Is Economic Growth Down Shifting?

Week in Review

The U.S. economy has shown signs of decelerating as it enters the first quarter of the year. Indications of softer consumer spending, coupled with waning confidence reflected in sentiment surveys, suggest a slowdown. While a dip in growth during the first quarter is not uncommon, what sets this period apart is the backdrop of significant policy uncertainty related to tariffs, government funding, and cost-cutting measures.

Fortunately, the U.S. economy began the year robustly, outperforming trend growth rates. At present, a recession does not seem imminent, and economic momentum might gain traction later in the year if tax reforms or deregulation gain priority. The Atlanta Federal Reserve's GDP tracker predicts a steep decline to a -2.4% annualized growth rate for the first quarter, a sharp fall from its earlier estimate of 3.9%. This downward shift can be largely attributed to a spike in imports, as companies rush to build inventory in anticipation of potential tariffs. However, this trend is unlikely to persist beyond the near term and should stabilize and potentially reverse. Additionally, consumption forecasts have been revised downward, expected to slow to 0.4% from a previous high of 4.1%. Given that consumption accounts for approximately 70% of U.S. GDP, a persistent slowdown in consumer spending could significantly dampen economic growth over time.

In the financial markets, a cautious stance has become apparent. Defensive sectors such as healthcare and consumer staples are ascending, whereas high-momentum sectors like technology are lagging. Bond markets have offered some relief, with Treasury yields plummeting since January, although recent trends indicate stabilization. This shift is partly due to anticipated additional Federal Reserve rate cuts factored into the market. Notably, market rotations suggest investors are adopting a more defensive approach across asset classes. In the stock market, defensive or "recession-proof" sectors are exhibiting strength, particularly healthcare and consumer staples. In contrast, sectors with recent strong momentum and high valuations, like technology (dominated by Apple, Microsoft, and NVIDIA) and consumer discretionary (led by Amazon and Tesla), are falling behind.

Economic & Earnings Calendar

Earnings season is set to wind down this week with several key companies reporting their quarterly results.

On Monday BioNTech and Vail Resorts report. As the week progresses, additional reports are anticipated from Dick's Sporting Goods, Kohl's, Adobe, Dollar General, DocuSign, and Ulta Beauty.

On Wednesday, the CPI inflation report is scheduled to be released with expectations that it will come in at 3.2%. PPI, or business inflation, for February will be released the following day and is expected to come in at 3.5%. There is a mix of tailwinds and headwinds to these numbers. We have seen both expectations of tariffs ramp up, offset by concerns around government job cuts and detonating consumer sentiment.

As of now there are expectations of an additional 0.75% in rate cuts for the remainder of 2025. The market expects the next round of cuts to occur in June, but this week’s data will help lay out the pace for the rest of the year.

Chart of the Week: Trade policy uncertainty is above recent historical highs

Disclaimer: The author of this blog is a financial advisor but may not be the right advisor for you. In fact, the author may not even be the right advisor for themselves. Please consult a qualified professional before making any financial decisions based on the content of this blog. And remember, just because the author has a fancy title and a briefcase full of spreadsheets, doesn't mean they know what they're doing.