Weaker spending, slipping profits and court order on tariffs

Summary

A 0.2% contraction compared to a first estimate of 0.3% may appear mild, but the underlying details are not encouraging. Corporate profits fell 3% and a key yardstick of underlying private demand slowed from 3.0% to 2.5%. We also unpack the overnight court ruling that puts tariffs on ice.

Underlying demand slowed

Arguably the most consequential shift in the revisions is that with the softer growth in consumer spending and resulting boost to inventories, growth in real final sales to domestic private purchasers came down to just 2.5% from the prior estimate of 3.0%. Since this measure serves as a gauge of underlying demand (by excluding trade, inventories and government spending) it diminishes the argument that excluding trade, the economy is doing fine. This measure has begun to slow off of the 3% pace registered on average last year (chart).

When the initial estimate of Q1 GDP became available in April, we suggested the report be considered through the lens of businesses and households trying to get ahead of the tariffs. That approach, in our view, allows many of the big pieces of the report to fall into line. What changes in today's revision is not a page-one re-write of that story, but rather one in which we now have greater details. In a nutshell, the details are not terribly encouraging.

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