Why is the economy shrinking?
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Americans are fearful that President Donald Trump's hefty tariffs will cause a recession. The U.S. economy shrank in the first quarter by an annualized rate of 0.3 percent — the first negative growth in three years. What caused this downturn? And is this the start of a Trump recession? I'm joined by my fellow columnists Eduardo Porter and Natasha Sarin to break down what these numbers signal for the rest of 2025.
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Heather Long Why did the U.S. economy shrink in the first quarter? And how alarmed should we be?
Eduardo Porter This is just arithmetic: To get gross domestic product, you subtract imports from the data on investment and consumption, which includes spending on both domestic products and imports. Businesses and consumers stocked up on imports — which was expected in anticipation of Trump's promised tariffs.
Heather Okay, if we strip out the import craziness, how was the U.S. economy doing in Q1?
Eduardo The underlying economic performance was pretty stable: consumer spending plus gross private fixed investment increased 3 percent in the first quarter, up from 2.9 percent in the previous quarter. This report is perhaps the last picture of an economy before getting walloped by Trump's barrage of unorthodox policymaking.
Natasha Sarin Yeah, it's what I call the 'Before Times' print. The economy was pretty strong!
Eduardo BTW, I share the general sense of alarm. It's just not in the Q1 data.
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Heather Is this -0.3 percent GDP in the first quarter the potential start of the Trump recession? Or should we ignore Q1 and focus on Q2 (and beyond)?
Natasha I am wary of what is on the horizon for the economy, but I don't think the headline number here is that meaningful. Harvard economist Jason Furman has been focusing on what he's calling 'core GDP': the consumer spending and investment number. And it was at a pretty strong 3 percent in Q1. So I'd look to Q2, which will have more months of Trump's policy environment reflected in it.
Eduardo Right. What isn't included in Q1 is the massive uncertainty, the plummeting consumer confidence and the shrinking 401(k) balances.
Natasha And the tariffs! April 2! So-called Liberation Day.
Eduardo Yeah! And the sticker shock from tariffs. Add that, and it spells recession. Of course, Trump would say this had 'NOTHING TO DO WITH TARIFFS.' If it's IN CAPS, it must be true. (He has also said he already cut 200 trade deals in a world of 195 countries.) Q2 is when we start to experience headspinning from Liberation Day.
Natasha 💯. JP Morgan CEO Jamie Dimon now thinks that a recession is the best case outcome. It is wild that we are on the precipice of a man-made recession.
Heather 'Man-made recession' is a good term, Natasha. Talk us through this: How exactly would a recession (or worse — stagflation) occur? How would we get from a mostly okay Q1 to a downturn?
Natasha General Motors pulled its 2025 profit guidance this week citing the tariffs. They know what's coming. You get there by imposing the highest tariff rates in a century that are going to drive up inflation and cost consumers $5,000 annually in higher prices.
Eduardo I think that a big part of the problem is that nobody really knows what's coming.
Natasha It's just totally bonker bananas 🍌. Where are we going?! Are we near trading deals with India and Japan? That means less tariff revenue. But Stephen Miran, chair of the White House Council of Economic Advisers, says the tariffs are going to produce lots of revenue for deficit reduction. So that must mean they're staying high? It's a constant yo-yo that is impossible to plan around and is leading to investors being down on America, and with good reason.
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Heather I think the key to watch is jobs. For now, over 159 million Americans are still employed and getting paychecks. People are clearly nervous (over 70 percent expect a recession soon), and we are starting to see some layoffs. If that picks up, then people will really start to cut back on spending. And that's how we could easily end up in a recession.
Eduardo Tariffs (reasonable tariffs) do not necessarily produce recessions. They just make the economy less efficient. I think the main cause for a recession in the coming months will be the massive uncertainty.
Natasha In any given year, the chance of a recession is like 15 percent. We, in this chat, are talking about it like a foregone conclusion, but to be clear, it isn't. The odds have gone way up because of the policy uncertainty.
Heather Let me ask it another way: Can we still avoid a recession? If Trump pulls back some more on tariffs, can we avoid the worst case?
Eduardo Maybe. If Trump decides to pull all the tariffs back to where they were in December, we might just avoid a recession. He has to backtrack on the tariffs and promise never to touch economic policy again.
Natasha The reality that is so devastating is Trump inherited a strong economy! He just had to watch it be strong and claim credit.
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Eduardo And we haven't talked about what happens if Trump really messes with the Fed …
Heather Good point. I was glad to see the strong market reaction (we saw the same thing in late 2018 when Trump first threatened to fire Fed Chair Jerome H. Powell), and it looks like Trump backed down again. I think at this point Trump won't fire Powell. He's better off trying to blame Powell for any downturn.
Natasha I hope you are right (not about blaming Powell of course). But I'm worried, because the same market discipline that we saw in the first Trump administration isn't governing here.
Heather Last question: Trump loves tariffs. Do tariffs ever make sense in your view?
Natasha Targeted tariffs in certain sectors. For national security, for supply chain resilience, sure. Broad based tariffs at the highest rate in a century that are pushing our allies straight into China's waiting arms? No, those don't ever make sense.
Eduardo There is a role for targeted tariffs. But that has nothing to do with what is going on now. In Trump's worldview, tariffs are to punish an unfair world that has somehow brought misery to the U.S.
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