Over the past quarter, the United States economy has seen a significant deceleration. It shrank by 0.3% – much worse than analysts had forecast. This drop is even more surprising compared to the 0.2% dip that economists were expecting, adding to worries about the overall economic picture. Even with this contraction, a few key signs point to continued resilience and strength in consumer spending and investment.
The U.S. experienced an all-time high in gold imports during January, boosting the overall import dollar total considerably. These gold imports were not accounted in the final GDP calculation. This reflects a critical disconnect between what people experience as economic activity and what the growth metrics reflect. Commercially, businesses are front-loading a lot of goods for fear of reciprocal tariffs. This sudden increase in imports will soon translate into negative trade dynamics in the months ahead.
Consumer Spending Holds Steady
Yet, despite the deep overall economic contraction, consumer spending proved surprisingly resilient. Real final sales to private domestic purchases were up 3%, showing strong consumer demand in the marketplace. Personal consumption increased by 1.8%, surpassing expectations and suggesting that households are willing to spend despite economic uncertainties.
Business investment held up, with a real growth rate of 3% (rev. 2.9% last quarter). Solid consumer and business spending is a testament to the deep-seated confidence in our economy. This resilience is even more remarkable given the weakness seen in other sectors.
Impact of Import Surge
That drastic and unprecedented increase in imports was a huge blow to economic growth. That added a 4.8% negative weight on the national totals. Analysts identified this spike as a temporary bump, driven by companies trying to evade the possibility of future tariffs. As goods flooded the market, inventory levels began to balloon. In turn, businesses will soon start changing how much they’re stockpiling, reducing those levels back towards normal over the next several months.
With import levels expected to fall, this should take some pressure off overall economic expansion. The short-term impacts of these imports have illustrated that healthy balance between domestic production and international trade.
Inflationary Pressures Persist
Beyond the complications inflicted by an ever-shrinking set of GDP numbers, inflation is still causing heartburn for those in policy circles. Even core inflation as measured by the Personal Consumption Expenditures (PCE) price index increased 3.6%, higher than the previous quarter’s 2.4%. Likewise, the price index for gross domestic purchases was up 3.4%, up from a 2.2% increase in Q4. These increases are a sign of persistent inflationary pressures that will weigh on future monetary policy deliberations.
Business fixed investment rebounded modestly this quarter at 1.3%. This record-setting growth reflects that businesses are still dedicated to investing in their future regardless of an unpredictable economy. Analysts are certain to pay great attention to these trends as they evaluate the possibility of a true recovery in future quarters.