A crowd is gathered around the sickbed of the economic expansion. Among the multitude are the workers, consumers and business people who would be most impacted by its demise. There are political partisans too, some fervently praying for recovery, others quietly hoping for the opposite. At the foot of the bed are fiscal and monetary doctors, the former preparing a sugary solution to inject into the patient and the latter casting nervous eyes both on the patient and the fiscal doctors, concerned about a renewal of inflationary fever. Foreign governments and central bankers also stand vigil, from as safe a distance as they can manage, conscious of the infectious nature of the patient’s disease. And close by the door are investors, contemplating a quick exit from American assets but haunted by the memory of the many past remarkable American recoveries. There is a knock at the door. It is the last week in April and a battery of tests are in that should shed further light on the delicate health of the economic expansion.
Growth
First quarter GDP numbers come out on Wednesday and should paint a picture of stagnation. We estimate that real GDP was unchanged in the first quarter, following 2.5% growth in the year ended in the fourth.
Looking at the details, we believe real consumer spending saw a modest 1.1% annualized gain in the first quarter, helped by a March surge in light vehicle sales as consumers tried to buy ahead of tariffs. Investment spending on equipment and inventories likely also contributed to growth and for the same reason. However, first quarter data should show a significant GDP drag from surging imports, as well as federal government cutbacks.
Peeking into the second quarter and beyond, without a quick resolution to the trade war, imports, exports and inventories all look set to fall sharply. Moreover, consumers could slow purchases in the face of higher prices and lower inventories while companies could cut back on hiring, capital spending and travel and entertainment expenses, all dragging on demand. Further federal cutbacks should prevent an overall government spending bounce-back, while tourism will likely be hit by the international reaction to the Administration’s policies. Given all of this, real GDP growth could be very slow, or even negative, over at least the first three quarters of 2025.
Jobs
The other major economic release this week will be the April jobs report, due out on Friday. This will be preceded by other indicators of labor market health including consumer confidence and JOLTS reports on Tuesday, the employment cost index on Wednesday, and jobless claims and PMI data on Thursday. Normally, in an economic slowdown, labor market conditions lag changes in GDP growth. Moreover, there is a further lag between the dates referred to in surveys and the dates when the data are actually published.
In particular, the JOLTS report will describe job openings at the end of March and quits, layoffs and hires during March. The establishment and household surveys used to compile the April jobs report refer to the pay period and the week, Sunday through Saturday, that contained the 12th of the month. Because of this, none of these reports will reflect the full impact of recently declining business confidence.
However, it must also be noted that weekly unemployment claims, a much more timely indicator, still do not show any surge in layoffs. It may well be that businesses that had such a hard time hiring workers over the past four years, are now unwilling to fire them before seeing the whites of the eyes of recession.
Still this is unlikely to last for long in the face of elevated uncertainty and slowing demand and we expect the May jobs report, due out on June 6th, to show more pronounced weakness, corroborated by rising unemployment claims in the intervening weeks. It is possible that the May jobs report will show an outright decline in payroll employment and this could serve as a prelude to a series of small monthly gains and losses in payroll jobs. This could also put some upward pressure on the unemployment rate, although the increase should be tempered by very weak trends in labor supply due to a sharp drop in net migration.
It’s also worth noting that close to zero percent real GDP growth in the first quarter, combined with payroll job gains of roughly 150,000 per month, imply falling productivity. With these data, we estimate that since the end of 2019, productivity in the non-farm business sector has risen at an annual rate of 1.8% while real GDP per worker has grown at a 1.6% pace. While these numbers are broadly in line with productivity gains seen so far this century, they suggest an upper limit to real GDP growth going forward in the absence of any meaningful growth in the labor force.
Inflation
The week ahead will also provide news on inflation and much of it should look benign. We expect year-over-year compensation growth to come in at 3.5% for the first quarter compared to 3.8% for the fourth, while average hourly earnings for April could be up 3.9% year over year, only mildly higher than the 3.8% seen in March. We expect March year-over-year PCE inflation to come in at 2.2%, at the headline level, and 2.6%, excluding food and energy, both down significantly from February.
We do expect to see evidence of rising inflation pressures in the prices paid and vendor delivery components of the manufacturing purchasing managers’ indices on Wednesday. Inflation should then begin to climb in the second quarter, as weakness in energy prices, hotel rates and airline fares is offset by the first impacts of higher tariffs. These impacts, along with the effects of a recently falling dollar, could boost year-over-year CPI inflation to close to 4% by the third quarter.
Profits
Finally, on the data front, the week ahead will be the biggest week of the earnings season, with 180 S&P 500 companies set to report according to FactSet. So far, the results have been unremarkable – with 38% of market cap reporting through last Thursday, 73% had beaten consensus expectations on earnings and 63% had beaten on revenues – very much in line with the long-term averages for these two series.
However, the general tone of earnings calls has been cautious, with airlines and some consumer-facing companies seeing or expecting to see lower demand and many other companies expressing concern about the potential impact of tariffs on exports, supply chains and consumption. FactSet’s compilation of analyst estimates still points to a 9.7% gain in pro-forma earnings for 2025. However, this is down from an 11.3% gain expected as of March 31st and this number will very likely fall further as analysts refresh stale forecasts in light of a slowing economy. All of this should look clearer by the end of the week.
Policy Decisions and Investment Implications
The week ahead will also see general elections in Canada and Australia and local elections in the United Kingdom. Center-left governments are expected to retain control in Canada and Australia, although in both cases, polling seems to be tightening. The UK could see a significant swing against both Labour and the Conservatives, with the more right-wing Reform Party making major gains.
In the U.S., pressure on the Administration will continue to build on the issue of tariffs. The President has said that a further 90-day pause on reciprocal tariffs, (above a 10% universal tariff), is unlikely when the current pause ends on July 9th. However, the reality is that the Administration is very unlikely to complete many detailed trade deals before that date and it is aiming to have a tax package, partly funded by tariff revenue, on the President’s desk by July 4th. Because of this, the White House may have to accept a further pause or retreat on tariffs in order to make meaningful progress in negotiations.
The House Ways and Means Committee is expected to reveal its proposed tax changes in the budget bill in the next few weeks. This will provide both the Federal Reserve and investors with a crucial piece of information, namely, whether this bill will effectively contain fiscal stimulus ahead of the mid-term elections - or not. If it is the former, the Fed will feel quite justified in continuing to hold the federal funds rate in its current range of 4.25% to 4.50% at its May 7th meeting. By the June FOMC meeting, however, there should be enough evidence of economic weakness to justify resuming rate cuts, provided the tariff tide continues to ebb and the budget bill is seen as not being too stimulative.
For investors, the prognosis on the American economy is gloomy but not disastrous. The most likely scenario, at this stage is that, having lingered at the edge of recession, the economy slides into a shallow one later this year. This, however, could set the stage for moderate fiscal stimulus in 2026, which, while further worsening the deficit, should be enough to restart economic growth. The Administration would likely take note of the damage done by tariffs and extreme reductions in immigration and federal government employment and could soften these policies. The Fed, seeing both a moderation in Administration policies and weakness in the economy, could deliver multiple rate cuts while the dollar could continue its decline both due to U.S. economic weakness and Fed rate cuts. All of this should pave the way for a better environment for both U.S. equities and fixed income in 2026.
However, the economy is likely to scare markets before that point and this could well lead to more volatility in both stocks and bonds. In this environment, equities with still-exuberant valuations and bonds with unreasonably tight credit spreads will continue to be vulnerable, pointing to the need for very broad global diversification with a focus on appropriate valuations.