This week, the US announced the first advance estimates of the Q1-2025 GDP along with the PCE inflation data for the month of March 2025. The US GDP saw contraction of -0.3% in Q1, which is in sharp contrast to the 2.4% growth in GDP seen in the previous calendar year. Also, the last time the US saw negative GDP growth was in 2023, when there were signs of a hard landing due to the persistent rate hikes by the Fed. That turned out to be deceptive, and the US economy continued to grow. So, what has triggered this GDP contraction? 

One of the most obvious reasons for the drop in GDP is a sharp drop in Federal spending, especially in defence spending. The DOGE, under Elon Musk, has been working hard to trim the staff in various government departments so as to ensure that the Federal costs are cut sharply. While this has met with legal hurdles, it is clear that Trump is unlikely to take up a lot of expenditures that previous US presidents were too keen to take on. That is hitting growth in multiple ways, although that may not be permanent. For now, spending is hitting US GDP growth. 

What has really taken a hit in the last quarter is consumption spending. It has fallen from close to 5% to just 1.4%. That has been a key factor in the slowing of US growth. If you look at the break-up of US GDP growth, there is pressure on durable and non-durable goods, but the services GDP growth is still robust. But, the real issue here is consumption spend and that is a direct function of the level of confidence that the people have in the economy. That is what is under stress now. Most of the US consumers, in the aftermath of the reciprocal tariffs, are very skeptical that a sharp spike in tariffs would not only spike inflation but also hit growth, jobs and income levels. As a pre-emptive measure, consumers have been more cautious in the last few months. 

The slowdown looks unlikely to last for too long. Much of this has to do with US consumer behavior and that would change once they see trade deals coming about. Clearly, Trump is using tariffs as a bargain chip to rectify the long-standing problem of perpetual trade deficits. The US runs massive trade deficits with EU, Canada, Mexico, China, and India and it would like that situation rectified. We are seeing India being more open to accept the US viewpoint and more countries will soon join that bandwagon. We may see another quarter of pressure, but then US growth should be well back on track!