Yes, the US GDP Decline Is an Ominous Sign
U.S. gross domestic product shrank by 0.3% in the first quarter of 2025, according to an April 30 report from the Bureau of Economic Analysis. The BEA press release suggests this isn’t cause for concern, as the decline is mostly a statistical artifact: “The decrease in real GDP in the first quarter primarily reflected an increase in imports, which are a subtraction in the calculation of GDP.”
That’s wrong. The BEA collects data on total consumption, investment and government spending and must subtract imports in computing GDP. But that’s no statistical artifact. GDP is a measure of domestic production, and imported goods aren’t produced in the U.S. Exports are also added in measuring GDP, since they are produced but not consumed here. The GDP number for the quarter is down because America produced less, not because it imported more.
So what did cause the decline in growth in the first quarter? It appears to have been largely the product of the massive uncertainty that the Trump administration’s trade policy has created as it wreaked havoc on supply chains and global commerce. Since most of the proposed tariffs have yet to go into effect, the negative growth of the first quarter is simply a warning of much worse to come if the administration doesn’t call off its trade war.
Based on the evident impact of the administration’s announced but largely unimplemented tariff policy on growth in the first quarter, it seems likely that if the tariffs proceed, the U.S. and most of the world will fall into recession in 2025. While the 177,000 jobs the U.S. added in April were encouraging, only a small part of the tariff program had actually gone into effect, and most jobs filled in April were budgeted long before Liberation Day. Many industries that have seen tariffs rise on products they sell or use in production are delaying action on employment or investment until they know the final tariff policy.
While imports don’t directly add to GDP, restricting them will quickly harm U.S. production. More than 61% of U.S. imports are component parts used in the American production process, according to the BEA. Importing goods that are cheaper to buy abroad lowers production costs and allows the U.S. economy to specialize in areas where we have a comparative advantage and can benefit from economies of scale. Imports therefore allow us to expand domestic production and enhance our living standards. Gary Clyde Hufbauer and Meagan Hogan of the Peterson Institute estimate that the gains in efficiency and consumer benefit from expanded postwar trade raised 2022 GDP by 10%, or $19,500 per household.
If the tariffs take effect, Americans will see dramatic evidence that imports enhance our ability to produce, consume and enjoy the growth premium that the world calls American exceptionalism. It’s a shame that lesson may end up being so painful.
Mr. Gramm is a nonresident senior fellow at the American Enterprise Institute. Mr. Boudreaux is a professor of economics at George Mason University. They are the authors of “The Triumph of Economic Freedom: Debunking the Seven Great Myths of American Capitalism,” forthcoming May 13.