The big news last week was the US GDP report — it appears the US economy shrank by 0.3% in the first three months of the year. There were some wonky effects, such as a huge increase in imports as businesses and individuals rushed to get ahead of tariffs (a negative) combined with a large buildup in inventories (a positive). What concerned me most about the data, however, was the contraction in consumer spending. It has been the consumer who has kept the economy afloat, and signs of struggle there may not bode well for the larger economy. More about this in this week’s Chart of the Week (see below).
Last week we also saw unemployment figures for April — a few more jobs than expected were created, however the unemployment rate remained steady, more due to people leaving the labor force rather than people finding a job. Overall the employment situation in the US appears to be deteriorating, though it is certainly not in freefall. We need to keep a close eye here.
We are now about three-quarters of the way through earnings season, and it is going well. Overall, it appears companies will report earnings growth of 12.5%, which is above average. That said, many analysts and companies are reducing their earnings expectations for the year in response to the Trump administration’s tariff policy. Corporate earnings have been the bright spot in this economy and if they can maintain good earnings growth, there is likely a floor to any market selloff.
I continue to urge caution in this environment. Despite corporate earnings, the early signs of recession are flashing. Investors have seen a reprive with the recent rally, but we still are still below some key levels in markets. For investors who are approaching a goal, downside risks currently loom larger than upside potential, at least in my view.
Chart of the Week
This week’s chart demonstrates how much consumers and businesses have pushed to get ahead of tariffs. Inventories increased as businesses imported and stocked what they could (blue in the chart below), while overall imports pushed a significant drag on the economy. To be fair, the GDP calculation assumes trade imbalance as a net negative to GDP growth, but the truth is much more complicated than that. I would expect these effects to go away in the next quarter — inventories are likely to shrink (creating a drag), government expendures appear to be shrinking (creating a drag), and net trade is likely to have litte to no affect. That leaves the size of consumer spending and private investment to make up the difference. The big question is: will they?
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