(Reuters) – The U.S. economy contracted in the first quarter, weighed down by a deluge of goods imported by businesses eager to avoid higher costs, underscoring the disruptive nature of President Donald Trump’s often chaotic tariff policy.
Gross domestic product decreased at a 0.3% annualized rate last quarter, the Commerce Department said in its advance estimate on Wednesday. Economists polled by Reuters had forecast that GDP increased at a 0.3% pace in the January-March period.
The survey was, however, concluded before data on Tuesday showed the goods trade deficit surged to an all-time high in March amid record imports, which prompted a sharp downgrade of GDP estimates. The economy grew at a 2.4% pace in the fourth quarter.
MARKET REACTION:
STOCKS: S&P 500 emini futures extended to a 1.27% loss, pointing to a weak open on Wall Street
BONDS: U.S. Treasury 10-year yield moved to at 4.1946% and the two-year yield rose to 3.658%
FOREX: The dollar index turned 0.21% lower
COMMENTS:
BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN
“Weak private sector payroll growth, faster inflation than expected, and a negative GDP print all point in the direction of stagflation. To get the stagflation of the late ’70s and early ’80s would require much higher unemployment and inflation, so this is more of an aroma of stagflation than an actual stench of stagflation.
“On the surface, the negative sign on GDP growth is upsetting, but final sales to domestic purchasers increased at a pretty decent 3% annualized pace. The surge in imports showed up mostly in information processing equipment and is in the “investments” bucket of GDP.
“It’s unfortunate that the convention is to focus on spending instead of production. In GDP, the P stands for production, not spending. To back into actual production, they subtract out imports, so it perpetuates the myth that imports are a bad thing.
“Real Gross Value Added is a better way to look at actual production instead of spending. Those details show where the real pain is being felt. Business value add fell 0.65% with farm value add falling a massive 35%. Federal government value add fell 1.6%.”
ROBERT PAVLIK, SENIOR PORTFOLIO MANAGER AT DAKOTA WEALTH IN FAIRFIELD, CONNECTICUT
“Inflation is up. The economy is slowing more. It’s not a great environment for the equity market. GDP is backward looking but it doesn’t portend good information going forward not with the environment we’re currently in. There’s still uncertainty with the trade tariffs being high, and uncertainty around what’s going to happen.”
“People are pulling back on spending. People not being sure about their jobs. If you’re unsure about your job you’re certainly not going to be making major purchases or life changing decisions as far as purchases are concerned.”
WASIF LATIF, PRESIDENT AND CHIEF INVESTMENT OFFICER, SARMAYA PARTNERS, PRINCETON, NEW JERSEY
“It’s a surprising number to the market on the downside. This is sort of in line with what we’ve been anticipating that we might be entering into a 70s-like scenario with weakening economic growth and still sticky, persistent inflation. That’s where you are seeing the response between bond yields moving up and equities going down. But we do need to take a step back because there is some noise in this GDP report because of the pull forward activity on inventory build and then the shipments of gold that impacted the international trade number that goes into the GDP data.”
LOU BRIEN, MARKET STRATEGIST, DRW TRADING, CHICAGO
“When you look to real final sales, which fell 2.5%, that’s the GDP not counting the inventory data, that’s a significantly weak number. It’s the weakest since the pandemic period and prior to the pandemic you have to go back to 2009 to find a quarter that has a weaker real final sales. So I think that’s probably the reason for the bonds to jump initially, but reconsidering, they probably looked over to the inflation measures, the GDP deflator and the PCE core, both significantly higher than anticipated. And so there was a little bit of a push me pull you on the bond market as a result of the report.”
PETER ANDERSEN, FOUNDER OF ANDERSEN CAPITAL MANAGEMENT, BOSTON
“There shouldn’t be a surprise, but the market is acting as if it is a surprise. This period where tariffs are trying to be negotiated and acknowledged by the market makes things extremely difficult to model, predict, etc. When the market cannot make a reasonable prediction, it tends to turn to the pessimistic interpretation of things.”
PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK
“The economy has shown negative growth, which means that we are probably already in a mild recession, or we’re about to enter a mild recession.”
“That’s obviously bad news but I would kind of think that the market has been already discounting the possibility of a mild recession now.”
“We got to these numbers because of Trump’s policies, right? They’ve created uncertainty and when you create uncertainty, nobody’s going to put their foot on the accelerator, and we’re seeing that as the earnings come out, right? Guidance has been pulled back.”
“So Trump’s policies have created this. But you know, he himself many times has said we might be headed for recession. He’s not denied that. Is he going to take a victory lap with these numbers? No, of course not.”
“But these numbers may accelerate the administration in perhaps reversing the tariff policy, and that would psychologically be a big boost to the economy.”
“I think the damage has already been done and so no matter what they do now, they just have to hope that the recession is not a steep one and that the there is a positive ending to the tariff situation. That’s what the administration needs to hope for at this point.”
JAMIE COX MANAGING PARTNER, HARRIS FINANCIAL GROUP, RICHMOND VIRGINIA.
“I’m not surprised the headline GDP print wasn’t worse, given the surge in imports. Underneath, however, real final demand remains super strong. Those who underestimate the US consumer, do so at their own peril.”
(Compiled by the Global Finance & Markets Breaking News team)
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