Companies stockpiled massive inventories ahead of reciprocal tariffs. What now?
The above amusing chart shows the increasing amplitude, in both directions, of Change in Private Inventories (CIPI) over time. Real means inflation-adjusted.
This is the second largest inventory build in history. Only pandemic rebuild was larger.
Real GDP, Real Final Sales, Real GDI
Real GDP grew at -0.2 percent in the first quarter of 2025.
Real Final Sales declined 2.9 percentage points in the first quarter.
That’s the important number, not the upwardly revised -0.2 percent top line number.
The difference between the headline number and Real Final Sales is CIPI which nets to zero over time.
Percentage Point Contributions to GDP
CIPI added a massive 2.64 percentage points to first-quarter GDP. Subtract that out and the bottom-line GDP estimate is -2.9 percent.
Significant Revisions to First-Quarter GDP
For discussion of the first revisions to first-quarter GDP, please see Significant Revisions to First-Quarter GDP, Income Declines 0.2 Percent
The BEA revised CIPI up by 0.4 percentage points which means Real Final Sales declined by the same amount, from -2.5 percent to -2.9 percent.
Gross Domestic Income (GDI) declined by 0.2 percent.
Key Numbers
- DGP: -0.2 percent
- GDI: -0.2 percent
- Corporate profits: -2.95 percent
- Real Final Sales: -2.90 percent.
These are very recession-looking numbers. Click on the previous link for more revision details.
Q&A on the Inventory Build
Q: Why did this happen?
A: Corporations front-ran Trump’s reciprocal tariffs.
Q: What Happens When Recession Hits?
A: The same thing you might suspect from the preceding chart. Orders will collapse, sales will collapse, and corporations will be forced to mark down inventory for which they overpaid.
Q: Who is to blame?
A: In this case Trump. But historically we can blame Congressional actions and the Fed. You do not get moves like we saw in the great recession without the Fed. And you don’t get panic surges without massive Congressional stimulus.
We now have the second largest inventory surge in history at a time the economy is clearly slowing.
What’s Next?
Great question. I had been pondering inflation as far as the eye can see due to massive tariffs. Inflation plus recession equals stagflation.
However, the US Court of International Trade blocked Trump’s huge reciprocal tariffs.
Trump won a stay pending full appeal, but I am extremely confident Trump will lose in an expedited case scheduled for June.
If recession hits sooner rather than later, a collapse in demand could send prices of goods and services lower too.
Inventory liquidation, with discounts impacting corporate profits may begin. And corporate profits already took a big hit in 2025 Q1.
Another factor is the Fed is highly likely to be slow to cut rates, unless there is a surge in unemployment.
Unfortunately, month-over-month rents appears stubborn. If rents remain high, it will be much more difficult for the CPI to drop and for the Fed to cut.
My best guess now is the worst of the tariff mess is behind us. The long bond (30-year treasury) is my guide on this, currently yielding an elevated 4.92 percent.
Student loan delinquencies are another issue. What former students spent on goods and services will now go to debt paydowns. In isolation, this is deflationary.
Finally, if the stock market tanks, that will be another drain on factors supporting consumption.
Related Posts
May 26, 2025: Student Loan Delinquencies Surge, How Will that Impact the Economy?
The delinquency rate jumped from 0.7% in the 4th quarter to 8% in the 1st quarter.
May 28, 2025: The Court Unanimously Strikes Down Trump’s Global Tariffs, Here’s Why
Let’s discuss Trump’s rationale for the tariffs and the court ruling.
May 29, 2025: Corporate Profits Suffer the Largest Drop Since the Fourth Quarter of 2020
Corporate profits fell by $118 billion, a decline of 2.95 percent.
Everything solidly points to recession, but the tariff ruling may put a damper on price hikes and thus stagflation.
For reasons stated, I am temporarily wavering from near-term inflation.
However, serious long-term debt issues remain. Trump’s One Big Beautiful Bill is a permanent fiscal disaster, and quite inflationary.
For comments, please see The One Big, Irresponsible, Deficit-Increasing Bill Passes the House
The cycle low on interest rates is long gone.
Ah, more political stench from the local lawyerly trade court bench giving illegal selective standing to a private party, not congress, a congress which approved emergency tariffs by a president in law and a congress that is not a party to any so called illegal tariff complaint now before the court by private party that has no standing. .
Mish, the BEA report you cited says “Real final sales to private domestic purchasers, the sum of consumer spending and gross private fixed investment, increased 2.5 percent in the first quarter, revised down 0.5 percentage point from the previous estimate.”
Where are you getting the -2.5 or -2.9%? What is the difference between the number you’re using and this “Real Final Sales” number?
“Companies stockpiled massive inventories ahead of reciprocal tariffs. What now?”
The Law of Supply & Demand???
High supply will result in lower prices, no?
Companies stockpiled massive inventories, ahead of Tariffs, to save on cost. I think they would love to grabs the higher prices at the higher profit, but I am not so sure it’s going to work out that way for them.
The Law of “Supply & Demand” is what sets prices typically, and in this case that would work out well in theory. If the demand is low however, because money is tight, and not sure where more might be coming from and when, then that law becomes void. Now it’s Supply Only what we can Afford, and demand for what we Must Have Only as well. That’s a big switch, from what they may have hoped for…
Stu, high supply & low demand means lower prices.
It’s not rocket science.
Mish,
I agree that Trump will almost certainly lose in his appeal for his universal tariffs, but only because he used the IEEPA as his premise for imposing the tariffs.
The International Emergency Ecnomic Powers Act allows the President to impose tariffs in the event of a national emergency.
Trump used the IEEPA for his tariffs because he claimed that our trade deficit constituted an national economic emergency.
We’ve ran a trade deficit every year since 1949 and one can’t argue that America hasn’t done incredibly well over the last 76 years.
Our trade deficit hardly constitutes a national emergency and Trump is going to be hardpressed to convince the courts that it does.
With that said, Trump can use a few other legal justifications to reimpose the tariffs, albeit with certain limitations as written in the law.
All three have much more solid legal foundation giving Trump the authority to do so.
The first is Section 122 of the Trade Act of 1974 which grants the President the authority to impose temporary tariffs to address “large and serious United States balance-of-payments deficits” or other situations that present “fundamental international payments problems.” The section limits any tariffs imposed to 15% and 150 days.
The second is Sections 301-310 of the Trade Act of 1974, often referred to as “Section 301,” which grants authority to the United States Trade Representative to take action against foreign countries that violate U.S. trade agreements or engage in acts that are “unjustifiable” or “unreasonable” and burden U.S. commerce.
The final one is Section 338 of the Tariff Act of 1930 empowers the President to impose additional duties on imports from countries that discriminate against U.S. commerce. Section 338 directs the President to impose tariffs when a foreign country either: 1) imposes unreasonable charges or regulations on U.S. products; or (2) disadvantages and discriminates against U.S. commerce “by or in respect to any customs, tonnage, or port duty, fee, charge, exaction, classification, regulation, condition, restriction, or prohibition.” Tariffs imposed under Section 338 may not exceed 50% of the value of the goods.
As you can see, the limitations to Trump’s legal authority is 15% tariffs for up to 150 days and 50% tariffs with no time limit.
In essence, Trump can impose up to 65% tariffs which would fall to 50% after 150 days.
Trump has also already used Section 232 of the Trade Expansion Act of 1962 to impose tariffs on steel and aluminum.
Section 232 of the Trade Expansion Act of 1962 authorizes the President to adjust the importation of goods that the Secretary of Commerce finds are being imported in such a way that threatens national security.
Trump could clearly expand the use of Section 232 for numerous other goods and no court has ruled against his use of Section 232 to impose tariffs.
The case currently before the courts is specifically foucsed on Trump’s use of the IEEPA to justify his tariffs and I too believe he will be found to have improperly used the IEEPA.
The only thing I disagree with is the belief that the worst of Trump’s self imposed tariff war is behind us.
There is no way this side of Heaven that Trump is going to negotiate new trade deals with all of our major tarding partners by the time his 90 day pause is up on July 8.
Given Trump’s history, I expect him to hike tariffs once again once that dat passes.
Heck, he already said he was gonig to for the EU., but backed off of that threat before the next Monday morning.
He’s already said that China isn’t doing what agreed to do, but heck, nobody know what they agreed to do when he dropped the Chinese tariffs back down to 30%.
I think it is all but certain he will hike tariffs on China before all is said and done.
Lastly, the Chinese are a proud and stubborn people and they will not bow down at the altar of Trump.
I’m willing to bet it will take well over a year to hammer out any new trade deal with China.
I’d suggest we’re far from this tariff nonsense being over and the worst is not yet behind us.
“nonsense being over and the worst is not yet behind us”
All of the nonsense covering the entire US Govt will not be over until Trump is gone. MAGA is gone and we’re back to a Democrat or Independent led govt.
Thanks for reminding me that there are still too many ignorant people voting. First of all, MAGA isn’t going anywhere. More importantly, anyone who thinks that democrats do a better job of governing is void of any common sense and among the most ignorant fools around. I’ll tell you what I’ve told people for years. Regardless of who is in charge in Washington, we all live under the same federal umbrella of laws, regulations, taxes, etc. States, cities and counties can add more laws, more regulations and more taxes. The greatest measure of who governs better is by looking at states and cities. There are many states that have been run by one side or the other for decades. Furthermore, there are dozens of cities that have been run by one side or the other for decades, generations and even since their founding. One can easily compare Republican run states and cities to those run by democrats. If one were to look at that data and virtually any metric they wish, they will see that people have a FAR better quality of life living in places ran by Republicans. They will also see that democrats literally destroy everything they put their filthy paws on. To even suggest that democrats will fix anything would be laughable if it didn’t prove how woefully uneducated too many people are. Not to mention, if democrats did such a bang up job of running government, why the heck are millions of American fleeing blue states and flocking to Republican states. Riddle me that dude!
Got it, everyone is running to MS, AL, FL, KS, SC and other failing states led by R’s. What states take more money from the Federal Govt than they pay in, you guessed it R run states.
Goggle it if you know how, but you don’t really want facts just BS from MAGA and Q.
Falling real retail sales, falling profits, and spiking inventories (misleading GDP measurements)…easy to be looking for the other shoe to drop.
More than a decade of artificially low interest rates & irresponsible expansion of the Federal govt has created an economy rife with distortions and malinvestments. Problems are much bigger than Trump or his efforts.
The problems are not even fully known or even understood yet, as many of the issues resulting from the mess we are in, are fairly new in nature, or even never witnessed before.
Massive amounts of Money has been taken (stolen) from the Taxpayer’s and used for all sorts of nefarious projects. The depth of which we are still trying to figure out.
Much of this money is gone, spent, taken, or earmarked for things still going on, that shouldn’t be.
DOGE has done an amazing job uncovering much of the damage that was done, or is still being done, by Courts allowing it to continue.
Unfortunately the damage is huge, and the money is gone, so it will take a whole lot more money to stop, and fix the issues at hand, and that is the part, along with the Courts, that keeps slowing things down. They were extremely devious and yet made sure rules were in place to slow down and at times stop any of the investigations into any of it. Ruthless, and evil people playing serious games, with serious consequences to the American Citizens.
Excellent example as to why real final sales is a more important economic measure than gdp.
If the “Big Beautiful Bill” passes, then fiscal excess spending will be *much* too large to allow for deflation anytime soon. Expect inflation to rise.
Things are so off-balance from this human-made, gratuitous “emergency,” it is starting to statistically resemble pandemic times. Lots of institutions and seeming components of normalcy have been running on prior momentum and finances. Will there be a Wile E. Coyote moment? Trump at some past point(s) highlighted some issues others were sleepwalking through. But his “solutions” are hilariously off, wildly erratic. He is rolling dice on things constructed over centuries, not just decades, and willfully so. We may look back nostalgically at the relative stability of this moment.
Trump thrives on chaos, systemic abuse and anarchy.
Literally the worst president EVER!
The greatest deflationary collapse in history is coming & the setup for it is taking shape perfectly. Do not forget that the 1st largest inventory build was when stimulus funds were being handed out to citizens & everyone delayed purchases due to lockdowns. Now economies are slowing massively or entering recessions, debts are defaulting, commercial property is in a depression, student loans resumed & defaulting, car loan defaults rising, credit card debt defaults rising, unemployment rising & inflation has been high for 3 years. You could say when all considered this inventory build is the most dangerous ever.
Useful information, thanx. The Real Inventory change chart is telling an important story. We might see some more volatility, both ways.
I had a curious insight today. Trump’s tariffs are absurd, and will probably prove quite damaging to USA prosperity, but ultimately, they will made a good, solid case, for free-trade, and USA Non-Isolationism. This will prove helpful to America – rather like the Civil War was – terrible as it took place for the South, but ultimately good for the Nation, once it was settled. Slavery was ended.
The current “Cultural Revolution” economic and political approach that Trump is trying to unleash (Will we see Harvard professors made to walk in parades, wearing dunce-caps soon?) will be very educational for Americans. We don’t think Trump is a “Conservative” at all. He is a full-on revolutionary, and his extremism will be good for Americans to experience. They will emerge stronger and collectively smarter, from this episode in their history. We have a theory about why the market has advanced, and why it must advance quite a bit further, despite the unwise economics being implemented.
We think Ray Dalio is right this time. But America is good at recovery from collapse events. What folks will want to do, is understand that even when the full SHTF thing happens, they will survive and ultimately prosper, as a Nation.
Also, there is a real chance, that Trump’s “madness” is so extreme, and his actions so counter to American wise political traditions, that his end is perhaps coming much sooner than many folks believe. All that is necessary is to quash an illegal “revolution” is for the top “Gang of Four” types to be arrested and executed – and the silly sh/tshow can be ended. This will not happen – but some legalistic version of it might. If Trump and the other members of the current Clown Brigade of Idiots is removed, what would happen to the USA markets? They would soar into the very stratosphere, would they not? Of course they would.
So, the economics really favours a small, gentle “coup d’etat”, as the French like to call it. Removing this abusive fraudster and serial bankrupt would solve a lot of the problems America is going to face, and it might just happen. It would be best if it can be done legally, and via a vote-process and such. But the how is not as important as the why and when. We certainly don’t suggest anyone doing this – but it would be silly not to plan for it happening, since the there is a real chance that the damage this fellow is doing, may just begin to grow exponentially.
And God help you, if you are “short” when this unlikely event occurs.
Wise folks should certainly be respectful of the genius and wisdom of the Founders of the USA system of Government, and the USA Constitution. They knew – exactly – the risks of this kind of thing happening – they had King George and the despotic Kings of Europe to see as examples – and they built the American political system to have the checks and balances to prevent an ego-driven Imperator from taking full political power in USA. This has kept USA intact, and allowed it to become the most properous nation on Earth. Be glad you have your Courts and your House and Senate to stop big-ego persons acting as President, from going power-mad.
Once all this insane nonsense is stopped, and Trump is removed, America can declare itself again “Open for Business”, and this will be a profoundly positive event that will probably send the American markets zooming straight up.
This wishful thinking about Trump’s removal prevailed all throughout Trump’s first term. You can find any number of articles from 2016~2020 bearing the title “Walls closing in On Trump” as various commentators hoped for at long last, a reckoning.
The guy is in a much stronger place now. He controls both houses of Congress, and put three new justices on the Supreme Court, which also made any “official acts” of his beyond review.
He immediately moved to replace the military leadership with MAGA-friendly types.
His policies are no more or less popular than any other administration’s, and most voters could care less about NATO, foreign policy, or university conflicts.
The Democrats are seemingly in even more disarray than usual, and Schumer, AOC, Sanders, et. al are shrinking the clown car to absurdly Lilliputian proportions.
Who is gonna remove him?
The people, when they finally tire of his bullshit.
The system has congress and the courts to check the president, and the next elections for the voters to hold the officials and parties accountable. An illegal overthrow wouid only erode the rule of law and make the system more unstable.
Trending inventories, unemployment, and consumer sentiment … There is a silver lining to #47’s tariff policies. Had the tariffs not been imposed, there is a reasonable possibility the Fed would have already started QE by lowering rates and expanding M2 money supply. This would have led to a further blow-off in US equities, with greater consequences for pension funds and small investors. The world ACWI index is at an all time high with an increase of 3 trillion in global M2 money supply since Jan 2025. If the simple laws of asset-debt macroeconomics hold, the SPX should reach a interim nadir level of 3000-3500 on 17 June 2025.
Jamie Dimon warns US bond market will ‘crack’ under pressure from rising debt
https://archive.is/wUZ5e#selection-1587.0-1587.77
If we are TRUMP DERANGED, then count me IN. The bullshit is never going to stop. There is NO difference in the RATE OF LYING from EVERY PRESIDENT.
To be real: if TRUMP were to call the kettle black, it would freak out EVERYONE!
WHEN is he allowed to STOP CRITICIZING BIDEN for the mess that has CONTINUED? It is quite an experience seeing him go ON AND OFF.
When will go from BIG BEAUTIFUL to BIGGER BEAUTIFUL to NOT BEAUTIFUL?
“WHEN is he allowed to STOP CRITICIZING BIDEN for the mess that has CONTINUED? It is quite an experience seeing him go ON AND OFF.”
This is the standard political playbook. There is even a famous joke about it (google 3 envelopes joke). Trump’s just finished opening envelope #1.
Good post, agree with analysis. I think the black swan no one is thinking with regards to jobs is AI. I have been reading and talking to quite a few people on the issue and there is exponential capabilities to replace tons of white collar jobs now and will grow over the next three years (rest of Trump administration) and beyond.
Reading the reddit threads on people who run small businesses related to services like this (third party support for payment processing, video services, etc) many are already starting to lose their shirt. High paid software developers are getting axed left and right. AI is only a few years old and the job damage is already starting to grow exponentially.
Ironically, Trump has little to nothing to do with it but he’ll take the blame when job losses explode and the economy sours.
It won’t be long before the layoffs start—mass layoffs.
Jeff Childers’ C&C (Coffee&Covid) opinion thinks President Trump will probably win his appeal of the court’s stop on reciprocal tariffs. I think the odds are 50-50. It’s always interesting trying to sort through the tension between inflationary forces and deflationary forces. Recession in the near term will only be a blip vs higher prices in the long term. The BBB’s continuation of irresponsible spending and the President’s support of it may be simply a tactic to get more votes that will ensure a win in the ’26 election, increasing the republican majority, after which they could get serious about cutting spending (I hope!).
I think he is crazy for reasons stated
Corporate profits: -2.95 percent.
Real Final Sales: -2.90 percent.
– These are very recession-looking numbers.
> No they’re not, alone, as they have had enormous success and profits over the last nearly decade?
Q&A on the Inventory Build
Q: Why did this happen?
– A: Corporations front-ran Trump’s reciprocal tariffs. > Corporations “Made The Choice” Only one to blame is themselves.
Q: What Happens When Recession Hits?
– A: Orders will collapse, sales will collapse, and corporations will be forced to mark down inventory for which they overpaid. > Exactly!
Q: Who is to blame?
– A: In this case Trump. > The Party who made the choice to stock up during an oncoming recession. That would naturally be the Corporations.
– We now have the second largest inventory surge in history at a time the economy is clearly slowing.
> Which is why I am shocked at the decision making of these companies. They knew this was coming.
What’s Next?
– If recession hits sooner rather than later, a collapse in demand could send prices of goods and services lower too.
> That’s what’s going to occur imo.
– Inventory liquidation, with discounts impacting corporate profits may begin. And corporate profits already took a big hit in 2025 Q1.
> They can take the hit, unless they squandered their earnings away. Blame them if they did, and not the economy at that point.
– Unfortunately, month-over-month rents appears stubborn.
> Not for long imo. Lots of these people renting, are accustomed to living with other people. Many will bunk up, 2 to a room, if it keeps them happy through this together. Call it a spillover college effect if you will, but with wiser people having had to grow up and make choices for real.
– Student loan delinquencies are another issue. > One that may linger for these particular spenders, and they certainly are! This will have the biggest impact to spending, borrowing and so forth imo.
– Finally, if the stock market tanks, that will be another drain on factors supporting consumption.
> I am still out on this one. Lots of new money is coming from outside sources (new money). People tend to invest (401K) when younger, and a steady income. I see the market going up slightly at the moment (in time)…
Many corporations will regret buying back their own stock in the near future.
Personally i think trump want to drive everything into the ground. That way hey can declare marshal law or something similar to keep himself in power.
Its the no finicial things in the bbb that im worried about
It seems like we are heading towards SOMETHING BIG. There seems to be a boiling roll start…a FULL ROLL will be TOO obvious and papering/talking over will not longer work!
Trump is beginning to look and act old. I don’t think he could do a third term.
The growing oscillations of inventory indicate a system with poles in the right hand plane, which is the mathematical definition of unstable.
You’d have to integrate the swings in each direction, not just look at peak amplitude for a single quarter, to make that conclusion.
I don’t think we are done with tariffs. Trump will double tariffs on steel and aluminum to 50%. Which will impact US manufacturing that still has to import significant quantities of both items.
I wonder if that will apply to the UK, since we just agreed to drop steel and aluminum tariffs on them to zero.
PAPA, Trump is rolling over. He is making noise now about China being UNREASONABLE to THEY ARE STUPID, to WE ARE GOING TO INVADE THEM!
Invade China? Not likely.
Sadly, there is no plan only 4d chess that nobody understands.
Technically, a financial engineering fix to an industrial problem.
I agree, I don’t think we are done with them either.
In fact if Trump gets his big beautiful bill to pass essentially ‘as is’ I think he’ll all but force Congress to implement the very tariffs he wants in order to pay for the give aways in that bill since it depends on revenue from tariffs to even make a dent in the deficit. In other words this bill is a round about way to get congress to LEGALLY implement the tariffs (which will function as a VAT on US consumers) he wants.
So much noise now. European and Usa governments are all running deficits. War is inflationary.
Ending is a process
BUT, it is NO ENOUGH WAR yet. It has to go WORLD WIDE or WTF can be allowed to happen? RIOTS?
Global War