Mixed US GDP data indicate potential stagflation in late 2025

·       The US economy is now facing an imminent supply shock, followed by a demand shock if Trump does not scale back his tariff policy uncertainty soon

·       Although US core real GDP (private consumer spending + capex) is still resilient in Q1, the surge in private capex was more related to beating Trump tariffs

On Wednesday, April 29, 2025, some focus of the market was also some focus of the market was also on US GDP data for Q1CY25 to see how Trump’s bellicose tariff policy is affecting the economy. The BEA seasonally adjusted annualized flash data (1st estimate) shows U.S. real GDP for Q1CY25 was around $23526.1B against $23542.3B sequentially (-0.1%) and $23053.5B yearly (+2.1%). In other words, the U.S. economy has contracted by around -0.1% sequentially (Q/Q), which is equivalent to a -0.3% annualized rate, slightly below the market expectations of -0.2% and the previous quarter’s annualized growth rate of +2.4%. This is also the 1st GDP contraction since Q1CY22 (post–COVID).

In Q1CY25, a 41.3% surge in imports contributed to the contraction in GDP, as businesses and consumers rushed to stockpile goods in anticipation of higher costs amid the Trump tariffs tantrum. The US Consumer spending growth also cooled to 1.8%, the slowest pace since Q2CY23, while Federal government expenditures fell 5.1%, the steepest drop since Q1 2022. In contrast, private fixed investment (CAPEX) surged 7.8%, the most since Q2CY23, as various corporations scramble (at Trump's gunpoint) to set up factories in the US to avoid higher tariffs.

The US GDP contraction reflects a combination of economic policy shifts, external disruptions, and trade dynamics. Personal Consumption Expenditures (PCE) Price Index: Rose by 3.6%, compared to a 2.4% increase in the previous quarter. Core PCE (excluding food and energy): Increased by 3.5%, up from 2.6% in Q4 2024. The expected GDP contraction has also sparked debate over the economic policies of President Trump's administration. Critics argue that the aggressive tariff strategy has introduced uncertainty, affecting business planning and consumer confidence. Supporters contend that the tariffs are necessary to address trade imbalances and protect domestic industries.

Key Drivers of GDP Performance 

Increase in Imports: A substantial surge in imports, which subtracts from GDP, was a primary factor in the contraction. Imports rose by 41.3%, driven by a 50.9% increase in goods, particularly consumer goods (e.g., medicinal, dental, and pharmaceutical preparations) and capital goods (e.g., computers and peripherals). This surge is attributed to businesses stockpiling imported cheaper goods ahead of anticipated tariffs under the Trump administration’s trade policies and a potential embargo on cheaper imported goods, especially from China.

Decrease in Government Spending & Investment: A reduction in federal outlays, partly linked to efforts by the Department of Government Efficiency (DOGE) to cut federal spending and employment, contributed to the GDP decline. This slowdown was compounded by state and local government adjustments.

Positive Contributions: Despite the overall contraction, increases in private investment, consumer spending, and exports partially offset the decline. Private domestic investment surged by 21.9%, led by a 22.5% rise in equipment spending, potentially also tariff-driven. Consumer spending grew at a modest 1.8%, the slowest since Q2CY23, down from 4% in Q4CY24.

External Factors 

Policy Uncertainty: The Trump administration’s trade policies, including the imposition of new tariffs, created economic uncertainty, impacting business and consumer sentiment. A 90-day pause in reciprocal tariffs announced on April 9, 2025, may influence future quarters.

Natural Disasters: Wildfires in Southern California, particularly in Los Angeles County, disrupted economic activity in January 2025. While emergency responses contributed to GDP, the destruction of fixed assets (estimated at $34 billion in private losses and $11 billion in state/local government losses) did not directly affect GDP but will impact future investment estimates.

Labor Market and Inflation: The labor market showed resilience, with 325,000 private-sector jobs added in the first two months of 2025. Inflation remained stable, with the Personal Consumption Expenditures (PCE) price index at 2.3% in March, slightly above expectations, and core PCE at 2.6%. These figures suggest inflationary pressures from tariffs may persist.

Economic Outlook and Implications

The GDP contraction raises concerns about an economic slowdown, with some analysts warning of recession risks if negative growth persists. The traditional recession indicator is two consecutive quarters of negative GDP growth, though the National Bureau of Economic Research uses a broader definition. The import surge may be temporary, potentially reversing in Q2 as tariff effects stabilize. However, ongoing policy uncertainty, including potential changes to GDP measurement (e.g., excluding government spending, as proposed by the Trump administration), could further complicate economic assessments.

Forecasts for 2025 vary, with the Federal Reserve projecting 1.7% annual growth (down from 2.1%) and private estimates ranging from 1.1% to 1.9%. The Federal Reserve’s response remains cautious, balancing growth concerns with inflation, with markets anticipating possible rate cuts by June and December 2025.

The U.S. economy contracted in Q1 2025, driven by a record import surge and reduced government spending, though bolstered by investment and consumer activity. While external factors like tariffs and natural disasters played a role, the outlook for Q2 hinges on trade policy developments and economic stabilization.

The Fed and also the White House (Trump) are now focusing on PDFP (Private Domestic Final Purchase; which is Personal Consumption Expenditure-PCE Gross Private Domestic Investment; i.e., core real GDP, constituting almost 88% of overall real GDP. The seasonally annualized real PDFP has grown +5.7% in Q1CY25 on an annualized basis, surging from +1.9% in the previous quarter. If we consider the overall TTM average, the annualized growth rate of real PDFP was around +3.6% against the overall real GDP growth of +2.0%.

The Fed is viewing the average core real GDP growth at 3.6% or even 3.0% as a sign of above-trend growth, but at the same time also of the view that the productivity of the US economy at around +4.0%, running higher than the core real GDP growth +3.0% on an average, it’s ensuring goldilocks nature of the US economy rather than causing overheating. The productivity of the US economy is running around +4.0% on average and higher than the real core GDP growth of +3.0% in the longer run, which ensures the goldilocks nature of the economy, without causing any overheating and inflation.

The US nominal GDP (at current prices) increased +3.4% to around $29977.6B in Q1CY25 against $29723.9B in the previous QTR and is set to break the $30T milestone by Q2CY25.

On seasonally not adjusted (NSA) and quarterly rate (not annualized), the actual US nominal GDP was around $7322.7B at Q1CY25, contracted -3.1% sequentially (Q/Q) and expanded +4.6% yearly (y/y). Similarly, the US real GDP, seasonally not adjusted and not annualized, contracted -4.2% sequentially (Q/Q) and expanded +1.9% yearly (y/y). The core real GDP contracted -3.2% sequentially (Q/Q), but expanded +3.5% yearly (Y/Y).

Overall, the underlying longer average run rate for US real GDP was around +2.6% till 2024 and 6.2% for nominal GDP. The potential US real GDP growth was +3.0%. But in 2025, it may come much below 2.0% if Trump trade & tariff war uncertainty remains and average weighted Trump tariffs remain around 27.5% or even 15% on average against 2.5% earlier. Higher tariffs and higher imported costs of consumer and industrial goods will inevitably cause a higher cost of living, subdued discretionary consumer spending, tepid private CAPEX, higher unemployment, and eventually stagflation or even an all-out recession. The US economy is set for a supply shock and then a demand shock if Trump does not change his bellicose tariff policies within the next few weeks.

Trump's Reaction to Q1CY25 GDP Growth

President Trump responded to the reported -0.3% contraction in U.S. GDP for Q1CY 2025 by quickly distancing himself from the economic downturn, attributing it to the policies of the previous Biden administration. In posts on X, he stated, “This is Biden’s stock market, not Trump’s,” emphasizing that his tariffs were only beginning to take effect and predicting a “historic economic boom” once the economy adjusts to his policies. At a Michigan rally, Trump claimed he had built “the greatest economy” during his first term and insisted that current challenges were temporary, urging patience and blaming the GDP decline on a surge in imports and spending cuts from the prior administration. Trump also pointed out that core real GDP expanded by +3.5% yearly (NSA/NA).

Trump’s comments on Trade and Tariffs:

Trump has been vocal about his tariff policies, framing them as essential for revitalizing U.S. manufacturing and reducing trade deficits. His administration imposed a 10% universal tariff on imports from most countries and a 145% tariff on Chinese goods, escalating the trade war with China. He argued that these tariffs would generate significant revenue, estimating over $1 trillion, and position the U.S. as the “most dominant economy” by addressing “unsustainable” trade imbalances, particularly with China. However, he temporarily shelved higher “reciprocal tariffs” of up to 49% on other countries for 90 days, except for China, following market volatility. Trump also claimed tariffs would not cause long-term economic harm, asserting that the GDP contraction was due to businesses stockpiling imports to avoid anticipated duties.

Trump Truthed:

“This is Biden’s Stock Market, not Trump’s. I didn’t take over until January 20th. Tariffs will soon start kicking in, and companies are starting to move into the USA in record numbers. Our Country will boom, but we have to get rid of the Biden “Overhang.” This will take a while, has NOTHING TO DO WITH TARIFFS, only that he left us with bad numbers, but when the boom begins, it will be like no other. BE PATIENT!!!”

Comments on Trade and Tariffs:

Trump has been vocal about his tariff policies, framing them as essential for revitalizing U.S. manufacturing and reducing trade deficits. His administration imposed a 10% universal tariff on imports from most countries and a 145% tariff on Chinese goods, escalating the trade war with China. He argued that these tariffs would generate significant revenue, to be collected by ERS (External Revenue Service), estimating over $1 trillion, and position the U.S. as the “most dominant economy” by addressing “unsustainable” trade imbalances, particularly with China. However, he temporarily shelved higher “reciprocal tariffs” of up to 49% on other countries for 90 days, except for China, following market volatility. Trump also claimed tariffs would not cause long-term economic harm, asserting that the GDP contraction was due to businesses stockpiling imports to avoid anticipated import duties.

Comments on the China Deal:

Regarding a potential trade deal with China, Trump expressed a hardline stance but indicated some flexibility. He stated, “China needs to make a deal with us. We don’t have to make a deal with them,” suggesting that the U.S. holds the upper hand. Despite imposing 145% tariffs on Chinese imports, Trump hinted at reducing these tariffs “substantially” as negotiations progress, though he clarified they would not be eliminated. Trump may be softening his approach amid a high potential supply shock to the US economy. Trump’s comment that he “won’t play hardball with China” was potentially influenced by Treasury Secretary Bessent’s advice to de-escalate tensions. However, no concrete deal has been announced, and China has resisted negotiations, imposing 125% retaliatory tariffs and restricting rare earth exports.

Conclusions

The Q1 GDP contraction, the first since 2022, was driven by a 41% surge in imports (as businesses stockpiled ahead of tariffs) and a 5.1% drop in federal spending, partly due to cuts from the “Department of Government Efficiency” led by Elon Musk. Economists note that the tariffs while raising $166.6 billion in 2025, could reduce U.S. GDP by 0.8-1.0% and risk a recession. China’s Q1 GDP grew 5.4%, beating expectations, but analysts predict a slowdown due to the 145% U.S. tariffs, which may cut China’s growth by 0.5-2.4%. Trump’s rhetoric remains optimistic, focusing on long-term gains, but global markets have reacted with volatility, losing $10 trillion in value since the tariff announcements.

Overall, the US economy is facing the risk of an imminent supply shock followed by a demand shock in H1CY25, if Trump does not scale back his tariff policy uncertainties, considering the reality of the situation on the ground. Both Main Street and Wall Street are concerned about the short to mid-term, as Trump’s plan to reindustrialize the US to compete with the scale and efficacy of China may not be possible in 1-2 years; it’s a long-term plan. Meanwhile, Trump’s tariffs, even if finalized at 20% on average in all countries, including China, would cause a higher cost of living, subdued discretionary consumer spending, tepid private capex, higher unemployment, higher inflation, and lower economic growth by late 2025.

Market Impact

On Tuesday, April 29, 2025, Wall Street Futures recovered from the GDP contraction panic low as fine print indicated robust core GDP, and Trump also pointed out that later, as per his economic advisory team feedback. Also, reports of back-channel trade talks between UIS and China and gradual exemptions of tariffs on critical products with each other boosted the risk trade sentiment, undercutting Gold.

Weekly-Technical trading levels: DJ-30, NQ-100, and Gold

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 40250) now has to sustain over 41200 for a further rally towards 41500/42000-42300-43300/44600, and even 45200 in the coming days; otherwise sustaining below 41100/40700,-40000 DJ-30 may again fall to 39700/38600-38000/37700-37300/37000 in the coming days.

Similarly, NQ-100 Future (19500) has to sustain over 19700 for a further rally to 20000/20550-20900/21400 and even 22000-22400 in the coming days; otherwise, sustaining below 19650, NQ-100 may again fall to 19100/18800-18600/18000-17600/16400 and 16200-15800 in the coming days.

Also, technically Gold (CMP: 3317) has to sustain over 3335-3370 for a further rally to 3400/3425-3450/3505*, and even 3525/3555 in the coming days; otherwise sustaining below 3325, Gold may again fall to 3300/3275-3255/3200, Gold may further fall to 3180/3130-3065/2990 and 2960/2900*-2800/2750 in the coming days.