Update 864: GDP Contracts by 0.3%

May 5, 2025 | Auto Industry, CFPB, FY25, FY26, Hearings, House of Representatives, Immigration, Inflation, IRA, Jobs, PCAOB, PCE, Reconciliation, Retirement, Senate, Tariffs, The Fed, Update | By

Update 864 – GDP Contracts by 0.3%;
Trump Skins FY26 Domestic Spending

Three key pieces of economic data were released this week. The Fed’s preferred measure of inflation ticked down to 2.3 percent in March, nearing the Fed’s two percent target, while a strong 177,000 jobs were added to the economy and unemployment remained unchanged at 4.2 percent in April. The Trump administration’s tariff policy is threatening to disrupt the economy in the coming months, with new data showing the U.S. economy contracted 0.3 percent in the first quarter of this year.

This week, several House committees also held markups of reconciliation bills, advancing dangerous legislation that would hurt American families. The Trump administration also released its much-anticipated preliminary budget request for Fiscal Year 2026 and announced tariff relief for companies building cars in the U.S. using imported parts. We cover these and relevant hearings below.

Good weekend all…

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Dana

Headline

U.S. Economy Contracts 0.3% in First Quarter

The United States economy contracted by 0.3 percent on an annualized basis in the first quarter of this year, according to the advanced estimate released by the Bureau of Economic Analysis on Wednesday morning. This contraction comes as the Trump administration’s chaotic tariff announcements and broader policy created uncertainty for businesses and consumers across the economy prior to early April’s sweeping tariffs announcement.

In the first quarter, the U.S. economy contracted for the first time since the first quarter of 2022. The decrease in GDP comes after the economy grew by 2.4 percent on an annualized basis in the fourth quarter of last year and by 2.8 percent over the entirety of 2024. 

As consumer and business increased imported purchases ahead of anticipated tariffs, imports increased 41 percent over the first quarter. Imports are a subtraction in the calculation of GDP. Imports were the main contributor to the decrease in real GDP over January, February, and March.

These movements were partly offset by increases in investment, consumer spending, and exports, suggesting growth remains strong beneath the Trump administration’s tariffs. As expansive post-first-quarter tariffs continue to impact the economy, consumer spending, and investment are expected to slow in the coming months. The potential slowing and even contracting growth in future quarters would represent a stark reversal of the past two years’ strong growth. A more complete estimate of GDP will be released on May 29.

Other Developments

177K New Jobs Added; Unemployment Steady at 4.2%

Total nonfarm payroll employment rose by 177,000 jobs and the nation’s unemployment rate remained unchanged at 4.2 percent last month, according to the April jobs report released by the Bureau of Labor Statistics this morning. 

Job growth in February was revised down by 15,000 jobs, from +117,000 to +102,000 jobs, while job growth in March was revised down by a notable 43,000 jobs, from +228,000 to

+185,000 jobs. With these revisions, job gains in February and March combined were 58,000 jobs lower than previously reported.

Last month, the largest job gains came in:

  • health care (+51,000 jobs)
  • transportation and warehousing (+29,000 jobs)
  • financial activities (+14,000 jobs)
  • social assistance (+8,000 jobs)

Federal government employment declined by 9,000 in April and is down by 26,000 since January.

The unemployment rate remained at 4.2 percent last month, unchanged from March. The unemployment rates in March and April were up from 4.1 percent in February and 4.0 percent in January, respectively. The unemployment rate remains remarkably low and has remained fairly consistent between 4.0 and 4.2 percent for the past several months.

Today’s report indicates that the labor market remains strong but continues to show signs of cooling. The report comes just days before the Federal Reserve’s interest rate setting committee, the Federal Open Market Committee, meets on Tuesday and Wednesday of next week to determine the fate of interest rates. The Committee has held rates steady this year after cutting rates by 100 basis points late last year. It will consider today’s positive report, along with inflation data, concerning GDP data showing a contraction in the first quarter, and most consequentially, the projected impact of the Trump administration’s drastic and chaotic policy changes. 

March Inflation Ticks Down Pre-Tariff Implementation 

The Federal Reserve’s preferred measure of inflation, the personal consumption expenditures (PCE) price index, rose 2.3 percent on an annualized basis in March, down from the 2.7 percent annualized increase in prices in February. Core PCE – which strips out food and energy prices – rose by 2.6 percent on a year-on-year basis last month, down from the 3.0 percent annualized increase in prices in February. This is according to the March PCE report released by the Bureau of Economic Analysis (BEA) on Wednesday. 

On a monthly basis, headline PCE fell by less than 0.1 percent last month after rising by 0.4 percent in February. Core PCE remained flat on a monthly basis in March. Energy prices fell by 2.7 percent last month while food prices rose by a notable 0.5 percent. 

The new data shows that inflation is approaching the Federal Reserve’s longstanding target of two percent just as the Trump administration’s sweeping tariffs begin to take effect, threatening to upend years of progress. With inflation expected to rise in the coming months, the new inflation data is unlikely to move the Fed’s rate-setting committee, the Federal Open Market Committee (FOMC), towards cutting interest rates at its meeting next week. 

House Begins Reconciliation Markups

This week, relevant committees began marking up legislative proposals to comply with the reconciliation instructions in the FY 2025 budget resolution passed by both chambers last month, advancing their respective sections (or “titles”) of the broader reconciliation package. 

In news that broke last night, disagreements over spending cuts have pushed more consequential markups in Agriculture, Energy and Commerce (E&C), and Ways and Means (W&M) that were originally planned for next week. E&C and Agriculture are still working on the details of their bills after being tasked with cutting $880 billion and $230 billion, respectively. E&C is searching for agreement on Medicaid cuts, and Agriculture is held up on a last-minute effort to add farm provisions to its portion of the bill. W&M, which was instructed to spend up to $4.5 trillion (reduced to $4 trillion if other committees do not cut at least $2 trillion), will likely have to wait behind these markups to add the finishing touches to its proposal.

Still, seven committees moved through the process this week and favorably reported a set of extremely harmful proposals. The approved titles now move to the budget committee, where they will be packaged into the larger reconciliation measure. Below, we comment generally on these committee markups and proposals, with more analysis of the markups to follow in the coming weeks. 

Education and Workforce

On Tuesday, the House Committee on Education and Workforce voted along party lines, 21-14, to advance the package that the committee’s GOP members claim would shave over $330 billion from the federal budget in line with its reconciliation instructions. The most notable changes made are those to federal student aid, with the following reforms:

  • A cap on the aid students can receive each year is set at the median nationwide cost of attendance for students in their same program of study.
  • A hard cap on unsubsidized loans for all categories of student loans.
  • Prevention of student borrowers from taking advantage of Parent PLUS loans if they had not exhausted their unsubsidized loans.
  • Put colleges on the hook for reimbursing the government for a share of their students’ unpaid federal loans.

Republicans argued that these changes would make federal student loans more solvent while forcing colleges to lower their tuition prices. Democrats, however, said these changes would make college more expensive for vulnerable students, reducing access to higher education. Several higher education groups, such as the American Council of Education, opposed the bill since it would hurt both colleges and students. In the end, Democrats proposed 33 amendments to alleviate the bill’s negative impacts, all of which were shot down.

Financial Services

The House Financial Services Committee advanced its proposed budget reconciliation provisions in a 30-22 party line vote on Wednesday, cutting roughly $1 billion from the federal budget and reducing protections for consumers and the broader economy. 

Committee Republicans advanced provisions to slash funding for the Consumer Financial Protection Bureau (CFPB), the federal consumer watchdog created in the aftermath of the 2008 financial crisis, by 70 percent by reducing the cap on funding the agency can request from the Federal Reserve from 12 to 5 percent of the FY 2009 budget and eliminating the inflation adjustment between 2009 and 2025. The provisions also dissolve the Public Company Accounting Oversight Board (PCAOB) into the Securities and Exchange Commission.

The Committee Republicans blocked over three dozen Democratic amendments, including those to strengthen the CFPB and boost the affordable housing supply.

Oversight and Government Reform

The House Committee on Oversight and Government Reform approved a set of proposals for reconciliation on Wednesday in a 22-21 vote. The roughly $50 billion package largely focuses on cutting the retirement benefits federal workers receive, including by changing the retirement calculation to reflect the average of workers’ highest five years of earnings as opposed to the highest three, and increasing the FERS retirement contribution rate. 

Members of both parties pushed back on the administration’s continued assaults on federal workers and their benefits. Representative Michael Turner (R-OH), opposed the package, stating, “Employee benefits are not a gift. They are earned.” Democrats joined in this sentiment, proposing 25 amendments (all rejected) to exclude certain federal workers from the proposed changes or prevent the administration’s attack on federal workers altogether.

Transportation and Infrastructure

On Wednesday, the House Committee on Transportation and Infrastructure (T&I) approved their package of reconciliation proposals (manager’s amendment) in a party-line, 36-30 vote. The proposals cut an aggregate of $10 billion in spending, and include funding for border security and modernizing air traffic control, offset by eliminating IRA climate programs and adding an annual fee on hybrid and electric vehicles.

The latter point caused a bit of contention following the release of the T&I proposal, which included annual fees of $200 for electric vehicles, $100 for hybrid vehicles, and $20 for all other vehicles (projected to raise $50 billion/10 years). Republicans pushed back on the $20 fee for gasoline or diesel powered vehicles, ultimately choosing to nix it in exchange for a $50 increase in the annual fee for electric vehicles. 

During the roughly seven-hour markup, Republicans also shot down around 100 Democratic amendments largely aimed at protecting transportation and infrastructure funding, including IRA provisions that the GOP proposal aims to cut. 

Armed Services

On Tuesday, the House Armed Services Committee (HASC) favorably reported its set of reconciliation recommendations in a 35-21 vote. Four vulnerable committee Democrats crossed party lines to support the title: Reps. Don Davis (D-NC), George Whitesides (D-CA), Jared Golden (D-ME), and Eugene Vindman (D-VA). 

The proposal, which includes $150 billion in increased mandatory defense spending, notably exceeds the HASC reconciliation spending instruction by $50 billion. Democrats largely focused their opposition on recent dysfunction at the Defense Department, such as by proposing an amendment that would hold back 75 percent of the funding until more safeguards are put in place for communicating classified information. All of the almost two dozen amendments proposed by Democrats were rejected, sending the proposal to the Budget Committee unchanged. 

Homeland Security

The House Homeland Security Committee voted 18-14 to advance its contributions – an estimated $70 billion – to the “one big beautiful bill” that focused on providing the tools the President needs to execute his mass deportation and border security agenda.

The funding includes $46.5 billion for border wall and barrier systems, $5 billion for CBP facilities and $6.1 billion for CBP personnel recruitment and retention. Democrats proposed amendments hoping to curb the executive branch’s deportation powers for American citizens, all of which failed. The package also flags over $1 billion for security preparations for global events in the U.S. such as the 2026 World Cup and the 2028 Olympic Games in Los Angeles. 

Judiciary

The House Judiciary Committee on Wednesday approved its portion of the reconciliation bill along party lines, 23-17. 

In support of the President’s immigration agenda of deporting 1 million immigrants per year, the committee marked $45 billion detention funding, $14 billion for the transportation of immigrants and $8 billion to bolster ICE personnel. Their plan also revealed a new system of fees for asylum seekers of $1,000. Democrats criticized the Trump administration’s heavy-handed actions in deporting and detaining individuals without due process.

The bill also advanced provisions from the Regulations from the Executive in Need of Scrutiny (REINS) Act, which would make it harder for agencies to enact regulations to protect the public. Committee Republicans abandoned a plan to shift the Federal Trade Commission’s antitrust authority to the Department of Justice through the reconciliation provisions, after recognizing the provisions were unlikely to be allowed under reconciliation rules. Committee Chair Jim Jordan has pledged to continue pushing the plan in the future. 

Trump Admin. Releases “Skinny Budget”

This morning, the Trump administration released a much-anticipated preliminary budget request for Fiscal Year 2026 (FY26), which begins on October 1. The preliminary blueprint, often termed a “skinny budget,” includes a 22.6 percent cut – $163 billion – in non-defense discretionary (NDD) spending and a 13 percent increase – $113 billion – in defense funding relative to FY25 levels.

Upon a quick review, here are some highlights (or, more like lowlights) of the changes to NDD included in the proposal: 

  • $27 billion cut in rental assistance 
  • $18 billion cut to the National Institute of Health
  • $15 billion cut in Bipartisan Infrastructure Law (BIL) climate funding 
  • $4 billion cut to the Low-Income Home Energy Assistance Program (LIHEAP), which would effectively end the program
  • $2.7 billion cut to IRS funding 
  • $44 billion increase in Department of Homeland Security funding

These proposed changes to discretionary funding come as the administration and congressional Republicans try to push a massive reconciliation package that is also rife with cuts to government assistance/programs and increases in defense and immigration funding. 

Presidential budget proposals often differ greatly from final appropriations bills, largely due to the fact that funding bills require a 60-vote majority in the Senate. However, Trump has consistently flipped Hill norms on their head by insisting that traditionally-bipartisan processes be made partisan. This “my way or the highway” style approach has already stoked fears over a potential shutdown when the current fiscal year ends on September 30 – completely valid fears considering the proposal is far from anything that Democrats should/would be willing to accept. While some Senate Democrats ultimately supported Republicans’ full-year CR for FY25 in March, that proposal was largely an extension of a Biden-era budget (albeit not adjusted for inflation/new funding needs and including harmful policy riders). This time around, Congress will be considering a Trump budget that is not expected to get the same Democratic support. 

Trump is expected to release a more detailed budget request in the coming weeks, though no official timeline has been released. 

Auto Industry Welcomes Slight Reprieve 

In an attempt to soften the blow of auto-parts tariffs taking effect May 3, President Trump announced Tuesday that companies building cars in the U.S. using imported parts would receive some tariff relief. 

Automakers can apply for an offset worth up to 3.75 percent of the retail price of an American-made vehicle. Next year, that rate will drop to 2.5 percent and then zero out in the third year. Companies will need to send a request to the Commerce Department and may eventually receive a reduction in their customs bills. The administration also announced that companies can apply for refunds for cars that were produced after April 3. 

The President also signed an order that would prevent imported automobiles from suffering from tariff “stacking,” or overlapping tariffs that add on top of each other, sometimes leading rates to astronomical levels. Vehicles built with 85 percent of their make from the U.S., or are USMCA-compliant, would be exempt from tariffs this year. Notably, reporting suggests that there is no tariff relief for imports from China. 

The relief is only a partial reprieve for auto manufacturers who remain subject to high tariffs. Policy uncertainty obtains, as sectoral CEOs are acutely aware that the President could change his mind and throw up sky-high tariffs on a whim. His relief announcement came as he held a rally in Michigan to celebrate his first 100 days and said these offsets would be “a little bit of a break” for the American auto industry. In the long run, the President wants car parts made in the U.S. and is still strongly pushing a mass reshoring of the auto industry to U.S. soil. 

Senate Fails to Curb Trump Tariffs

On Thursday, a 49-49 vote in the Senate failed to pass the termination of the national emergency declared by President Trump, allowing him to implement worldwide tariffs. Absent Senators Sheldon Whitehouse (D-RI) and Mitch McConnell (R-KY) – both were expected to support the resolution – allowed the tied vote to be decided by Vice President J.D. Vance, who then killed it. Democratic leadership is fielding some frustration after what some view as mishandling of a prime opportunity to rally a win in the tariff debate in Congress. 

Three Republicans, Rand Paul (KY), Susan Collins (ME), and Lisa Murkowski (AK), joined Democrats in support. The resolution was unlikely to gain support in the House, and the President announced plans to veto if necessary. 

Hearings

HFSC Financial Institutions Subcommittee Considers Banking Deregulation

The House Financial Services Subcommittee on Financial Institutions convened for a hearing in which Subcommittee Republicans, led by Chair Andy Barr (R-KY), discussed plans for deregulation of the banking system. HFSC Ranking Member Maxine Waters (D-CA) said in her opening remarks, “Republicans are once again using community banks to advance an agenda for megabanks.”

The subcommittee discussed a slate of deregulatory bills, which notably included H.R. 2702, the Financial Integrity and Regulation Management Act (FIRM Act), led by Barr. A companion bill is led by Senate Banking Committee Chair Tim Scott (R-SC) in the Senate. The bill would eliminate reputational risk as a component of supervision and likely allow crypto firms greater involvement in the banking system, despite concerns of fraud within the space. 

The hearing is part of Republicans’ broader financial deregulatory agenda.

Look Ahead

Tuesday, May 6

  • May Federal Open Market Committee meeting (Day 1)

Wednesday, May 7

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