Clipped from: https://www.thehindubusinessline.com/opinion/editorial/growth-googly/article69531313.ece
Uncertainty over Trump policy impact on US growth
Consumers as well as businesses are on edge due to policy flip-flops | Photo Credit: KAREN PULFER FOCHT
The 0.3 per cent contraction in real GDP in the US for the first quarter of 2025, may appear alarming at first glance. The growth has been dragged down by a sharp increase in imports of consumer and capital goods by companies, ahead of the announcement of the reciprocal tariffs by the US government. Since these imports were one-off and anticipatory in nature, their impact on the GDP should be discounted.
Indeed, a contraction in imports in the second quarter will have a positive effect on GDP, even as export performance remains an unknown. The latter would depend on varied trade policy effects, including rising costs or the prospect of markets being prised open. Even if US indicators are a mixed bag for now, there are straws in the wind to suggest that the Trump administration’s actions will hurt growth in months to come. Now, the labour market looks good, with the unemployment rate at 4.1 per cent. Payroll additions have been increasing at 200,000 per month. Inflation edged lower, towards the long-term target. Industrial production was resilient in the first quarter of 2025. But on the flip side, the growth in consumer spending, which accounts for 68.5 per cent of the gross GDP, slowed in the first quarter as consumers cut back on their purchases of durable goods. The spending on non-durables, housing, healthcare bolstered the numbers, somewhat.
Strong expansion in investment supported GDP growth in the first quarter. But this increase has been led by a large jump in private wholesale inventory. Data shows that inventory of drugs and sundries moved higher in the first quarter suggesting that retailers were beginning to build up their stocks ahead of the tariff increases. It is obvious that consumers as well as businesses are on edge due to the policy flip-flops. US consumer confidence index has plunged, hitting a four-year low in April this year. Business optimism has also dropped from the peak recorded towards the end of last year. Meanwhile, the 10 per cent universal tariff on all imports and the 145 per cent increase in tariff on imports from China are likely to increase prices for US consumers and manufacturers, having a negative impact on demand and output.
The uncertainty associated with the ongoing negotiations with other countries could also increase the cost of imported goods and suppress consumer confidence. If inflation moves higher, it could restrict the US Federal Reserve from cutting interest rates. This could hurt growth further. Trump’s immigration policy along with the numerous measures to prune government expenditure, including laying off government employees, is also likely to squeeze consumption and sentiment. Whether a weaker dollar, increase in exports and decline in imports because of the ongoing trade negotiations and lower deficit, will help the US economy remains to be seen. To borrow an expression from Reserve Bank of India Governor, Sanjay Malhotra, there are too many ‘known unknowns’ and ‘unknown unknowns’.
Published on May 2, 2025
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