Economic Monitor – Weekly Commentary
by Eugenio Alemán

Firms front-load increase in tariffs during Q1 2025

May 2, 2025

Chief Economist Eugenio J. Alemán discusses current economic conditions.

The GDP report for the first quarter of the year showed a very engaged business sector as it rushed to try to minimize, as much as possible, the future impact of higher tariffs. Net exports of goods and services, which is defined as exports of goods and services minus imports of goods and services, contributed a negative

4.8 percentage points to the economy’s growth rate during the first quarter of the year. That is, exports of goods and services contributed 0.19 percentage points, but imports of goods and services contributed by subtracting a whopping -5.03 percentage points from growth during the quarter. The good, and bad, news is that much of this increase in import growth was “hoarded” by firms during the first quarter and thus contributed positively to economic growth during the quarter and is sitting as business inventories, which is part of real investment (we know it sounds complicated, but it gets even more complicated!).

Firms increased inventories in such a way that the accumulation of inventories “added” 2.25 percentage points to economic growth during the quarter, that is, slightly less than half of the 4.8 percentage point negative contribution from net exports of goods and services. In some way, the drawdown produced by the surge in net exports of goods and services was stored for the future. And this is the bad part of part of firms hoarding goods as inventories: inventory accumulation entered as “real investment” in GDP accounting during the first quarter, but it will start coming out in the following quarters. If firms have very large inventories, as they deplete these inventories during the next several quarters, this depletion in inventories will subtract from economic growth, through a reduction in real investment. Thus, what was positive for today will be negative for the future.

If Inventories Are So High, Why Are We Hearing That Americans May Face Empty Shelves?

Here is where things get even more complicated. Uncertainty has the potential to disrupt decision making by firms and affect the economy in a negative way. What happened with imports during the first quarter of the year was a clear indication of this uncertainty at work. Some are comparing what happened during the COVID pandemic to what is about to happen today. We disagree with the comparison but not with the potential effects.

During the COVID pandemic there were various goods that were scarce, like toilet paper, cleaning products, even ice cream was flying off the shelves with no reassurance of when it was going to be restocked, just to give some examples. At the same time, for many of these products, if they were available, customers had limits on the number of items they could buy. These issues were real and were triggered by supply chain disruptions across the global economy and by the fact that people rushed to hoard these goods because they didn’t know when they would be able to buy them again in the future. The limitations in “only one or two per person” had also to do with the fact that sometimes people buy extra if they know it will become scarce in order to benefit later by selling the stock at a higher price. During the pandemic, there were numerous cases of people hoarding some supplies and then asking for higher prices. Sometimes politicians pass ordinances or laws against price gouging during crisis.

But this is not the case today. Any firm can buy whatever good from whatever supplier available in the domestic or international markets. There are no supply chain issues right now, or at least not one triggered by a collapse in production across the global economy, as happened during the pandemic.

The problem today is: at what price? One of the determinants of companies’ pricing policies has to do with restocking costs. The uncertainty over what would be the price firms would have to pay for acquiring (i.e., restocking) a good in the future could push firms to pull goods from shelves until they have more certainty of how much it will cost to restock those inventories, even if they have plenty of supplies available of those goods today. We are not saying that this is going to happen, but it could happen if the uncertainty over tariffs remains.

At the same time, we have already seen some indications that foreign shipments have plunged, as some of these tariffs, especially against Chinese imports, are punitive—that is, nobody will buy goods from China at those tariff levels. If China is the only supplier of a specific good, then that good is going to be scarce. If consumers start to think that some goods are going to be scarce and they start hoarding these goods, it could also contribute to empty shelves during the next several quarters.

While we don’t like tariffs as a policy instrument, what is negatively affecting the economy is not the tariffs themselves but the uncertainty of not knowing what the tariffs are going to be and not being able to make informed decisions.

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