This morning, the airwaves were full of talking heads suggesting we could be headed into a recession as indicated by today’s GDP number, which decreased at an annual rate of negative 0.3%, according to the Bureau of Economic Analysis. This is a slowdown from the 2.4% growth in the fourth quarter of 2024 – a pretty dramatic reversal. We may be headed into a recession because of President Trump’s trade war, but today’s negative GDP number isn’t a sign of underlying economic weakness or the first quarter of a coming recession.
Victoria Guida from Politico explained it in her post on X, where she said: “The conversation around trade + GDP right now is making me want to pull my hair out. Economists are explaining (correctly) that imports don’t formally subtract from GDP. That’s because GDP is a measure of domestic production, and so aren’t included at all. BUT When people/businesses are buying a lot of imports, that’s money they’re not using to buy domestic good/services, which reduces – you guessed it – domestic production. And that’s a big reason we saw negative GDP growth this past quarter.”
So, a trade war could very well lead to a recession, but today’s numbers have nothing to do with that. Companies are front-loading foreign orders. As the deadline for negotiations gets closer, those orders will fall off. Ships importing goods from China are already reportedly turning back. I remain very concerned about recession and inflation risk, but I want to be sure that you are aware that tying today’s GDP to that risk doesn’t hold water.
For a more detailed explanation, I asked Perplexity to explain her post in more detail. If you aren’t currently using an AI Large Language Model, this is my go-to source. Much more accurate than Chat GPT, not rigged by advertisers like Google, and thoroughly footnoted. Perplexity further clarified that “while Guida is correct that a shift toward imports can reduce domestic production, the Q1 2025 GDP drop was mainly due to temporary, tariff-driven import behavior – not a straightforward case of imports crowding out domestic goods.”
Here’s Perplexity’s complete analysis:
Victoria Guida’s post addresses a common confusion about how imports affect U.S. GDP, especially in light of the negative GDP growth reported for the first quarter of 2025. Here’s an expert breakdown of the issue, drawing on the latest data and economic analysis:
How Imports Are Treated in GDP Calculation
GDP (Gross Domestic Product) measures the value of all goods and services produced domestically within a country during a specific period. The most common formula for calculating GDP using the expenditure approach is:
GDP=C+I+G+(X?M)
Where:
- C= Consumption (spending by households)
- I= Investment (business spending)
- G= Government spending
- X= Exports (domestic goods sold abroad)
- M= Imports (foreign goods bought domestically)
Imports (M) are subtracted in the formula, but this does not mean they directly reduce domestic production. Instead, imports are initially counted in consumption, investment, or government spending. Subtracting imports simply removes the value of foreign-produced goods from the total, ensuring only domestic production is measured. 1 2 8
“Imports are first added to GDP in the consumption, investment, and government spending components, and then subtracted out again. The total contribution of imports on GDP is zero.” 8
Why Did GDP Fall in Q1 2025?
The U.S. economy contracted by 0.3% in the first quarter of 2025, largely due to a historic surge in imports as businesses rushed to stockpile goods before new tariffs took effect 3 4 5 7 9 11 12. This spike in imports caused the “net exports” component (X?MX?M) to become much more negative, which mathematically reduced the GDP figure.
- Imports grew by over 40% in Q1, the largest jump on record 4 11 12.
- This surge subtracted about 5 percentage points from GDP growth, overwhelming gains in consumer spending and business investment12.
The Subtlety: Imports and Domestic Production
Guida’s point is that while imports don’t directly subtract from GDP (since GDP only counts domestic production), a surge in imports can indirectly signal weaker domestic production. If consumers and businesses buy more imports instead of domestic goods, domestic producers sell less, which can reduce domestic output and thus GDP. 1 8
However, it’s crucial to note:
- The negative impact on GDP from imports is a matter of accounting, not a direct causal relationship. Imports are subtracted to avoid double-counting foreign production, not because buying imports destroys domestic output. 1 2 8
- In Q1 2025, the import surge was unusual: businesses front-loaded purchases to avoid tariffs, so the hit to GDP was a statistical artifact rather than a sign of underlying economic weakness. 4 5 7 9 11 12
“A rise in imports may appear to lower economic growth and show a shift away from domestic consumption, but that doesn’t tell the whole story… imports show up as an offsetting positive elsewhere because they show up in increased consumption or business investment, or they are recorded as an increase in inventories.”7
Summary Table: Imports and GDP
| Aspect | Direct Effect on GDP | Indirect Effect on Domestic Production |
| Imports in Formula | Subtracted (to avoid double-counting) | May reduce demand for domestic goods if consumers substitute imports |
| Q1 2025 Impact | Imports surge led to negative net exports, reducing GDP | Most of the surge was inventory buildup, not a collapse in domestic demand |
Bottom Line
- Imports do not “subtract” from GDP in the sense of destroying domestic output; they are subtracted in the formula to avoid counting foreign production as U.S. output.
- A surge in imports can coincide with weaker domestic production if consumers substitute imports for domestic goods, but in Q1 2025, the import spike was driven by tariff-related stockpiling, distorting the GDP figure.
- Economists agree that the GDP drop in Q1 2025 was largely a statistical artifact of the trade balance and inventory timing, not a fundamental collapse in domestic production. 4 7 12
So, while a shift toward imports can reduce domestic production, the Q1 2025 GDP drop was mainly due to temporary, tariff-driven import behavior – not a straightforward case of imports crowding out domestic goods and definitely not proof of a coming recession.