• A 3.4% GDP quarter rode a sustained, solid comeback of the consumer in 2Q26 and 3Q26 after an abysmal start to the year in PCE growth when the PCE line weighed in at +0.7%. PCE is almost 68% of GDP. The 3Q26 PCE growth line of 3.8% was boosted by a material increase on the Services line at +4.1% (reminder: Services is more than 2x the Goods line in dollars).

• The stock market driver remains the massive fixed investment driven by the AI ecosystem with nonresidential investment at +12.7%. That includes fixed investment at +9.4%. That fixed investment line includes the tech-heavy equipment line at +20.9%, intellectual property at +8.4%, and structures at +5.4%. That is a rare set of numbers in historical context. Residential is still dragging at -3.3%.

• Among the quarterly distorters and swing lines in “contribution to % change in GDP,” we see an increase of +1.61% for “change in private inventory” with a GDP haircut of -3.32% for “net exports of good and service” with the export line down slightly and the import line much higher.

• The import and export line is where Trump should get a reminder that a strong economy imports a lot of goods – and that includes a massive increase in the Taiwan trade deficit that supports so many other GDP lines (and the stock market). It is no surprise they don’t get asked that question by a docile, cowed media (even CNBC). He would need to admit something.

• The Government GDP line also rang up big numbers in changes vs. the preceding period at +5.3% with +15.8% in Federal vs. -0.1% in State and Local. The total contribution to the headline GDP from the Government line was +0.9% (about that ballooning deficit…).

The strong 3Q26 GDP advance estimate story is clear in the numbers.

The GDP table details the breadth of the growth across the consumer and investment lines. The 19.4% in gross private domestic investment (GPDI) remains dominated by the AI ecosystem story and related products.

There are a lot of macro multiplier effects on the other side of the investment lines. As we saw this past week, some of those effects are mass layoffs. That could be a PCE risk factor in later quarters.

In PCE, Goods performed well at +3.0%, but the growth rate was down sequentially from 2Q24’s +4.5%. Nondurables are much larger than Durables. And Nondurables posted +3.4% vs. +2.3% for Durables.

Services rang up +4.1% for highest rate presented in the timeline with 3Q25 2^nd highest in the timeline at +4.0%.

Investment lines remain the capital markets headline story even if PCE is almost 68% of GDP. Information and processing equipment has been a major factor, including in trade.

The Personal Consumption Expenditure release is also out today, and we get a more granular breakdown on inflation, which remains a serious problem and rising across numerous product buckets. The PCE release reveals the “what” of the consumer outlays mix and how the price pressure and affordability challenge is leaning on savings rates. Inflation is still running ahead of hourly wage growth, and that means negative real wage growth. We look at that in a separate commentary.

See also:

GDP 2Q26: Bullish Final Revisions 9-30-26

2Q26 GDP: 2nd Estimate 8-26-26

2Q26 GDP: Good Underlying Numbers Despite Headline 1.5% 7-30-26

GDP 1Q26 Final: PCE Growth Plunge 6-25-26

GDP 1Q26 Second Estimate: Shrunk in the Dryer 5-28-26

1Q26 GDP Advance Estimate: Consumer Fade, Investment Boom 4-30-26

4Q25 GDP: More Adverse Revisions in the Golden Year 4-9-26

Some “distortion” stories of past GDP reports:

3Q25 GDP: Morning After Variables to Ponder 12-27-25

2Q25 GDP: Second Estimate, Updated Distortion Lines 8-28-25

2Q25 GDP: First Cut of Another Distorted Quarter 7-30-25

1Q25 GDP Advance Estimate: Roll Your Own Distortions 4-30-25

• PCE growth in 2Q26 is now only back to the levels we saw in 2Q24 to 4Q24, and the question of sustainability will get put to the test. With PCE around 68% of GDP, that is a key variable.

• The real winners have been along the fixed investment lines, which are smaller in terms of total GDP contribution but remain key drivers of wealth effects and potentially payroll stability from tech to freight and logistics to financial services.

The chart breaks out the critical drivers of GDP from 1Q24 to 2Q26. We detail the contributions to GDP for Personal Consumption Expenditures (PCE) and for Fixed Investment. We already looked at these numbers in our GDP update for the final 2Q26 estimate (see GDP 2Q26: Bullish Final Revisions 9-30-26).

This chart offers a more granular comparative update of objective factual numbers by quarter. The political spin is heavy on adjectives, but the concept of “higher” or “lower” is a fact and not an opinion. The underlying drivers and macro or micro quality assessments of what can influence these numbers is more subjective.

The fallout from Iran is hard to find in the PCE trend. Consumers showed up even if the asterisk ties the volume to the “K shaped recovery” and inequality of the consumption patterns. Wage growth running below inflation is shifting with the lower CPI and PCE inflation metrics, but that reality remains a problem.

The easy takeaway from the chart is that the consumer sector was doing much better in PCE growth in 2024 than in 1Q25 to 1Q26. Trump’s attempt to tag the US as a “dead country” in 2024 reflects his usual economic ignorance since the PCE numbers were strong. PCE growth was north of a 2% contribution in 3 of 4 quarters in 2024 vs. 1 of 4 in 2025 and now 1 of 2 quarters through 1H26.

We see fixed investment coming on strong into 2026 with the AI spending boom. “Equipment” at +13.4% has been a big winner as detailed in the 2Q26 update. “Intellectual Property Products” are also on a roll at +9.2%. We don’t see the capex pace slowing down yet, and that would be a market shock if it did.

The IP and Equipment boom is one of those times when an intrepid reporter could ask Trump “How well do you think the US would be doing without the massive growth in the trade deficit with Taiwan?” You sure will not hear this raised as a topic on CNBC. They do not want to risk their GOP dignitary guest flow.

“Golden Age” still will not fit with these numbers for anyone who was around in the 1980s and 1990s.

The banner fixed investment is obvious in 2026 and 1Q25 period, but the PCE piece of the story is only now starting to swing toward more positive numbers. The sustainability of the PCE growth will get tested with the lag effects of inflation, energy, tariffs, etc.

We covered the noted PCE rebound in the GDP commentary. After we reviewed this month’s PCE data release (Income and Outlays report), the consumption story is proving remarkably resilient after a weak stretch in early 2026.

Headline GDP often comes with material moving parts as we cover in our GDP updates. Net Exports/Imports and changing balances in inventories are usually the biggest movers that can easily swing Headline GDP by +/- 2 points and even more with the wild phase-ins of tariffs and dislocations in working capital in 2025 (see 2Q25 GDP: Second Estimate, Updated Distortion Lines 8-28-25, 2Q25 GDP: First Cut of Another Distorted Quarter 7-30-25). The export and inventory lines in GDP contributions for 2Q26 moved the headline number -1.6 points lower. While Trump hates trade deficits, one does not need much imagination to see that the massive and growing Taiwan trade deficit has been a big contributor to the investment boom.

• The constant self-praise of “greatest economy ever ever ever” even when we see bad numbers can undermine the perception of what is a very solid set of final numbers for 2Q26 GDP growth. This time the numbers are actually very good.

• Inventories shaved off -0.53% from the headline number and net exports of goods and services another -1.1%, so the critical line items in PCE and Fixed Investment are more important signals of strength than the headline. Government was essentially flat.

• Favorable revisions for both headline GDP (revised up by +0.7% to +2.2%) and PCE growth to 3.8% offer the best news. The consumer sector has been the bigger worry with a mixed jobs picture, affordably challenges, inflation worries, and soaring costs at the pump with home heating oil also a worry as the change of season unfolds.

• Durables consumption rose by 7.4% in the final 2Q26 numbers after a favorable +1.7% revision with the much larger Services line revised higher to +3.4%.

• The PCE inflation for the quarter lingers as a worry at +5.0% even after a downward revision from the +5.3% in the 2^nd estimate. We cover the monthly PCE price index release separately, and there are still plenty of Goods and Services showing high MoM price increases. The GDP performance highlights there is solid demand behind that trend.

The above table updates the final revisions on some important GDP lines. There is little to see in the deltas that is anything other than good news. The -0.2% downward revision in Equipment fixed investment is only down to a still-dazzling +13.4% as the AI-driven boom in capex rolls on and the segments of the supplier chain from materials to components to tech and services keep on spending. The Structures line was revised higher by +1.9% and crossed out of negative range.

The above table updates where the time series has migrated since 3Q22 after the 2Q22 start of the tightening cycle, the peak in inflation, and the reactions to the Russia-Ukraine energy fallout.

We highlight the +3.8% increase in personal consumption expenditures, which is the best level since the 2024 period and the 2Q24 to 4Q24 period (we doubt that will come up in White House conversation).

The fixed investment lines in 2026 are still the most impressive macro variables, but PCE is around 68% of GDP and is critical to the cycle and demand side factors influencing pricing power in the new world of tariffs. The favorable revision of +1.9% in Gross Private Domestic Investment reached +4.6%. That is an impressive number. Even residential moved back into the 2% handle range.

See also:

2Q26 GDP: 2nd Estimate 8-26-26

2Q26 GDP: Good Underlying Numbers Despite Headline 1.5% 7-30-26

GDP 1Q26 Final: PCE Growth Plunge 6-25-26

GDP 1Q26 Second Estimate: Shrunk in the Dryer 5-28-26

1Q26 GDP Advance Estimate: Consumer Fade, Investment Boom 4-30-26

4Q25 GDP: More Adverse Revisions in the Golden Year 4-9-26

Some “distortion” stories of past GDP reports:

3Q25 GDP: Morning After Variables to Ponder 12-27-25

2Q25 GDP: Second Estimate, Updated Distortion Lines 8-28-25

2Q25 GDP: First Cut of Another Distorted Quarter 7-30-25

1Q25 GDP Advance Estimate: Roll Your Own Distortions 4-30-25

• A 1.5% headline for 2Q26 GDP, down from 2.1% in 1Q26, is not impressive by any stretch. We find reassurance in the stronger Personal Consumption Expenditure (PCE) growth, which was revised higher to 3.4% after an abysmal 1Q26 of 0.5% and 4Q25 of 1.9%. The headline PCE price index for the quarter was revised higher to +5.3% and Core PCE revised up to 3.6%.

• For some context, that 3.4% PCE growth is one of two 3% handle PCE Growth quarters in Trump 2.0 (we saw 3.5% in 3Q25). During 2024 and Biden’s last year, PCE growth was 3.9% in 4Q24, 4.0% in 3Q24, and 3.9% in 2Q24. The consumer made a comeback in 2Q26.

• The dazzling fixed investment lines remain very impressive at +7.0% as noted in the charts and earlier GDP review. Nonresidential is driving the numbers even with a downward revision in Equipment to +13.6% while Intellectual Property Products was unchanged at +8.8%. Those two dwarf a weak Structures line at -1.8%. Residential was revised down by -0.2% to +1.3%.

• The multiplier effects of the AI boom across so many industries (durables and services) are carrying the ball for the economy broadly as highlighted in the 2Q26 Corporate Profits schedule release along with the GDP.

• We would argue it takes a string of 4% and 5% headline PCE growth rates to make a “Golden Year” (let alone a “Golden Age”). We have had them in the past, but “this ain’t it.” Clinton and Reagan had more than a few Golden years (see Presidential GDP Dance Off: Clinton vs. Trump 7-27-24, Presidential GDP Dance Off: Reagan vs. Trump 7-27-24).

The above chart updates the GDP line item deltas to reflect the 2^nd estimate for 2Q26. We covered the main events in the bullets on PCE and Fixed Investment, but Government also continues its decline with a -1.0% 2Q26 and a -0.2% adjustment from the advance estimate.

For the usual “distortions” that we highlight each quarter, the “change in private inventories” contribution shaved -0.72% off the headline GDP while the trade deficit delta reduced GDP by another -1.14%.

The GDP timeline above tells a story of slower growth than past cycles but also a mix of line items that highlight the fixed investment boom as well as the dramatic swings in inventory and trade deficit impacts in the interim quarters of 2025 as working capital management was dramatically distorted by tariff phase-ins (see 3Q25 GDP: Morning After Variables to Ponder 12-27-25, 2Q25 GDP: Second Estimate, Updated Distortion Lines 8-28-25, 1Q25 GDP Advance Estimate: Roll Your Own Distortions 4-30-25).

When the smoke cleared on 2025, the annual GDP rate was 2.1% vs. 2.8% in 2024. The 2.1% GDP growth of 2025 was the lowest annual GDP growth since -2.1% in 2020 and +1.8% in 2016. Those are the facts from the BEA.

The challenge in 3Q26 and 4Q26 is to generate a 3.0% handle year despite the tariffs, Iran War fallout, and higher UST rates driven in part by inflation and the pressure of massive deficits and other-worldly UST supply. A 3.0% annual GDP growth rate would not be a Golden Year but would be a well-polished and useful Pewter Year for the next leg of the AI journey. Fewer trade wars and shooting wars would help.

See also:

GDP 1Q26 Final: PCE Growth Plunge 6-25-26

GDP 1Q26 Second Estimate: Shrunk in the Dryer 5-28-26

1Q26 GDP Advance Estimate: Consumer Fade, Investment Boom 4-30-26

4Q25 GDP: More Adverse Revisions in the Golden Year 4-9-26

Some “distortion” stories of past GDP reports:

3Q25 GDP: Morning After Variables to Ponder 12-27-25

2Q25 GDP: Second Estimate, Updated Distortion Lines 8-28-25

2Q25 GDP: First Cut of Another Distorted Quarter 7-30-25

1Q25 GDP Advance Estimate: Roll Your Own Distortions 4-30-25

• The 1.5% headline GDP moved down from 2.1% in 1Q26 and rose from +0.5% in 4Q25, but 2Q26 includes a healthy bounce in PCE growth from +0.5% in 1Q26 to +3.2% in 2Q26.

• Fixed investment growth is still dazzling, running at a robust +7.0% (up from +6.5% in 1Q26 and +1.5% in 4Q25).

• We always look to the consumer (PCE) and investment lines for the “real” story. The usual distortion lines in GDP contribution such as net exports (-1.01% in 2Q26 vs. -0.37% in 1Q26) and changes in private inventory (-0.67% in 2Q26 vs. +0.23% in 1Q26) shave a total of almost +1.7% off the headline GDP.

• The Government consumption and investment line also shaved off -0.8% in 2Q26 with underlying moves at the Federal level of -4.1% (+2.4% National Defense, -12.9% Nondefense) combined with the much larger (78% bigger) State and Local line at +1.1%.

The GDP growth below the headline level tells the story with the PCE line being the most important swing in the advance 2Q26 numbers. PCE is a line that is typically 68% of GDP, so that always tops the list. PCE at +3.2% includes an impressive pop of +5.2% in Goods with Durable Goods at +6.8% and Nondurables at +4.4%. Meanwhile, Services was only +2.2% but shows a favorable variance vs. the +0.5% of 1Q26.

The fixed investment line stayed hot at +7.0%, which is impressively above historical levels and up from +6.5% in 1Q26 and +1.5% in 4Q25. Within fixed investment, the Equipment line posted +15.2%, down slightly from +15.8% in 1Q26. Intellectual Property Products growth stayed strong at +8.8% even if down from +13.8% in 1Q26. We even saw Residential Investment get out of the red zone with sustained weakness in housing at least stabilizing.

The usual “distortion lines” were at work again as we have discussed in past GDP commentaries. The “softer” GDP lines include net exports and inventory changes. These can generate minimal to major swings each quarter. The timing of inventory pre-buying and trade flows materially distorted some of the 2025 quarterly moves in dramatic fashion (see links at bottom). For 2Q26, the distortion was just under 1.7 points (-1.0 for trade, -0.67 for inventory). That effect was much smaller than some 2025 impacts but still material.

The classic growth drivers of the Personal Consumption Expenditure growth and Fixed Investment performed well, and it is always a useful drill to check out how much contributions from trade deficits and inventory swings move the needle at the headline level.

See also:

GDP 1Q26 Final: PCE Growth Plunge 6-25-26

GDP 1Q26 Second Estimate: Shrunk in the Dryer 5-28-26

1Q26 GDP Advance Estimate: Consumer Fade, Investment Boom 4-30-26

4Q25 GDP: More Adverse Revisions in the Golden Year 4-9-26

Some “distortion” stories of past GDP reports:

3Q25 GDP: Morning After Variables to Ponder 12-27-25

2Q25 GDP: Second Estimate, Updated Distortion Lines 8-28-25

2Q25 GDP: First Cut of Another Distorted Quarter 7-30-25

1Q25 GDP Advance Estimate: Roll Your Own Distortions 4-30-25

• Despite the upward revision of headline GDP related to imports, the main story line is still concentrated in the consumer sector (PCE) and corporate capex (fixed investment) with capex winning and households losing.

• The decline in the critical personal consumer expenditure (PCE) line (68% of GDP) reflects a mediocre economic backdrop, worries around inflation and job security, and the household cash flow pressure tied to energy costs, higher health care premiums (and costs for those who can no longer afford the premiums), and higher rates on increased household borrowing.

• The low savings rates, higher household debt, and developing signs of consumer credit quality erosion remain on the front burner for economic growth uncertainty. The 6.5% mortgage rates don’t help. Neither does negative real wage growth.

• The usual “distortion lines” (notably net exports, see 3Q25 GDP: Morning After Variables to Ponder 12-27-25) were at work again in the final revision as lower imports boosted headline GDP from the “net exports of goods and services” line.

• Fixed investment remained extremely strong in the final 1Q26 numbers, but Residential investment was revised even lower to -7.8%. Gross private domestic investment of +7.9% reflects the capex boom in tech more than the hope for a reshoring wave in manufacturing.

• On a somber note for inflation, the PCE price index for the quarter ticked slightly higher to +4.6% with the Core PCE price index for the quarter at +4.4%.

The above table updates the most important GDP line items for the final 1Q26 growth numbers. The most notable adverse variances are along the PCE lines with PCE sliding from +1.4% to only +0.5%. That was a downward revision of -0.9% from the second estimate. You can track that history in the second chart below.

The +0.5% growth rate for PCE in 1Q26 is the worst since 1Q22 at +0.4%. The total contribution to GDP from the PCE line in 1Q26 was only 0.37% (vs. 1.30% in 4Q25). The +0.5 growth in PCE was only slightly worse than the weak 1Q25 in Trump’s first quarter of his second term at +0.6%. We tend not to hear much from Bessent or Hassett on the GDP growth numbers cited in Trump’s recurring praise of the “hottest country” in the world (After all, why use objective numbers when adjectives are available?).

That +0.5% in 1Q26 can be framed against 2024 with +3.9% PCE in 4Q24, 4.0% in 3Q24, and 3.9% in 2Q24 (back when Trump claims the US was “dead” before the current “Golden Age”). Services growth in the final 1Q26 PCE saw a material negative revision of -1.3% to +0.5% for 1Q26 in Services. As noted in the chart, the period from 1Q22 through 1Q26 shows the two worst growth quarters for Services were 1Q26 at +0.5% and 1Q25 at +0.8%.

What has been impressive in the GDP accounts is the extraordinary growth in fixed investment numbers with even more upward revisions in the nonresidential lines in the final numbers. Equipment and Intellectual Property Products are soaring. Residential is obviously a very different story with the numbers getting even worse.

The above table offers a timeline that can be used to objectively frame how the GDP lines have performed across the periods from the end of ZIRP in 1Q22 across the inflation spike, into the tightening cycle, into the tech boom, across a backdrop of broad tariff policies, and then an oil spike related to the Iran War.

See also:

Trade Deficits: The Moving Parts and Macro Goals Matter Most 6-24-26

Market Commentary: Asset Returns 6-21-26

The FOMC Dance: Will Warsh and Trump Find a Rhythm? 6-17-26

Housing Starts May 2026: Weaker for both Single Family and Multifamily 6-16-26

Industrial Production May 2026: Steady, Balanced Utilization Levels 6-15-26

Geopolitical risk: Trump’s Nuclear Saber Rattling? 6-14-26

Producer Price Index May 2026: Too Many “Since 2022” References 6-11-26

CPI May 2026: The 4% Rubicon 6-10-26

Remembering D-Day: June 6, 1944

Employment May 2026: Big Rebound, Low Multiplier Bias 6-5-26

The Fall of CBS 6-3-26

JOLTS April 2026: A Modestly Positive Turn 6-2-26

Retail Signal Read Part Deux 6-1-26

New Home Sales April 2026: Slow Start to Spring 5-28-26

PCE Inflation: Income and Outlays April 2026 5-28-26

GDP 1Q26 Second Estimate: Shrunk in the Dryer 5-28-26

Retail Equity Comps: Looking for Signals 5-26-26

D.R. Horton: Financial Powerhouse Despite Cyclical Softening 5-20-26

• A downward revision in GDP growth from 2.0% to 1.6% offers minimal bragging rights in the line item that is over 68% of GDP. The fixed investment line is a very different story with GPDI at +7.0% including +10.1% in Nonresidential investment. Government weighs in at +4.4%.

• Residential remains under a cloud at -6.2% and offers a prism to view how interest rates dampen consumer big tickets on financing costs. Mortgage rates at a 6.6% handle are not helping. The FOMC easing story line and bull flattener theories are taking a beating unless the Iran situation gets to a more constructive conclusion. The 1Q26 headline PCE price index still weighed in at +4.5% while the Core PCE price index ticked slightly higher to +4.4% from +4.3%.

• The Personal Consumption Expenditure line at +1.4% is weak in historical context with Goods at only +0.4% and Services at +1.8%. That is even with saving rates hitting post-2022 lows at 2.6% (vs. 3.2% in March and 4.3% to start the year in January). Savings rates are above the 2.2% lows of June 2022 and flat to the 2.6% in April and May of 2022.

• Fixed asset investment is booming with Equipment at +17.2% and Intellectual Property Products at +11.6% partially offset by -5.4% on Structures and -6.2% on Residential.

The above chart updates the GDP line item deltas to reflect the 2^nd estimate for 1Q26. The main moves include a downward revision of Gross Private Domestic Investment (GPDI) from “extremely high” to “slightly less extremely high.” The negative growth in Residential was less negative. PCE was clipped by a material revision to the large Services line. Goods as revised higher, which was a positive signal considering tariffs.

The above table updates the running GDP line items beginning in 1Q22 during the quarter when ZIRP ended, inflation was kicking into gear, and the tightening cycle got busy in the following quarters. The easing cycle started in 3Q24.

See also:

1Q26 GDP Advance Estimate: Consumer Fade, Investment Boom 4-30-26

4Q25 GDP: More Adverse Revisions in the Golden Year 4-9-26

3Q25 GDP: Morning After Variables to Ponder 12-27-25

2Q25 GDP Final Estimate: Big Upward Revision 9-25-25

1Q25 GDP: Final Estimate, Consumer Fade 6-26-25

Trump’s “Greatest Economy in History”: Not Even Close 3-5-25

Gut Checking Trump GDP Record 3-5-25

Presidential GDP Dance Off: Clinton vs. Trump 7-27-24

Presidential GDP Dance Off: Reagan vs. Trump 7-27-24

• The 1Q26 headline GDP growth marks a sequential strengthening from a very weak 4Q25, but the stark divergence across growth in PCE vs. Fixed Investment reminds us that there is a lot going on in the mix from the household level to corporate investment budgets and what is underway in tech sector evolution (see 4Q25 GDP: More Adverse Revisions in the Golden Year 4-9-26).

• Personal Consumption Expenditures (PCE) posted growth of 1.6% for 1Q26, down from 1.9% in 4Q25 and the lowest since 0.6% in 1Q25. PCE growth in 1Q26 is lower than all 4 quarters of 2024 (Biden’s last year in office). That is what the objective numbers say. Subjective storytellers have other versions.

• The real GDP growth movers were over in the fixed investment bucket where tech outlays carried the day. The line items notably diverged with total Nonresidential fixed investment at +10.6% on the back of the Equipment line at +17.2% and Intellectual Property Products at +13.0%. In contrast, we see Structures at -6.7% under the fixed investment line. Residential investment weighed in at -8.0%. The contribution to GDP (Table 2) from “Information and Processing Equipment” was 0.83% and dwarfs other equipment categories. Tech rules capex trends.

• The GDP report includes details of a 4.5% PCE price index for 1Q26 vs. 2.9% in 4Q25. The core PCE price index stood at +4.3% in 1Q26 vs. 2.7% in 4Q25. The March monthly PCE price index data was also released this morning with some fairly ugly numbers. The 3.5% YoY for March was up from 2.8% in Feb 2026 while Core PCE YoY of 3.2% was up from 3.0% in Feb 2026. That is the wrong direction for easing. Goods PCE rose by 3.8% in March vs. 1.8% in Feb. The +14.4% YoY for PCE prices in Energy Goods and Services is a number with more lag effects to come.

• The reality of sharply higher inflation across multiple line items brings the potential for an ongoing squeeze on real wages and more threats to an already soft PCE line in the GDP accounts. The Iran War (“excursion”?!) thus could further undermine the latitude for FOMC easing even if Warsh can play with the data and squeeze out enough outlying data points to make his inevitable advocacy for easing somewhat stronger. Perhaps the consumer will instead “trim the mean” on their household baskets, change diets, switch brands, and drive/travel less.

The chart above updates the key drivers of GDP with Personal Consumption Expenditures (PCE) always the dominant factor at around 68% of GDP. The Gross Private Domestic Investment categories account for almost 18% of nominal GDP and posted a very strong quarter. That is where the tech boom is playing out under Equipment and Intellectual Property. The dramatic swing in the Federal GDP contribution (from -16.6% in 4Q25 to +9.3% in 1Q26) tend to get discounted and segregated from the core economic story. The big move in government lines was the swing in the Nondefense Federal line from -24.3% in 4Q25 to +20.3% in 1Q26.

Coming off the +0.5% 4Q25 GDP and annual GDP growth rate of 2.1% for 2025, there is little to brag about in the GDP story until this Fixed Investment pop in 1Q26. PCE and Fixed Investment is the main story and not trade deficit deltas or working capital distortions (see 4Q25 GDP (Advance Est.): Less Distortion This Time 2-20-26, 3Q25 GDP: Morning After Variables to Ponder 12-27-25).

The annual GDP growth of 2.1% in 2025 was well below the 2024 growth rate of +2.8% (see 4Q25 GDP: More Adverse Revisions in the Golden Year 4-9-26) and no amount of “grinning and spinning” by Hassett et al. can make 2025 a good growth year. We now see the 1Q26 numbers getting better in fixed investment.

The multiplier effects of the impressive tech capex cycle show up in higher imports and exports both. We also see the major industrials getting some lift from the capex programs as underscored by Caterpillar’s stock response today as CAT rose by almost 10% with robust earnings and guidance. Both the “Construction” and “Power and Energy” segments showed impressive growth. CAT also reduced its tariff cost estimates (for now).

The PCE wildcard and the inflation X factor…

The numbers in the box above tell a story of weaker growth rates in historical context. A scan of the PCE price index in the 1Q26 GDP report was bad news, so the FOMC role as a potential tailwind (or not) is still up in the air with the oil scare. We saw mortgages briefly hit 6.5% yesterday, so the housing story and cost of durables financing by customers is a developing story with the Iran War fallout.

The 4% handle numbers for PCE inflation reported for 1Q26 might leave Warsh in need of a good qualitative sales pitch since the numbers are not helping the FOMC easing themes (no wonder he wants to change the data approach).

The YoY lines by product groups in GDP growth are also sobering with Goods at -0.1%, Durables at 0.0%, and Nondurables at -0.2% (Table 1). Services weighed in at +2.4% growth for 1Q26 in the GDP report. Overall, the PCE line and consumption growth rates rolled up into an unimpressive rate of growth that certainly does not fit under the heading of “Golden Age.” The tech story came through loud and clear on data centers and equipment demand.

Consumers don’t help the sustained expansion story so far…

The Personal Consumption Expenditure (PCE) lines are starting to show the wear and tear of policy chaos. It is hard to lean on a scenario of lower chaos levels ahead even if Iran can get worked out. The hectic headline uncertainty extends from tariffs to geopolitics. In tariffs, we have the USMCA up for review and Trump still does not even admit the buyer/importer writes the check, so what do you do with that? Trump even blasted out “Truth” social commentary along the way that tariff refunds would be going to foreign sellers and other countries.

The tariff topic will heat up again with Canada and Mexico, where the relationships have been rapidly deteriorating. No members of the sycophant legion have dared to explain the basic tariff mechanics to their leader. Or he is simply not telling the truth. Meanwhile, the Iranian nukes that had been “obliterated” (remember how mad Trump would get about anyone who said otherwise) are now the refrain (What is preventing a nuclear weapon worth? As repeated over and over by Hegseth to Congress this week.) Nukes are now the core rationale for the Iran War and the continued blockade.

Trump’s core strategy is based on the idea that a radicalized nation of over 90 million, including many hardened by a brutal Iran-Iraq war int the 1980s, would roll over like Venezuela, where the ancestral allies of Maduro remain at the helm. Extrapolation from Venezuela rolling over to expecting an easy victory in Iran will get written up in the history books for generations to come with a Trump brand stamped on it. Not in a good way.

See also:

Market Commentary: Asset Returns 4-26-26

Synchrony Financial: Favorable Consumer Credit Signals 4-24-26

Market Commentary: Asset Returns 4-19-26

Industrial Production March 2026: Mixed Picture, Big Questions Ahead 4-16-26

Existing Home Sales March 2026: New Beginnings or New Ends? 4-15-26

Producer Price Index March 2026: Heater or Curve Ball? 4-14-26

CPI March 2026: The CPI Cycle Could Prove Maddening 4-12-26

4Q25 GDP: More Adverse Revisions in the Golden Year 4-9-26

The US as an Aspiring Emerging Market: Fiscal SNAFU, Political FUBAR 4-6-26

Employment Situation March 2026 4-4-26

Payroll Focus: ADP Highlights March 2026 4-1-26

JOLTS Feb 2026: Openings Down, Hires Down, Layoffs Up 3-31-26

UST Deltas: Elevation Realities 3-29-26

Market Lookback: Confusion Reigns, Dislocation Pours 3-22-26

New Homes Sales Jan 2026: The Nays Carry 3-19-26

Market Lookback: The Gulf of Cause and Effect 3-15-26

Housing Starts Jan 2026: Total Starts Up, Completions Up, Permits Down 3-12-26

VIX: Market Still Not Getting the Vapors 3-6-26

Meanwhile…Back in Economics and Tariffs 3-2-26

• The final revision for 4Q25 GDP moves the needle to +0.5% from +0.7% in the 2^nd estimate and +1.7% in the advance estimate. Weakness in personal consumption expenditures (PCE) was the dominant driver (Reminder: PCE is ~68% of nominal GDP).

• The 4Q25 PCE line posted a contribution to 4Q25 GDP of 1.30%, down from the +2.61% of 4Q24. The PCE % change from the preceding period (Table 1.1) posted +1.9% in 4Q25 vs. +3.9% in 4Q24. The 4Q25 period and annual 2025 numbers do not qualify as “golden” or meet Trump’s description of the US as the “hottest” country. The objective numbers are not there.

• Fixed investment was weak in 4Q25 at +1.5% vs. the prior period despite all the data center and capex themes. The Structures line was negative at -6.5% with Residential at -1.7%. The Net exports of goods and services line was only -0.22% after all the dramatic swings of earlier quarters as tariffs rolled in and working capital cycles swung around (3Q25 GDP: Morning After Variables to Ponder 12-27-25).

• As the “greatest first year in Presidential history” goes, the final annual GDP story of 2025 leaves something to be desired with an annual GDP growth rate of only +2.1%. That +2.1% annual growth rate is lower than all 4 years of Biden (including 2022).

• The “truth” social tirade this week revisited the “dead country” theory of what came before Trump. As dead countries go, the 2.8% annual GDP growth rate in 2024 was well above the “golden year” of 2025. The +2.1% annual GDP growth rate is the lowest year since 2020 in Trump 1.0. (see Cyclical Histories: Will Facts Be in Vogue in 2026? 1-2-26). Hassett will have to really up his “perma-grin” game to paint this as a good quarter and a good year. When he plays his game of citing nominal growth (vs. real), he should at least label it as such.

The above chart details the movement along the key GDP lines from the advance estimate on through the financial line items released today in the final cut. We include the latest delta from the second estimate on the right. The +0.5% 4Q25 GDP growth rate was a bad way to end the year that had started with a -0.6% GDP growth rate in 1Q25.

The PCE growth rate in 4Q25 of +1.9% (table 1.1) was the lowest since 1Q25 at +0.6%. Goods consumption was weak at +0.3% in 4Q25 with Durable Goods at only +0.1%. Fixed investment growth was only +1.5%. The best performer in fixed investment was Intellectual Property at +5.4% with Equipment at +4.3%. The setbacks in Fixed investment growth includes Structures at -6.5% and Residential at -1.7%.

Exports posted negative growth at -3.2% with imports at -1.0%. Government weighed in at -5.6% with Federal at -16.6% and the larger State and Local line at +1.5%.

Thinking in calendar year annual terms and the “contribution to GDP” schedule, we see lower contributions to annual GDP from PCE at 1.78% in 2025 vs. 2.0% in 2024. Gross private domestic investment (GPDI) is lower on the annual 2025 GDP line at +0.35% vs. +0.54% in 2024.

For the Government consumption and investment lines, the total is lower at the headline level with -5.6% in a mix that is lower at both the Federal and State and Local level in calendar 2025 vs. 2024. It is notable that both Government Consumption as well as Gross Investment are down at the State and Local level for calendar 2025. That is not just a “Federal cuts” story.

The above table updates the running GDP growth lines from 1Q22, which marked the rough ride from an unusually strong post-COVID rebound in 2021 that fed into an inflation spike and tightening cycle. The 2H22 period showed the resilience from low unemployment and a relatively steady consumer sector. The setbacks in 2022 were only made worse by the late-Feb 2022 Russian invasion of Ukraine and the energy market dislocations. The 2022 staying power against inflation is a reassuring data point in the face of the current Iran mess.

Despite that disarray in 2022, the calendar year saw an annual GDP growth rate of 2.5%, which is more than we just printed to 2025. The ability of the US economy to get through an ugly year like 2022 offers a reminder of how much needs to go wrong to drive a recession in such a well-diversified, services-intensive economy as the US.

The line items in the table start in a troubled 1Q22 and ends in 4Q25 with the +0.5% growth rate. We get the 1Q26 advance estimate at the end of this month that will include 1 month of the post-Iran chaos. We get the updated PCE inflation and Personal Income and Outlays data for March at the end of this month also.

See also:

GDP 4Q25 Second Estimate: Sharp Move Lower 3-13-26

4Q25 GDP (Advance Est.): Less Distortion This Time 2-20-26

3Q25 GDP: Updated Estimate 1-22-26

Cyclical Histories: Will Facts Be in Vogue in 2026? 1-2-26

3Q25 GDP: Morning After Variables to Ponder 12-27-25

2Q25 GDP Final Estimate: Big Upward Revision 9-25-25

1Q25 GDP: Final Estimate, Consumer Fade 6-26-25

1Q25 GDP Advance Estimate: Roll Your Own Distortions 4-30-25

Trump’s “Greatest Economy in History”: Not Even Close 3-5-25

Gut Checking Trump GDP Record 3-5-25

Presidential GDP Dance Off: Clinton vs. Trump 7-27-24

Presidential GDP Dance Off: Reagan vs. Trump 7-27-24

• The decline in GDP for the 2nd estimate is tied to lower personal consumption expenditures (PCE), weaker fixed investment in structures, and another negative Government line. The unfavorable PCE delta vs. the advance estimate was in Services, but relative to 3Q25 the PCE weakening is evident in both Goods (+0.4% goods in 4Q25 vs. +3.0% in 3Q25) and Services (+3.6% in 3Q25 vs. +2.7% in 4Q25). PCE is 68% of GDP, so that is the main event (see 4Q25 GDP (Advance Est.): Less Distortion This Time 2-20-26).

• The annual GDP growth rate for calendar 2025 was revised slightly lower to 2.1%, which is lower than the 2.8% GDP growth in calendar 2024. That is unlikely to come up in conversation around the “greatest first year of a Presidential term in history.” We look at the PCE inflation topic in a separate commentary later today.

• The chaos of government budgets in an economic expansion has been a big story in 2025 with a -5.8% GDP line for 4Q25 including -16.7% for the Federal GDP line (Table 1 of the release). That brought an overall GDP contribution (Table 2 of the release) of -1.03% to 4Q25 GDP. We see 3 of the 4 quarters of 2025 for Government GDP posted negative contributions to GDP. That will change on defense in 2026.

The above table details the major GDP line deltas for the second 4Q25 estimate vs. the advance estimate. We see the major revisions in PCE and Fixed Investment as the most important moving parts for a read on the broader cycle and economic expansion. The downward revision of PCE and downward revision of Fixed Investment go in the “negative column” as incremental variables. Residential was revised upward but remains negative.

The Government GDP lines were also revised lower for Federal and State and Local, but that tends to be more about policy than the economic cycle. That said, those are real jobs with real consumption and are signaling “less” at the Federal level. The Iran War will make for more interesting reading on the Federal line in 2026.

The above table updates the running quarters from the 1Q22 period when ZIRP ended and the tightening cycle began through 4Q25. The 1Q25 to 3Q25 periods have more than a few distortions to consider outside the critical PCE and Investment lines. We have looked at those moving parts in other commentaries. The “distortions” primarily tie into net export/import measurement and working capital swings around tariff phase-in dates (see 1Q25 GDP Advance Estimate: Roll Your Own Distortions 4-30-25, 2Q25 GDP Final Estimate: Big Upward Revision 9-25-25, 3Q25 GDP: Morning After Variables to Ponder 12-27-25).

We take the view that the PCE lines and Fixed investment lines are the main events for a read on the cycle. There are some other “noisy” lines that need to be looked at in context. For example, Net exports of Goods and Services posted a -0.22% contribution to the 4Q25 GDP line after +1.62% in 3Q25, +4.83% in 2Q25 and -4.68% in 1Q25.

For changes in private inventories, we see a +0.28% contribution to GDP in 4Q25 after -0.12% in 3Q25. The wild inventory distortions around tariffs drove a -3.44% contribution in 2Q25 (ties into the net export/import distortion) and +2.58% in 1Q25 ahead of the key tariff dates.

Overall, the 4Q25 GDP number was bad and the annual GDP number was unimpressive but competitive with the post-2000 US economic growth numbers. Compared to the 1980s and 1990s, the 2025 GDP numbers were poor. They were also much worse than 3 of 4 Carter years. “The numbers are the numbers,” and that makes them facts. Interpretation and analysis and cause-and-effect color is a separate drill.

See also:

4Q25 GDP (Advance Est.): Less Distortion This Time 2-20-26

3Q25 GDP: Updated Estimate 1-22-26

Cyclical Histories: Will Facts Be in Vogue in 2026? 1-2-26

3Q25 GDP: Morning After Variables to Ponder 12-27-25

2Q25 GDP Final Estimate: Big Upward Revision 9-25-25

1Q25 GDP: Final Estimate, Consumer Fade 6-26-25

1Q25 GDP Advance Estimate: Roll Your Own Distortions 4-30-25

Trump’s “Greatest Economy in History”: Not Even Close 3-5-25

Gut Checking Trump GDP Record 3-5-25

Presidential GDP Dance Off: Clinton vs. Trump 7-27-24

Presidential GDP Dance Off: Reagan vs. Trump 7-27-24

• On a day when GDP came in weaker and PCE price inflation came in higher, the story is still in the line items and not the headline numbers.

• The 4Q25 GDP numbers were materially less distorted than 1Q25, 2Q25, and 3Q25 when the net export line and investment in inventory injected major plus and minus impacts on headline numbers (see 1Q25 GDP Advance Estimate: Roll Your Own Distortions 4-30-25, 2Q25 GDP Final Estimate: Big Upward Revision 9-25-25, 3Q25 GDP: Morning After Variables to Ponder 12-27-25).

• An exception to the better comparability across quarters for the core GDP lines was Government consumption and investment growth that weighed in at -5.1% with Federal at -16.6% in GDP and State and Local at +2.4%.

• With Personal Consumption Expenditures (PCE) at 68% of total GDP, the +2.4% PCE growth was weaker than 3Q25 and 2Q25 and well down from +3.9% in 4Q24 and +4.0% of 3Q24. The 1Q25 period was the worst PCE quarter at +0.6%.

• Fixed investment at 17.6% of GDP generated +2.6% before the Federal government shutdown was essentially N/A for the 4Q25 period at -16.6%. State and Local (1.7x the size of Federal) posted +2.4%.

• If you believe we now are operating in a new millennium that is a 2% handle annual growth period for the US with its overleveraged Federal government and demographic profile (that is what we believe), the 4Q25 period was a normal set of numbers for GDP even if the distortions (notably net exports and inventory) can swing around from quarter-to-quarter (just not in 4Q25).

The 4Q25 headline GDP had less noise from tariff swings and working capital management chaos. For net exports of goods and services, the contribution to GDP was only +0.08% in 4Q25 vs. +1.62% in 3Q25, +4.83% in 2Q25, and -4.68% in 1Q25. The pre-buying binge ahead of tariffs in 1Q25 was one for the ages and reversed as the year went on with the change in private inventories for 4Q25 at +0.21% vs. -3.44% in 2Q25 and +2.58% in 1Q25.

We typically lock in on PCE given its scale in the GDP (68%) and the various fixed investment lines (almost 18% of GDP). In fixed investment, the mix of structures, equipment, intellectual property products, and residential investment are where some of the main cyclical and growth indicators live.

In PCE, Goods PCE posted -0.1% growth with durables at -0.9% and nondurables at +0.4%. That is not pretty. Services was +3.4%. Over in the PCE inflation data also released this morning, Goods inflation was +1.7% YoY while Services was +3.4% YoY. PCE inflation was +2.9% and Core was +3.0%. That is a mediocre backdrop.

Noise reduction…

The lower level of noise in 4Q25 will not stop the White House from doing their usual Watusi around nominal GDP, annualized quarters, etc., instead of sticking to the historical real GDP growth line items (note: anything to avoid rational, fact-based historical comps). The new world of record budget deficits and high tariffs is challenging, especially coming off the second high-inflation period since the Carter and early Reagan years.

When you are running with the “greatest economy in history” story line, numbers can be the enemy whether for that recurring claim in Trump 1.0 or for the “greatest first year in Presidential history” this time around (see Trump’s “Greatest Economy in History”: Not Even Close 3-5-25). Clinton and Reagan would certainly question that view (see Presidential GDP Dance Off: Clinton vs. Trump 7-27-24, Presidential GDP Dance Off: Reagan vs. Trump 7-27-24 ). Even Carter fans might raise their hands (see Payroll % Additions: Carter vs. Trump vs. Biden…just for fun 1-8-25, Annual GDP Growth: Jimmy Carter v. Trump v. Biden…just for fun 1-6-25).

In many ways, the party in charge might not matter in the new millennium low growth period since the challenges are a long list. The tariff policies and magnitude of the political and social divisions just make life more difficult to execute on policy in Congress in a world of “government by executive order.” That said, as we go to print, the Supreme Court just ruled against Trump’s IEEPA tariffs…we’ll tackle this separately. It will be interesting to see how refunds vs. new tariffs work in practice.

See also:

3Q25 GDP: Updated Estimate 1-22-26

Cyclical Histories: Will Facts Be in Vogue in 2026? 1-2-26

3Q25 GDP: Morning After Variables to Ponder 12-27-25

2Q25 GDP Final Estimate: Big Upward Revision 9-25-25

1Q25 GDP: Final Estimate, Consumer Fade 6-26-25

1Q25 GDP Advance Estimate: Roll Your Own Distortions 4-30-25

Trump’s “Greatest Economy in History”: Not Even Close 3-5-25

Gut Checking Trump GDP Record 3-5-25

Presidential GDP Dance Off: Clinton vs. Trump 7-27-24

Presidential GDP Dance Off: Reagan vs. Trump 7-27-24

• The 3Q25 GDP numbers of +4.4% is the highest since 4.7% in 3Q23 and 7.0% (revised) in 4Q21. PCE does the heavy lifting with both Goods and Services with 3% handles.

• 3Q25 highlights the rebound of the consumer as evident in PCE growth to +3.5% after a bad 1Q25 and soft 2Q25. Trump’s end zone dance is somewhat constrained by the fact that 3.5% PCE is below 3 of 4 quarters in 2024 including +4.0% in 3Q24. Goods PCE of +3.0% is also below 3 of 4 quarters in 2024.

• GPDI remains constrained in Table 1 at +0.8% with a mixed picture across the line items. Structures at -5.0% and Residential at -7.1% are more than offset by Equipment at +5.2% and Intellectual Property Products at +5.6%.

• We see another distortion effect from Net exports of Goods and Services which adds a +1.6% contribution to the headline from Table 2. Exports had a good quarter at +9.6% after two bad quarters and added a +1.0% contribution to GDP from Table 2 (see 3Q25 GDP: Morning After Variables to Ponder 12-27-25).

• The solid consumer picture and PCE growth should beat down the recession scenarios but also raise questions around the FOMC game plan with PCE inflation ticking higher YoY. PCE inflation moved to 2.8% in Nov from 2.7% in Oct. The Fedwatch odds of no cut in March rose again to 84.1% as we go to print and rose to 71.9% for April.

The above table updates the GDP line deltas from the first 3Q25 estimate. The changes in the headline and PCE numbers were minor while the more volatile GPDI lines show the Nonresidential line moving higher as Residential still struggles in the red. Government continues to stall with the Federal total revised lower and State and Local higher

.The above table updates the running quarters from 1Q21 and the last full year of ZIRP. We updated the 1Q23 to 3Q25 details for the latest revisions but left the 1Q21 to 4Q22 data unrevised (in the interest of time). There is little mystery to the 2021 numbers at this point. In 2021, the post-vaccine transition highlights the scale of pent-up activity with outsized numbers in PCE and GPDI. Then 2022 slid into inflation and a tightening cycle.

The PCE line comprises 68% of GDP and you can simply run your fingers across the lines from 1Q21 to 3Q25. For PCE, we see 3 of 4 quarters in 2024 ahead of the 3.5% posted in 3Q25. After PCE, the next economic focal points for cyclical indicators are along the fixed investment lines. Those are mixed across the full 2025 period with Structures and Residential struggling but IP Products and Equipment rolling along in solid fashion.

We believe that the outlier trends in the Net Export contribution to GDP and the “change in private inventory line” have been major factors in the headline distortions during 2025. Those import/export whipsaws around tariff dates and extraordinarily rare working capital swings are worth thinking about from the headline level down unless you are marketing good news and bad news for political purposes (see Cyclical Histories: Will Facts Be in Vogue in 2026? 1-2-26, 3Q25 GDP: Morning After Variables to Ponder 12-27-25, 2Q25 GDP Final Estimate: Big Upward Revision 9-25-25).

No recession signals here…

The ugly year of 2022 was able to escape recession talk on the back of low unemployment and solid PCE numbers (see Unemployment, Recessions, and the Potter Stewart Rule 10-6-22). When the market shows steady PCE at 3% or higher and low unemployment in historical context, the economy can be mediocre but not a red flag trend.

We look at 4% handle unemployment as in a zone that would be considered full employment in past cycles. Meanwhile, a 3% handle PCE or GDP is cause for calm whether under Biden or Trump. More extreme partisans will of course make “stuff” up.

We look at the 4.4% headline GDP as distorted by the +1.6% add-on from trade deficits decline and how the GDP accounting works. Even adjusting for that unusual add-on in historical context, we see a good quarter. The personal consumption detailed today in the Personal Income & Outlays report is not signaling setbacks in 4Q25 so far.

Higher exports in 3Q25 GDP are a positive, but the loss of access to low cost imported supplies for producers or low-cost offshore goods for consumers comes with a very big asterisk (higher prices, lower profit margins downstream etc.).

We live in a world where the President will not even admit the “buyer writes the check” for tariffs and that a trade deficit is a “subsidy” for other nations rather than a free market economic decision to the advantage of the buyer. That might get you a bad grade in intro economics class, but these days it can get you a cabinet position. Welcome to the new world.

See also:

Cyclical Histories: Will Facts Be in Vogue in 2026? 1-2-26

3Q25 GDP: Morning After Variables to Ponder 12-27-25

2Q25 GDP Final Estimate: Big Upward Revision 9-25-25

1Q25 GDP: Final Estimate, Consumer Fade 6-26-25

1Q25 GDP Advance Estimate: Roll Your Own Distortions 4-30-25

Trump’s “Greatest Economy in History”: Not Even Close 3-5-25

Gut Checking Trump GDP Record 3-5-25

Presidential GDP Dance Off: Clinton vs. Trump 7-27-24

Presidential GDP Dance Off: Reagan vs. Trump 7-27-24

• Will 2026 be a year of transparency and economic coherence in Washington with honest performance attribution across tariffs and inflation side effects with truthful discussions of small business impact? (Hint: No).

• It is important to look at the past cyclical facts for frames of reference that can be yardsticks for “grading on the curve.” Those who misrepresent the past are probably doing the same in the present.

• We reproduce some of the historical economic growth tables in this note with a new one looking at the best Fixed Investment performance years for each President from Carter to Biden. The best fixed asset growth year from Trump 1.0 was 2018, which is in last place among the other “best of” years. He was also dead last in Residential investment that year vs. presidential peers.

• When looking for what a “great year” looks like, Clinton 2 stands out in 1998 with Clinton 1 in 1996 close behind. Meanwhile, Reagan 1 in 1984 was one for the ages for investment growth. Carter’s best year of 1977 crushes Trump’s 2018 best year as did Obama 1 in 2012 in the post-crisis rebound.

• Overall, the post-2000, post-Clinton years have been abysmal for PCE and Investment growth when framed against the 1980s and 1990s. No President from that period can come close to claiming the “greatest economy” even just for the last 50 years from that period using economic growth as a measuring stick. Of course, we will hear it a lot more again during 2026 despite Trump 1 being a bottom quartile growth economy since the mid-1970s.

As we detail the various key GDP lines since Carter, the simple exercise is a quick scan with a goal of gauging “What is a high number? and “What is a low number?” based on history. The speed of self-congratulations usually neglects to mention any specific numbers or history. That is also the case with the financial media, who want to make sure they keep their GOP guests coming back. As the old saying goes, the numbers “are what they are.” It’s not hard to find these numbers at the BEA.

The above table plots the annual GDP growth across each year of the Presidential administrations from Carter in 1977 through Biden in 2024. The headline GDP is always a useful number but only if you look at the main moving parts with PCE (68% of GDP) and Fixed Investment (almost 18% of GDP) easily tied into the other stories that determine cycles (payroll, wages, savings, etc.).

As we await the final annual numbers for 2025 (and 4Q25), it is important to consider the unprecedented adjustments that were driven by volatile swings in Net Export deltas and how that ties into inventory changes. We discussed those topics at length in earlier commentaries and some of our recent LinkedIn posts (see 3Q25 GDP: Morning After Variables to Ponder 12-27-25).

The above table tracks the PCE lines across the timeline from Carter to Biden. PCE is the critical driver at around 4x the size of the Fixed Investment line and 4x the “Government Consumption Expenditures and Gross Investment” line.

The PCE for Biden in 2021 obviously comes with a major asterisk with such a lofty number tied to the “great reopening” after the vaccine and pent-up demand was unleashed. Trump’s 2% handles before COVID in 2017 to 2019 had no excuses and most certainly were not impressive. Just scan back across time for objective evidence those were low.

That stretch of economic weakness and poor capital markets performance could be part of the reason why the FOMC had to step in and ease in 2019 as exports and capex weakened. Powell et al. bailed out the Trump 1 economy and markets after 2018 saw tariffs rise as an issue and in turn all the major equity and bond market benchmark returns ended 2018 in negative range (see Histories: Asset Return Journey from 2016 to 2023 1-21-24).

The above table tracks the Fixed Investment line as the distant #2 driver of GDP behind PCE. This will be a critical line for Trump in 2026 given all the noise around the “many trillions” of investment dollars that he claims his tariffs will bring (the promised investment number varies from very high to intergalactic).

Of the post-2000 Presidents, only Biden and Obama 2 got through those terms without a negative Fixed Investment growth year number. GW Bush had a tech bubble meltdown on the way into “GW Bush 1” above in Year 1 and a bank system and auto sector crisis on the way out in “GW Bush 2.” The 2001 period saw massive and recurring easing by Greenspan (see Greenspan’s Last Hurrah: His Wild Finish Before the Crisis 10-30-22).

Obama 1 inherited the financial crisis in 2009 as we see in Year 1. Obama 2 got back on track with improving Fixed Investment and payrolls that flowed into Trump 1. As we show in the tables, the Obama 2 annual Fixed Investment numbers handily beat Trump’s for each year paired up.

Ranking the best years for Fixed Investment…

In the above table, we take the best Fixed Investment growth rate year from each Presidential administration. In this case, we use the most recent annual term available (Biden) and use a chronological order from most recent on the left back to Carter on the right. We await the 4Q25 and annual numbers for Trump 2.

It is basically a comp table for the “best investment growth year.” We see Trump’s best year of 2018 in dead last at #12. That does not flow smoothly into the “greatest economy in history” theme. The “give us your best shot” approach comes up short. Numbers matter, but when a leader avoids them it is usually a sign of bad intent and misleading commentary. We have seen plenty of that from Washington over the years from both sides, but Trump stretches the boundaries on economic performance.

Biden ranks #7 and is tied with GW Bush 2. The banner year of 1984 was one for the ages in Reagan 1 while 1998 in Clinton 2 took #3. The #2 spot is held by Carter in 1977. If you need a measure of what a “great year” or “good year” looks like, we see 3 of the best years in double digits. We see 5 years in the “best of” with 7% or 8% handles. We see 3 “best years” with 5% handles. In other words, 5% is bottom quartile among this collection of best years. The full collection of annual growth numbers was in an earlier table above.

Trump had great fun using Carter as a punching bag, but 1977 and 1978 into the “Carter” yield curve inversion were strong years with double-digit investment growth as detailed in the earlier tables. While that is a story for other days, the 1979 Iranian oil crisis and fallout from waves of deregulation sent the Carter economy into inflation and then stagflation mode. That haunted early Reagan 1 years. Massive deregulation does not come without its risks and unintended consequences.

The above table reproduces the “GDP distortion table” that highlights the outsized anomalies of 2025. These distortions tie into market swings in imports related to tariff timing and inventory pre-buying. The scale of numbers that flow into the Net Export deltas % and the “Change in Private Inventories” line are extraordinary over the periods we reviewed (decades).

The PCE and Fixed Investment lines are the main events for the cycle and not the erratic Net Export line during the rapid phase-in. The same is true for working capital management “on the fly” and how that distorts inventory management and the timing of imports and ensuing inventory liquidation.

A 5.0% addition to the GDP math from imports in 2Q25 is something you don’t see. A glance at the BEA histories will hammer that home. The same is true for the scale of the partial offsets from change in private inventories.

Seeing should be believing…

If you say “greatest economy in history” often enough, a subset of the population will believe it (assuming they are allergic to numbers…and want to believe it). “Greatest economy of all time” is less threatening to democracy than “I won the 2020 election” since the “greatest economy” numbers are easily proven to be a lie using the government’s own numbers.

The election issue should be obvious based on the absence of evidence. The attacks on economic data (BLS and payrolls, etc.) in 2025 is an attempt to use the “election fraud strategy” but people intuitively feel the economy (jobs, prices, wages, etc.). They don’t “feel” the vote count as a one-time Big Lie. That is more an emotional choice devoid of factual substance.

See also:

3Q25 GDP: Morning After Variables to Ponder 12-27-25

Payroll % Additions: Carter vs. Trump vs. Biden…just for fun 1-8-25

Annual GDP Growth: Jimmy Carter v. Trump v. Biden…just for fun 1-6-25

Presidential GDP Dance Off: Clinton vs. Trump 7-27-24

Presidential GDP Dance Off: Reagan vs. Trump 7-27-24

Credit Cycles: Historical Lightning Round 4-8-24

Credit Markets Across the Decades 4-8-24

Histories: Asset Return Journey from 2016 to 2023 1-21-24

Tale of the Tape in GDP: Trump vs. Biden 12-4-23

Employment Across the Presidents 8-15-23

Business Cycles: The Recession Dating Game 10-10-22

• During a holiday shortened week, 3Q25 GDP results offered a hot topic for political spin. 3Q25 GDP showed a much lower level of distortion than what has been seen in 2025 so far in the 1Q25 and 2Q25 numbers.

• With the aggressive tariff program, dramatic swings in imports, and distorting impact of the working capital volatility, there were notable anomalies in the numbers. Headline GDP saw big moves as pre-tariff inventory spiked and swings in import totals drove major deltas in the import line and in working capital build and subsequent downsizing. Even in 3Q25, net export moves alone added almost +1.6% to the headline GDP of +4.3%. (We always highlight that a substantial decline in imports also implies an inability to capture low-cost sourcing opportunities and thus raises cost to US-based buyers. At the same time, this bumps GPD higher.)

• The growth story and cyclical drivers are found in Personal Consumption Expenditures (PCE) at 68% of GDP and another 1/3 of GDP essentially split between Gross Private Domestic Investment (over 17%) and Government Consumption and Investment (~17%). As detailed below, the net exports gets the total back to 100%.

• The PCE contribution to GDP in 3Q25 was lower than 3 of 4 quarters in 2024. That did not get mentioned much. The reality is the numbers from 2023 as well as 2024 put up better PCE growth numbers than 2025. For fixed investment, 2025 beats 2024 across the main buckets as detailed below, but 2023 (not included in these charts) beat 2025.

• Trump’s latest Jedi Mind Trick on how great 3Q25 was just the usual politics. The good news is that 2025 is not flashing recession signals since that type of downside will take more damage across payrolls and industrial markets than what we see now.

• In the end, the idea that the economy in 2025 is a great economy is absurd but the same holds true for the comments that say 2025 is “collapsing.” The most moronic statement would be that 2023 and 2024 were economies of a “dead country.” The numbers don’t say that at all.

The above chart plots the main moving parts of the 3Q25 GDP performance, and we also include those lines for each quarter from 1Q24 through the latest 3Q25 results from this week’s release. The second chart further below details Fixed Investment lines for each quarter.

3Q25 overall was a solid quarter with the headline GDP less distorted by tariff effects from inventory than that seen in 1Q25 or 2Q25. The low adjustment for inventories was -0.22% in 3Q25. In contrast, pre-tariff inventory builds and GDP distortions seen in 1Q25 posted a +2.58% boost to GDP ahead of the rapid liquidation of inventory that reduced GDP by -3.44% in 2Q25. With aggressive tariff policies flowing into working capital management, 2025 has been highly unusual on both the net export and inventory lines. Those are distortions in reading the trend even if they reflect real economic events.

The goal in looking at the moving parts of GDP is to frame sea level growth, and that is driven by the multiplier effects of the PCE line (68% of GDP), GPDI (over 17% of GDP), and the Government line (17%). Those three buckets add up to just over 102% of GDP. Net exports of -2.5% then brings you back to 100%.

As we covered in a separate post on LinkedIn, the GDP discussion usually leaves out the distortions unless the headline number is a bad one and the White House wants to talk the number up. We heard “it is higher than it looks” from the White House after the 1Q25 GDP of -0.6%, but we did not get the “lower than it looks” speech after 2Q25 when GDP was boosted by the net export line with +5.0% from lower imports after the pre-tariff order boom in 1Q25.

Consumer and Fixed Investment not signaling “Golden Years”

The PCE growth for 3Q25 was solid in 2025 context but posted lower contributions to 3Q25 GDP than 3 of the 4 quarters in 2024 (yes, the year Trump claims the US was “dead.”) . Consumers are not dead yet as covered in the GDP numbers, Retail Sales reports, and PCE Income and Outlays.

On the other hand, this is not 2021 with all its high flying pent-up demand. Calling up the quarterly PCE from the BEA data set is not rocket science, and the 2025 consumer engine is mediocre. Whether stagflation risks (payrolls, consumer prices, tariffs, health care premiums, etc.) eat up more of the household budget allocation in 2026 still needs to play out. Having health care could be a zero-sum game for many that hits the PCE goods and services lines. The risk symmetry is not good at this point.

GPDI growth in 3Q25 was slightly negative with fixed investment growth in 3Q25 lower than 3 of 4 quarters in 2024. The Government contribution % to GDP was the highest of 2025 but lower than 3 quarters of 2024. Fixed investment lines have posted notable variances during the post-COVID stimulus period, but were low in 3Q25 at +0.19%, which is less than 3 of 4 quarters in 2024. Residential investment was negative for all 3 quarters in 2025.

GDP commentary often turns into an axed, political interpretation, but some adjustments should always be considered. The numbers are at least objective even if there are some BEA assumptions and models in the storyline.

Declining imports (“less negative” net exports) bolsters GDP (2Q25 by +4.83%, 3Q25 by +1.59%). Recall that lower imports alone added +5.03% in 2Q25 but only +0.67% in 3Q25 after shaving off -4.70% in the negative GDP quarter (-0.6%) of 1Q25 when buyers were front-loading pre-tariff imports.

Exports rose in 3Q25 after posting negative growth in 2Q25. That +1.59% net export contribution is a big chunk of the +4.3% headline GDP in what is a 2% handle GDP economy in the new millennium. Take out the net exports distortion and you are back under the 3.0% line. The “2% economy” curse in general has been a fact of life since the 2000 elections with some exceptions. Many attributed it to high government debt since the Clinton surplus. An “other worldly” supply of UST debt and massive budget deficits will only get worse ahead under Trump (or anyone else in the seat).

The above table breaks out the GDP contributions across the key GPDI and Fixed Investment lines. There is little to signal the arrival of a Golden Age or even anything close to the best recovery year since COVID. While the tax bill (capex tax deductions, etc.) should encourage investment and tariffs should bolster reshoring (auto OEMs. Pharma, etc.), that is not jumping off the page at this point. Capex is tied to economics first and tax second. For the trillions and trillions of trade partner investment promises, the old expression of “call me when we get there” is evident in the above chart. Elections and the IEEPA SCOTUS decision (and Trump policy reactions) will be 2026 variables.

The AI boom should sustain solid numbers, but the more immediate impact of tariffs will be headwinds for company budget planning, pain for small businesses, and higher costs. It is worth noting that the Structures line is negative for all 3 quarters while Equipment was positive but not well ahead of 2024. Equipment has many challenges from the tariff impacts as evident in weak manufacturing payroll performance. Intellectual Property is always a strong line in the tech boom and is having a solid 2025.

For all the debate on the timing of the “benefits” from tariff expenses paid by the buyer, the reality is that tariffs only guarantee that a tariff payment expense will need to be paid by the buyer. That tariff cost is an expense or rolls into cost of sales. That means profit margins go down, prices go up, and/or other expenses are taken out in some form (often payroll for small businesses).

That inherent tariff expense vs. price vs. cost-cutting dynamics will continue into 2026. Partisan economists tend to spin that topic. That economic reality goes in the category of “you can run but you can’t hide” from the tariff costs (footnote to Joe Louis, heavyweight champion).

Most everything else in the tariff debate is a theory and not a hard fact. The worst of the lies (“seller pays the tariff”) will echo across economic history to the embarrassment of those that have any shame at all (a dwindling population of zero in White House economists). The “selling nation pays” is a blanket statement by Trump and a general “seller pays” favor comes from so many in Washington. That falsehood is one of the lead stories of 2025 and arguably will be for the entire term. “Someone pays somewhere” starting with the buyer.

The main tariff question is whether the seller cut prices to offset the tariff, and that has very little empirical support. Massive buyers with market clout can try to extract price concessions. That comes down to a range of issues such as the existence of substitutes and the usual supplier chain checklist of factors.

Small businesses are screwed. The expected boom in reshoring jobs and investments are clearly not here yet in the GDP numbers or payrolls (see Payrolls Nov 25: Into the Weeds 12-16-25, Employment Nov 2025: Bad News is Bad News 12-16-25). We are still playing catch-up on payroll data. The December jobs data for small businesses from ADP will be a useful data point along with the usual BLS data.

The tariffs drive price increases to consumers cited by the bears will remain a market test as time unfolds for the economic assumptions list. That tariff price recovery question is still playing out into 2026 with the USMCA review also on the horizon. Many tariff fans want to pretend that debate is over and that the game clock has run out. In fact, prices are higher overall and materially higher for many product lines. Trump can rely on the red hats and political bobbleheads to agree with him, but prices in aggregate are higher for those located on the planet Earth with positive inflation.

See also:

Durable Goods Oct25: Core Capex Still in Gear 12-23-25

Market Lookback: Last Call for Unusual Behavior 12-22-25

Existing Home Sales Nov 2025 12-21-25

November CPI: Tricky Navigation 12-18-25

Payrolls Nov 25: Into the Weeds 12-16-25

Employment Nov 2025: Bad News is Bad News 12-16-25

The Curve 12-15-25

Market Commentary: Asset Returns 12-14-25

Market Lookback: FOMC Fragments, Rate Debates Murky 12-13-25

FOMC: Dot Plot Scatters for 2026 12-10-25

PCE, Income & Outlays: Calendar Gap Closing 12-5-25

Simplifying the Affordability Question 11-11-25

CPI September 2025: Headline Up, Core Down 10-24-25.

2Q25 GDP Final Estimate: Big Upward Revision 9-25-25

1Q25 GDP Advance Estimate: Roll Your Own Distortions 4-30-25

Trump’s “Greatest Economy in History”: Not Even Close 3-5-25

Gut Checking Trump GDP Record 3-5-25

Presidential GDP Dance Off: Clinton vs. Trump 7-27-24

Presidential GDP Dance Off: Reagan vs. Trump 7-27-24

• The move from 3.3% GDP growth in the second 2Q25 estimate to 3.8% in the final estimate saw a major upward revision in PCE Services consumption from +1.2% to +2.6%. Goods PCE ticked lower to +2.2% from +2.4%. The Gross Private Domestic Investment line in the final 2Q25 GDP numbers weighed in at a negative with -13.8% (no top line revision) driven by -7.5% for Structures and -5.1% in Residential.

• For historical context, the final Personal Consumption Expenditure line for 2Q25 (reminder: 68% of GDP) was +2.5%. That 2.5% can be framed against the annual results of 2022 at +3.0%, 2023 at +2.6%, and 2024 at +2.9%.

• If we look back across the eight quarters of 2023-2024, we see that the final PCE number of +2.5% in the 2Q25 GDP is muted. We see 6 of 8 quarters higher the prior two years ranging from 3.0% to 4.5%. 2024 posted +1.7% in 1Q24, +3.9% in 2Q24, +4.0% in 3Q24, and +3.9% in 4Q24. When we consider the PCE line of +0.6% in 1Q25 and +2.5% in 2Q25, it is safe to say the consumer has been faltering in 2025. We get a fresh PCE and Income and Outlays report tomorrow.

• As we covered in the earlier GDP releases, the big distortions of scale were tied to +4.83% in net exports that include +5.0% added to GDP from lower imports. We would note that exports also declined slightly in the 2Q25 GDP line. The 2Q25 numbers include a negative GDP impact of -3.44% for a decline of private inventories. We are inclined to look at declining imports, declining inventories, and declining exports as “not a good thing.”

The above table breaks out some important GDP line item deltas to show the walk from the first estimate to the final 2Q25 GDP growth rate. We break out the latest delta in the right column. We see quite a few positive variances in the revisions (good for job security these days at the BLS and BEA!). The consumer showed some signs of life in 2Q25 vs. 1Q25, but remains below recent years. Goods and Durable Goods PCE getting revised down was a flag on consumer risk appetites, but PCE Services moved notably higher in the revisions.

The GPDI lines were broadly revised higher with the notable exception of Residential. That fixed investment line was the undoing of the Trump 1.0 macro story when investment weakened and exports were soft in 2019. That prompted the FOMC to ease multiple times in 2H19. That seldom shows up in dialogue around the Trump-Powell relationship.

Powell helped bail out a faltering economy in 2019 and then saved the capital markets – and notably the credit markets – from collapse and a radical liquidity crisis in March 2020. We would like to hear Bessent say anything about that very successful tag team of Powell with Mnuchin or just tip his hat for that Fed mission creep seen in 2020.

Government was soft in the latest 2Q25 print with Federal weak and State and Local solid. State and Local in the GDP accounts is around 68% bigger than Federal.

The above table updates the running GDP lines from 1Q21 across the Biden years and now into the first two quarters of Trump 2.0. When we keep hearing about how “dead” the US was before the 2025 calendar year, it is hard to look at the numbers and not highlight that 2023-2024 were the best back-to-back years for the S&P 500 since the late 1990s.

The consumer lines and PCE are the critical drivers of GDP just on the math, but the Gross Private Domestic Investment lines are very important to watch as a reality check when we hear about the investment bonanza ahead in new investment and reshoring. We hope that scenario comes to pass and that the market (that demand thing) makes project economics and related investment strategies ripe for the trillions and trillions that have been talked about. A lot of those headlines lack granularity and contractual details that would make for more believers that they are in fact “guaranteed.”

It is always good to be skeptical when the refrain from the White House is that Trump 1.0 was the “greatest economy in the history of the world.” That was repeated again at the United Nations this week. For an objective numbers check, we have broken those out in earlier periods:

Trump’s “Greatest Economy in History”: Not Even Close 3-5-25

Gut Checking Trump GDP Record 3-5-25

Presidential GDP Dance Off: Clinton vs. Trump 7-27-24

Presidential GDP Dance Off: Reagan vs. Trump 7-27-24

The consumer will hold the key to getting the PCE line back above 3.0% but the investment activity and “promises” still need to show up in Structures, Equipment, Intellectual Property, and Residential. Distinguishing the AI boom (power and data centers) from the rest of the fixed investment lines will take up more time of economists. That will make for a lot of granular detail work ahead.

GDP Commentary:

2Q25 GDP: Second Estimate, Updated Distortion Lines 8-28-25

2Q25 GDP: First Cut of Another Distorted Quarter 7-30-25

2Q25 GDP: Into the Investment Weeds 7-30-25

1Q25 GDP: Final Estimate, Consumer Fade 6-26-25

1Q25 GDP 2nd Estimate: Tariff and Courthouse Waiting Game 5-29-25

1Q25 GDP Advance Estimate: Roll Your Own Distortions 4-30-25

1Q25 GDP: Into the Investment Weeds 4-30-25

Trump’s “Greatest Economy in History”: Not Even Close 3-5-25

Gut Checking Trump GDP Record 3-5-25

Presidential GDP Dance Off: Clinton vs. Trump 7-27-24

Presidential GDP Dance Off: Reagan vs. Trump 7-27-24

2024:

4Q24 GDP: The Final Cut 3-27-25

4Q24 GDP: Inventory Liquidation Rules 1-30-25

GDP 3Q24: Final Number at +3.1% 12-19-24

2Q24 GDP: Final Estimate and Revision Deltas 9-26-24

State Unemployment: A Sum-of-the-Parts BS Detector 6-30-24

1Q24 GDP: Final Cut Moving Parts 6-27-24

• The major distortion numbers were similar to the advance estimate with net exports of goods and services adding +4.95% and change in private inventories shaving off -3.29%. The net effect of the two added 1.66% to the headline number of 3.3%. Real final sales to private domestic purchases was revised from +1.2% to +1.9%.

• The bump in GDP for the second estimate saw PCE up by +0.2 to a still weak 1.6%, which beat the 1Q25 +0.5% but is still the lowest since 2Q23. Lower interest rates and bonus depreciation in the tax bill (equipment) should drive some recovery subject to tariff impacts.

• Goods (+2.4%) rallied off a weak 1Q25 (+0.1%), but goods growth remains below 2Q24, 3Q24, and 4Q24. Durables bounced to +2.6% from -3.7% in 1Q25 while nondurables moved slightly from +2.1% to +2.3%.

• The services growth line in 1Q25 and 2Q25 are the lowest since Trump 1.0. Services at +1.2% climbed off the +0.6% of 1Q25, but growth in services remains at multiyear lows with only 2Q23 (+1.6%) below a 2% handle. In a services economy, annual service growth in 2024 was 2.9%, 2023 was 2.9%, and 2022 at the inflation peak was +5.0%.

• Gross Private Domestic Investment (GPDI) stayed weak at -13.8% with a lower negative than the advance estimate. Structures (-8.9%) and Residential (-4.7%) remain mired in the red while Equipment is rolling along at +7.4% and IP products at +12.8%.

The above table updates the GDP line deltas from the advance estimate (see 2Q25 GDP: First Cut of Another Distorted Quarter 7-30-25). The fresh round of line items are mostly favorable variances. The biggest delta move of +6.4% in Intellectual Property Products is intuitive given the run in tech asset classes. The IP line is just ahead of Equipment in size among the GDP accounts of GPDI. In other words, it is larger than Structures and Residential investment in the 2Q25 lines.

The above table updates the GDP line items across PCE and GPDI as well as some important Government lines (defense, non-defense, State and Local). We start the timeline in 1Q21. The “follow the bouncing ball” scan tells the story. Adjectives are fun in Washington, but numbers are facts and that literally counts. As a reminder, PCE is 68% of GDP with 18% for GPDI, Government at 17%, and the net Imports (trade deficit) line is -3%.

We always highlight that those negative GDP numbers tied to “imports > exports” can also be interpreted as demand for low-cost sourcing that drives corporate profitability (stock markets, services company expansion) and allows many small businesses to exist. At the same time, low-cost sourcing supports household budgets and purchasing power.

Trade deficits have been painted as “death of American jobs” and subsidies of foreign nations. That is where politics depart from economics. According to the Constitution, it is a choice for legislators (and voters), but it has become the decision process of one man.

The nature of the tariff adjustments to pricing and expenses is a part of an ongoing process and will not be clear until well into 2026. Anyone who tells you the effects are clear at this point is selling a bridge they don’t own.

See also:

GDP comments:

2Q25 GDP: First Cut of Another Distorted Quarter 7-30-25

Q25 GDP: Into the Investment Weeds 7-30-25

1Q25 GDP: Final Estimate, Consumer Fade 6-26-25

1Q25 GDP 2nd Estimate: Tariff and Courthouse Waiting Game 5-29-25

1Q25 GDP Advance Estimate: Roll Your Own Distortions 4-30-25

1Q25 GDP: Into the Investment Weeds 4-30-25

Trump's “Greatest Economy in History”: Not Even Close 3-5-25

Gut Checking Trump GDP Record 3-5-25

Presidential GDP Dance Off: Clinton vs. Trump 7-27-24

Presidential GDP Dance Off: Reagan vs. Trump 7-27-24

2024:

4Q24 GDP: The Final Cut 3-27-25

4Q24 GDP: Inventory Liquidation Rules 1-30-25

GDP 3Q24: Final Number at +3.1% 12-19-24

2Q24 GDP: Final Estimate and Revision Deltas 9-26-24

State Unemployment: A Sum-of-the-Parts BS Detector 6-30-24

1Q24 GDP: Final Cut Moving Parts 6-27-24

• The overall GPDI contribution to GDP of -3.09% saw another quarter of inventory related distortions with only a +0.08%contribution to GDP from the fixed investment lines that serve as core indicators of business cycle health.

• A relatively weak fixed investment print in this morning’s GDP under a poor GPDI headline number gives a new set of data that rolls into varied levels of confidence from capital goods and consumer durables manufacturing to the secular lift seen in technology (AI, data centers power, etc.). The tariff backdrop and material cost challenges leave more than a few outstanding questions on what influence policy changes this year will have on longer-term strategic and capital planning decisions. These things take time.

• The debate on how to decouple the tariff distortions, tax bill tailwinds for equipment, and AI and data investment effects will play out in the quarters to come. There is some clear divergence in these early innings with EV projects under siege, LNG and public sector infrastructure rolling, and data centers and power needs soaring.

• The massive inventory distortions in GDP may be the most prominent short-term effect, but the marked decline of -10.3% QoQ in Structures investment raises some doubts on the early efficacy of tariffs for bringing domestic manufacturing capabilities back. Technology and IP investments are unshakeable at this point at least.

• Equipment investment increased 4.8% after a very strong 1Q25 performance of 23.7%, but the growth was clustered in aircraft, computers, and tech supporting industries. These areas continue to prop up the overall equipment investment where other areas experience stagnation and some declines.

The above chart breaks out the long-term history of private investment in Structures and Equipment under the GPDI lines in the GDP release. For context, GDPI overall is about 18% of total GDP and these two above are representative of the capex trends. They total just about 8.4% of GDP.

This quarter’s release sees a notable divergence between Equipment investment up $33.7 bn set against a -$19.1 bn decline in Structures. The main drivers for Equipment investment this quarter narrowed in scope, driven by $26.1 bn of computer and $19.0 bn of aircraft equipment investments. The scale of those investment needs to keep up with demand masks weakness in the broader manufacturing picture that sees tepid investment growth even with policy incentives this year.

As the endgame on tariff levels starts to become clearer, the use of Section 232 actions especially on semiconductors or chips is still a major concern for the levels above and still leaves risk to volumes, even if the nominal amounts might keep up. We cannot avoid the issue of lingering legal challenges to tariffs, but the SCOTUS deck is pretty stacked once everything proceeds to the legal finish line.

Structures investments pulled back significantly this quarter after such a major runup in the post-COVID period. How much of the slowing activity here is tied to uncertainty in policy and costs and how much is tied to confidence in cyclical outlook is difficult to disaggregate in this point, but so far this year we naturally see at least some short-term hesitation without the tariffs and legal challenges set. For many industries, project economics remain unclear. The theory remains that the policy incentives laid out this year stand to bolster these investments. Though there have been some major “commitments” to investments, most are yet to materialize as contractual commitments and capex flows.

This chart frames the Fixed Investment in Equipment line vs. the Intellectual Property investments. The lead taken by IP investment run rate since 2Q20 underscores the importance of digital infrastructure and highlights how intangible assets now dominate capital planning for firms navigating supply chain and labor cost volatility. However, the rapid growth for both reflects a convergence of drivers as AI and data infrastructure have become key growth drivers.

The above chart compares the scale of Public and Private investments. Government spending continued to grow to a new nominal all-time high as the notable reduction in nondefense spending were more than offset by increases at State and Local levels.

In the above chart and the following charts, we detail the private investment line items and their history to demystify the Equipment and Structures spending. We’ve previously looked at this from a Biden centric, Post-COVID investment shift but now change the comparison at 4Q24 to start framing the immediate impacts of Trump policy and business response. We leave in the medium-term history for those who want to see the path up to today. As a reminder, these tables use nominal dollar amounts, and the derived percentages are thus different than those in Table 1 of the GDP release.

The scale of growth for the Information Processing equipment line continues to dwarf the investment in other areas this year and even drives the areas of industrial equipment investment seeing growth this year. The outlook for construction and other equipment at least remain stable at this point and the upcoming periods will provide insight on whether we see a similar short-lived investment impulse due to the tax bill like 2017 or a more sustained expansion. The sugar high theory of 2018 cannot be ruled out into 2026, but there is a lot more on the mega project table already across a wide range of industries and markets.

On the Structures side, we still see a marked slowdown after a period of rapid growth in all areas except Power and Communication contracted this year. Another quarter of weakness in the Structures numbers reflects further hesitation in longer cycle bets, and even though trade policy uncertainty still loomed over the quarter, these levels could reflect a period of slower growth for longer.

The above chart narrows the focus to the Equipment categories for granular details. Computers and aircraft are standouts this year with minor contributions from Communications and Medical Equipment. In the Industrial equipment lines, we see some growth in sectors adjacent to the IP boom with semiconductors accounted for in the Special Industry line.

The last chart runs a similar exercise for the Structures subcategories. The lackluster growth this year spans all the lines with an exception for Other power.

GDP comments:

2Q25 GDP: First Cut of Another Distorted Quarter 7-30-25
1Q25 GDP: Final Estimate, Consumer Fade 6-26-25
1Q25 GDP 2nd Estimate: Tariff and Courthouse Waiting Game 5-29-25
1Q25 GDP Advance Estimate: Roll Your Own Distortions 4-30-25
1Q25 GDP: Into the Investment Weeds 4-30-25
Trump's “Greatest Economy in History”: Not Even Close 3-5-25
Gut Checking Trump GDP Record 3-5-25
Presidential GDP Dance Off: Clinton vs. Trump 7-27-24
Presidential GDP Dance Off: Reagan vs. Trump 7-27-24

2024:

4Q24 GDP: The Final Cut 3-27-25
4Q24 GDP: Inventory Liquidation Rules 1-30-25
GDP 3Q24: Final Number at +3.1% 12-19-24
2Q24 GDP: Final Estimate and Revision Deltas 9-26-24
State Unemployment: A Sum-of-the-Parts BS Detector 6-30-24
1Q24 GDP: Final Cut Moving Parts 6-27-24

• The swings in imports and exports and changes in private inventory are the typical distortion lines each quarter, and 2Q25 saw +4.99% positive contribution to GDP after -4.61% in 1Q25. The change in private inventories was -3.17% in 2Q25 after +2.59% in 1Q25 (Table 2 of release). This was heavily about the tariff working capital strategies.

• For the most important economic activity lines and deltas (Table 1 of release), 2Q25 PCE posted +1.4% in a rebound from 1Q25’s +0.5% but still at the second lowest since 2Q23.

• Gross Private Domestic Investment (GPDI) posted -15.6%, down from +23.8% in 1Q25. The lines under GPDI showed “Fixed Investment” at +0.4% with Nonresidential at +1.9% (down from +10.3% in 1Q25) and Residential at -4.6% (down from -1.3% in 1Q25). The biggest hit in Nonresidential in 2Q25 was Structures at -10.3%.

• Government consumption and investment weighed in at +0.4% (up from -0.6% in 1Q25). The 2Q25 +0.4% was the second lowest (ahead of 1Q25) since 2Q22 in the peak inflation quarter and start of the tightening cycle.

• The PCE price index number of 2.1% for 2Q25 was good news vs. 1Q25 at +3.7% and the 2.5% for Core PCE for 2Q25 was down sequentially from +3.5%. The market anxiously awaits the June PCE and consumer income and outlays release due tomorrow.

The above table breaks out the timeline for the main moving parts of the GDP lines we watch in Table 1. We look at Table 2 for the relative contributions of the big distorters such as Net Exports of Goods and Services (+4.99% in 2Q25) and “Change in Private Inventories” (-3.17% in 2Q25). Those two taken together amounted to +1.82% after the same two lines amounted to -2.02% in 1Q25.

When you look beyond those two 2025 quarters along the past 25 years, the 2Q25 GDP growth was just another weak quarter consistent with the poor growth history of the post-2000 administrations. That is the case on both sides of the aisle with some banner periods occasionally posted after some brutal event-driven weakness (COVID being the worst plunge and best rebound).

For some history of what impressive economies look like, see Presidential GDP Dance Off: Clinton vs. Trump (7-27-24) and Presidential GDP Dance Off: Reagan vs. Trump (7-27-24). For a history on the GDP growth rate counts since the Carner years, see The Politics of Objective GDP Numbers: “Flex Facts” on Growth (10-30-24). The sense is that political partisans always rely on adjectives and skip the most relevant numbers since they often get in the way of a false story line. The reality is a debt-heavy sovereign balance sheet typically leads to slow growth (see This Time is Different). That is where the US is now, and the balance sheet is getting worse – regardless of who is in the White House.

Into the major GDP lines…

We summarized the main line items in the bullets, and the Personal Consumption Expenditures line always rules. For 2Q25, PCE was 68% of GDP with Goods PCE at 21% and Services PCE at 47%. The GPDI line was 18%, and the Government Line at 17%. The “Net exports” line was down to -3.0%.

The strange “goal” in Trump’s tariffs is to eliminate the -3.0% while putting the 68% at risk. The theory is the lower -3.0% will be joined by materially higher GPDI with the reshoring and full redeployment of non-US capacity (autos, mining, pharma, etc.). The trick (and the worry) is that the process is largely being funded by corporate expense lines and potentially consumers via price increases. The simple way around that risk is to say “seller pays.” That is both simple and dishonest since the buyer writes the check to customs. The assumption that the seller pays is that 100% of the tariff is covered by seller price cuts to make the buyer whole. Good luck with that.

The worry for the moving parts of GDP is that elasticity of demand matters. That said, it will take months for adjustments to be made and work their way through the system via working capital cycles, capex programs, and relocations, etc. Tariff advocates want to pretend the debate is already over to run with the story line of “tariffs do not cause price increases.” That will become more evident in the MoM CPI lines reported each month and from the household consumer shopping experiences.

There are the “pass through vs. buyer eats the tariff” theories, but there is also the simple reality of supply and demand during the transition process. Besides taking years, the sale of lower cost or proprietary offshore products (e.g. apparel from Asia, pharma from Europe, metals from resource rich regions, etc.) can shift the supply-demand balance and take prices higher the old-fashioned way. That is, supply-demand imbalances run their natural course and prices often rise. We got a taste of that after COVID.

A lot of information and disinformation flows lie dead ahead.

GDP comments:

1Q25 GDP: Final Estimate, Consumer Fade 6-26-25

1Q25 GDP 2nd Estimate: Tariff and Courthouse Waiting Game 5-29-25

1Q25 GDP Advance Estimate: Roll Your Own Distortions 4-30-25

1Q25 GDP: Into the Investment Weeds 4-30-25

Trump's “Greatest Economy in History”: Not Even Close 3-5-25

Gut Checking Trump GDP Record 3-5-25

Presidential GDP Dance Off: Clinton vs. Trump 7-27-24

Presidential GDP Dance Off: Reagan vs. Trump 7-27-24

2024:

4Q24 GDP: The Final Cut 3-27-25

4Q24 GDP: Inventory Liquidation Rules 1-30-25

GDP 3Q24: Final Number at +3.1% 12-19-24

2Q24 GDP: Final Estimate and Revision Deltas 9-26-24

State Unemployment: A Sum-of-the-Parts BS Detector 6-30-24

1Q24 GDP: Final Cut Moving Parts 6-27-24

• We see an anemic final GDP cut for 1Q25 at a -0.5% contraction with Personal Consumption Expenditures taking a downward hit to only +0.5% from +1.2% in the second estimate, which was also down from +1.8% in the first estimate. That is down from +4.0% PCE in 4Q24 and +3.7% in 3Q24.

• We get a fresh read on PCE inflation on Friday along with Personal Income and Outlays after the April read showed solid income but defensive consumption (see PCE April 2025: Personal Income and Outlays 5-30-25).

• The PCE price index for 1Q25 at +3.7% and Core at +3.5% for 1Q25 is not reassuring with initial tariffs slowly rolling into working capital cycles and waves of reciprocal and Section 232 tariff plans on deck.

• At some point, real transaction flow will more fully settle the debate on whether sharply higher unit costs from tariffs flow into profit margins via higher expenses or into pricing – or both – and where along the economic chain more of the costs are absorbed.

The above chart frames the GDP line item deltas for the final estimate vs. the second estimate. We detail the changes in the right column across the key GDP lines from PCE to Gross Private Domestic Investment (GPDI) to Government Consumption and Investment.

The headline numbers can be useful, but we tend to go straight to the PCE lines and Fixed Investment lines. We see negative variances in PCE at -0.7 and GPDI at -0.6 lower. In Nonresidential fixed investment, we see Structures and Equipment both post negative moves in the final estimate with a partial offset by IP product investment. Residential is also negative. Based on GPDI deltas, the tariff plan has not set off a rush to invest yet. In the Government lines, the Federal reductions were flat and still weighed in at -4.6% for the final estimate. State and local ticked higher with the final estimate.

The final “distortion lines” found in Private Inventory investment and trade deficits can be seen in Table 2 of the release for their “contributions to percent change in real GDP.” These swing factors can materially move the headline number (see 3Q22 GDP: It’s the Big Little Things 10-27-22).

We see +2.59% for inventories and -4.61% for “net exports of goods and services. Those two lines combine for a -2.07% hit to headline GDP. That still leaves “ex-distortion” GDP numbers below 2% which is right in the zone of the recent forecasts for 2025 from the median Fed forecast, the World Bank and the OECD. Those are just some of the reports detailing the expected adverse impact of the tariff program on global and US growth via impaired trade flows and rising costs (see FOMC Day: PCE Outlook Negative, GDP Expectations Grim 6-18-25).

The above table updates the running history of the GDP line items from 1Q21 when the post-COVID stimulus wave from 2020 and then 2021 fed into demand growth. Stimulus and relief actions set off demand drivers that were not adequately considered in the context of supply. The contraction in 1Q25 has plenty of distortions in it as we covered in the first two estimates (see 1Q25 GDP 2nd Estimate: Tariff and Courthouse Waiting Game 5-29-25, 1Q25 GDP Advance Estimate: Roll Your Own Distortions 4-30-25).

The idea that “the whole supply and demand thing” is a bit lofty for the average politician is not news (and notably the typical House type), and the tariff themes are still a matter of party loyalty (“seller pays” “no inflation risk” and “Trump 1.0 was the greatest economy in history” despite tariffs). We have already picked over the actual asset performance of 2018-2019 and Fed action in other commentaries and what they meant (see links below or Histories: Asset Return Journey from 2016 to 2023 1-21-24, Past-Prologue Perspective for 2025: Memory Lane 2018 6-5-25).

Political point scoring over the short term (whether GOP or Dems) often takes precedence over prudent fiscal policy. That was true of excess stimulus, which is easier to understand than tariffs. Tariffs are more complicated in framing the impact on consumers since there is a reason that a tariff program of this scale has never been tried before. The reasons are well known (bad for the economy and was a catalyst for a worsening Depression with Smoot Hawley in 1930, etc.). In the end, the political loyalty tests require adherence to the chronic misinformation on the tariff topic.

Pricing, consumption, and the tariff blues….

The summer and fall will offer some cures to the disinformation tactics that beg you to look backward and avoid forward thinking. A basic fact check and concept filter on the border tax-to-expense-to-pricing impact helps in framing the uncertainties in the flow of decisions from seller to importer to customer. We have addressed those in other commentaries, but the important question that many small businesses have used is “Who writes the check?” That question is harder to “talk around” and reframe (A Bessent specialty).

That sharing of “economic costs” is an assumption-driven analysis. What is not an assumption but is a fact is that the buyer “writes the check” that is collected by customs. This means that Trump’s insistence that the US Treasury “collected hundreds of billions from selling nations” explicitly and factually is false (aka a lie). The words “collected from” are also key “fact words.” The verbal gymnastics that go into spinning “who pays the tariff” combines dishonesty with perhaps a dose of ignorance. Repetition comes first and facts are well down the list of priorities.

In the end, the winners and losers list will all come down to the economics of the assigned tariffs and how they frame up from seller to the end markets. The brief stop at the border for a tariff is just part of a complex process. It would be easier to have faith in the assumptions if the tariff advocates did not lie at step 1.

See also:

GDP comments:

1Q25 GDP 2nd Estimate: Tariff and Courthouse Waiting Game 5-29-25

1Q25 GDP Advance Estimate: Roll Your Own Distortions 4-30-25

4Q24 GDP: The Final Cut 3-27-25

Trump's “Greatest Economy in History”: Not Even Close 3-5-25

Gut Checking Trump GDP Record 3-5-25

4Q24 GDP: Inventory Liquidation Rules 1-30-25

Presidential GDP Dance Off: Clinton vs. Trump 7-27-24

Presidential GDP Dance Off: Reagan vs. Trump 7-27-24

Markets:

Footnotes & Flashbacks: Credit Markets 6-23-2025

Footnotes & Flashbacks: State of Yields 6-22-2025

Footnotes & Flashbacks: Asset Returns 6-22-2025

Mini Market Lookback: FOMC Spoke Clearly, Iran and Trump up next 6-21-25

• We see the headline 1Q25 GDP number slightly improve to a less negative number at -0.2% vs. -0.3% with mixed deltas in key lines such as PCE (worse), Equipment, (better), Structures (worse) and Government (better). The top line needle barely moved but there was action in the line items (see 1Q25 GDP Advance Estimate: Roll Your Own Distortions 4-30-25, 1Q25 GDP: Into the Investment Weeds 4-30-25).

• The tariff headwinds were set to kick in during the summer months on the pauses and “negotiations” (which have badly lagged with the EU, Japan and South Korea) with the latest headline legal setbacks raising questions on timing and relative leverage near term. The SCOTUS decision on Trump’s power will more likely come sooner rather than later.

• The new TACO headlines (“Trump Always Chickens Out”) will run the course of political backbiting and lampooning in coming days, but the extreme moves in tariffs lose some of their power unless the SCOTUS upholds Trump’s rights to use such shock-and-awe tariff numbers. The court ruling manages to take some of the crazier, more destructive gamesmanship off the table, but it is “on the clock.” Unless allowed again on appeal, the effect could be that Trump stalls on “deals” with less leverage for now or moves more slowly until he gets more ammo back in his arsenal. The timing is a matter of speculation (for now).

• In the event he loses, some pressure would come off Canada and Mexico (fentanyl) and the EU and China would have better relative leverage vs. what they had before. When the smoke clears, tariffs will still be a multiple of all-time highs across numerous critical industry groups. The threat is still there but with less extreme immediate pressure favoring the Trump game theory (again, for now. Subject to SCOTUS).

At a minimum, the courts up the ante on legal outcomes for emergency tariffs getting finalized for the “reciprocal” and emergency tariffs. Today, an appeals court allowed Team Trump to keep collecting them. The duration of the stay is not set yet as we go to print and more legal motions are coming. Meanwhile, the massive budget bill includes language that tries to derail court challenges to Trump’s various executive actions (a separate story required for that one). Times are tense in trade, politics, and in the world of checks-and-balances.

Regardless of the “reciprocal” and emergency tariffs, the Section 232 laundry list of tariffs are still teed up with more in the queue (pharma, semis, aircraft/engines/parts, lumber, copper, etc.). Some are massive import line items (autos, pharma, aerospace, semis) so the trade war impulse remains. The mix of weapons just changed.

The above chart runs through the deltas we monitor (see 4Q24 GDP: The Final Cut 3-27-25). We like to watch the consumer and corporate investment patterns as first on the priority list with Government a distant 3^rd even though government consumption and investment line is close to Gross Private Domestic Investment (GPDI) in its share of nominal GDP. As usual, the consumer and the PCE line rules at 68% of GDP followed by GPDI at 19% and Government at 17%. That adds to 104% (rounding) with over -4% from the net trade deficit.

The two big distortion lines in the 2^nd estimate for 1Q25 are the usual suspects with the trade deficit (Net exports of Goods and Services) bringing a negative contribution to GDP of -4.9% (Table 2). The “change in private inventories” line added +2.64% with the mad scramble of pre-tariff inventory stocking as many industries sought to beat the tariff charges that importers (aka “buyers” not sellers) need to pay. Stocking inventory made for a lot of two-way traffic that juiced up the import line to a level that drove a -5.16% contribution to GDP vs. +0.34% for exports.

How one wants to ponder that -4% haircut from trade is very multi-layered and often in the eye of the beholder. We have looked at that topic in other commentaries. Everyone has a view. Lower cost imports help juice up profits? Consumers are happy with lower costs and higher purchasing power for goods? Supply chains are optimized in quality and cost? International expansion base? Reinvestment of profits in capex, hiring, R&D, tech, and more downstream investment from offshore? (Auto transplants, dealers, finance and insurance, real estate, freight and logistics investment, etc.)

The dark side has been advertised regularly in the US with the erosion of the manufacturing base and race to the bottom on wages. Trump also believes a trade deficit is a payout/subsidy and nothing else.

The above chart breaks out the longer timeline from the start of 1Q21 in Biden’s term for an easy scan across the post-COVID period that includes the ZIRP year of 2021 and then into the rising inflation and tightening cycle of 2022 before the start of easing in 3Q24.

The PCE trend line is unfavorable in the drop from +4.0% to+1.2 but it is at least not contracting. We get another round of outlays data for April this week with the PCE release (Income and Outlay). Goods declined sharply and Services also dropped.

In GPDI, we see the Equipment line rolling along at +24.8%, but the Structures line has been faltering and hit -1.4%, well below the earlier stimulus periods. Residential has been volatile and had another subpar reading by falling into the red zone. IP Products ticked higher to 4.6% in the revised numbers. The Government line hit the lowest since the peak inflation quarter of 2Q22.

Overall, the revisions for 1Q25 signal weakness but no recession. That will be up to tariffs, which is a drama in the process and how consumers respond.

See also:

Homebuilder Rankings: Volumes, Market Caps, ASPs 5-28-25

Durable Goods Apr25: Hitting an Air Pocket 5-27-25

Footnotes & Flashbacks: Credit Markets 5-27-25

Footnotes & Flashbacks: State of Yields 5-25-25

Footnotes & Flashbacks: Asset Returns 5-25-25

Mini Market Lookback: Tariff Excess N+1 5-24-25

New Home Sales April 2025: Waiting Game Does Not Help 5-23-25

Existing Home Sales April 2025: Soft but Steady 5-22-25

Credit Snapshot: Lithia Motors (LAD) 5-20-25

Home Starts April 2025: Metrics Show Wear and Tear 5-19-25

Footnotes & Flashbacks: Credit Markets 5-19-25

Industrial Production April 2025: CapUte Mixed but Time Will Tell 5-15-25

Retail Sales April 25: Shopping Spree Hangover 5-15-25

Credit Spreads: The Bounce is Back 5-13-25