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The U.S. economy just posted its first contraction since 2022 and the culprit isn't a surprise. Companies front-loaded imports at a breakneck pace, triggering a 41.3% spike in Q1 the sharpest in nearly five years to beat Trump's sweeping new tariffs. That scramble crushed GDP, with net exports subtracting a record 5 percentage points, according to the latest government data. Consumer spending managed to grow 1.8%, but that was its slowest pace since mid-2023. Federal outlays didn't help either, sliding as defense spending plunged 8% following Trump's pause on Ukraine aid.
Strip away the noise from trade and inventory swings, and there's still some muscle left in the core economy. Final sales to private domestic buyers the cleanest read on underlying demand clocked in at 3%. Business equipment investment surged 22.5%, helped by aircraft deliveries and a rebound in tech spending. But those tailwinds could fade fast. The tariff rate now hovers around 23% the highest in a century and companies from Whirlpool to Carter's are warning that consumers are cutting back on big-ticket items. Retailers are pointing to a real-time collapse in sentiment, particularly among lower-income households and stock-weary high earners.
Markets didn't take it well. The S&P 500 (SPY) opened in the red, down over 1.4% at 10.45am today, Treasury yields slipped, and the Federal Reserve is now stuck in the middle. Inflation remains sticky with core PCE up 3.5% but growth is clearly cracking. A soft April private payrolls report added to the gloom. While Trump deflected blame onto Biden in a social media post, the math is what it is: with tariffs creating tax-like friction and recession odds now a coin flip, investors should brace for a bumpy second half.
This article first appeared on GuruFocus.