Last night, the U.S. released first-quarter GDP and PCE data, showing a year-on-year GDP growth rate of only -0.3%, far below market expectations, making it feel like the U.S. economy is in trouble.
The PCE data is also absurdly high, and inflationary pressures are still rising.
But strangely, the market only fell slightly and did not experience a significant drop.
What’s going on? Today we will break down the logic behind the data and see why the market is so calm and what signals deserve our attention.
Why is GDP so poor? Is it really a signal of recession?
First, let’s talk about GDP. The annualized growth rate of actual GDP in the U.S. for the first quarter was only -0.3%, which is not only much lower than market expectations but also a significant decline from the previous quarter.
From the data, there does seem to be a feeling that the economy is in trouble. But looking deeper, it's actually not that simple.
There is a key indicator called domestic private final sales, which reflects domestic demand in the U.S. and has increased at an annualized rate of 3%.
What does this mean? Simply put, the public is still spending money, companies are still buying equipment and building, and real estate investment has not stopped. Domestic demand in the U.S. is still quite stable, and the economic foundation has not collapsed.
So why is GDP so bad?
The root cause is Trump's tariff policy. Tariffs have caused import costs to soar, disrupted the supply chain, and directly dragged down economic growth.
In the first quarter, imports surged, which directly dragged GDP down by 5.03%.
Why did imports surge? Companies are also rushing to stock up! They are worried that tariffs will be higher after Trump takes office, making costs more expensive, so they are now frantically hoarding raw materials, similar to how we stock up before Singles' Day, fearing price increases.
Trump himself couldn't sit still either; he publicly stated yesterday that the volatility in the stock market is a problem left by Biden, attempting to shift the blame completely. However, the market doesn’t seem to fully buy that.
However, don’t be too quick to sing the blues. The U.S. consumption growth rate remains around 3%, close to the historical average level, indicating that the public is still spending money, and the economic foundation is not that fragile.
In contrast, tariffs only have a short-term impact; the long-term effects will depend on subsequent policies.
Why is the PCE data so high? Is inflation going out of control?
Looking at the PCE data again, the first quarter PCE data far exceeded expectations, showing that inflationary pressures are still considerable.
Especially the overall PCE data, which makes it feel like inflation is about to take off. But looking closely at the monthly data for March, the situation is a bit different.
In March, both PCE and core PCE year-on-year and month-on-month were below expectations, with month-on-month growth even at 0%, marking the mildest performance in nearly two years. This indicates that inflation may have signs of slowing down in the short term.
So why was the overall PCE still so high in the first quarter?
The main reason is that consumption was too strong. In the first quarter, personal real disposable income saw its largest increase in over a year, and people have money and are willing to spend.
Especially before the tariffs take effect, many people may worry about future price increases, leading them to stock up and increase consumption.
This consumption boom has pushed up the PCE data, but it has also supported the economy.
Therefore, on the surface, the data shows high inflation, but behind it is actually a combination of healthy consumption and short-term inflation slowing down.
This is also one of the reasons why the market did not crash; inflation has not spiraled out of control, and consumption remains stable.
Will the Fed cut interest rates because of negative GDP growth?
Seeing the negative GDP growth, some people began to speculate whether the Fed would have to quickly cut interest rates to save the market.
But the data tells us that things are not that simple.
This negative GDP growth is mainly attributed to the surge in imports caused by tariff policies and has little direct relationship with the Fed's monetary policy.
The 3% growth in domestic demand also indicates that the U.S. economy is not in a dire situation.
Before the GDP data was released, CME predicted a 92.3% probability that the Fed would not cut interest rates in May, and 35.2% in June. After the data was released, the probabilities changed to 94.2% and 36.1%.
This indicates that the market believes the urgency for the Fed to cut interest rates in June is not that high.
The negative GDP growth is a result of disruptions caused by tariff policies; domestic demand is still okay, and the Fed has no reason to take drastic action immediately.
Why hasn’t the market collapsed? What is supporting it?
Yesterday, when the GDP data was released, the market was indeed a bit shocked, with U.S. stocks temporarily falling as investors worried that the U.S. economy might really be slipping into recession.
But by the close, the three major U.S. stock indices rose collectively, indicating that investors were not that panicked. There are several reasons behind this.
First, Trump’s tariff policy has been temporarily shelved. His and Bessent's recent positive attitudes in trade negotiations have reassured the market.
As long as negotiations are ongoing, the uncertainty around tariffs and policies will not completely spiral out of control, and market sentiment will tend to be optimistic.
Secondly, the -0.3% in this instance is only the initial value for the first quarter, and the market has already digested a lot of pessimistic sentiment.
Compared to the Fed’s GDPNow model prediction of -2.7%, this data is actually not that bad.
Moreover, economists define a recession as 'two consecutive quarters of negative GDP growth.' We are only in the first quarter, far from a true recession; subsequent data revisions and second-quarter performance will also be crucial.
Additionally, this week is earnings season for U.S. stocks, with major reports like MSTR coming out tomorrow. If companies perform well, market confidence could rise again.
But now market sentiment has mostly recovered, and investors are starting to want more substantial results, such as real progress in trade negotiations and signing a satisfactory agreement for the market; just talks are no longer enough.
Therefore, the upcoming economic data will become increasingly important.
How will the market move next? What should we focus on?
From the market trend, it is difficult to see a strong rise like last week in the short term, and it is likely to maintain high-level fluctuations while waiting for new driving forces.
Where the market is headed, we need to focus on three things:
First, whether there can be real progress in trade negotiations, such as signing a solid agreement. If the tariff policy remains unclear or even if negotiations collapse, the market may fall back into panic.
Additionally, economic data must also be monitored. Soft data, such as consumer confidence and PMI, has been dismal, while hard data, such as employment, retail, and industrial production, may also face challenges.
The non-farm payroll data on Friday is the highlight of this week, especially the unemployment rate and the number of new jobs.
If the unemployment rate really rises and the number of new jobs falls below 150,000, then it will be troublesome. Falling wages, rising consumption, and increasing unemployment rate—doesn't that signal an economic recession?
Finally, the 10-year U.S. Treasury yield also needs to be monitored. It reflects market expectations for the economic outlook; the greater the volatility, the less confidence there is.
So, the market is also watching and waiting in the short term. The performance of tariff trade negotiations, economic data, and U.S. Treasury yields will determine the direction of this market trend.