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Muddied GDP report leaves investors with little clarity about economic risk
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Muddied GDP report leaves investors with little clarity about economic risk
May 25, 2025 10:58 PM

NEW YORK (Reuters) -Investors were left with little clarity on Wednesday about the health of the U.S. economy despite a fresh report on gross domestic product, with the fallout from President Donald Trump's sweeping tariffs muddying growth signals.

On its face, the first-quarter data showing the first U.S. economic contraction since 2022 was alarming and brought immediate pressure on U.S. stocks. 

But some economists had braced for an even deeper contraction and were encouraged by the data. The weakness stemmed from a surge in imports as businesses sought to avoid higher costs from the new tariffs, a phenomenon that many analysts said was poised to reverse in coming months.

Investors faced a similar position as they had before the highly anticipated report, vulnerable to twists and turns in Trump's very much unresolved trade war that stood to keep markets on edge and the potential for a recession still on the table.

"There's just massive distortion and volatility in the economic data right now because of the pull-through of tariffs," said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management. The GDP report "doesn't help shake off this economic contraction fear that has been gripping markets."

U.S. gross domestic product fell at a 0.3% annualized rate last quarter. Imports jumped at a 41.3% rate, resulting in a large trade gap that chopped off a record 4.83 percentage points from GDP.

"It's more frustration for the long term investor because you're not getting a really good read on what the actual economy is doing," Mark Hackett, chief market strategist at Nationwide. "We need to know what's happening in the economy ... and reports like this don't give us a lot of useful data on that."

Larry Werther, chief U.S. economist of Daiwa Capital Markets America, said he was encouraged that consumer spending, which accounts for more than two-thirds of the economy, grew at a 1.8% rate, indicating "the domestic economy was still on track" in the first quarter.

Recession was not Werther's base assumption "but odds of it in the next 12 months have increased substantially" from the start of the year, he said.

Meanwhile, the persistent uncertainty itself poses a risk to markets.

"This period where tariffs are trying to be negotiated and acknowledged by the market makes things extremely difficult to model, predict, etc," said Peter Andersen, founder of Andersen Capital Management in Boston. 

STOCKS FALL AFTER GDP REPORT   

Stock futures fell sharply after the report but major averages pared some of their losses by mid-day. The S&P 500 was last off about 1%, and down 10% from its February record high.

Wednesday's data leaves investors at a crossroads: On the one hand, even allowing for the one-off tariffs-related hit, the growth picture looks lackluster; while on the other hand, with markets braced for the worst, any signs of better-than-expected data in coming months could spark a rally in risk sentiment.

"People are positioned conservatively ... and when that happens, it doesn't take a ton of good news to move the markets pretty violently positive," Nationwide's Hackett said.

In the meantime, investors are trying to position for a variety of outcomes. Lack of clarity on the tariff situation is leading Sonu Varghese, global macro strategist at Carson Group, to favor a "barbell" approach to portfolios, with defensive, low-volatility stocks at one end and high-momentum, growth equities at the other. 

Investors will quickly get another view of the economy on Friday, with the release of the U.S. employment report. 

"Everything else is skewed because of tariffs ... but right now consumption is still holding the economy together," Varghese said.

"If the labor market starts to falter here, then we have a big problem going forward."      

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