• 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

• With so many distortions leading to a negative 1Q25 GDP print, the rolling policy changes around tariffs will be picking up pace from here as tariffs get registered more quickly at the transaction level. Market dynamics and the impact of higher all-in costs will then test the various theories on price impact and “cost sharing.”

• For 1Q25, framing which investment lines were bolstered by defensive buying ahead of trade war scenarios is tricky and gets into the handicapping of what will overcorrect to the downside in 2Q25/3Q25

• Inventory build contributed to the surge in GPDI of 21.9% QoQ growth tied to Fixed Investment in Equipment growing 22.5% QoQ led by tech and information processing growth. Whether this reflects sustainable infrastructure program growth or pull-forward ahead of tariffs remains a key question. Aircraft demand was also strong.

• Fixed Investment in Structures came up lackluster but at least positive at 0.4% QoQ growth even as tariff policy squarely aims at bolstering activity in this space. As one of the major targets for growth under Trump’s trade policy, we will see if erratic tariff-based trade “incentives” are the right tools for the job. A more business friendly tax regime will complicate that analysis on timing.

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 18.5% of total GDP and these two above are representative of the capex trends. They total around 8.4% of GDP.

The 1Q25 release shows increases for both of these but on different scales as Equipment investment surged $81 bn higher and Structures gained just over $3 bn. The main driver for the Equipment investment is unsurprisingly $73 bn in growth of information processing equipment given both the fervent demand for AI and database infrastructure and growth. The major question from this morning remains how much is pull-forward in anticipation of semiconductors and chips possibly getting caught in another round of Section 232 or other tariff actions. Ongoing trade tensions could slow investment and delivery cycles.

On the other hand, Structures investment remained low growth but at least at elevated run rates. As the Trump team continues to target previous incentives and fiscal support, policy actions will be the main driver of incremental capex programs for structures. The heavy tilt toward tech-driven equipment investment and relative weakness in structures points to a preference for short-cycle assets over long-horizon infrastructure. With tariff effects unfolding over time, firms are hesitant to commit to those large, multi-year programs amid persistent uncertainty. That clarity remains a major hurdle for now even if some announcements get made for political points.

This chart frames the Fixed Investment in Equipment line vs. the Intellectual Property investments. The lead taken by IP investment run rate since 2Q20 reflects the importance of digital infrastructure and highlights how intangible assets now dominate capital planning for firms navigating supply chain and labor cost volatility.

Under uncertain tariff and supply chain conditions, IP investments have the advantage of less disruption and provide an investment avenue that has a few less policy question marks. As labor and inventory costs are set to increase, robust IP capex programs at least set the stage to utilize those resources more effectively.

The above chart zooms out and looks at the overall balance between Public and Private investments. While the chart shows government spending at a nominal all-time high, its real contribution to GDP was negative due to defense spending cuts. Trump’s team has committed to lowering this figure one way or another, but the reported $160 bn slashed away by DOGE is a small drop in the bucket here.

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 to 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 the nominal dollar amounts, and the derived percentages are thus different than those in Table 1 of the GDP release.

We have already commented on the surge in Information Processing Equipment and the outsized contribution to the fixed investment growth in 1Q25 overall, but the 14.3% QoQ nominal growth is the largest single period growth on record. It remains difficult to disentangle how much of this reflects genuine, long-term AI infrastructure buildout versus short-term tariff-related pull-forward. The run rates in the next quarter’s GDP will clarify the main drivers of the action above. Aircraft investment, which is typically volatile, drove most of the 2.5% increase in the transport category, masking declines in other subsectors.

On the structures side of the ledger, there are minor variances with mixed results. Manufacturing activity notably notched slightly down after a very positive trend under Biden-era policies (IRA, CHIPS, Infrastructure bill) that saw Manufacturing climb from $79.9 bn up to $233.7 bn. We will now get a look at how the tectonic shifts in global trade practices can drive similar results (or not).

We worry about the lack of strength in the Structures numbers above as reflecting hesitation in longer cycle bets, especially as trade policy shifts have been struggling with consistency. The investment time horizons need a more coherent message. The lack of growth in Mining/E&P does not reflect confidence in the economics of higher investment at current oil prices. A harder line on Russia and their oil supply might have helped.

The above chart narrows the focus to the Equipment categories for granular details. The short story is that besides a select few lines of Computers, Communication, Medical, and Aircraft Equipment investment, the results were quite mixed. Notably, we see declines in Agricultural Machinery, Trucks, and Autos that missed possible opportunities to front-run some capex.

The last chart runs a similar exercise for the Structures subcategories. We see the Power and Communication and Office lines as main contributors to the small growth on the quarter.

See also:

PCE March 2025: Personal Income and Outlays 4-30-25
1Q25 GDP Advance Estimate: Roll Your Own Distortions 4-30-25
JOLTS Mar 2025: No News is Good News 4-29-25
Tariffs: Amazon and Canada Add to the Drama 4-29-25
Credit Snapshot: D.R. Horton (DHI) 4-28-25
Footnotes & Flashbacks: State of Yields 4-27-25
Footnotes & Flashbacks: Asset Returns 4-27-25
Mini Market Lookback: Earnings Season Painkiller 4-26-25
Existing Home Sales March 2025: Inventory and Prices Higher, Sales Lower 4-24-25
Durable Goods March 2025: Boeing Masking Some Mixed Results 4-24-25
Equipment Rentals: Pocket of Optimism? 4-24-25
Credit Snapshot: Herc Holdings (HRI) 4-23-25
New Home Sales March 2025: A Good News Sighting? 4-23-25
Footnotes & Flashbacks: Credit Markets 4-21-25
Footnotes & Flashbacks: State of Yields 4-20-25
Footnotes & Flashbacks: Asset Returns 4-20-25
Mini Market Lookback: The Powell Factor 4-19-25
Ships, Fees, Freight & Logistics Pain: More Inflation? 4-18-25
Home Starts Mar 2025: Weak Single Family Numbers 4-17-25
Credit Snapshot: Service Corp International (SCI) 4-16-25
Retail Sales Mar25: Last Hurrah? 4-16-25
Industrial Production Mar 2025: Capacity Utilization, Pregame 4-16-25
Credit Snapshot: Iron Mountain (IRM) 4-14-25
Mini Market Lookback: Trade’s Big Bang 4-12-25
Tariffs, Pauses, and Piling On: Helter Skelter 4-11-25
CPI March 2025: Fodder for Spin 4-10-25
Credit Snapshot: Avis Budget Group (CAR) 4-9-25
Payroll March 2025: Last Call for Good News? 4-4-25
Payrolls Mar 2025: Into the Weeds 4-4-25
Credit Snapshot: AutoNation (AN) 4-4-25
Credit Snapshot: United Rentals (URI) 4-1-25

• For the rolling 3 months, the bulls can tailor some mitigating factors such as a distorted trade deficit to weave into the drop to -0.3%. The bears can back out some inventory excess and inflated pre-buying in GPDI. The key is to lock in on what can roll into 3Q25 action as inventory gets liquidated, tariff-driven price increases impact PCE, and the trade deficit gets whipsawed by all the tariff effects.

• The two distortions you always need to look at each quarter are the trade deficit and the private inventory investment. For 1Q25, the pre-buying drove a -4.83% deduction from GDP while the change in private inventories tacked on +2.25%. Those two could allow one to add back 2.6% net (if you are axed). There could in theory be some big reversals in both of those in 3Q25.

• PCE growth of +1.8% was a major sequential drop from 4Q24 (+4.0%) and 3Q24 (+3.7%). Goods dove to +0.5% from +6.2% in 4Q24 with Durables at -3.4%. The Services line was modestly lower at +2.4% from +3.0% in 4Q24. The PCE price index for the quarter was +3.6%, which is a bad number for the stagflation story line. March PCE was released later and tempered that number. We cover this separately.

• The Equipment growth line of Gross Private Domestic Investment (GPDI) went off the charts at +22.5% (that number needs some peeling back) on what is likely many of the same catalysts of accumulating ahead of trade war escalation. The GPDI number was +21.9% with Nonresidential at +9.8% under that broader umbrella.

• Government weighed in at -1.4% with Federal at -5.1% with Defense at -8.0% and Nondefense -1.0% driving that number. State and Local slid to +0.8% from +2.5%.

The above table breaks out the line items across the PCE and GPDI lines. The 21.9% looks strange but we saw similar magnitudes back in 3Q21 and 4Q21. The Fixed Investment lines can whip around as we have seen often in the past and notably on the way into downturns. The Residential line was positive in 1Q25 and that is one that historically can move very quickly and in “size.” Mortgage rates and jobs are the critical drivers there.

We will do our usual drill-down into the Nonresidential subcategories in a separate piece later today. Based on our preliminary review of that data, there was a lot of action in the “Information Processing Equipment” bucket, which would be logical given the tension with Asia on tariffs and discussions of semiconductors being a Section 232 candidate or a unilateral tariff even outside Section 232. Trump has a collection of legacy legislation to do whatever he wants. It is all legal even if the legislative intent gets stretched to the limits.

Government consumption and investment is going in the direction that has been promised by Team Trump – as in smaller Federal. The “path to smaller” and the report card on execution turns instantly subjective and political. It remains to be seen how pulling the plug on grants and cutting heads on such a scale and so quickly will translate into multiplier effects in the broader industry mix outside “government investment” (notably in health care industries and biotech). That is a separate topic.

See also:

JOLTS Mar 2025: No News is Good News 4-29-25

Tariffs: Amazon and Canada Add to the Drama 4-29-25

Credit Snapshot: D.R. Horton (DHI) 4-28-25

Footnotes & Flashbacks: State of Yields 4-27-25

Footnotes & Flashbacks: Asset Returns 4-27-25

Mini Market Lookback: Earnings Season Painkiller 4-26-25

Existing Home Sales March 2025: Inventory and Prices Higher, Sales Lower 4-24-25

Durable Goods March 2025: Boeing Masking Some Mixed Results 4-24-25

Equipment Rentals: Pocket of Optimism? 4-24-25

Credit Snapshot: Herc Holdings (HRI) 4-23-25

New Home Sales March 2025: A Good News Sighting? 4-23-25

Footnotes & Flashbacks: Credit Markets 4-21-25

Footnotes & Flashbacks: State of Yields 4-20-25

Footnotes & Flashbacks: Asset Returns 4-20-25

Mini Market Lookback: The Powell Factor 4-19-25

Ships, Fees, Freight & Logistics Pain: More Inflation? 4-18-25

Home Starts Mar 2025: Weak Single Family Numbers 4-17-25

Credit Snapshot: Service Corp International (SCI) 4-16-25

Retail Sales Mar25: Last Hurrah? 4-16-25

Industrial Production Mar 2025: Capacity Utilization, Pregame 4-16-25

Credit Snapshot: Iron Mountain (IRM) 4-14-25

Mini Market Lookback: Trade’s Big Bang 4-12-25

Tariffs, Pauses, and Piling On: Helter Skelter 4-11-25

CPI March 2025: Fodder for Spin 4-10-25

Credit Snapshot: Avis Budget Group (CAR) 4-9-25

Payroll March 2025: Last Call for Good News? 4-4-25

Payrolls Mar 2025: Into the Weeds 4-4-25

Credit Snapshot: AutoNation (AN) 4-4-25

Credit Snapshot: United Rentals (URI) 4-1-2

• The 4Q24 numbers show a slight upward revision from +2.3% to +2.4%. We look across the recent quarter as well as the annual full year 2024 print of +2.8%. For those keeping score, that +2.8% annual number beats 3 of 4 Trump 1.0 years with only Trump’s 2018 higher (see Gut Checking Trump GDP Record 3-5-25, see Trump's “Greatest Economy in History”: Not Even Close 3-5-25).

• The GDP line item exercise is worthwhile in framing what might come ahead in 2025 with waves of forecasts streaming out (Fed, OECD, etc.) including a +1.7% 2025 median forecast recently from the Fed with the OECD calling for the US posting a +2.2% GDP growth rate in 2025 and +1.6% in 2026. There will be more forecasts to come in the weeks and months ahead that attempt to factor in the waves of tariffs (and speculative retaliations). Those revisions are likely biased lower.

• In a fact-free world, we emphasize that today’s release cites annual 2024 “profits from current production” rose by over 22% to $281 billion. You will not be hearing about that from Bessent or Lutnick, but we are partial to facts.

• With PCE at 68% of nominal GDP dollars, Gross Private Domestic Investment (GPDI) at 18%, Government Consumption/Investment at 17% (State and Local 10.4%, Federal at 6.5%, Nondefense Federal 2.7%), and Net exports (exports – imports) at -3%, that gets you to 100% of GDP. How tariffs will impact the 68% in PCE and 18% in GPDI is likely to end up as much more important than the impact on the -3% from the trade deficit. DOGE will impact the Government line (in a bad way).

• It is always important to get into the line items and take the 30,000-foot adjectives and political spin (“ripping us off” and “subsidizing” other nations, Federal government “waste and fraud”) for what they are.

• As we get into the tariff implementation process and ensuing trade wars, the potential for both imports and exports to move lower is high. Both were already negative in 4Q24. As a reminder, weak exports and weak fixed investment in the US were on the short list of factors shaping why the Fed eased in 2019 after a brutally bad year for assets in 2018 (see Histories: Asset Return Journey from 2016 to 2023 1-21-24).

The above chart updates the 4Q24 GDP deltas from the advance estimate, across the second estimate, and now the final numbers for 4Q24. As people play politics with the economic themes in qualitative terms, it is always a good drill to look at the real numbers and along the line items from the consumer side of the ledger and then across the GPDI lines and finally government outlays (consumption and investment).

After booming stimulus and exceptional growth in the early Biden years, the GPDI line has leveled off and is now sliding. Equipment is also contracting and that is the line that Trump promises will go much better. We looked under the hood at the “capex lines” in an earlier commentary (see 4Q24 GDP: Into the Investment Weeds 1-30-25).

Musk wants Government lines out of the GDP accounts as if the economic activity does not exist as it relates to government consumption and the benefits of investment (including human capital). He may be a genius at businesses he is involved in, but the common-sense factor around how the US population lives is beyond his scope. From defense contractors to construction companies – to name two obvious ones – many real economy companies see government outlays as quite economically relevant.

The same is true of the suppliers to those parties and the employees on the payrolls. That he sees teachers and state and local services as economically irrelevant is absurd (with a touch of mean spiritedness). Those state and local teachers are investments in the next generation of employees and the necessary human capital they help develop (this is the automaton’s excuse for a human being running DOGE).

Musk presumably has never washed and waxed the floors of a school in a part-time job or washed dishes in a metro health care facility. Meanwhile, the garbage does not grow wings and fly to its next destination. Someone takes it out (and some Fortune 500 companies or municipal entities pick it up). In the age of infrastructure focus, the idea that 17% of GDP should not be in the numbers is just odd. If GDP growth slows, get ready for the complaint about methodologies. The Project 2025 playbook wanted to control the information and insert like-minded people. That rolls up under the Census and Commerce.

Consumers rule, but GPDI and Government face headwinds

The reality of the GDP numbers is that the PCE line drives the economic growth at 68% of GDP, and how the consumer feels heading into 2025 has been a dominant part of the macro discussions including numerous retailers, airlines, and homebuilders of late on earnings calls and in earnings revision commentary.

The consumer sector dominates GDP and how those serving that sector consume and invest. For government, the State and Local numbers dominate. Even if the nondefense Federal mix of 2.7% of GDP gets the DOGE engines running, it’s a small part of the mix. What the wunderkind crowd will do for the defense line remains to be seen as the Pentagon purge continues. Fighting with the military did not work out so well for Joe McCarthy in the early 1950s.

We saw the abysmal UMich sentiment numbers and then again this week the even worse Conference Board numbers at a 12-year low and inflation expectations numbers that were almost impossible. The UMich report earlier was no bargain either with sharply higher inflation expectations. The sales pitch on “tariffs don’t cause inflation” is not catching on, and the more nuanced sleight of hand on “transitory” and the idea that a “one-time increase is not inflation” being spun by the semantic savants of the economics circuit is not selling well to households.

The tariff either leads to a “reduction in purchasing power” or not (25% tariff meets 4% wage growth). That basic transactional reality of higher costs at the borders lacks “focus group” value, so they tend not to tackle it in their talking points (after all, Trump still says the “seller pays”). Someone loses along the chain in the world of “debits and credits.” Figuring out who gets hurt more is the exercise.

The process from here is watching for the timing and adjustments across the transaction chain from negotiating with suppliers to taking out other costs (layoffs). The focus will be on what can be flowed into price and how currencies and the supply-demand dynamics of any given product group impact pricing power.

The above chart updates the running GDP growth rates by quarter and major line items (ex-government). There is more to life than GDP accounts, but we see GDP, Inflation, and Payroll trends as our top 3. The trade deficit fixation ignores how low-cost global sourcing has been a key driver of low inflation and monstrously strong equity returns. Admitting that would be a good start. It has been a bipartisan challenge since the “other guy” is always the bad guy or the idiot. The only objective statement that has easy support on whether someone is a “bad guy” is if he denies the numbers and ignores facts (you can decide who those are).

How you can get the US back to a consistent 3% GDP growth economy gets into the fiscal debt and sovereign borrowing risks as a problem that gets worse every 4 years (see US Debt % GDP: Raiders of the Lost Treasury 5-29-23).

Besides the revenue and expense line, a big “values question” is how you can change growth prospects without also addressing human capital and education. That is an economic debate and not just another theme day with AOC and Bernie. The DOE is getting scuttled. The cost of underinvestment thus becomes more ideological than economic. The DOGE folks simply don’t give a damn, and a growing mix of the consumer sector is starting to feel that as expressed in their reactions.

The slow economic growth since 2000 across Bush, Obama, Trump, Biden and now Trump again happened for a reason (fiscal, geopolitical, etc.). Obama had the worst numbers of the lot in Obama 1.0. His performance in Obama 2.0 was better. Bush was bookended by crises. Trump 1.0 was a 2% economy overall (excluding COVID) even as his minions keep saying it was a “3% economy” as if repetition is the soul of the factual (see The Politics of Objective GDP Numbers: “Flex Facts” on Growth 10-30-24). A sub-2.0% GDP number can be wagged simply by inventory deltas into a material increase or decrease relative to a 2.0% baseline. We prefer looking at the private sector pieces of PCE and GPDI for real answers. It is hard to find a lot of good news ahead in 2025 in those lines right now.

See also:

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

3Q24 GDP Second Estimate: PCE Trim, GPDI Bump 11-27-24

Fixed Investment in 3Q24: Into the Weeds 11-7-24

The Politics of Objective GDP Numbers: “Flex Facts” on Growth 10-30-24

3Q24 GDP Update: Bell Lap Is Here 10-30-24

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

2Q24 GDP 2nd Estimate: The Power of 3 and Cutting 8-29-24

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

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

GDP 2Q24: Banking a Strong Quarter for Election Season 7-25-24

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

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

Construction Spending: Stalling Sequentially at High Run Rates 6-4-24

1Q24 GDP: Looking into the Investment Layers 4-25-24

4Q23 GDP: Final Cut, Moving Parts 3-28-24

GDP and Fixed Investment: Into the Weeds 1-25-24

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

Construction Spending: Timing is Everything 12-1-23

3Q23 GDP: Fab Five 11-29-23

Fixed Investment in GDP: The Capex Journey 10-30-23

GDP 3Q23: Old News or Reset? 10-26-23

Construction: Project Economics Drive Nonresidential 10-2-23

US Debt % GDP: Raiders of the Lost Treasury 5-29-23

• After a long speech before Congress by Trump, we look back at the annual GDP growth from Nixon/Ford through Biden and include Trump 1.0, which was once again billed as the “Greatest Economy in History”. That certainly sounds better than the truth: “Bottom quartile in the last half century.”

• One of the morning shows called the Trump address to Congress a MAGA rally ChatGPT product, but software does not set records for longest speech since Clinton in 2000.

• The median annual GDP growth since Nixon/Ford was +2.8%, so if we set an aspirational target of 3.25% as a bar to clear for annual GDP growth, the post-2000 years have been ugly and Trump 1.0 one of the worst. The 1970s, 1980s, and 1990s crush Trump 1.0. Fact.

When we hear that Trump 1.0 was the “greatest economy in history,” we worry that delusion and widespread ignorance combined with a basic lack of mental effort in a factual void can make “imaginary facts” real just by repetition. After all, it has worked so far. That worry ties into the false tariff story line and the Trump sales pitch that the “selling country” pays.

It is worth remembering that Trump 1.0 promised 4% GDP growth and elimination of the deficit in 8 years. Well, we can restart the game clock in 2025 and hope he does not seek to be President for Life or until he actually achieves those milestones (i.e. many terms or until a sovereign debt crisis – whichever comes first).

Even that “seller pays” nonsense is grounded in the idea that some mystical sovereign body decides what the buyer purchases. As the nonsense flies, that means transactions translate into the other sovereign nation receiving subsidies from the US. Those who actually believe that should stick with the Crayola box of 6. You are not ready for the Box of 64.

That said, the market needs to worry about policy and how disinformation on tariffs gets worked in as a tailwind for high taxes on the consumer and companies who have non-US supply chains. You can promise small and medium sized businesses tax relief if they in fact can be profitable once you have damaged them with tariffs on their expense line. Same thing goes for the relative impact on their revenue line after trade partner retaliation. The domestic supply chain competition will raise prices. Many already have just like the 2018-2019 tariff adventures.

Looking back across annual GDP growth…

We do not plan to revisit the Presidential story lines here (my first vote was in 1976), but we saw a lot of 5% GDP growth handles and 4% handles along the way as evident in the chart.

Trump had zero years above 3.0%. Biden had one. Carter had 3 years higher than Trump’s best (see Annual GDP Growth: Jimmy Carter v. Trump v. Biden…just for fun 1-6-25). We know there is more to life than GDP growth, but we easily rank that as #1. It tells a story of activity that leads to hiring, tax base growth (Government investment and consumption), and long-term investment.

We saw some wild times under Nixon and then Ford with post-Vietnam inflation and the structural challenges after the Arab Oil Embargo. The year 1974 was brutal, but it was followed by two 5% handle years and a 4% handle year.

In the case of “greatest economy,” you cannot lay claim to that title with subpar GDP growth numbers. It is like telling the diving judge “Come on, have you ever seen such a big splash. That was awesome.”

In the end, we all have to vote with our gut, and many of us come from families with split political views and MAGA vs. whoever, etc. The 1968 election was an especially colorful one around the dinner table. My Mother voting for Wallace was very Boston Irish working class at that time even if Humphrey took the state with 63% of the popular vote. Wallace was a firebrand segregationist who won 5 states in that election which are all MAGA states now (nope, not very subtle).

Voting with “your gut” is fine, and most of us do just that. However, it should not be done right after a heavy meal of utter falsehoods and outright lies. Doctors recommend waiting for half an hour before swimming in a sea of disinformation.

See also:

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

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

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

• The updated GDP number in the second estimate were dull at the headline level and unchanged at +2.3%. The hot 4.2% PCE consumption number was also unchanged from the advance estimate.

• The PCE price index raised the stakes ahead of Friday’s PCE release for January with so much chatter about tariffs that have not rolled in yet. The Core PCE prices for 4Q24 were revised higher to 2.7% from 2.5%. The headline PCE price index ticked up on the revision to 2.4% from 2.3%. That is not what the Fed wants to see.

• We are in one of those pivotal periods in the economy where the Consumer sector is adding a few more signals to make UST bulls happy and growth fans less optimistic. The almost daily headlines of new and/or more specific tariffs do not help on inflation worries or growth handicapping.

• The ebb and flow of verbiage on trade by Trump now has copper as a Section 232 review, and the EU is likely to officially (sort of) join Canada and Mexico with blanket tariffs.

• Capital budgeting will face a mix of complexities and hurdles with so many tariff scenarios and capex budgets complicated by the uncertain inputs for the fixed investment lines of GDP as well as hiring plans.

The above chart is the easy part this time around with the top line PCE flat at +4.2% with a few moving parts that netted out to unchanged. The Goods line of PCE came down a little on the revisions of Nondurables while Durables was unchanged. That decline in Goods was offset by an uptick in the larger Services side of the PCE mix. Services is around double Goods in the PCE mix.

We see GPDI move slightly lower on the revisions at -0.1% with Nonresidential weaker and Residential holding up. The biggest higher revisions were in Structures with Intellectual Property off -2.6%. Equipment was weak and got weaker.

The Government line moved higher with Federal higher than the State and Local uptick. That Government line is all over the map in the qualitative commentary from here as the budget gets hammered out. If the market looking for more support from the Government line into 2025-2026, they are more likely to “take the under.”

The above table updates the running quarterly GDP tallies from 1Q21 across the Biden timeline and ending with the latest revisions for his last quarter of 2024. We see 4 of the last 6 quarters at 3.0% or higher starting with +4.4% in 3Q23 as inflation was coming down rapidly from the June 2022 peak. The consumer sectors and payrolls were proving resilient as we covered along the way.

The Gross Private Domestic Investment (GPDI) line has often shown volatility across the cycles and as cyclical confidence ebbs and flows, tax incentives roll in, and tariffs disrupt markets. Since 2018, trade clashes and tariffs had decidedly mixed effects on corporate investment and exports (retaliation, impact on trade partner economies, currency effects, etc.). We have covered those histories in other pieces and will revisit again as we wade further into the next round of tariffs and retaliation.

GDP and trade deficits in the context of the moving parts…

The line item deltas from the advance estimate tell a mild story, but the PCE inflation number for the quarter will get UST bears’ blood running ahead of this Friday’s PCE price index. It is way too early to get a read on price action from tariffs, but consumption vs. income and related savings rates will add some useful color on the consumer.

Whenever GDP comes out, it is worth remembering the main pieces with Personal Consumption Expenditures just over 68% of the total, Gross Private Domestic Investment (GPDI) at just under 18% of GDP and Government Consumption at just over 17%. Those three dominant GDP buckets amount to around 103% (68% + 18% + 17%). The swing factor to get to 100% is the -3% from the “net exports of goods and services”.

As Team Trump rants over trade deficits and moves to slap tariffs on the top 6 trade partner nations, the fixed investment outlook gets murky from here (see Auto Tariffs: Japan, South Korea, and Germany Exposure 2-25-25). In all the noise, it is worth keeping in mind the responses to tariff threats can lower the PCE, GPDI, and Government GDP lines directly and indirectly. That negative -3% from the trade deficit that rolls into GDP cannot be evaluated in a vacuum.

The tariff policy rhetoric assumes all of that -3% in the trade deficit is bad despite emanating from private sector decisions that benefit that buyer. There will be reactions to the tariffs over in the103% as policy actions unsettle the ecosystems of the 103% constituents.

If one just assumes all imports are bad, life is easier. It is also dumb. Such assumptions are inevitably simplistic, axed, and reverse engineered by subjective policy goals.

Actions taken to raise costs of imports via taxes – tariffs – can also impact decisions that lower PCE, GPDI, and Government spending. Such actions can even undermine the tax base on the multiplier benefits of the trade flows (see The Trade Picture: Facts to Respect, Topics to Ponder 2-6-25, Tariffs: Questions to Ponder, Part 1 2-2-25). DOGE will do enough damage on the tax base front, but it is worth keeping in mind that total non-defense Federal consumption/investment was only 2.7% of GDP.

The catharsis for the DOGE Gang in firing so many people will show up in other GDP lines even if just PCE and a reduction in state and local budgets as the tax base erodes. There are always multiple economic impacts. The same goes for cutting off payments to so many recipients from the ag sector to NGOs that support so many end markets (or causes). The psychic reward value for the manpower pillagers and budget axe-wielders in Washington does not get a line item. Trillions more will be added to budget deficits regardless in the proposed budget.

As much as Team Trump simplifies the trade issues, the reality will play out in the market just as it did in 2018-2019 (see Histories: Asset Return Journey from 2016 to 2023 1-21-24). During 2018, asset performance was terrible. During 2019, exports and investment weakened, and the Fed had to ease. The higher costs in 2025 will lead to decisions in the private sector and at the household level for PCE. They don’t have to go along with the political sales pitch.

The policy pitches are delivered by some highly credentialed enablers on the power-seeking circuit, but they show up with glaring misstatements of facts (some by omission) and misapplications of basic economic concepts. In other words, their PhD pedigree means squat if they reverse engineer, omit, and/or misstate.

Among the more notable fact and concept gaps from the White House that are not addressed factually or conceptually is that the buyer pays the tariffs, trade deficits are not a US subsidy but a private sector purchasing decision, and the single metric at the border (trade deficits) in no way captures the full direct secondary and tertiary economic impacts.

Tariff policy tough to model for corporate sector capital budgets…

This next round of tariffs will dwarf what the market experienced in 2018-2019. Back then, NAFTA was actually updated into what became Trump’s USMCA deal. The current direction sets the stage for the termination of the USMCA. The terms of the USMCA are already being breached by the proposed tariffs. Further this past week, Trump affirmed he was going after the EU (#1 trade partners as a bloc on both imports and exports).

At the same time, Trump is putting copper on his list for tariffs. Attacking materials from the base metals (aluminum, copper) to steel will have an effect on manufacturing cost structures that is somewhat obvious. That is even before the retaliation and possible disruptions in production chains that have reverberating effects on finished goods production rates.

Those of us who spent some time watching copper names in the credit markets in past decades remember the legacy names getting rolled up over the cycles (Amax, Cyprus, Phelps Dodge, Asarco, Freeport-Mac, etc.). The basic realities of high-cost vs. low-cost mines were usually at the heart of the struggle for some mining companies.

The metals sector restructurings came along with the usual cyclical volatility seen in the late 1970s and early 1980s with some rough stretches in the 1990s –notably in emerging markets. Nationalization battles of bygone years in Latin America (e.g., Chile nationalized copper, later rolled into Codelco, etc.) was part of the story of the late1960s/early 1970s. Even the international US oil companies were heavily involved in the metals sector along the way (e.g. Amoco, Sohio).

For commodities, a good rule is “lowest cost and strongest balance sheet wins.” Contrary to the political pitch, putting tariffs on low-cost base metals is “ripping off” the manufacturers who need those materials from offshore sources. Among the largest end markets for copper is construction. That is a topic for another day. Copper hits a lot of products serving construction and also hits autos.

In the end, competitive production costs in commodity markets were the usual drivers of who won and who lost. US interests were spread all across the globe even before the industry was rolled up into a few dominant non-US metals players. If you are in a mining nation facing US tariffs in metals, the first thing you put on your list for retaliation is Caterpillar and throw your weight behind a European mining equipment operator. Then you dial up China to see what can be worked out.

The economics of these product groups only get more complicated from here. We can always annex Peru and Chile after the US Navy ships sail over through the new Trump Canal. At least we haven’t rule it out. We’re still uncertain about the Electoral College votes to be allocated to Canada, Greenland, Peru, and Chile. Panama gets zero. That is not an official forecast.

See also:

New Homes Sales Jan 2024: Homebuilders Feeling Cyclical Signals? 2-26-25

Auto Tariffs: Japan, South Korea, and Germany Exposure 2-25-25

Footnotes & Flashbacks: Credit Markets 2-24-25

Footnotes & Flashbacks: State of Yields 2-23-25

Footnotes & Flashbacks: Asset Returns 2-23-25

Mini Market Lookback: Tariffs + Geopolitics + Human Nature = Risk 2-22-25

Existing Home Sales Jan 2025: Prices High, Volumes Soft, Inventory Up 2-21-25

AutoNation: Retail Resilient, Captive Finance Growth 2-21-25

Toll Brothers 1Q25: Performing with a Net 2-20-25

Housing Starts Jan 2025: Getting Eerie Out There 2-19-25

Herc Rentals: Swinging a Big Bat 2-18-25

UST Yields: Sept 2024 UST in Historical Context 2-17-25

Tariff links:

Auto Tariffs: Japan, South Korea, and Germany Exposure 2-25-25

Mini Market Lookback: Tariffs + Geopolitics + Human Nature = Risk 2-22-25

Reciprocal Tariffs: Weird Science 2-14-25
US-EU Trade: The Final Import/Export Mix 2024 2-11-25
Aluminum and Steel Tariffs: The Target is Canada 2-10-25
US-Mexico Trade: Import/Export Mix for 2024 2-10-25
Trade Exposure: US-Canada Import/Export Mix 2024 2-7-25
US Trade with the World: Import and Export Mix 2-6-25
The Trade Picture: Facts to Respect, Topics to Ponder 2-6-25
Tariffs: Questions to Ponder, Part 1 2-2-25
US-Canada: Tariffs Now More than a Negotiating Tactic 1-9-25
Trade: Oct 2024 Flows, Tariff Countdown 12-5-24
Mexico: Tariffs as the Economic Alamo 11-26-24
Tariff: Target Updates – Canada 11-26-24
Tariffs: The EU Meets the New World…Again…Maybe 10-29-24
Trump, Trade, and Tariffs: Northern Exposure, Canada Risk 10-25-24
Trump at Economic Club of Chicago: Thoughts on Autos 10-17-24
Facts Matter: China Syndrome on Trade 9-10-24

• The first estimates for Private Fixed Investment in 4Q24 show continued growth in Intellectual Property but both Equipment and Structures contracting vs. 3Q24.

• With Gross Private Domestic Investment GPDI retreating from all-time highs, the Government expenditures and investment side of the ledger saw another quarter of growth. The path for continued growth will be murky given the flurry of policy actions and how those flow energy capex and AI investments alongside some planned deep spending cuts.

• Biden’s tenure oversaw Private Fixed Investment increases across almost all major areas except for Mining (using 4Q19 as a benchmark) with Structures up 30.0% and Equipment up 25.6%. One of the largest swings was seen in the very strong Manufacturing investment revival that is just shy of 3x the 4Q19 level.

The first chart provides an overview of Government spending and investment compared with Gross Private Domestic Investment (GPDI). After the main PCE event, these are the other two major contributors to GDP. As a reminder, GDPI covers items such as manufacturing, construction, real estate, E&P, and tech investments. The Government component includes Federal, State, and Local spending with the majority coming from the State and Local level.

Recent trends are very favorable for GPDI and Government spending and include pockets of impressive growth outright but especially considering the backdrop of an inflation spike and the subsequent high interest rate environment. GPDI pulled back slightly this quarter after a solid run of numbers and notably in 2023.

Government spending has been in growth only mode alongside the growing Federal budget deficit. As the current administration considers policies affecting both sides of the ledger, the deficit continues to be a looming issue as well as its impact on longer rates. For now, we see growth at the Federal and State/Local level. The Federal growth rate was down sequentially from +8.9% in 3Q24 to +3.2% in 4Q24. Defense and Nondefense at the Federal level were both up over 3%. State/Local was down to +2.0% in 4Q24 from +2.9% in 3Q24.

The above chart details the long-term time series for private investment in Structures and Equipment. For reference, these come from the GPDI line item in the GDP release and comprises just under 18% of GDP. We examine these as a high-level proxy for Capex trends across with more industry detail to follow.

The 4Q24 release today showed declines for both Equipment and Structures. Structures investment provides a stronger relative pause signal as it is virtually flat from where it ended in 4Q23. The Equipment Investment data point for this quarter sequentially and was down sharply by -7.8% in the GDP accounts. That said, the last year of growth still shows about a 5% increase since 4Q23.

The overall story is still impressive given the challenges of the higher interest rate environment and supports the Fed’s decision yesterday to maintain policy rate at current levels. The fixed investment rates are still quite resilient and interest rates are well down from the peaks. There is time to watch the moving parts of policy fallout (notably tariffs, deregulation, tax incentives etc.) and the flow-through into economic activity.

The next stretch will be about how incentives and fiscal support under the Biden administration will continue to be targeted under Trump and what replaces them. The flurry of policy action has already signaled the focus towards fossil fuel production and away from EVs and clean energy sources. Trade policy and tariffs used as an import deterrent or as a catalyst for domestic structures and equipment demand comes at a lag. The volume of tariff-driven structures or equipment that will actually be put in place is anything but clear. Meanwhile, the tariff rates and duration of those tariffs are uncertain variables for capital budgets that can stall commitments. There are many moving parts that need to be wrestled with by corporate decision makers.

The above chart simply changes the frame of reference to a comparison of Equipment vs. Intellectual Property. IP is on a steady ascent and did not materially contract across the pandemic while Equipment investments cratered. IP is now the largest component of GPDI and has been since 2Q20. The secular shift to increased IP investments is still underway with the newest AI and data leg another evolution of the broader technological trends. That extends into numerous sectors such as power and data centers.

Continued IP investments here lead to questions around what supporting investments on data centers, semiconductors, energy, etc. are needed and where the fiscal support is allocated. The DeepSeek headlines this past week gave the debate fresh lags and excuses to revisit the most ambitious forecasts.

In the above chart and the following charts, we frame the private investment line items vs. the pre-COVID 4Q19 quarter and provide a medium-term history given the lead times involved. We detail the 4Q19 deltas on the right of the chart. The immediate dip across 2020 then saw rapid growth over the past few years with the Structures the beneficiary of legislative initiatives (IRA, CHIPS, Infrastructure bill) that led to +30.0% expansion in investment and a still respectable +25.6% for Equipment.

Within the Structures line, the winners and losers are very clear with E&P the only one seeing contraction since pre-COVID. We expect upstream energy and related infrastructure is an area that will see renewed focus under Trump, but it is relatively small in the larger context of Structures Investment. As we have covered earlier, the Manufacturing line is where the lion’s share of the growth came from with a gross increase of $209 bn that sees 4Q24 end at almost 3x the 4Q19 level. That is a very bug delta supporting manufacturing.

The Equipment side saw much more balanced growth across the lines as all four areas saw 20-30% growth in recent history. We see slightly more robust growth for Industrial Equipment and Information Processing equipment. As the next leg of planning is underway, the impact of strict immigration policy on labor force and the fallout for construction project planning will be an important theme to watch.

This chart narrows the focus to the Structures categories where we see some more nuance in the swings. We see some major winners the past few years such as Healthcare (+33.2%), Warehouses (+54.8%), and Alternative Electric (39.7%) subcategories.

The last chart runs a similar exercise for the Equipment subcategories. We see the major contributors to the pullback in Equipment investment this quarter at Computers and peripheral ($-11.5 bn) and Aircraft lines ($-24.3 bn). Stepping back to the 4Q19 comparison mark, we see broad growth across the board.

Kevin Chun, CFA
Glenn Reynolds, CFA

See also:

4Q24 GDP: Inventory Liquidation Rules 1-30-25
GDP 3Q24: Final Number at +3.1% 12-19-24
3Q24 GDP Second Estimate: PCE Trim, GPDI Bump 11-27-24
Fixed Investment in 3Q24: Into the Weeds 11-7-24
The Politics of Objective GDP Numbers: “Flex Facts” on Growth 10-30-24
3Q24 GDP Update: Bell Lap Is Here 10-30-24
2Q24 GDP: Final Estimate and Revision Deltas 9-26-24
2Q24 GDP 2nd Estimate: The Power of 3 and Cutting 8-29-24
Presidential GDP Dance Off: Clinton vs. Trump 7-27-24
Presidential GDP Dance Off: Reagan vs. Trump 7-27-24
GDP 2Q24: Banking a Strong Quarter for Election Season 7-25-24
State Unemployment: A Sum-of-the-Parts BS Detector 6-30-24
1Q24 GDP: Final Cut Moving Parts 6-27-24
Construction Spending: Stalling Sequentially at High Run Rates 6-4-24
1Q24 GDP: Looking into the Investment Layers 4-25-24
4Q23 GDP: Final Cut, Moving Parts 3-28-24
GDP and Fixed Investment: Into the Weeds 1-25-24
Tale of the Tape: Trump vs. Biden 12-4-23
Construction Spending: Timing is Everything 12-1-23
3Q23 GDP: Fab Five 11-29-23
Fixed Investment in GDP: The Capex Journey 10-30-23
GDP 3Q23: Old News or Reset? 10-26-23
Construction: Project Economics Drive Nonresidential 10-2-23
US Debt % GDP: Raiders of the Lost Treasury 5-29-23