Imports surged at a 41.3 percent annual rate in the first quarter, with goods imports rising at a 50.9 percent rate, leading to the first quarter of negative growth in three years. This is a sharp turnaround from the 2.5 percent growth rate of 2024. The imports largely replaced consumption of domestically produced goods, as people seemed to be buying in anticipation of tariffs.

Consumption of services also slowed substantially, increasing at just a 2.4 percent annual rate after rising at a 3.0 percent rate through 2024. Consumer services account for almost half of GDP. A sharp decline in restaurant spending was the major source of weakness.

Imports Rise as Consumers Buy in Advance of Tariffs

The Bureau of Economic Analysis does not provide a breakdown of goods imports in the advanced report, but it is a safe bet that cars and other big-ticket items were the main cause of the huge surge in the first quarter, as well as the stockpiling of industrial materials. This was clearly an effort to get ahead of tariffs.

It is worth clarifying a point that is often confused in discussions of trade. Imports appear as a negative in the GDP accounts, but they are directly offset by appearing as a positive item in another category, such as consumption or inventories. If we spend another $10 billion on imported cars in the first quarter, but this allows people to buy another $10 billion of cars that they would not have bought otherwise, then the imports have no net effect on GDP.

However, if the $10 billion spent on cars replaced $10 billion that otherwise would have been spent on domestically produced cars, then imports have lowered GDP. With the weak growth in overall consumption in the first quarter (1.8 percent in Q1, compared to 4.0% in Q4), it looks like consumption of imports was replacing consumption of domestically produced goods.

Spending by Foreigners Traveling in the United States Falls in First Quarter

While we had a trade deficit of roughly $1.2 trillion in goods in 2024, we had a surplus of almost $300 billion on services. One of our major service exports is travel: foreigners coming to the United States for vacations, business, or education.

Last year, our exports in this category came to $215.3 billion — almost a third larger than the $165.5 billion in exports of agricultural products. It was also growing rapidly, with real spending rising 7.3 percent over the course of 2024, getting almost back to the pre-pandemic level.

The real value of exports of travel services fell at a 7.8 percent annual rate in the quarter. This presumably reflects increased hostility by many foreigners to the US, as well as fear of harassment by ICE officers. We will likely see further declines in future quarters, especially among students coming to study in the United States.

Factory Construction Slows in the First Quarter

The boom in factory construction, which saw real spending more than double from 2019 to 2024, appears to be fading. Real spending in the first quarter fell at a 4.5 percent annual rate from the fourth quarter. Investment in structures overall rose at a 0.4 percent annual rate.

Equipment investment grew rapidly — rising at a 22.5 percent annual rate — and investment in intellectual products increased at a 4.1 percent annual rate. A 69.3 percent increase in information processing equipment (e.g., computers) accounted for most of the growth. This was also likely in anticipation of tariffs.

Within the category of intellectual products, all the gains were due to software, which is likely AI related. Investment in research development, which is a very broad category that includes everything from biomedical research to research on car production, rose at just a 1.4 percent rate. Investment in entertainment products and literary works fell at a 3.2 percent rate. Spending in this category is still down more than 20 percent from its levels in 2023, before the strikes by actors and screenwriters.

Investment in intellectual products more generally may slow in the quarters ahead if the enthusiasm over AI fades due to Chinese competition and cutbacks to NIH spending and in other areas.

Consumption Growth Slows Sharply in First Quarter

Consumption growth had averaged 3.1 percent over the course of 2024, with growth of 4.0 percent in the fourth quarter. That was driven by a 12.4 percent growth rate in durable good consumption due to tariff anticipation.

Consumption growth slowed to 1.8 percent in the first quarter. A big part of this was the slowing in durable goods consumption, which fell at a 3.4 percent rate. This was predictable, since consumption of durables would not rise much from the already high levels of the fourth quarter.

However, there was also slow growth in services, which rose at a 2.4 percent annual rate, after averaging growth of 3.0 percent in the fourth quarter. A decline in real spending at restaurants was the major factor, with spending overall declining at a 3.0 percent annual rate and spending at fast food restaurants falling at 3.6 percent rate. This is a useful measure of how people feel about their financial situation, since going out to restaurants is very much a discretionary expenditure.

It is also worth noting that utility consumption grew at an extraordinary 18.9 percent annual rate. This was likely weather related and will possibly be reversed in the next quarter.

Productivity Growth Falls Sharply

Productivity growth averaged 1.9 percent from the fourth quarter of 2019 to the fourth quarter of 2024. This is up from just 1.0 percent over the prior decade. Productivity growth will be close to zero and possibly negative for the first quarter. Hours worked will be close to flat, with a small positive in payroll hours offset by a decline in the number of people reported as self-employed. Value-added in the non-farm business sector fell at a 0.3 percent rate. This will translate into near zero, and possibly negative, productivity growth.

The data for both hours and GDP are subject to substantial revisions, so the numbers may look different in subsequent months. Also, the quarterly data are erratic, so it’s not unusual to see a quarter far out of line with the longer trend. But if we are moving to a slower productivity growth path that would be bad news for both real wage growth and inflation.

The First Quarter Could Be the Start of a Recession

A recession is conventionally defined as two consecutive quarters of negative growth. This is not a hard and fast rule, but it is a reasonable metric. With considerable uncertainty from the administration’s tariff policy and the impact of its job and spending cuts starting to hit, we may be seeing larger hits to the economy in the quarters ahead. The fact that inflation accelerated sharply, the core PCE deflator rose at a 3.5 percent annual rate, up from 2.6 percent in the fourth quarter, will make it harder for the Fed to decide how to respond.