Consumers Unfazed, for Now, as U.S. GDP Shrinks

Key takeaways

• The U.S. economy shrank in Q1
• Economic uncertainty is high
• Diversification can be crucial in uncertain times

On the latest edition of Market Week in Review, Senior Investment Strategist and Head of Canadian Strategy, BeiChen Lin, unpacked the first-quarter U.S. GDP (gross domestic product) report. He also shared key watchpoints for investors and explained the value of diversification in times of uncertainty. 

Lin started by noting U.S. GDP shrank during the first quarter, contracting at a 0.3% rate year-over-year. Normally, a negative GDP reading would imply economic softness, but in this case, there might have been some special factors at play, he said.

Lin explained that U.S. imports surged during the first quarter as businesses and consumers tried to get ahead of the Trump administration’s tariffs. Imports are subtracted from headline GDP, which helped drag U.S. growth into negative territory.

A look at other components of the GDP report suggests economic activity remained resilient during the first quarter, Lin said. “This includes personal consumption expenditures and private domestic final demand,” he remarked. In addition, S&P 500 earnings growth for the first quarter is tracking around 13%—above the long-term average of 8%—while the U.S. unemployment rate remains relatively low.

Lin said one main watchpoint moving forward will be whether “hard” data and “soft” data continue to diverge. The latest hard data—like corporate earnings and layoffs—suggests the U.S. economy remains robust. Meanwhile, the latest soft data—including surveys and sentiment indicators—implies consumers are growing more worried about the economy.

“The burning question is, what will consumers do if their concerns continue to mount? Will they keep spending or cut back? If consumers start to rein in their spending, this could impact the profit margins of businesses, which could lead to a rise in layoffs,” Lin explained. He added that with so much economic uncertainty, some companies have even omitted forward-looking guidance from earnings reports.

The tariff situation is another major watchpoint in the months ahead, Lin said. “I believe there’s a good case to be made that the United States is using tariffs as a negotiating tool,” he remarked, adding that U.S. officials have expressed optimism that some trade deals may be reached soon. 

Lin finished by noting U.S. recession risks continue to look higher than normal. “I think there’s about a 40% chance of a recession in the next 12-18 months,” he stated. Outside of the U.S, the odds are likely even higher, Lin added.

Diversification remains a powerful tool for investors amid all this uncertainty, he said. As proof, Lin pointed to Canada and Europe, where stocks have outperformed their U.S. counterparts despite higher recession risks. Infrastructure, which is a very defensive asset class, has also outperformed traditional equities so far this year.

“Ultimately, I continue to believe having a well-diversified portfolio will be crucial in the months ahead,” Lin concluded.