This will be the first quarterly GDP report of the Trump administration. While he came into office 20 days into the quarter, his policies already have had a visible impact on the economy. In particular, his tariff plans, which have been widely anticipated, were already affecting durable good consumption in the last two months of 2024. There has been little clear price effect of the tariffs to date, but that will likely change in the next quarter’s data after more of them have taken effect.
Productivity Growth Has Slowed Sharply
One of the underappreciated benefits of the Biden economy was an uptick in productivity growth. It averaged 1.9 percent from the fourth quarter of 2019 to the fourth quarter of 2024. This is up from just 1.0 percent over the prior decade. In the fourth quarter it grew at just a 1.5 percent annual rate, but it was up 2.0 percent over the prior year.
Average hours for the quarter are likely to be close to flat with payroll hours rising at a 0.4 percent annual rate, with a roughly offsetting decline in self-employment. However, with GDP also coming in close to zero, this will mean very weak productivity growth.
That is a negative sign for future wage growth and inflation, with slower productivity growth limiting the extent to which wages can grow without leading to either higher inflation or an erosion of profit shares. With profit shares still around 2.0 percentage points above their pre-pandemic level, there is some room for wages to rise just to get to their pre-pandemic share. The profit share has increased by more than 4.0 percentage points compared to the 2000 share.
The quarterly productivity data are highly erratic, so we should not make too much of the first quarter’s data. Nonetheless, the slowing does raise the risk that the faster productivity growth of the Biden years may be coming to an end.
Slowing of Factory Construction Boom
In 2024 real factory construction was more than twice as high in 2019, the last year before the pandemic. This was an unprecedented increase, especially given that it had been trending downward for decades.
Clearly the main factor was the three multi-year spending bills passed under Biden: the Infrastructure Bill, the CHIPS Act and the Inflation Reduction Act. It is likely that construction would have slowed in any case as factories get completed, but the big question will be the rate of slowing. With tariffs creating uncertainty it is likely few new factories will be started, although we will probably not be able to see much impact in the first quarter.
Boom in Durable Goods Consumption
Fear of tariffs already led to considerable anticipatory buying in the fourth quarter of last year. This has continued into the first quarter. We will again see strong durable goods consumption, but it may not match the fourth quarter’s elevated level. Both non-durable and service consumption also look to be weak in the first quarter. In particular, spending at restaurants has been weak, which could indicate consumers are worried about their jobs and the state of the economy.
Surge in Equipment Investment, Likely Due to Exports
There was a large increase in aircraft shipments in the first quarter of this year. These likely ended up as exports, as companies tried to move planes before new tariffs went into effect. Equipment investment other than planes will be relatively weak in the first quarter. This pattern may hold true for the rest of the year as there was a big surge in aircraft orders in the first quarter, with new orders of other capital goods being very weak.
It is possible that these orders were driven by an effort by foreign countries to win the favor of the Trump administration. These orders will not result in planes actually being delivered for several years. Also, it is possible that if the orders were the result of efforts to curry favor, they may be cancelled before the planes are actually delivered.
Investment in intellectual products, in particular in biomedical research, is likely to decline as a result of the Trump administration’s cuts at NIH and in university funding. It is not clear how much of this falloff will show up in the first quarter, but we clearly will see more impact in future quarters.
Housing Investment Will Be Close to Flat
There was little change in housing starts in the first quarter. There was some uptick in mortgage refinancing in February and March, when there was a modest decline in mortgage rates before the more recent increases. This may lead to a small positive growth in residential construction.
Government Spending Will Show Modest Growth
Despite the efforts of DOGE to reduce government waste, we are unlikely to see much impact in the first quarter. Both federal and state and local spending are likely to grow at between a 2.0- 2.5 percent annual rate.
Trade Deficit Will Soar in the First Quarter
We will likely see the largest trade deficit in many years in the first quarter as imports of both investment goods and consumption goods increased sharply in the quarter. The trade data was distorted to some extent by major imports of gold, which will not be counted in the GDP calculation. But even without the gold, there were large purchases in anticipation of Trump’s tariffs.
It will also be worth closely examining the trend in services. While the country has been running a goods trade deficit of close to $1.2 trillion, it has a surplus in services of around $300 billion. One of our major exports is foreign tourism. Also, foreign students pay roughly $60 billion a year in tuition and other expenses. Both are likely to decline in response to Trump administration policies, although it is not clear how much will be visible in the first quarter data.
Inventories Will Be a Positive Factor in the First Quarter
Inventories subtracted 0.84 pp from growth in the fourth quarter. Inventory accumulation will almost certainly be at least a modest positive in the first quarter, since the rate of change in the fourth quarter was extraordinarily weak.
Economy Is Taking a New Direction
It is clear that we will be moving away from the pattern of growth we saw in the recovery from the pandemic. Much of the growth in the first quarter reflects efforts to adjust to the transition rather than the new pattern itself. At this point, it is very unclear what this new pattern will look like, because there is still so much uncertainty about the Trump administration’s policies on tariffs and funding for scientific research. There is a real risk that these changes will push the economy into a recession. At the very least, they will lead to slower growth in the near-term future.