Addition and Subtraction, Not Recession

Gross Domestic Product (GDP) is one way to measure the output of our economy.   It considers how money is spent in America by consumers, businesses, and the government.  Recently, the Bureau of Economic Analysis released the advance report on first quarter 2025 GDP, and it was negative for the first time since declining for two consecutive quarters in 2022.  Alarm bells rang and politicians scrambled looking for who or what was to blame. In short, it was math and how this statistic is calculated.  Before delving too deeply, Atlas would like to suggest that the American economy is fine, to wit, it is growing.  Growing but not perfect, however. 

Worries about tariffs caused a large influx of imports, with firms attempting to bring goods into the country before these extra costs took effect.  When a merchant adds to its inventory (no matter where it was made) the transaction is added to the Gross Domestic Product figure as an investment.  Once it is sold to the end user, the value of the inventory is removed from GDP, and the price paid by the consumer is added to it.  The initial inventory investment and the final consumption is always domestic; but the production of the ware may be imported, and this is why imports are subtracted from the GDP, because they would ultimately be double-counted otherwise.

In short, subtracting imports is an accounting adjustment.  This adjustment does not mean imports are inherently bad for the economy.  In fact, Atlas would argue that many imports help America focus on more high-value productive activities (e.g., working on aerospace or medical devices instead of t-shirts).

This is not to say that tariffs will have no impact on the economy.  Many firms (including a few owned by clients of Atlas) import goods from other countries to sell to their end customers.  While a lot of the most feverish rhetoric has subsided, American businesses in the future will be faced with managing profit margins after paying tariffs.  Firms within our nation’s form of capitalism are excellent at adapting and adjusting, something which they will surely do once again as they remain flexible in an ever-changing global economy.