False prosperity under tariffs? The real economic test for the US is Q2.

This weekly report focuses on the economic data of the United States in the first quarter, analyzes the structural reasons behind the short-term contraction of GDP, and discusses the potential impact of tariff policy on the economic trend in the second quarter. (Synopsis: Lai Qingde was slapped in the face? Bank of Korea Governor: The US government is pressuring for "Asian currency appreciation") (Background supplement: Trump interview shouts that "cryptocurrencies are important" will be snatched away if China does not do it: tariffs do not affect the economy, recession is a short period of pain) Preface The main economic data in the first quarter of the United States have been fully released, showing an overall pattern of slowing growth, cooling inflation, and maintaining a resilient job market. However, the breakdown shows that the first quarter's performance was affected by early action by businesses and consumers driven by tariff expectations, resulting in data distortion. With a new round of tariffs officially taking effect from the second quarter, real economic adjustments will begin one after another, and market trends will need to wait for more feedback from the real economy to verify the direction. This weekly report will provide an in-depth analysis of the content of Q1 data, and look forward to the changes and impacts that Q2 may bring. Analysis of Q1 GDP quarterly growth and weakening in the United States The annualized decline of GDP in the first quarter of the United States by 0.3% is worrying on the surface, but further dismantling of the structure shows that this contraction is mainly due to trade imbalances, not weakening internal economic momentum. According to the U.S. Department of Commerce, imports of goods and services surged 41.3 percent in the first quarter, the biggest increase in nearly five years. Among them, the merchandise trade deficit widened to $162 billion in March, up 9.6% month-on-month, far exceeding market expectations. Cumulative imports totaled US$342.7 billion, an annual increase of 31%; In contrast, exports fell significantly, resulting in annualized GDP growth in the first quarter being dragged down by net export projects by about 5 percentage points, the worst level on record. Figure 1: Quarterly changes in GDP breakdowns in the first quarter of 2025 (Source:BEA) It is worth noting that the surge in imports does not reflect the recovery of terminal demand, but is influenced by policy variables. As the US government announced that it would raise tariffs on China from April 2, enterprises have prepared goods in advance to avoid rising import costs in the future, forming a one-time and expected replenishment behavior. Although such anticipatory imports drive corporate activity and import amount in the short term, because these goods are produced overseas, they will be deducted in GDP accounting, which in turn puts pressure on real GDP. In fact, even though core domestic demand (such as personal consumption, equipment investment, and government spending) remained stable at about 2.8% annually in the first quarter, suggesting that domestic economic fundamentals have not deteriorated, overall GDP has shrunk technically as net exports have dragged down by nearly 5%. The abnormal rise in imports is a short-term phenomenon, as enterprises complete stockpiling and demand returns to normal, import momentum is expected to cool significantly in the second quarter, the trade deficit is expected to narrow, and the drag on GDP may also be reduced. According to Gene Seroka, executive director of the Port of Los Angeles, freight traffic at the port is expected to drop by 35% from May compared to the same period last year due to tariffs on Chinese goods. He added that many large U.S. retailers have fully suspended imports from China, and about a quarter of vessels arriving in May are expected to be cancelled. These signals reflect that the surge in imports in the first quarter will not continue to the second quarter to a large extent, but may turn into a positive factor supporting the recovery of GDP. In addition, the active stocking of enterprises in the first quarter led to a significant increase in inventories. As destocking proceeds in the second quarter, the negative impact of inventory changes on GDP will gradually mitigate or even turn into a positive contribution. Taken together, GDP is expected to rebound technically in the second quarter as imports normalize and inventory adjustments proceed, helping to dispel recession fears in the short term. Core inflation hits new low, early import and tariff impact need to be vigilant The latest US core personal consumption expenditure (PCE) price index in March increased by only 0.03% month-on-month, the smallest increase since the early days of the epidemic in April 2020, and the first monthly change below the US Federal Reserve's 2% target in four months; The upward revision also slowed to 2.6% from 3.0% in February, the lowest since March 2021. The three-month and six-month annualized core inflation fell to 3.5% and 3.0%, respectively, indicating that short-term inflation momentum has indeed cooled. Figure (2): Core PCE in March (Source: ZeroHedge) Figure (3): 3-month/6-month/12-month core PCE annualized inflation (Source: BEA) However, because it has not yet reflected the pressure that may be brought by the new round of tariffs on China implemented in April, the improvement of inflation data may only be a short-term technical pullback. So far, the accumulation of commodity inventories caused by a large number of early imports by enterprises in the first quarter (Q1 import annual growth rate is as high as 41.3%), has suppressed price increases in the short term. However, as these inventories are gradually digested, companies will face a new round of higher purchase costs, and commodity prices may rise again in the coming months and gradually pass on to consumers. On the demand side, U.S. consumer spending remains strong. Real personal consumption expenditure rose 0.7% m/m in March, the largest increase since the beginning of 2023, with an annual increase of 3.0%. But this largely reflects the advance consumption deployment of American households in response to the upcoming tariff hike, especially in items such as automobiles, home appliances and imported furniture. Although such early consumption behavior supports economic activity in the short term, it may cause consumption momentum to fall in the coming months, and the impact of tariffs is gradually emerging, and prices are also at risk of rising. Figure 4: Monthly increase in personal consumption expenditure (Source: Bloomberg) Overview of the April Employment Market Report The April US non-farm payrolls report shows that the overall labor market remains resilient, but the structural differentiation between industries is more pronounced. Nonfarm payrolls added 177,000 jobs in the month, significantly exceeding market expectations, but across sectors, healthcare expanded steadily, while transportation and warehousing were driven by short-term trade and manufacturing continued to weaken due to structural pressures. Figure 5: Monthly Change in Nonfarm Payrolls by Industry (Source: MishTalk) First, the healthcare sector added 51,000 people, firmly leading the job growth. As the healthcare industry is driven by domestic demand and has little correlation with international supply chains and tariff changes, it is the most stable source of growth in the job market. This also reflects the long-term upward trend of the aging population and the demand for basic medical care in the United States. According to Indeed Hiring Lab and other market reports, the medical and social assistance sector has continued to record new job openings since 2024, indicating strong structural demand. Second, transportation and warehousing added 29,000 people, the largest increase since December last year. The jump may be due to a short-term surge in logistics demand due to a new round of tariffs on Chinese goods imposed by the United States on April 2, and companies short-term expansion of imports in order to prepare goods in advance. In contrast, manufacturing employment fell by 1,000, the weakest post-pandemic performance in 2020. Although there is stocking behavior to support short-term demand, terminal sales have not yet picked up significantly, coupled with the rise in the cost of imported raw materials, which has suppressed the willingness of the production side to expand. This shows that the pressure of tariff policy on the current US manufacturing industry is more than supportive, and it is difficult to benefit from trade protection in the short term. Federal government departments cut jobs for the third month in a row, dropping by 9,000 in April. The cumulative number of layoffs so far in 2025 has been 282,000, mainly from negotiations with the government...