Uncertainty, Not Inventory, Is Hurting The American Economy

US President Donald Trump posted an Artificial-Intelligence-generated image of himself as the Pope. He has not made a secret of his desire to rule like a monarch. He is also kingmaker: he has propelled the victory of incumbent prime minister Mark Carney and his Liberals in Canada, and of incumbent prime minister Anthony Albanese and his Labour party in Australia. In both Canada and Australia, the principal challengers had been leaders who fashioned themselves as local Trumps. And that prompted voters to set aside other differences and re-elect the anti-Trump figure in their politics.

Will Trump’s aspired-for combination of temporal and spiritual authority suffice to shelter the American economy from the economic squalls the Trumpian turbulence has unleashed? Is the US economy, which, at $30 trillion, accounts for about 26% of global output, about to go into recession, pulling down growth rates around the world? The honest answer is, no one knows, thanks to Trumpian uncertainty. But the negative growth registered in the first three months of 2025 is not a happy augury.

Many have tried to explain away the -0.3% growth registered in January-March 2025 as the result of excessive imports by domestic agents to accumulate stocks before the Trump tariffs kick in. This explanation is plain wrong, although the element of net exports, among the components of GDP, shrinks, when imports shoot up.

This is easy to understand, if we appreciate how GDP is computed. Everything that is produced in an economy is consumed, invested or exported (it is conventional to carve out government consumption and expenditure and show their combined effect separately, so that an item, commonly represented by G, figures in national income accounts; but, at a higher level of aggregation, we can disregard who does the consuming and investing).

So, if we add up the totality of consumption, investment and exports, do we get the value of gross domestic output? Not quite. There would be an element of imports in consumption (edible oil, for example), investment (machinery, for example), and exports (rough diamonds, for example). So, GDP is the sum of consumption, investment and exports, less aggregate imports. This is how we get GDP = C+I+X-M. Now, X-M is net exports. So, we have the national income identity, that GDP is the sum of consumption, investment and net exports.

When imports go up, the value of net exports goes down. So what is wrong with the proposition that excessive imports shrank US GDP in the January-March quarter? When imports go up to stock up goods before higher tariffs kick in, those imports would go into inventories. Inventories are part of investment. So frontloaded imports have the effect of raising the level of investment beyond what it would have been, in the absence of such excess imports. The excess investment and excess imports would cancel each other out in the equation, GDP = C+I+X-M.

This sort of confusion would have much smaller a role in the public discourse, if people would take into account the reality that M is actually the sum of imported components of C, I, and X, respectively designated as Mc, Mi, and Mx. That is to say, GDP = (C-Mc) + (I-Mi) + (X-Mx), and M = Mc+ Mi +Mx, and not a stand-alone lumpsum.

If imports are not to blame, what accounts for the contraction of the US economy in the first quarter? Biden, says Donald Trump. We have seen this movie before, in which a new government faults the previous one for the economy’s ills. If neither accelerated imports nor Biden is responsible for the slowing economy, what explains it?

Lower government spending and decelerating consumer spending, says the US Bureau of Economic Analysis (disappointingly, the Bureau also blamed imports). In particular, the Federal government spent less. And that is in line with the Trumpian, and general Republican, agenda of cutting back on Big Government, which they blame for the rise in US debt to 124% of GDP.

Today’s US debt/GDP ratio is actually lower than the 130% reached in 2021, after massive spending on Covid relief out of borrowed funds. One way to lower the figure is to pay back the debt. The other is to let inflation increase the nominal GDP. The combination of excess demand, induced by huge Covid-era fiscal deficits, and pandemic-disrupted supply chains produced inflation that proved less transitory than the US Fed had expected it to be. That inflation brought in Trump, and has also lowered US debt/GDP.

A slight contraction in GDP in one quarter need not mean sustained loss of momentum for the remainder of the year. The IMF forecast is for the US economy to grow 1.8% this year, after the growth of 2.8% registered in 2024, to the envy of the rest of the rich world.

When the US grows 1%, that adds $300 billion to the global output. India would have to achieve a growth rate of almost 8% to add $300 billion to total output. If the US economy shrinks, the shock to global demand would be similarly gargantuan.

The IMF forecast of a US growth rate of 1.8% in 2025 does not take into account the effects of the reciprocal tariffs announced by Trump and suspended for the time being. Nor does it take into account the uncertainty over whether the tariffs will actually materialise, be negotiated down, only to be abandoned and revived later. In the absence of certainty, companies would find it difficult to firm up investment plans.

Freight movement from China is slowing down dramatically, reports the Wall Street Journal. This means that US exports would be hit, for want of containers, if not for anything else. This was one of the lessons of the Covid impact on trade. The containers that leave a country are those that have brought goods into the country, emptied them at the ports and are ready to take fresh supplies abroad. If fewer containers come in, fewer containers would leave.

If the trade war persists, it is not just Chinese exports to the US that would be hit. US exports to the rest of the world would also come down sharply. That would affect US growth.

US jobs growth has sustained in January-March. This is to be expected, as additional imports would need to be unloaded from ships and transferred to trucks. The trucks would need to be driven from ports to distant warehouses. At the warehouses, the stuff would need to be unloaded, sorted and stacked. All this calls for manpower. When imports come down, all that work would also disappear.

Many would-be tourists are choosing to skip the US this year. According to trade.gov, a US government website, tourism accounted for $2.3 trillion in revenue and supported 9.5 million jobs in 2022. Travel and hospitality industries are likely to be hit.

The cutbacks in research funding would not just affect direct activity associated with research but also, in combination with hostile immigration policies, deter foreign students from enrolling at US universities. Foreign students contribute not only to university coffers, but to the economies of university towns, where they live.

If the crackdown on immigrants continues, many sectors employing seasonal workers would be impacted. Construction would be hurt, adding to the cost of housing. Tariffs already threaten price rises.

OPEC has decided to jack up output, and global demand for energy would decline, as and when the trade war lowers trade volumes and economic growth, as the IMF and the World Trade Organisation have forecast. Oil prices, already below $61 a barrel, and could fall further. The price level of $61 a barrel, is the current break-even for shale oil, America’s big strength in oil production. When Trump cries, drill, baby, drill, many drill horizontally in the shale, porous rock containing oil and gas in large tracts of the US, pump in sand, carried along by water thickened with gum made out of guar seeds exported from India, to keep the drilled fracture open, and push out the oil and gas trapped in the rock pores. If oil price falls below the break-even for shale producers, babies would stop drilling and start bawling.

The fear of tariff-induced inflation getting out of control holds the Fed’s hand when it comes to lowering rates. Yields have already jumped as more and more investors dump US treasuries, anticipating future Fed rate cuts.

Will there be recession in the US? A 40% probability, says Goldman Sachs. Even if there is no outright contraction, economic growth is unlikely to be as high as the 1.8% forecast by the IMF.