The author is a professor at Harvard University and former chairman of the White House Economic Advisory Board
The U.S. trade war is creating huge turmoil in the global economy. It creates greater turmoil in statistics used to track the global economy. When reading economic data, it is crucial to extract signals from noise. Now, as the impact of tariff changes takes effect, it is even more critical to do so.
This week, U.S. GDP statistics will be released, and the title may be very weak. You should ignore it as I always do and focus on what is called “core” GDP, which is a number that reflects consumer spending and private investment.
Economists and market participants already know to focus on core inflation, thus eliminating volatile food and energy items. They do this not because they don’t care about the food and energy price burden of their households, but because statistically, core inflation is a predictor of overall future inflation, not the total inflation quantity itself. In other words, core inflation is a signal. When it is high, inflation tends to be high in the future. Changes in food and energy prices tend to reverse their own noise.
However, when GDP comes out, the title number always attracts the attention of the lion. For example, in the first half of 2022, there was a lot of debate over whether the U.S. was in a recession after GDP growth, two consecutive quarters of signing – a 1.3% drop per year (one of these negative quarters was revised in the 2024 update).
I wasn't worried at that time because I focused on statistics that grew in both ways, with an average of 1.5% per year in the original data release. The statistics in question have a complex name - "final sale to private household buyers" (perhaps because it didn't cause it.) The Bureau of Economic Analysis generated our GDP data, adding it as a memo in the memo to them during their time as Chairman of the Obama Advisory Committee to emphasize its official GDP issued by its research-based official GDP.
"Final sales to private domestic buyers" are just growth in personal consumption and fixed investments, including commercial and residential investments. These are often inertial, and over time, the readings are stable, just like the core consumer price index. It does not include: net exports, inventory and government expenditures.
Now this is important because the trade war is having a huge temporary impact, especially the net exports and lists of realities and the difficulties of measuring abnormal movements. China's GDP in the first quarter was increased by export growth to raise tariffs, but that was almost certainly short-lived - slower growth. Instead, the transfer of goods from domestically produced to imported goods could artificially reduce U.S. GDP growth in the first quarter, a way that reflects more changes than basic basic knowledge.
Current estimates of U.S. first-quarter growth suggest weak or even possible weak growth. Currently, S&P Global Forecast predicts that the economic year is 0.2%. However, its estimate of core GDP growth is 2.4%, which is the first part of the year to make a more reliable guide to economic strength, although tariffs could lead to a significant weakening of the forward.
Currently, central banks are forced to make difficult choices about whether to care more about inflation or unemployment. It would be great if they could make these choices by looking forward, but this is basically impossible given policy uncertainty. As a result, they have to rely more on data in the rearview mirror than ever before. In this way, by focusing on the basic economic image, we will serve us better. Viewing core GDP is a good way.