With the recent contraction of the US economy in Q1 2023, a significant change in the state and direction of economic activity has been marked. According to the Commerce Department, the economy has contracted at an annual rate of 0.3%. That’s quite a reversal after posting a strong 2.4% growth rate in last quarter. The real story behind this contraction is the sharp decline in government spending, federal and state combined. To make matters worse, firms accelerated their imports into the country to get in front of expected tariffs coming down the pipeline.
This report, which tracks economic activity through the end of March, precedes former President Trump’s announcement of his most extensive tariffs. During this period, imports skyrocketed by more than 40%, indicating businesses’ urgency to stockpile goods before potential price increases due to tariffs.
And in spite of the overall contraction, final sales to private domestic purchasers grew every quarter. In turn, they expanded at a robust rate of 3%, matching their vigorous tempo from last quarter. Business investment was surprising too—when you look beneath the top line there’s some clear strength pointing to resiliency. On the other hand, consumer spending grew at a slower rate than earlier in the year, rising only 1.8%.
The economy’s mixed messages have caused many analysts to reconsider their rosy outlooks. Paul Ashworth, chief North America economist at Capital Economics, remarked on the situation:
“Overall, not as bad as feared.” – Paul Ashworth
While the decline in government spending played a critical role in the economic contraction, the increase in imports highlights businesses’ proactive measures to mitigate future costs. The role that these factors played will surely inform debates over fiscal policy and economic targeting in the years ahead.