Three critical economic reports were released this past week - the first read on Q1 GDP, the first read on quarterly core PCE prices and the ADP employment report (with the more important non-farm payroll numbers coming on Friday).
As I’ve mentioned before, we’re approaching a very critical juncture for the financial markets. Most of the trailing hard data we’ve gotten to this point has been through the end of March. Trump’s Liberation Day tariff spree happened on April 2nd, so we have yet to see the real results of the global trade war except for anecdotes.
Up until recently, we’ve seen the “soft” data, including sentiment surveys and inflation expectations reports, indicate a sharp decline in optimism. Investors have pivoted more defensively and the huge rally in gold is indicative of a flight to safety that hasn’t included Treasuries. Then there’s that pesky little issue of tariffs that has many worried that things are simply going to get too expensive and they’ll be forced to cut back on spending whether they want to or not.
This week’s Q1 GDP report also takes into account activity through the end of March, but the impact of the Trump tariffs can clearly be seen. For the first time in three years, the U.S. economy contracted, shrinking by -0.3% and well below consensus expectations for 0.3% growth (although estimates were all over the place).
While the headline number may look like there was only a modest contraction in activity, there was a lot of variability within the report itself. The number probably wouldn’t have looked that bad except for one major factor - the Trump tariffs.
Net export activity cut nearly 5% off Q1’s GDP growth figure.
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