Don’t
get distracted by the recent 3 percent GDP number. A former top
Commerce Department official explains why the economic outlook is grim.
by Robert J. Shapiro
Everyone who has ever used a dating app
knows the disappointment when an online picture doesn’t match reality.
Sometimes, economic reports suffer from a similar gap. On Wednesday, the
Bureau of Economic Analysis (BEA) reported that
the country’s Gross Domestic Product (GDP) grew at a 3 percent annual
rate in the second quarter. That sounds like good news, but the
underlying data tell us that the U.S. economy is stumbling—and that’s
before President Donald Trump doubled down last week on his destructive
tariffs.
GDP
captures everything the U.S. economy produces, whether it goes into
consumption or savings and investment. The BEA data show that Americans’
private consumption grew in the second quarter at an anemic 1.4 percent
rate—half the rate in 2024 and half the annual average since 1990.
Business investment was also weak in the second quarter, increasing at a
1.9 percent rate, again barely half last year’s rate and one-third the
average rate since 1990.
There’s
more bad news from other economic fundamentals. Residential investments
declined at a 4.6 percent annual rate, compared to 4.2 percent gains in
2024 and average annual gains of 2.5 percent since 1990. And government
consumption and investment were nearly flat.
The latest jobs numbers from
the Bureau of Labor Statistics also show a weak economy. So far this
year, employment has increased an average of 85,000 jobs per month,
falling to 32,000 jobs per month over the past three months, versus
monthly increases averaging 216,000 jobs in 2023 and 168,000 jobs in
2024.
The
official 3 percent growth report for the second quarter does not
reflect the economy’s fundamentals. So, where did it come from?
I
have an advantage here because I oversaw the BEA as Bill Clinton’s
Under Secretary of Commerce and learned precisely how the Bureau builds
the GDP measure. The answer is that the 3 percent growth number was an
artifact of how it technically accounts for changes in imports, which
fell dramatically in the second quarter.
Trump’s
tariffs initially took effect on April 1, 2025, also the first day of
the second quarter. Over the next three months, our imports fell at a
virtually unheard-of 30.3 percent rate because markets worked as they
were supposed to. As the tariffs began to raise import prices, as
confirmed by the recent uptick in inflation,
businesses and consumers pulled back sharply on those purchases—an
important reason why overall consumption and investment weakened.
That’s
what always happens when a country imposes high tariffs. Less
well-known is that falling imports are counted as a positive for GDP
growth under the BEA’s growth accounting. The approach here logically
follows BEA’s larger framework for tracking GDP. Growth represents how
much the value of domestic production—the DP in GDP—increases, whether
it goes to private or public consumption or savings and investment.
Imports
present a special case because households, businesses, and the
government use them without producing them. So, BEA subtracts imports
from its measure of the value of output produced here, and when imports
fall sharply, as they did in the second quarter, the decline is counted
as a positive for growth. Similarly, when imports rise, the increase is
counted as a negative for domestic production.
BEA’s
treatment of exports follows the same logic. When we produce and export
goods or services, they don’t appear as part of consumption or
investment. Accordingly, when exports rise, the increase is seen as
positive for growth; when they fall, the decrease is a negative for
growth.
That’s
how the dramatic decline in U.S. imports since Trump’s “Liberation Day”
drove the 3 percent official growth rate for an economy that by every
basic measure is weakening.
A
simple comparison of past years and decades illustrates today’s
economic weakness and how Trump’s tariffs have distorted our import and
export flows. (I exclude the years of the financial crisis and pandemic
here as Black Swan outliers.)
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