Blow-off Top Coming? GDP Contracts, Jobs Weaken, Inflation Eases

The U.S. economy hit a rough patch in the first quarter, with GDP shrinking at a 0.3% annualized rate, according to the Bureau of Economic Analysis. Despite this contraction, underlying growth showed resilience, as real final sales to private domestic purchasers climbed 3%, slightly up from 2.9% in the prior quarter. Personal spending grew at a modest 1.8% rate, the weakest since mid-2023, while durable goods purchases plummeted 3.4%, the steepest drop in over three years. Fixed investment surged 7.8%, driven by a 22.5% spike in equipment spending, likely tied to preemptive moves ahead of anticipated tariffs.

April’s ADP employment report signaled a sharp slowdown in hiring, with private employers adding just 62,000 jobs, well below the expected 125,000 and down from 147,000 in March. This marks the weakest report since last summer’s hurricane-disrupted figures. While ADP’s track record is uneven, it sets a cautious tone for the upcoming official jobs report, where economists anticipate 130,000 new jobs and a steady 4.2% unemployment rate. Rising unemployment could give the Federal Reserve room to ease rates, especially as tariff-driven inflation looms.

March offered a reprieve on inflation, with the Fed’s preferred core PCE price index unchanged, lowering the 12-month rate to 2.6%, as forecasted. This tame reading helped the S&P 500 trim losses, dropping 1.6% after an earlier 2% slide. However, Q1’s core PCE inflation ran hotter than expected at 3.5%, against forecasts of 3.1%. Wage growth remained moderate, with Q1 compensation costs up 0.9%, aligning with the Fed’s view that wages aren’t fueling inflation. S&P 500 futures fell 1.4%, and the 10-year Treasury yield rose to 4.21%, hinting at stagflation concerns as tariff impacts approach.