“Final sales to private domestic purchasers” jumped by 3.0%, on strength in the private economy of businesses and consumers.
By Wolf Richter for WOLF STREET.
A massive spike in imports, by far the worst ever, on tariff-frontrunning subtracted 5.0 percentage points from GDP growth (adjusted for inflation), turning it negative. A decline in government spending subtracted another 0.25 percentage points, and turned GDP growth to -0.3%, despite decent growth in consumer spending (+1.8%) and a huge surge in gross private domestic investment (+21.9%), including a 22.5% increase in investment in equipment, as companies have begun ramping up investing in production in the US to avoid the tariffs.
We’ll start with “net exports” because they’re the stars of this show today. Net exports are exports minus imports. Exports are a positive in GDP, imports are a negative in GDP. Net exports, driven by an explosion of imports on tariff frontrunning, worsened to a seasonally adjusted annual rate of negative $1.37 trillion in Q1.
- Exports: +1.8% (goods exports +3.2%, services exports -0.7%). Exports added 0.19 percentage points to GDP growth.
- Imports: +41.3% (goods imports +50.9%, services imports +8.6%). This reduced GDP growth by 5.0 percentage points.
GDP dipped by an annualized rate of 0.3%, adjusted for inflation (“real GDP”), after growth rates of 2.4% in Q4, 3.1% in Q3, and 3.0% in Q2.
Exploding imports are not a sign of weakening demand. The Q1 2022 drop in GDP was also caused by a surge in imports after the shortages as supply chains recovered and backed-up goods began arriving in the US.
In terms of dollars, “real” GDP dipped to an annual rate of $23.5 trillion in Q1, according to the Bureau of Economic Analysis today.
“Final sales to private domestic purchasers”: The private US economy.
This metric is part of the GDP report, released today by the BEA, and tracks US private domestic demand from consumers and businesses, including fixed investments by businesses. It is GDP less exports, less imports, less government consumption expenditures, less government gross investment, less change in private inventories. It covers about 87% of GDP and presents the core of the private US economy.
Powell also mentions it from time to time as a purer indicator of private domestic demand from consumers and businesses – which is what monetary policy is trying to influence (not trade and government spending).
Adjusted for inflation, final sales to private domestic purchasers jumped by an annual rate of 3.0% in Q1, to $20.7 trillion, up from 2.9% Q4, attesting to the strength of private domestic demand and investments by consumers and businesses.
The blue columns show the growth rates (left axis), the red line shows the dollars (right axis), all in seasonally adjusted annual rates (SAAR):
Not adjusted for inflation, “current-dollar” GDP grew by an annual rate of 3.5% to $30.0 trillion, measured in current dollars, not inflation-adjusted dollars. This sometimes called “nominal GDP” represents the actual size of the US economy in today’s dollars and forms the basis for the Debt-to-GDP ratio (further down) and similar GDP-based ratios.
Consumer spending rose by an annual rate of 1.8% in Q1, adjusted for inflation, to $16.4 trillion, after three quarters of higher growth rates.
- Services: +2.4%.
- Durable goods: -3.4%%
- Nondurable goods: +2.7%.
Consumer spending along with business activities got “disrupted” by the wildfires in Los Angeles County (nearly 10 million population) in Q1, and the disruptions is included in the GDP data, but the BEA says, “it is not possible to estimate the overall impact of the California wildfires on first-quarter GDP.” So it’s in there, but it can’t be split out:
Private fixed investment jumped by 7.8% annualized and adjusted for inflation, the highest growth rate since Q2 2023, and the second highest since Q1 2022. Of which:
- Nonresidential fixed investments: +9.8%:
- Structures: +0.4%
- Equipment: +22.5%, the highest growth rate since Q3 2020, and the second highest since Q3 2011, as companies invested to ramp up production in the US, which is what tariffs encourage them to do.
- Intellectual property products (software, movies, etc.): +4.1%.
- Residential fixed investment: +1.3%.
Private inventory investment rose to $3.0 trillion in Q1, driven by the surge in imports that went into wholesale inventory. According to the BEA, the top contributor to this increase in wholesale inventories was imported pharmaceutical products, as drug companies were frontrunning the tariffs. This change in private inventories contributed 2.25 percentage points to GDP growth.
Government consumption expenditures and gross investment dipped by 1.4% annualized and adjusted for inflation, the first decline since Q2 2022.
The drop reduced overall GDP growth by 0.25 percentage points.
Combined, federal, state, and local government consumption and investment accounts for 17% of GDP.
Within total government spending, state and local governments account for 61% and the federal government for 39%.
This does not include interest payments, and it does not include transfer payments directly to consumers (the biggest part of which are Social Security payments), which are counted in GDP if and when consumers and businesses spend these funds or invest them in fixed investments.
- State and local governments: +0.8%.
- Federal government: -5.1%.
- National Defense -0.8%.
- Nondefense -1.0%.
The Debt-to-GDP ratio improved slightly to 120.8%, on 3.5% growth in current-dollar GDP (see above) and the Treasury debt that has been stuck at the debt ceiling of $36.2 trillion since the beginning of the year. As soon as the debt ceiling is lifted, the debt will spike, and the Debt-to-GDP ratio will worsen.
The Debt-to-GDP ratio is based on current-dollar GDP and on current-dollar Treasury debt, neither adjusted for inflation (the effects of inflation being both in the numerator and denominator cancel out).
The spike in 2020 occurred as GDP collapsed during the lockdown while the Treasury debt jumped on the government’s free-money-giveaway spree.
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