Source : THE AGE NEWS
The US economy contracted in the first quarter of this year. Donald Trump blames his predecessor Joe Biden, but that’s not what the data shows.
Beneath the headline showing the world’s largest economy shrank by 0.3 per cent during the first three months of the year there were some unusual shifts in the underlying numbers, with the early impacts of Trump’s trade policies starting to show up. Indeed, they were the reason for the contraction in America’s gross domestic product (GDP), the first in three years.
“Nothing to do with tariffs”: Donald Trump blames his predecessor Joe Biden for the economic setback. Credit: nnaapril.glover
Consumer spending, which accounts for about 70 per cent of America’s GDP, rose 1.8 per cent, less than half the rate in the December quarter, while government spending fell more than 5 per cent, presumably reflecting the early effects of Elon Musk’s DOGE team’s assault on the US government bureaucracy.
The more striking number and the reason GDP dipped into the red, however, was the massive discrepancy between what the US exported and what it imported in the March quarter.
Imports soared by 41.3 per cent while exports grew only 1.8 per cent. With imports being subtracted from GDP calculations – because they reflect foreign goods and services, rather than domestic investment and spending — that generated a 4.8 per cent hit to the headline GDP number.
That surge in imports, which was accelerating towards the end of the quarter – the US trade deficit in March was a record $US162 billion ($251 billion) – is attributable to Trump’s trade war. It reflects the front-running and front-loading of Trump’s tariffs by businesses and consumers anxious to stock up or acquire goods before the threatened tariffs were implemented.
‘This is Biden’s Stock Market, not Trump’s … Our Country will boom, but we have to get rid of the Biden ‘Overhang.’ This will take a while, has NOTHING TO DO WITH TARIFFS.’
Donald Trump’s social media post
Trump blamed Biden for the apparent slump in an economy that was growing at a rate of 2.3 per cent in the December quarter, before Trump regained the presidency, and for the initial sell-off overnight in the US sharemarket (later largely reversed) in response to the data.
“This is Biden’s Stock Market, not Trump’s,” he posted on Truth Social.
“I didn’t take over until January 20th. Tariffs will soon start kicking in, and companies are starting to move into the USA in record numbers. Our Country will boom, but we have to get rid of the Biden ‘Overhang.’ This will take a while, has NOTHING TO DO WITH TARIFFS.”
He’s wrong on both counts.
When Trump took office, the sharemarket, after rising more than 90 per cent during Biden’s term, was still booming, partly in expectation of his promised tax cuts and deregulation.
It kept rising until mid-February, when Trump announced his plans for “the Big One,” his “reciprocal” tariffs. Since the day of that announcement, it has fallen more than 9 per cent. So it’s definitely Trump’s stock market.
There is no Biden overhang, either in markets or the economy, which he handed over to Trump in a healthy state.
That’s actually borne out by the GDP data. If the effects of the trade imbalance are excluded, consumer spending and investment numbers, while slowing, were still quite solid. It was Trump’s tariffs that distorted trade activity and generated the shrinking GDP bottom line.
Trump unveiled the detail of his tariffs – the baseline 10 per cent universal tariff and the “reciprocal” tariffs on the 90-odd countries with the biggest trade surpluses with the US (whose implementation was subsequently paused for 90 days after the financial markets’ shocked reaction) – on “Liberation Day,” or April 2, which was after the end of the March quarter.
When the June quarter numbers are available, the big bulge in inventories and equipment spending from the March quarter ought to have shrunk significantly, and the trade balance narrowed somewhat because of the universal tariffs and the 145 per cent tariff on imports from China. Already, US West Coast port authorities are reporting massive falls in container volumes.
Once the second-quarter data comes out, the ongoing effects of the tariffs on consumer spending and business investment will be clearer. They are unlikely to be positive.
On Tuesday, Trump told a rally of supporters in Michigan that “inflation is basically down and interest rates came down despite the fact that I have a Fed person [Federal Reserve Board chairman Jerome Powell] who’s not really doing a good job.” Trump’s verbal attacks on Powell and the Fed’s credibility and independence have been another factor in the sharemarket’s fall.
Along with the trade data, the US Commerce Department also released inflation data for March, which showed a slight – 0.1 percentage point – drop in the headline inflation rate to 2.4 per cent.
That would normally be good news, except that the impact of Trump’s tariffs on inflation had yet to flow through to companies’ profit margins or consumer prices in March. When it does, it will push up the inflation rate, reduce consumer spending, slow the growth of the underlying economy and could even lead to a recession.
That combination of economic contraction and higher inflation – stagflation – would be the worst-case economic outcome for America from Trump’s trade war.
The first-quarter data does underscore how significantly even the prospect of Trump’s tariffs has distorted business and consumer behaviour.
Trump has downplayed the effect of higher prices and shortages of goods that will flow from the tariffs on China alone.
“Well, maybe the children will have two dolls instead of 30 dolls. So maybe the two dolls will cost a couple bucks more than they would normally,” he said after a cabinet meeting on Wednesday.
The tariffs, of course, will apply to a lot more goods than dolls. Their cost will feed into the cost bases of most businesses and will be passed on, almost entirely, to consumers, if the history of tariffs is any guide. They are effectively a highly regressive form of tax on consumption.
In some instances – probably in many, given how reliant the US is on imports, particularly from China – there will be empty shelves because either Chinese exporters see no profit in trying to sell products with a 145 per cent tariff attached, or they’ve gone out of business.
Both the US and China are being damaged even in this early phase of the trade war, with surveys of manufacturers in both countries showing reduced activity and slumps in both business and consumer confidence.
In the US, consumer confidence is near five-year lows, according to a Conference Board survey released this week. That’s the lowest since the onset of the COVID-19 pandemic.
Trump can try to blame Biden for what’s now occurring, but it is his trade policies – what the Wall Street Journal dubbed “the dumbest trade war in history” – and an overlay of Musk’s crude assault on government agencies that have driven the sea-change in sentiment, behaviour and costs within the US economy.
They are driving the world’s biggest economy towards the proverbial cliff – and it’s all on him.
