News in Charts: Would the real US economy please stand up

It has been known for some time that US President Donald Trump was seeking to renegotiate US trading relationships, but it wasn’t until 2 April — or the so-called ‘liberation day’ — that the scale of the potential change to the status quo was laid bare, with larger-than-expected US tariffs announced on many countries. Some of these were subsequently paused and what followed was a series of wild stock market sessions, as investors priced in a range of different tariff scenarios. While the outlook remains uncertain, the uncertainty itself affects economic activity.

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The full effect of the trade uncertainty will not be reflected in data before April, although the advance estimate of US Q1 GDP did point to a small contraction last quarter and was affected by trade policy and tariffs — or the prospect of tariffs. Net trade made a record negative contribution to GDP last quarter, shaving off 5.5 percentage points from headline GDP growth. Imports exceeded exports as US buyers rushed to acquire goods from abroad, ahead of these tariffs being implemented. Stock-building rose and made a large, net positive contribution to GDP (as stocks rose on the back of these imports), but the positive contribution they made was much less than the negative contribution of trade. These figures will be revised as more data become available, with the full extent of the impact trade has had on headline GDP not yet clear.

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Underlying domestic US demand appeared strong, with private domestic fixed investment jumping 7.8% on an annualised basis, thanks to strong spending on equipment and software. Personal consumption expenditures, the largest component of US GDP, rose by a respectable 1.8%, despite a large contraction in durable goods, motor vehicles and parts. Once again, this probably does not reflect true underlying demand, as spending on the latter rose by nearly 20% in Q4, as consumers brought forward purchases of EVs ahead of Donald Trump’s second term, over fears he might remove tax breaks on EV purchases. A decline in Q1 was to be expected. Government consumption expenditure and investment contracted by 1.4%.

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Timelier data, such as the forward-looking components of the consumer and business surveys for April, point to a bleaker picture. The New Orders Index of the closely watched Philadelphia Fed survey dropped to its lowest level since the pandemic, while the Conference Board’s Expectations Index dropped to a 13-year low. Uncertainty itself acts as a drag on economic activity as investment and consumption decisions can be delayed and, while GDP does not always align with these surveys, it seems likely that domestically-focused economic data such as investment and consumption will get worse before they get better, whatever the outcome on tariff and trade negotiations. Indeed, Fathom expects a sharp slowdown in economic activity with the full extent of the slowdown still unclear.

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At the time of writing, the US payroll figures for April have not yet been released. Employment figures from ADP, which were released earlier in the week, showed private payroll growth slowed to 62,000 and below expectations. Jobless claims paint a more positive picture, however. Yes, initial claims rose from 223,000 to 241,000 in the week commencing 21 April, but volatility from week to week is not unusual and these readings are much lower than they were ahead of the 2008 financial crisis, when they exceeded 300,000 in each week in the twelve months prior to the collapse of Lehman Brothers, a moment that some people have compared to today.

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The views expressed in this article are the views of the author, not necessarily those of LSEG.

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