Wednesday's first-quarter GDP report did little to calm fears the U.S. may already be in a recession, or is headed for stagflation, where stubborn inflation is coupled with sluggish growth. Stocks sold off in midday trading Wednesday, though they were off their worst levels of the trading session, after the Commerce Department said first-quarter gross domestic product fell at a 0.3% annual pace. That was a sharp reversal from 2.4% growth in the fourth quarter and the first negative reading since 2022. The GDP report, together with a poor ADP private payrolls report for April, also released Wednesday, unnerved investors who saw the worsening hard data as confirmation of recent weakness in soft consumer sentiment surveys. Combined, they showed the U.S. could be headed for a self-induced recession owing to business and spending uncertainty tied to President Trump's tariffs. "If you were looking for a playbook on how to slow a healthy economy, this seems like a good example," wrote Scott Helfstein, head of investment strategy at Global X. "The continual sequence of policy reversals has led to very high levels of uncertainty for businesses and investors." Canary in a coal mine The first-quarter contraction "should be a canary in the coal mine for the new administration, but perhaps their willingness to inflict economic pain in pursuit of the long-term goals was underestimated," Helfstein added. "Today's data shows more stagflation, with the economy shrinking and prices rising more than expected. Trade was a huge drag as imports jumped ahead of tariffs," wrote David Russell, global head of market strategy at TradeStation. "Combined with the weak ADP payrolls growth and yesterday's weak JOLTs data, the numbers increasingly suggest a recession may have begun." EY chief economist Gregory Daco, warned investors the weak GDP data could be a precursor to even more troubling economic releases ahead. "The contraction was largely a function of economic activity being pulled forward as importers, businesses and consumers rushed to get ahead of the tariff implementation," Daco said. "This artificial front-loading of demand sets the stage for a sharper demand cliff in Q2 — a far more troubling phase of the ongoing economic slowdown." Fed outlook The soft economic reports add to a belief among many investors that the Federal Reserve will be forced to cut rates from their current 4.25 to 4.50%, a tough task when inflation is not yet at the central bank's 2% target. This month, Trump ramped up rhetoric calling for Chair Jerome Powell to lower interest rates, even going so far as to threaten his job. Powell has indicated he's willing to hold interest rates where they are as the Fed awaits more certainty on trade policy. Next week, central bank policy makers will convene for their May 6-7 meeting. Markets were last pricing in four interest quarter-point cuts in 2025, with the first set to come in June, according to the CME FedWatch tool. To be sure, other market observers warn against reading too much into one economic release. Paul Stanley, chief investment officer at Granite Bay Wealth Management, said "the jury is still out" on whether the U.S. is headed for a recession, urging investors to wait for the second and third readings of first- quarter GDP to get a better picture of the economy. Jeffrey Roach, chief economist at LPL Financial, noted "the consumer is too strong to speculate the economy has dipped into recession," reminding investors that a resolution to the trade disputes will remove much of the uncertainty for companies and consumers.
