Market Week in Review digital banner

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

2025-05-02

BeiChen Lin, CFA, CPA

BeiChen Lin, CFA, CPA

Director, Head of Canadian Strategy




Find other posts with these tags:
Economic insights
Market insights
Hello everyone and welcome to market weekend review for the week ending May 2nd, 2025. My name is Bean Lynn. I'm a senior investment strategist and head of Canadian strategy here at Russell Investments. On this week's edition of Market Weekend Review, we'll be discussing three major topics. First, what should investors know about US GDP activity in the first quarter and why we think the US economy was still relatively resilient despite this news? Second, we'll talk a little bit about some of our watch points going forward and why do we think economic uncertainty continues to remain elevated. And finally, we'll wrap up with a discussion of why we think diversification continues to be so crucial. So, let's get started. In terms of the US GDP, the latest data from the Bureau of Economic Analysis suggests that the US GDP actually shrank in the first quarter, contracting at an annualized pace of 0.3%. Now, this was the first contraction since 2022. And while ordinarily a contracting GDP would imply economic softness, I think it's important to note that this time around there might have been some special factors at play. We know that the US government decided to impose tariffs on a wide variety of imports. And likely one of the things that happened is ahead of that tariff imposition deadline, some consumers and businesses likely decided to accelerate or pull forward their imports. And because of that, we actually saw imports rise during the first quarter. And that surge in imports likely weighed down on the overall headline GDP numbers. When we look at other components within the GDP report, for example, personal consumption expenditures or private domestic final demand, those two measures suggest that US economic activity was actually still quite resilient in the first quarter. And when we look at things like earnings, for example, S&P 500 companies generated earnings growth of around 13% year-over-year in the first quarter, which is above the longer term average earnings growth rate of around 8%. In addition, the unemployment rate remained relatively low in the first quarter as well. And so we have all these signs that still point to economic resilience in the first quarter. Now, one of our key watch points then is what happens in the second quarter. in the third quarter and the fourth quarter of this year and this is where I think it's important to highlight this hard data versus soft data divergence. So when we look at the hard data like the earnings numbers like the layoff picture that suggests that the US economy has still been robust but when we look at the soft data which is things like surveys and sentiment that suggests that people are getting a little bit more worried about the economy. So, for example, the Conference Board's measure of consumer confidence that fell to a 5-year low, and that mirrors a similar story from the University of Michigan's consumer sentiment survey, which also fell to some relatively low levels in its longerterm history. So, there are some signs that consumers are getting a little bit more worried. And the key question going forward is what do consumers do if they get more worried? Do they end up still spending or do they end up end up pulling back on some of their spending? Because if they do pull back on spending that then that can potentially adversely impact business profit margins and could lead to a cycle where ultimately we see the number of layoffs rise. And so there is a lot of uncertainty going forward. And in fact, some companies in their earnings reports even decided to suspend forward-looking guidance because there's so much uncertainty in the economic picture. Now, one of the continued watch points going forward is going to be what happens with the tariff situation. And we do continue to think that there is a strong case to be made that the US government is likely using these tariffs as a form of a negotiating tool. And in fact, we've even heard some statements out of the US government this week that they were optimistic that perhaps there could be some trade deals that would be reached within the next couple of months from now. But it is a watch point going forward and we do need to continue to monitor that situation very carefully. We continue to think that economic risks remain above average. And in fact, we think the risk of the US economy tipping into recession is higher than the longerterm average. We think that the US the risk of the US economy tipping into recession over the next 12 to 18 months is about 40%. And we think that the cyclical risks might be even higher outside of the US. So how should investors navigate this uncertain environment? We continue to think that diversification remains a powerful tool. To give you an example, even though we think that cyclical risks are higher outside of the US, we think that equity valuations in places like Canada or Europe are actually better than equity valuations in the US. And I think that's one of the reasons why you've actually seen equities in those regions outperform US equities despite the higher cyclical risks. We also saw infrastructure, a very defensive asset class, outperform traditional equities year-to- date. So, I continue to think having a well- diversified portfolio is going to be crucial. Thanks for tuning in and we'll see you next time. Hi, I'm Sophie Antal, head of portfolio and business consulting at Russell Investments. If you liked what you just saw and heard, consider subscribing to our YouTube channel or check us out on LinkedIn. Thanks for tuning in.

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. 

More to it

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.

Choices, choices

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. 

Powerful tool

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.

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

This material is not an offer, solicitation or recommendation to purchase any security.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.

Diversification and strategic asset allocation do not assure a profit or guarantee against loss in declining markets.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

The Russell Investments logo is a trademark and service mark of Russell Investments

Any statements of opinion expressed within this publication are that of Russell Investments and are current at the time of issue. The information and opinion given in this publication is given in good faith. All opinions expressed are subject to change at any time. Russell Investments nor any of its staff accepts liability with respect to the information or opinions contained in this publication.

All investments carry a level of risk and do not typically grow at an even rate of return and could experience negative growth.

Any past performance results should not be seen as a guide to future returns. Any scenarios presented are an estimate of future performance based on evidence from the past on how the value of an investment varies and are not an exact indicator.

In EMEA this content is suitable for Professional Clients Only.

Russell Investments is committed to ensuring digital accessibility for people with disabilities. We are continually improving the user experience for everyone, and applying the relevant accessibility standards.

Russell Investments' ownership is composed of a majority stake held by funds managed by TA Associates Management, L.P., with a significant minority stake held by funds managed by Reverence Capital Partners, L.P. Certain of Russell Investments' employees and Hamilton Lane Advisors, LLC also hold minority, non-controlling, ownership stakes.

Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the "FTSE RUSSELL" brand.

Issued by Russell Investments Limited. Company No. 02086230. Registered in England and Wales with registered office at: Rex House, 10 Regent Street, London SW1Y 4PE. Telephone +44 (0)20 7024 6000. Authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN.

© Russell Investments Group, LLC. 1995-2026. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an "as is" basis without warranty.

CORP-12781