%, the highest growth rate since Q3 2020, and the second highest since Q3 2011, as companies invested to ramp up production in the US, which is what tariffs encourage them to do.
- Intellectual property products (software, movies, etc.): +4.1%.
- Residential fixed investment: +1.3%.
Private inventory investment rose to $3.0 trillion in Q1, driven by the surge in imports that went into wholesale inventory. According to the BEA, the top contributor to this increase in wholesale inventories was imported pharmaceutical products, as drug companies were frontrunning the tariffs. This change in private inventories contributed 2.25 percentage points to GDP growth.
Government consumption expenditures and gross investment dipped by 1.4% annualized and adjusted for inflation, the first decline since Q2 2022.
The drop reduced overall GDP growth by 0.25 percentage points.
Combined, federal, state, and local government consumption and investment accounts for 17% of GDP.
Within total government spending, state and local governments account for 61% and the federal government for 39%.
This does not include interest payments, and it does not include transfer payments directly to consumers (the biggest part of which are Social Security payments), which are counted in GDP if and when consumers and businesses spend these funds or invest them in fixed investments.
- State and local governments: +0.8%.
- Federal government: -5.1%.
- National Defense -0.8%.
- Nondefense -1.0%.
The Debt-to-GDP ratio improved slightly to 120.8%, on 3.5% growth in current-dollar GDP (see above) and the Treasury debt that has been stuck at the debt ceiling of $36.2 trillion since the beginning of the year. As soon as the debt ceiling is lifted, the debt will spike, and the Debt-to-GDP ratio will worsen.
The Debt-to-GDP ratio is based on current-dollar GDP and on current-dollar Treasury debt, neither adjusted for inflation (the effects of inflation being both in the numerator and denominator cancel out).
The spike in 2020 occurred as GDP collapsed during the lockdown while the Treasury debt jumped on the government’s free-money-giveaway spree.
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LA Wildfires and “disruption.” Makes sense that it can’t split out, but was it positive or negative for the numbers? After the fires, the malls (and hotels) throughout Southern California were packed with people…a lot of spending to replace lost things. So did this potentially artificially drive up consumer spending numbers? How much could it move the needle?
Gold imports, measured in dollars, are up roughly 30X from a year ago. Without that surge,
1st quarter gdp would be positive.
Imports of gold that investors buy are excluded from GDP calculation. I discussed this in detail here:
https://wolfstreet.com/2025/04/28/how-gold-imports-blew-up-the-atlanta-fed-gdpnow-the-old-model-is-dead-long-live-the-new-gdpnow-model-starting-apr-30/
Doesn’t sound as bad as some of the more dramatic sites suggest. The US economy certainly seems strong. My son lost his job yesterday in Canada as he works in an industry which supplies special medical lasers for cancer research, which have no competition except for a company in Britain. The tariffs or a fear of recession, caused a big reduction in orders and layoffs of about 10% of the company. He’ll get a job elsewhere but I think the fears being amplified in the media are causing a reduction in spending and reduction in full-time employment. Without this fear and uncertainty, the US economy would probably be even stronger
‘Exports are a positive in GDP, imports are a negative in GDP. ‘
If the importer is a retailer, doesn’t it add to GDP when he resells the item?
If the importer is a retailer (Temu, for example), then the import wipes out the retail sale. I presented this simplified example the other day (excluding the effects of shipping and delivery):
If you buy a $20 product from Temu, imported and sent directly to you: GDP growth = +20 retail -$20 import = $0 added to GDP.
If you buy the $20 product from a US producer: GDP = +20 retail -$0 import = +$20 added to GDP (and more later if you consider the benefits of jobs and investments)
That’s the choice. That’s why large amounts of imports instead of domestic production are so devastating to the economy.
Wouldn’t the import be lower? Assuming the cost to import to the importer is $5 and retails for $20, wouldn’t that result in GDP growth of 20-5=$15?
Wolf, I am confused by something, I thought I remember you saying the government spending was not calculated into GDP, but it would appear that government spending on actual things does?
My love, Would you please please RTGDFA?!
It’s the same as I’ve ALWAYS said.
That last debt-to-GDP chart really tells the tale of post-2000 macro economy dysfunction.
Reagan rode to victory in 1980 decrying Fed deficit (ultimately debt) financing that was 25%(!!!) of today’s.
Timeline of US astronomical debt spikes…
1) The Fed insisting on phoney-baloney post-2000 ZIRP (and fused-at-the-spine Home Bubble 1.0 overvaluations) leads to Housing Implosion 1.0…
2) Which the Fed insists upon “saving” via epic QE money prints post 2009,
3) Leading to Home Overvaluation Bubble 2.0 (implosion pending, oh-so-pending…),
4) Then $10 billion per year CDC (as in “Disease Control”) manages to make rather massive hash of Covid,
5) “Justifying” second leg of massive debt spike (“Never let a hash go to waste…”)
And we still have the massive entitlements crisis (frequently cited in 19 freaking 80…) to deal with.
I thought Reagan got elected for his breakthrough movie “Bedtime for Bonzo”
When Reagan took office the total debt of the US was one trillion dollars. Then came the Reagan tax cuts, aka Reaganomics, which would of course pay for themselves ( see Laughter, (Laffer) Curve. 4 years later the debt accumulated over 2 centuries had doubled. This began the political era of ‘deficits don’t matter’
Enjoy it. Just make shure you have 2-3 times as many assets as cash. Governments never stop spending, but asset application is not all profit.
It seems that the markets have read Wolf’s article because they are shaking off earlier losses.
I don’t see how this GDP report isn’t a good thing, but the headlines of course lead with the worst news of it.
No country should be relying on Government spending aka taxes to boost jobs and GDP as Biden was doing. It is devasting long term and then there is a hangover when it runs out. Sure, some gov’t spending is necessary but it should not be a driving force.
More consumer spending, more investment, less government. What’s not to love?
Another great article to ground us solidly onto the earth.
The economy has become big media business meaning that talking/reporting on it has become part of the entertainment industry. The needs of entertainment and understanding are in conflict.
Entertainment needs drama and fast pacing.
Unfortunately the actual economy operates over many quarters and many months.
“Equipment: +22.5%, the highest growth rate since Q3 2020, and the second highest since Q3 2011, as companies invested to ramp up production in the US, which is what tariffs encourage them to do.”
Investing in US production to avoid tariffs of products, or purchasing equipment earlier to avoid paying tariffs in THAT equipment? I.e. front-running, which you point out for the import piece. My bet is on the latter, as decisions to change manufacturing locations and supply chains were not made early enough to change Q1 numbers.
Increased imports due to front-running, while a negative on GDP, are matched with increased spending (positive on GDP) and come out in the wash. Either consumers front-ran, which increases spending, or businesses did – increasing investment, or inventory (both are positive to GDP).
The only issue here is that the initial reads on GDP tend to be bad at counting inventory (slower reporting). Expect the later revisions to adjust inventory counts, possibly improving GDP numbers a little.
Imports are going drop in future quarters (the other side of frontrunning), boosting GDP. Inventory adjustment in future quarters is going to reduce GPD by some.
The issues of imports and inventories are UNRELATED TO DEMAND IN THE US ECONOMY.
That’s why I gave you in the article above this, quoted verbatim from my article above because people don’t seem to have read the article:
The health of the private US economy: Growth of “final sales to private domestic purchasers” accelerated to +3.0%.
This metric is part of the GDP report, released today by the BEA, and tracks US private domestic demand from consumers and businesses, including fixed investments by businesses. It is GDP less exports, less imports, less government consumption expenditures, less government gross investment, less change in private inventories. It covers about 87% of GDP and presents the core of the private US economy.
Powell also mentions it from time to time as a purer indicator of private domestic demand from consumers and businesses – which is what monetary policy is trying to influence (not trade and government spending).
Adjusted for inflation, final sales to private domestic purchasers jumped by an annual rate of 3.0% in Q1, to $20.7 trillion, up from 2.9% Q4, attesting to the strength of private domestic demand and investments by consumers and businesses.
And similarly, the front-running purchases, inventory-building and investing will plunge, lowering GDP
A ton of confusion here and elsewhere about GDP seems to miss what the P stands for. It’s meant to measure what we produce. But because it’s much harder to count every thing we produce, we use accounting identities to get that answer from other numbers that are easier to collect (exports, imports, change in inventories, consumption, and government spending).
Saying GDP was reduced because imports were high is mistaking an accounting identity for a cause. Technically, imports do not affect GDP at all, as Wolf has explained. What affects GDP is how much stuff is made here (both goods and services, so not just manufacturing). The only question with regards to tariffs are if they will increase production because people can’t just buy stuff from overseas, or if they will reduce production because people will be poorer or because they can’t access the parts they need to make stuff or because the stuff we do make can’t be sold overseas anymore.
You added to your response after I added mine… Note that I did read your article.
“The issues of imports and inventories are UNRELATED TO DEMAND IN THE US ECONOMY.”
Of course, but all 3 are part of GDP, which is what this article is ostensibly about.
GDP is a measure of domestic production, which is calculated by [domestic consumption] + [domestic storage] + [export] – [import].
Domestic production (GDP) should not plunge from front-running – it goes in both the plus and minus columns – however the (mis)-counting of those columns isn’t always equal.
The final sales to domestic purchasers will also contain front-running, so the fact that it did not jump up 5% is a bit of a red flag for demand.
This is bad Mmmmkay. Anyone? anyone? Buelluer Buelluer?
Anyone?