Understanding GDP and Its Components

GDP Q4 Growth at 2.3%, Below Expectations Due to Inventory Volatility However, excluding the noisy inventory component, growth remained strong, driven by consumer spending, which saw a robust 4.2% increase in the last quarter of 2024. Rather than focusing on the headline number, we emphasize the Fed’s key GDP metrics—final sales of domestic products and private domestic purchasers—which both rose 3.2% for the quarter. Given the economy's strong performance in Q4, the Fed is well-positioned to take a cautious approach to adjusting interest rates in Q1, as we previously noted. A key driver of consumer spending was durable goods, particularly automobiles, which surged 13.9%, likely influenced by the two hurricanes in the South during the quarter. Additionally, recent data suggests that consumers accelerated purchases ahead of rising tariffs, particularly on import-dependent goods. While the full-quarter trade data does not yet confirm this trend, December trade figures showed a notable increase in the trade deficit, supporting this view. At the same time, consumers drew down existing inventories, causing the inventory component to decline sharply in Q4, subtracting 0.93 percentage points from overall GDP. One concerning aspect of the report was the drop in nonresidential investment, which fell 2.2% in Q4. The decline was driven primarily by reduced spending on equipment, particularly in transportation and information. Looking ahead, we expect underlying growth to moderate to our baseline forecast for the entire year of around 2.5% regardless of the volatility of trade and inventory data, as the temporary increase in goods spending cools down while overall demand continues to normalize. 

Is Protectionism Reshaping the Global Economic System? Global trade is undergoing a fundamental shift due to the rising wave of economic protectionism, ignited by former U.S. President Donald Trump’s broad tariff policies. According to The Wall Street Journal, these policies evoke memories of the economic isolation of the 1930s, which contributed to the Great Depression. But how do leading economists view this trend? 📌 Larry Elliott (The Guardian): "Trump sees his trade war as a show of strength, but it’s quite the opposite." 📌 Joseph Stiglitz: "Trump’s trade policies have made the U.S. a frightening place for investment and increased the risk of stagflation," a situation where inflation remains high while economic growth slows. 📌 Steven Greenhouse (The Guardian): "Trump’s obsession with tariffs is a losing proposition." These policies have not only raised prices but also hurt economic growth and negatively impacted U.S. industries, suggesting they could backfire. Alarming Figures: 📊 4,650 import restrictions among G20 countries (a 75% increase since Trump took office). 📊 Global growth softens across major economies: Global GDP is expected to decline from 3.2% in 2024 to 3.0% in 2026, with U.S. growth cooling to 1.6% by 2026 and China slowing to 4.4%. ⚠️ Economic Risks: ✔ Rising Inflation – Tariffs make imports more expensive, driving up prices. ✔ Weaker Economic Growth – Trade restrictions reduce efficiency and productivity. ✔ Eroding International Relations – Protectionism could lead to prolonged trade wars. In my opinion: Tariffs can be beneficial in the short term, but their risks are significant in the long term. Do you think we are witnessing a long-term shift toward economic isolation, or is this just a temporary trend that will soon fade? Sources: in the comments #GlobalTrade #Protectionism #Tariffs #SupplyChain #Inflation

The need to separate noise from signal is very much in play after the release of Q1 GDP out today, which showed a decline. The headline, a decline: The Q1 GDP reading, showing an annualized decline in economic activity of 0.3%, was extremely noisy, reflecting a massive 41% surge in imports as firms sought to get ahead of tariffs. That rush is set to turn to a slowdown in imports, container ship traffic is set to wane on the West Coast, but inventories are fully stocked for now. But how will consumers behave in the months ahead?   GDP Math is difficult: Measuring the world’s largest economy is difficult and complicated. Reflecting that, the difference between exports and imports subtracted nearly 5% from growth during the first three months of the year. Government spending, led by the federal government, declined during the period. No surprise given the Trump administration’s approach.    Maybe more useful as a measure: A gauge of underlying consumer and business demand that may be more useful during this volatile time, final sales to private domestic purchasers surged at an annual rate of 3%. As for consumers, who power the economy, spending rose at an annual rate of 1.8%, down from 4% in the fourth quarter of last year coinciding with the holiday shopping season.   OK, but what about a recession? A continued GDP contraction in the current quarter and beyond is far from guaranteed, but it is a risk. At issue is whether the consumer continues to power the economy and whether they'll have the wherewithal and desire to remain engaged as purchasers. With imports being sharply curbed and prices likely set to rise, their ability and desire to buy, not dissimilar from the supply chain disruption days of COVID, will be watched closely.   Who decides, consumers or someone else? There's a difference between the official declaration of a recession and how consumers can feel, as affirmed by the fact that many consumers have incorrectly associated their reduction in buying power in the face of elevated prices with a recession. On top of that, consumer sentiment is in the dumpster, on fire. The National Bureau of Economic Research (NBER), the official arbiter of recessions in the U.S. takes a much broader and nuanced look to make the declaration, requiring more in its assessment than a GDP contraction or two. Other key metrics include income, employment, and industrial production. If declines are seen in these areas, that could lead the NBER to check off the boxes it requires to make the recession call, typically some months after a downturn has begun.   The Fed is watching: Don’t look for a rate cut, or increase for that matter, next week. The Federal Reserve is watching to see how inflation and the job market shape up in the coming months.  

Key Economic Indicator Slows, Contradicting Rosy GDP Growth Headline Gross Domestic Product grew by 3.0% (annualized) more than inflation during the 2nd quarter of 2025. If real GDP growth were a good measure of the healthy of overall macroeconomic conditions then +3.0% would be great news--but in this case it's not. In fact, +3.0% for Q2 is just as misleading as the -0.5% real GDP growth figure for Q1, which didn't really indicate an economy in recession. The GDP number, unfortunately, can be whipsawed by two factors that exert a great deal of leverage but that aren't necessarily meaningful: one is net exports, and the other is change in inventories. (Changes in government spending can also distort a diagnosis of the health of the private economy.) The -0.5% overall GDP figure in Q1 was driven primarily by a huge +38% increase in imports as consumers and businesses sought to purchase from overseas before an enormous announced increase in import taxes went into effect. Guess what happened in Q2? That artificial import surge was reversed, with imports down by -30%. For anybody interested in the actual health of the overall macroeconomy, a much better figure is "Final Sales to Private Domestic Purchasers," which focuses on private-sector consumption and investment, ignoring those whipsawing accounting entries (net exports and inventory change) as well as changes in government spending. So here's the bad news: final sales to private domestic purchasers has weakened during each of the last three quarters. That key figure grew by +3.4% in 2024Q3, then by just +2.9% in 2024Q4, then by just +1.9 percent in 2025Q1, and finally by just +1.2% in 2025Q2. That's not healthy. In data going back to 1947, only 1/8 of non-recession quarters had real growth in final domestic purchasers weaker than +1.2%. The problem is that inflation still hasn't come down: the core PCE price index for Q2 showed inflation still too hot at +2.5%, which means that it will be difficult for the Federal Open Market Committee (FOMC) to reduce policy interest rates to protect the economy from recession. To be clear, recession does not seem to be imminent: job markets, consumption, and investment have been showing plenty of resiliency. The steady erosion of real final sales to private domestic purchasers, however, is the first sign of weakness that I have found meaningfully ominous. #gdp #economy #recession #interestrates #inflation #fomc #Middleburg

The overall domestic economy grew 1.6% annualized in the first quarter, dragged down by inventories and trade. Highlights from Advance GDP Release (Q1): · If we look just at the consumer, spending downshifted to 2.5% annualized from 3.3% in Q4 of last year. · Consumers pulled back on goods purchases and focused on the demand for services in an economy still recovering from the pandemic shock. · Residential investment contributed to growth as demand for housing was strong. Construction activity was robust as builders offset the low inventory of homes available for sale and the years of underbuilding. · Personal savings fell to 3.6% in Q1 from 4.0% in the previous quarter as consumers dipped into savings to fuel spending. Bottom Line: The economy will likely decelerate further in the following quarters as consumers are likely near the end of their spending splurge. Savings rates are falling as sticky inflation puts greater pressure on the consumer. We should expect inflation will ease throughout this year as aggregate demand slows, although the path to the Fed’s 2% target still looks a long way off. LPL Financial LPL Financial - Research

As I reflect on economic data reported by Bloomberg, one thing is clear: the global economy is navigating a complex and intensifying push-pull dynamic shaped by inflationary aftershocks, divergent growth rates, and policy recalibrations. The numbers tell a compelling story. The US economy remains resilient, with fourth-quarter GDP expected to increase by 2.7%, driven by strong consumer spending and a robust labor market. In contrast, Europe is grappling with stagnation, while Asia presents a mixed bag of opportunities and challenges. Central banks across the globe are carefully calibrating policies to balance inflation risks, growth ambitions, and geopolitical uncertainties. For corporate finance leaders, these signals demand strategic reflection. Here’s how I’m interpreting the landscape: - US personal consumption exceeded 3% growth for two consecutive quarters, powered by a strong labor market. However, rising delinquency rates among lower-income households hint at potential cracks beneath the surface. Companies targeting affluent consumers may see more stable growth, but businesses across all sectors should prepare for shifts in spending patterns. - The Federal Reserve is expected to hold rates steady, with only limited cuts projected for the year. This signals that the cost of capital will remain elevated, underscoring the importance of disciplined capital allocation and careful management of debt tied to SOFR. Maintaining liquidity and flexibility will be critical as borrowing conditions remain tight. - The US continues to outperform, but Europe is stalled, and Asia remains uneven. While Japan shows strength, headwinds in China and elsewhere may limit broader regional momentum. For multinational firms, the U.S. remains a reliable growth engine, but global demand dynamics could weigh on export-driven strategies. - Heightened tariff uncertainty and evolving US trade measures could disrupt supply chains and increase costs. Companies should proactively assess exposure to potential trade disruptions and consider regional diversification strategies. 2025 is shaping up to be a year that rewards thoughtful, data-driven finance teams. It will be interesting to see how divergent monetary policies and country-by-country trade tensions play out on the global stage. #finance #business #economy #policy #inflation #financeinsights

The U.S. economy contracted at a 0.5% annual rate in Q1 2025 in newly revised data, slightly worse than the previous estimates of a 0.2% decline. It remained the first decrease in activity since Q1 2022, with a  sharp pullback from 2.4% growth in Q4 2024. That said, the data are volatile, distorted by consumers and businesses front-loading purchases ahead of anticipated tariff increases.   Consumer spending—a key driver of restaurant sales—slowed sharply in the first quarter. Personal consumption expenditures rose just 0.5%, the weakest pace since the pandemic and a key contributor to the downward revision in the latest GDP report. Despite the negative headline number, underlying data still point to pockets of resilience—though each revision has introduced more uncertainty. Consumer spending and fixed investment, which together represent domestic demand, contributed 1.67 percentage points to GDP growth in Q1, expanding at a 2.2% annual rate. That’s down slightly from the prior estimate of 2.14 points and 2.5% growth. Business fixed investment rose a strong 7.6%, led by gains in equipment and intellectual property products.    Looking ahead, uncertainty looms—particularly on the policy front—prompting caution among both consumers and businesses and dampening discretionary spending, including dining. While Q1 was skewed by tariff-driven stockpiling, Q2 may show the reverse: reduced imports and inventory drawdowns. Some early purchases may also have pulled demand forward, setting the stage for additional softness.   Current forecasts call for annualized GDP growth of 1.5% in 2025, though downside risks keep the outlook clouded. Greater policy clarity could help unlock stronger economic performance, but for now, anxiety continues to weigh on momentum. Even so, the U.S. economy has shown surprising resilience, and with fewer obstacles, consumer and business spending could help stave off a more pronounced slowdown. For the full National Restaurant Association post on the latest GDP revision, see https://lnkd.in/e9_cZ7Rp.

The bottom line for the advance estimate of first quarter GDP is that the 0.3% dip is not far out of line with the market expectation of a 0.2% increase. As expected, growth was primarily dragged down by a big widening in the trade deficit in the first quarter as consumer and business demand for imported goods surged before expected changes in tariffs could increase costs and perhaps disrupt supply chains. Net exports saw a deficit of $1.262 trillion in the first quarter after $920.1 billion in the fourth quarter. Net exports made a negative contribution of -4.83. Some of the imports of goods went into inventories for later use. The change in private inventories rose to $181.7 billion in the first quarter from $13.6 billion in the fourth quarter and made a positive contribution of 2.25. Too much should not be read into a single quarter of negative growth in the context of two negative quarters signal a recession. The first quarter is heavily influenced by a single component that should normalize over the next few quarters. Moreover, the first quarter of a year is typically the slowest. However, the all-important component of personal consumption was up 1.8% in the first quarter and made a positive contribution of 1.21 which was less than usual. Gross investment outpaced that with a jump of 21.9% in the first quarter and a contribution of 3.60 which is an unsustainable increase. Between signs of moderation in consumer spending and businesses having front-loaded their inventories and expenditures for capital goods, there is likely little upward momentum going forward for the US economy. The advance estimate is based on a number of assumptions and is likely going to be revised when the second estimate is released at 8:30 ET on Thursday, May 29. It is unlikely to change the picture of a US economy in an abrupt slowdown from the up 2.4% in the fourth quarter. #gdp Please do not use without attribution. Prepared without use of AI. Copyright © Theresa A Sheehan

EY Macro Pulse The US economy looked good in Q2, but… 📈 Real GDP growth was revised 0.2ppt higher to 3.0% annualized, more than double the modest 1.4% gain in Q1. The main takeaway from this report is that domestic demand retained solid momentum through midyear. Still, recent labor market, consumer spending, and business investment data point to gradually softening economic activity in Q3. The underlying growth mix signals robust momentum: o           Consumer spending growth revised up an impressive 0.6pt to 2.9%... o           Business investment growth revised lower 0.6pt to 4.6%... o           Residential investment fell 2.1%... o           Inventories contributed 0.8ppt to real GDP growth... o           Net trade represented a substantial 0.8ppt drag on GDP… o           Government spending growth was revised lower to 2.7%... 📉 The major blemish in this report came from gross domestic income (GDI) only rising 1.3% in Q2, following a similarly soft 1.3% increase in Q1. As a result, gross domestic output (GDO) – which is the average of GDP and GDI – climbed 2.1% in Q1. Looking at the broader trend, while real #GDP retained strong momentum in Q2, up 3.1% y/y, real GDI only grew 2.0% y/y. The forward-looking GDO measure is likely a more accurate gauge of underlying economic momentum in Q2 at 2.6% y/y.. 📊 The report also provided the first glance at how companies fared during Q2. Before-tax corporate #profits rose by $57.6bn, following a $47.1bn decrease in Q1. Stronger domestic financial and nonfinancial profits offset weaker international profits. Profit margins rose 0.1pt to 12% of GDP – still elevated by historical standards. 💵 On the #inflation front, price pressures eased modestly in Q2 with headline inflation flat at 2.6% y/y – the lowest since Q1 2021 – and core personal consumption expenditures (PCE) inflation softening 0.3ppt to 2.6% y/y – also the lowest since Q1 2021. 🤔 We expect slower economic activity heading into 2025 as still-elevated prices and interest rates curb private-sector activity. Households will spend more prudently as labor market conditions and income growth soften further while elevated financing costs lead businesses to hire and invest with discretion. Still, business leaders and consumers are not retrenching and financial market volatility is more a reflection of the Federal Reserve being behind the curve in terms of easing policy than reflective of any fundamental economic weakness. This is positive as Fed policy easing in the coming months should support the economy and reduce financial market volatility. We foresee real GDP growth averaging 2.5% in 2024, and easing to 1.7% in 2025. 💼 Unless labor conditions deteriorate materially in the coming weeks, we continue to expect a majority of policymakers will favor a 25bps cut in September. We foresee 25bps rate cuts in each September, November, and December. Full note via EY-Parthenon https://lnkd.in/dmpGXN_m

For two decades, the U.S. relied on China for cheap goods. That era is ending. When China joined the World Trade Organization (WTO) in December 2001, it transformed global trade. At the time, China accounted for just 7% of U.S. imports—well behind Canada (18%), Europe (13%), and Mexico (11%). Over the next two decades, China became the world’s factory floor. At its peak, 22% of all U.S. imports came from China—powering global supply chains and keeping prices low for American consumers. Then came the 2018 trade war. The Trump administration imposed sweeping tariffs, raising the average tariff rate on Chinese goods from 3.1% to 19.3% by the end of 2019. And yet, inflation stayed modest, averaging just 2.1% in both 2018 and 2019. U.S. GDP growth remained steady. The stock market posted strong returns despite periods of volatility—demonstrating the economy’s resilience through the first round of tariffs. Fast forward to today: the conversation around trade and tariffs is heating up again. In 2025, the Trump administration is rolling out global tariffs aimed at putting pressure on trading partners and reshaping the global economic order. The strategy? Use tariffs as leverage—a tool to renegotiate relationships, reduce dependence on China, and reassert U.S. economic strength. Voter frustration with inflation hit a peak during the 2024 election—making inflation the number 1 issue at the polls. Years of rising costs left many households feeling squeezed, and inflation fatigue drove voter sentiment more than any other economic concern. That creates a delicate balancing act for policymakers. If tariffs drive another spike in consumer prices, it risks alienating the very voter base that elected Trump. The same voters championing tougher trade stances are also the ones most sensitive to rising costs at the grocery store, gas pump, and in their monthly budgets. So what’s the risk if a full-scale global tariff war breaks out? The impact on inflation, GDP, jobs, and supply chains is hard to predict—but history offers clues. During Tariff War 1.0 (2018–2019), the U.S. saw surprisingly limited economic fallout: - Inflation remained modest - GDP growth held steady - The stock market delivered strong returns While certain industries felt targeted pain, the broader economy proved resilient. This time, however, the scope is much larger. Trump’s proposed global tariffs wouldn’t just target China—they could impact multiple major trading partners. That raises the stakes and the potential risks: protecting some industries while raising costs, dampening growth, and straining international relationships on a much broader scale. And the real question is—are these tariffs permanent or simply a negotiating tactic? If this is about leverage, we could see most tariffs rolled back once new agreements are struck. But if they become permanent, the long-term economic consequences could reshape global trade for a generation.