May 29, 2025

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The preliminary estimate of first quarter GDP was -0.2% compared to the advance estimate of -0.3%.  That compares to the final estimate of fourth quarter GDP of 2.5%.  Growth in the past year has been 2.1%.  That first quarter decline was seriously distorted by a dramatic increase in imports caused by businesses trying to get goods into the country prior to the imposition of tariffs.  In fact, the trade component subtracted a mind-boggling 4.9% from GDP growth in the first quarter.

Final sales, which is GDP excluding the change in business inventories, fell 2.9% in the first quarter after having risen 3.3% in the fourth quarter.  The estimate of final sales was distorted by a huge increase in inventories.  Presumably some of the imports that are intended for future use ended up at least temporarily inventories.  Subtracting a big increase in inventories from GDP ended up as a 2.9% decline in final sales.  Given a decline in GDP of 0.2% and a 2.9% decline in final sales, the change in inventories added 2.7% to GDP growth in the first quarter..

Final sales to domestic purchasers which excludes both the change in inventories and trade rose 2.0% in the first quarter after having risen 3.0% in the fourth quarter.  With a 2.9% decline in final sales and a 2.0% increase in final sales to domestic purchasers, the trade component subtracted 4.9% from  GDP growth in the first quarter as exports rose 2.4% while imports surged by 42.6%.  In our opinion the 2.0% increase in final sales to domestic purchasers most accurately describes the strength of the economy in the first quarter.

Consumption spending rose 1.2% in the first quarter after having jumped 4.0% in the fourth quarter. While nervous about what might happen to the inflation rate and jobs in response to the imposition of tariffs, consumers continue to shrug off those fears.   With real disposable income rising 1.7% in the past year and personal consumption expenditures rising 2.9%, consumers will likely slow their pace of spending somewhat in 2025.  We expect them to spend at a 1.8% growth rate in 2025.  Spending on goods rose 0.1% in the first quarter while spending on services climbed by 1.7%.

Nonresidential investment surged by 10.3% in the first quarter after having fallen 2.9% in the fourth quarter.  Spending on structures declined by 1.4%.  Spending on equipment surged by 24.8% led by a big jump in spending on information processing equipment.. Intellectual property climbed by 4.6% in the first quarter driven by a big increase in spending on software.  This is AI at work in the economy.  Everybody is looking carefully at how AI might benefit their business.  This should continue to years to to come..

Residential investment declined 0.6% in the first quarter after having gained 5.5% in the fourth quarter.    The  housing market appears poised for a gradual upturn in 2025.  We expect to see 3.4% growth in this category in 2025.

The foreign sector as measured by the deficit for real net exports widened by widened by $326.3 billion in the first quarter to a deficit of $1,379.0 billion, after having narrowed by $16.6 billion in the fourth quarter.   Exports rose 2.4% in the first quarter while imports surged by 42.6%.  Again, the increase in imports reflects business trying to get goods into the country prior to the imposition of tariffs.

Federal government spending declined declined 4.6% in the first quarter after having risen 4.0% in the fourth quarter.   Defense spending fell 7.1% while nondefense spending declined by 1.1%.

After growing 2.5% in 2024 we expect to see GDP growth of 1.9% in 2025.  The economy keeps cranking out jobs and wages keep rising which will allow consumer income and spending to grow rapidly.  AI spending should keep nonresidential investment climbing at a respectable pace.

Stephen Slifer

NumberNomics

Charleston, SC