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Economic Warning Signs in Q1 2025
The global economic tides are shifting, and the first quarter of 2025 has delivered a clear message: the United States’ trade war has backfired. With U.S. GDP contracting by 0.3%, the data confirms what many feared — an economic downturn is unfolding even before the full brunt of retaliatory measures has taken effect. In stark contrast to the 2.4% growth recorded in Q1 2024, the American economy is now showing signs of systemic weakness, weighed down by a combination of declining trade, shrinking federal spending, and most notably, a weakening dollar.
From Tariffs to Global Repercussions
When former President Trump initiated sweeping tariffs as part of an economic offensive, the goal was to strengthen domestic industries and rebalance trade. Instead, those tariffs have accelerated the global shift away from the U.S. dollar as the dominant reserve currency. International partners have interpreted America’s aggressive trade stance as a signal to diversify their trade relationships — and currencies.
China's Yuan Surges in Global Trade
The clearest evidence of this comes from China. New data shows that 54.3% of China’s cross-border trade in March was settled in the yuan, reaching a record-breaking $725 billion. This marks a dramatic turn from just a few years ago, when over 70% of China’s trade was settled in U.S. dollars. Today, that figure has fallen to just 41.4% — a steep decline with long-term implications for dollar dominance.
Official Denial Amid Market Realities
Despite warnings from economists, U.S. policymakers have largely remained in denial. Treasury Secretary Scott Basset recently dismissed current market signals as short-term noise, insisting that the U.S. remains on solid footing. But the markets are telling a different story. Since March, foreign investors have sold off over $63 billion in U.S. equities. With 18% of the American stock market held by foreign capital, this trend could accelerate if confidence in the U.S. economy continues to erode.
Imports Collapse and GDP Drags
The economic pain is being felt across multiple fronts. Imports have collapsed, contributing to a five-percentage-point drag on GDP growth. At the same time, federal belt-tightening is amplifying the slowdown. And looming over it all is the continued decline in dollar usage for international trade — a trend that undermines the very foundation of U.S. financial power.
China Builds Alternative Trade Alliances
China, for its part, is deepening trade ties with Europe, Latin America, and Southeast Asia. Beijing is actively promoting the yuan for bilateral trade, reducing dependency on the dollar. The high tariffs imposed in April — 245% on Chinese goods and 125% on U.S. exports — have effectively frozen U.S.-China trade outside of exempt sectors. This isolation, while initially intended to protect American interests, is now eroding one of the last strategic levers the U.S. holds: the global demand for dollars.
Policy Inertia and Missed Opportunities
In theory, rolling back the tariffs could reverse some of the damage. It would support American consumers by lowering prices and encourage global trade to continue flowing through dollar settlements. But the current administration appears unwilling to pivot, still clinging to the narrative that the U.S. is winning the trade war.
Investment Risks and Economic Fallout
Meanwhile, the fallout is growing. Dollar weakness threatens to wipe out investment gains for international holders. U.S. stock markets face the risk of deeper selloffs. And the American consumer — long the engine of global demand — is under pressure.
The Future of the Dollar
The question now is not whether the world is moving away from the dollar, but how quickly and how far that shift will go. And if current policies persist, the economic consequences for the U.S. could be deeper and more enduring than many yet realize.
US Spending Collapse Coming
People have stockpiled cheap imports in anticipation of tariffs—but will this lead to a spending collapse starting in April? So far, all official forecasts seem overly optimistic. The real numbers are coming in worse than projected, suggesting that an actual consumer collapse may be on the horizon. Anxiety is growing fast: 65% of Americans now expect unemployment to rise, and only 32% believe jobs are currently plentiful—the lowest level in recent history.
Consumer Confidence Erosion
When people expect to lose their jobs and see few opportunities available, they naturally start cutting back on spending. They begin saving more for emergencies and lose confidence in buying, especially as prices continue to rise. The timing couldn’t be worse. Instead of addressing this, Washington is displaying a bizarre mix of deflection and denial.
White House Denial Mode
The economy has officially entered a bizarre phase. In just 100 days, economic indicators are flashing red. Yet, Trump blames Biden for the market crash and denies any link to tariffs. He claims a manufacturing boom will follow due to companies relocating to the US, which he argues should drive more jobs and consumer spending. But that assumption doesn’t hold up under scrutiny.
Reshoring Without Supply Chains
Yes, Trump inherited economic challenges—Biden’s previous administration did flood the system with excessive stimulus. But trying to undo decades of globalization in just two years without fixing supply chains is proving unworkable. Input costs remain high. A weakening dollar makes imports even pricier. Whether consumers buy domestic or foreign, prices are still going up. That means Q2 growth could stagnate or crash, even after early stockpiling.
Inflation Fears and Consumer Paralysis
Inflation expectations are skyrocketing. Consumers expect prices to rise 6.5% over the next 12 months—the highest since 1981—and 4.4% over the next 5 to 10 years, the highest since 1991. High inflation expectations freeze spending and worsen contractions. Consumers cut back in fear, which is especially harmful in a consumption-driven economy like the US.
Time to End the Tariff War
This would be the moment to stop the tariff war and reset trade policies. Even if consumers turn away from foreign goods, prices won’t fall due to supply chain and currency issues. Unfortunately, the administration seems to be spinning the data instead. One economic advisor even claimed the negative GDP report was “the best” he’d ever seen.
GDP Spin and the Supply Chain Reality
He pointed to a 22% increase in domestic investment, saying this offsets the hit from imports and inventories, implying a 3% growth rate. But this ignores the core problem: future demand and price competitiveness. Higher input costs and tariffs will make US-made goods less attractive globally. The dollar’s weakness can’t compensate when key components are still imported.
Rewriting Recession Definitions—Again
Back in 2022, Biden’s administration redefined recession to dodge the downturn label, and now Trump’s team seems to be doing the same. Trump claims the GDP drop isn’t his fault and emphasizes “core GDP” growth. But few people, possibly not even Trump himself, fully understand what this metric entails. It sounds like scripted spin, likely from advisors like Navarro or Bassant.
The Bigger Picture
Blaming Biden may be politically convenient, but the tariff war is undeniably a major factor in the economic slowdown. The US may face another negative GDP print in Q2, though “core GDP” will likely be used to claim success. That might be a political win in their eyes—but it’s cold comfort for struggling consumers and investors.
Looking Ahead
Will the world keep dumping the dollar in global trade? Will the US economy officially enter a recession in Q2? Let me know your thoughts in the comments.
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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