IN THIS ISSUE:

1. 1Q GDP Was 3.1%; 2Q Looks to Be Significantly Lower

2. Trump Thinks Tariffs Are the Solution – I Think He’s Wrong

3. Tariffs Hurt Both Sides’ Economies, Corporations & Consumers

4. Who in the White House Has Trump’s Ear? Miller & Navarro

Overview

Today, we’ll look at last week’s second estimate of 1Q Gross Domestic Product. While the report showed the economy still growing by just over 3%, some of the internals of the report are troubling and suggest the economy will slow significantly just ahead.

Following that, I’ll give you my thoughts on President Trump’s surprise decision to put tariffs on 100% of what we buy from Mexico. In short, I think it is terrible! While I’ve been upbeat on the economy for the last few years, I now worry that Mr. Trump’s expanding trade war threatens the longest US economic expansion on record.

1Q GDP Was 3.1%; 2Q Looks to Be Significantly Lower

The Commerce Department released its second estimate of 1Q GDP last week at 3.1%, down slightly from its first estimate of 3.2% in late April. Despite the fact that the latest estimate held above 3%, the details inside the latest report don’t look so good, unfortunately. Those details, as I’ll summarize below, suggest we won’t see anything like 3% growth in the 2Q and probably in the 3Q as well.

Real GDP

The troubling details in the latest GDP report include trade, inventory buildup and consumer spending. Trade alone accounted for almost one-third of the 3.1% GDP print. Export giants like Boeing, Apple and others rushed to push orders out the door in the 1Q, trying to avoid President Trump’s (and Beijing’s) tariff moves that have roiled markets since the quarter ended.

The other problem is that a fourth of 1Q growth came from business inventory buildup – usually a sign of rising business confidence – but in this context, it’s more likely a sign that businesses were building inventories ahead of the accelerating trade war. Meanwhile, consumer spending – which accounts for apprx. 70% of GDP – rose by an anemic 1.3% in the 1Q, well below expectations.

These developments and others in the latest report have forecasters dialing back their estimates for the 2Q. The Blue Chip Economic Forecast aggregate now calls for only 2% growth in the 2Q. Most economists I read are now warning that with the growing trade war, growth in the second half of this year could be significantly lower than 3%.

I should also point out that there is no guarantee 2Q growth will be 2%. Recent data have some tracking forecasts plummeting as low as 1% for the 2Q. Among those, the Atlanta Federal Reserve Bank’s GDPNow tracker puts 2Q growth at only 1.3%, while the New York Fed has it at 1.4%. And how they got there is instructive.