Pre-Tariff Import Surge Drove Q1 U.S. GDP Contraction
The second estimate of Q1 GDP, published by the Bureau of Economic Analysis last week, confirmed that the U.S. gross domestic product declined in the first three months of 2025, albeit at a slightly slower pace than previously estimated. The second estimate showed an 0.2 percent contraction of U.S. economic output in the first three months of 2025, only seemingly feeding into the recession fears that have gripped the United States ever since President Donald Trump dove head-first into a new trade war.
While the disappointing GDP reading was in fact caused by tariffs or the fear thereof, it wasn’t their damaging impact on consumer spending or private investment that caused the contraction. Instead, it was a steep increase in imports in anticipation of upcoming tariffs that drove the GDP decline. As imports are a subtraction in the calculation of GDP, a surge in imports actually hurts GDP growth, even if only in the short run.
As businesses were anticipating new tariffs, they stocked up on goods and inputs sourced abroad to avoid the levies. Once those products are sold in the U.S., they are counted as personal consumption expenditure, however, at which point their negative effect on GDP will be negated. As the U.S. Federal Reserve explained in a blog post in 2018, imports are merely an accounting variable in the calculation of GDP and the purchase of imported goods and services has no direct negative impact on U.S. GDP.
With that in mind, the latest GDP reading doesn’t look as bad it did at first glance. As our chart shows, the impact of U.S. companies front-loading imports in anticipation of new tariffs more than offset the positive contributions from consumer spending and private investment, which together account for 89 percent of U.S. GDP. As the BEA noted, real final sales to private domestic purchasers, i.e. the sum of consumer spending and private investment, increased 2.5 percent in the first quarter, which is down 0.5 percentage points from the previous estimate but still far from recession territory.