The US economy experienced its first contraction since 2022! The main reason is the sharp increase in imports.

Due to a sharp increase in imports before the implementation of tariffs, along with a more moderate growth in consumer spending, the US economy experienced its first contraction since 2022 at the beginning of this year, reflecting the initial chain reaction of Trump's trade policies. Preliminary estimates released by the US Bureau of Economic Analysis on Wednesday, April 30, showed that the adjusted US Gross Domestic Product (GDP) in the first quarter declined by 0.3% on an annualized basis, significantly lower than the average growth rate of about 3% in the previous two years. Personal consumer spending, which accounts for two-thirds of GDP, saw an annualized growth of 1.8%, the lowest growth rate since mid-2023 but still better than economists' expectations. The indicator measuring potential economic demand remained robust due to the fastest growth in business equipment purchases since 2020. The core Personal Consumption Expenditures (PCE) accelerated in the first quarter, reaching 3.5% on an annualized basis, exceeding the market's expected 3.1%. The growth in consumer spending was boosted by a comprehensive increase in service expenditures and a rebound in non-durable goods spending. Following the data release, US stock index futures continued to decline, while US Treasury yields increased slightly. Currently, forecasters believe that the likelihood of the US entering a recession in the next year is almost equal to the likelihood of avoiding a recession. Looking ahead, many economists predict that higher tariffs will trigger supply shocks, challenging businesses and leading to a decrease in demand. Consumers are increasingly concerned that tariffs will damage the labor market and increase living costs. The report from the Bureau highlighted that net exports dragged GDP down by nearly 5 percentage points, the largest drag ever recorded. These data underscored the sense of urgency among businesses to bulk purchase goods before the widespread implementation of tariffs. The latest GDP data showed a 41.3% surge in imports on an annualized basis, the largest increase in nearly five years. As these goods and services are not produced domestically in the US, they need to be deducted from the total GDP. Economists expect the sharp expansion of the trade deficit to be reversed in the second quarter. Normally, imported goods enter warehouses or are sent directly to stores. However, the report revealed that business inventories contributed 2.25 percentage points to GDP, the highest level since the end of 2021. The recent surge in imports may result in higher inventory levels in the coming months, which will boost GDP in the second quarter as the trade deficit narrows. Because fluctuations in trade and inventories can sometimes distort overall GDP data, economists tend to use the indicator of "final sales to private domestic purchasers in the United States" to more accurately assess demand conditions. This indicator grew by 3% on an annualized basis in the first quarter, up from 2.9% at the end of 2024. Multiple consumer sentiment surveys indicate a significant drop in consumer confidence, casting doubt on whether households can continue to provide strong support for economic growth. Low-income consumers are already feeling the pressure of high prices, while affluent individuals have been impacted by the recent decline in stock prices. At the same time, business equipment investment grew by 22.5% on an annualized basis. Apart from a surge in commercial aircraft shipments after the end of a months-long strike at Boeing Company, production of information processing equipment and computers also saw a significant increase. Economists also expect tariffs to put pressure on capital expenditure, and businesses have acknowledged in the current earnings season that the future path of consumer spending is challenging. Retailer Tractor Supply Company (TSCO.US) and appliance manufacturer Whirlpool Corporation (WHR.US) have both noted a softening in recent non-essential spending and sales of large goods. Many corporate executives mentioned the decline in consumer confidence and the likelihood of consumers adopting a more cautious spending attitude. The uncertainty of tariffs' impact on inflation and the overall economy has put the Federal Reserve in a dilemma. Federal Reserve officials have stated they are not in a rush to lower interest rates until the impact of US policies on the economy is better understood. The US March nonfarm payrolls report is set to be released this Friday, with expectations of showing a cooling job market in the US. On Wednesday, the "little nonfarm" ADP employment data showed a slowdown in growth, with only 62,000 jobs added in April according to data released by the ADP Research Institute, well below market expectations and the smallest increase since July last year.