Halfway to Recession? 

After a lot of handwringing and hypothesizing, we finally got the advance reading of first-quarter gross domestic product(GDP). At one point a few weeks ago, the Atlanta Fed was predicting a -2.5% reading — a stunning reversal from the +2.4% growth rate in the fourth quarter. But prognostications and projections seldom match reality, and the initial reading was -0.3% instead. 

We keep hearing this is some sort of Global Financial Crisis 2.0. But it actually feels more like what happened in 2020, when markets dropped at the start of the pandemic and bounced back when the world reopened. There’s no liquidity crunch, no subprime loan problem. President Trump simply started a tariff tiff, and markets and the economy went through a bit of a shock before finding their footing. 

Real GDP declined at a -0.3% annual rate in the first quarter, lagging consensus expectations of +0.2%. The largest drag on real GDP growth in the quarter came from net exports, due to a huge increase in imports of goods. Government purchases also declined. The largest positive contributions came from inventories (boosted by a surge in imports as companies tried to avoid tariffs), personal consumption and business investment in equipment (capital expenditure). Personal consumption, business fixed investment and home building, combined, rose at a 3.0% annual rate in the quarter. 

What do we make of this? Businesses were front-running tariffs by focusing on getting goods into the country as quickly as possible. As a result, trade (net exports) dragged down the real GDP growth figure by 4.8 percentage points, with all of that (on net) attributable to greater imports of goods. 

To put this in perspective, trade’s drag on GDP was larger than in any quarter since at least 1947. Our trade deficit is almost constantly net negative, so if imports go up even more, GDP goes down more. I would imagine this number gets revised significantly and is not a harbinger of things to come. Although we are technically halfway to a recession (defined as two consecutive quarters of negative GDP), we don’t think it will go much farther than that. These one-off events won’t send us into a recession, and we would need to see a protracted trade war deplete inventories before we see higher prices and businesses laying people off or closing their doors. 

In the meantime, earnings have been solid, with Meta (Facebook) and Microsoft leading the way. There have also been hopes for a resolution in the tariff fight, as the latest headlines say China is signaling it wants to talk and deals with other countries are “imminent.” 

Markets initially dropped on Wednesday following the negative GDP news but rebounded on earnings and tariff optimism to end up again for the week. In fact, the S&P 500 notched its longest winning streak in two decades and is up over 12.5% since April 8. See how quickly things can change? There’s still a lot out there to trip us up, but if the tariff turmoil settles down and we get some help from Washington by way of the tax bill, we could put all this behind us and get back on track for a decent year. 

Are Jobs “Goldilocking” Us? 

OK, so we know “goldilocking” isn’t a real word, but Friday’s Bureau of Labor Statistics nonfarm payrolls number was just that: not too hot, not too cold, but just right. Consensus was calling for +130,000 jobs, and the number actually came in at +177,000. February and March numbers were also revised downward by a total of 58,000, while the unemployment rate remained at 4.2%. Growth came from the health care, transportation and financial sectors, while government jobs declined. 

Given all the attention being paid to cost-cutting and government layoffs, Friday’s report showed a surprising balance that did little to dissuade the market’s perception that the Federal Reserve is on pace to cut rates in June. We didn’t see massive unemployment, and jobs are being created in the civilian sectors (although not in government). Job openings are declining, but so are layoffs. It doesn’t look like we are headed for recession despite the negative first-quarter GDP print. 

The ADP employment number was soft but not horrible (+62,000), stemming primarily from the ongoing tariff drama.11This puts the Fed in a gray area; there is enough data making the case for cuts (weak GDP, slowing inflation), but there is also a case for staying put (steady jobs, consumers still spending). The data didn’t prevent President Trump from renewing his calls for Fed Chair Jerome Powell to cut rates as soon as the April jobs report was announced. That’s beginning to lose some punch, and Trump either needs to do something with Powell or leave him alone because it appears the public criticism isn’t having the desired effect. No matter how you slice it, a case can be made for or against rate cuts. 

Friday’s jobs report preserved the market’s preferred narrative that a rate cut is coming in June. Given the market’s delicate mood and all the balls currently in the air, that narrative could quickly unravel — but for now, everything seems to be just right.