U.S. Economy teeters on edge, displaying resilience at the brink

U.S. Economy teeters on edge, displaying resilience at the brink

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Good morning! While the Trump tariff drama might be grabbing headlines, it's time to focus on another story — the AI revolution! Microsoft recently reported a staggering 20% surge in its Azure business, buoyed by demand for AI services. Meanwhile, both Microsoft and Meta have confirmed their plans to continue pumping big bucks into data centers. Now, isn't that worth a couple of days' focus instead? Drop us a line anytime at robert.armstrong@our website or aiden.reiter@our website!

Economic GDP: The Before and After

Our main economic measures lack the coveted "after" picture, much like those glossy "after" photos in ads promising anti-aging creams or dandruff shampoo. We're stuck with the "before" picture for now, with educated guesses about the miracle treatment - in this case, Donald Trump's high-tariff regime.

The tariffs, rolled out on April 2, cast a long shadow on the previous quarter's advance GDP report, which came out last week. But don't worry, it was a pleasant surprise!

Headline growth was a mere 0.3%, but don't be fooled! A monstrous surge in imports was responsible for this number, potentially subtracting as much as 4.8% from headline growth. Imports are subtracted from GDP since they aren't produced domestically and preventing double-counting. This surge in imports could be a temporary blip caused by demand-pulling ahead—fingers crossed it washes out!

Now, let's focus on the good stuff. Real household consumption, the primary engine of the U.S. economy, shot up by 1.8%, and real final sales to domestic purchasers (consumer spending + fixed private investment excluding inventories) rose by a solid 3%. Despite dismal consumer and small business sentiment surveys, this is reassuring news indeed.

The investment picture gets a bit murky, though. Private investment soared by a whopping 22% from the previous quarter, mostly due to a massive hike in computer equipment purchases, contributing almost a full percentage point to GDP growth. Was this rush on computer equipment due to companies filling long-awaited needs from global suppliers ahead of tariffs, continued strong demand from the AI economy, or perhaps both? We can't say for sure, but it's something to ponder.

There's more to the story as well. The surge in imports has a influential sibling—an admittedly mystifying spike in business inventories, contributing over 2 percentage points to GDP. The Bureau of Economic Analysis says: "The estimates of private inventory investment were based primarily on Census Bureau inventory book value data and a BEA adjustment in March to account for a notable increase in imports." Translation: Hard data on imports (which we can measure) is available, while inventory numbers (which we can only model) might not be as accurate. It's possible that consumption has been significantly higher, and inventory build-up lower, or vice versa. This uncertainty matters when we assess economic growth.

A final crucial aspect of the report: inflation. Core personal consumption expenditures price inflation, the Federal Reserve's preferred measure of inflation, slowed a little, but remains stubbornly above target at 2.6%.

In summary: consumer spending is holding up well (though not accelerating), business investment seems strong (but tariff effects muddy the waters), and inflation is falling (yet isn't quite on target). This suggests that the Fed might keep rates unchanged at the next week's meeting and potentially hold them steady even longer—better buckle up, as the futures market predicts 4 rate cuts of 25 basis points by year's end!

So, we have a positive "before" picture. What about the "after"?

The breathtaking importance of tariffs is soon to be revealed in the "after" picture. Visa recently reported that payment volumes across its US network grew 6% in the first quarter and picked up a bit in the first three weeks of April. The CEO of Visa noted that overall consumer spending remained resilient, although growth differed among consumer groups.

However, consumers haven't felt the effects of tariffs yet, either in terms of price increases or unavailable products. As for businesses, they are still burning through pre-tariff inventory, whilst praying for a change in policy. But the inevitable moment of truth is fast approaching—with cargo ships moving at a deliberate pace, expect the "after" picture to become clear this summer.

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1. The staggering 20% surge in Microsoft's Azure business signifies an emphasis on technology and AI services, a story worth focusing on instead of the ongoing Trump tariff drama.
2. The economy, in its before picture, shows a 0.3% headline growth, but a monstrous surge in imports may have subtracted as much as 4.8% from this figure.
3. Real household consumption and real final sales to domestic purchasers have shown promising growth, while the investment picture remains somewhat murky due to tariff effects and uncertainty about the factors behind a surge in computer equipment purchases.
4. The Bureau of Economic Analysis has highlighted an influential sibling to the surge in imports - an admittedly mystifying spike in business inventories, contributing over 2 percentage points to GDP.
5. Inflation, the Federal Reserve's preferred measure, has slowed but remains stubbornly above target, suggesting that the Fed might keep rates unchanged at its next meeting and potentially hold them steady even longer.
6. The brevity of the before picture ends with the approaching arrival of the after picture, as consumers and businesses will soon feel the effects of tariffs on price increases and unavailable products.
7. As you delve deeper into the world of finance, join our community of premium subscribers, sign up for our FTLive event, and subscribe to our podcast for a 15-minute dive into financial headlines.

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