A battery of new data shows how the US economy is holding up amid Trump’s tariffs

US Q1 GDP was finalized at -0.5% annualized, with consumer spending growth revised down to a four-year low of 0.5%, primarily driven by a significant trade deficit and tepid demand. Despite this backward-looking weakness and an increase in continuing jobless claims, business investment remains robust, evidenced by a 16.4% surge in durable goods orders and a rebound in non-defense capital goods, partly attributed to recent tariff reductions. While some Fed officials view the labor market as normalizing, the central bank's future policy decisions, especially on interest rates, are expected to hinge more on current labor market dynamics and inflation risks rather than past GDP figures.

Analysis

The latest US economic data presents a conflicting picture, marked by weak backward-looking indicators and more robust forward-looking signals. The third and final estimate for Q1 Gross Domestic Product (GDP) was revised downward to an annualized rate of -0.5%, worse than the -0.2% previously reported. This decline was largely driven by a significant trade deficit and a notable slowdown in consumer spending, which grew at just 0.5%, its weakest pace in over four years. Concurrently, the labor market is showing potential signs of softening, with continuing jobless claims rising to 1.974 million, the highest level since November 2021. However, contrasting this weakness, business investment appears resilient. New orders for durable goods surged 16.4% in the last reported month, while a key proxy for business investment—non-defense capital goods orders excluding aircraft—rebounded 1.7% in May. This strength is partly attributed to a de-escalation in trade tensions, with specified tariff reductions between the US and China. Market participants and the Federal Reserve appear to be discounting the poor GDP figure as historical data, focusing instead on the more current indicators of business investment, inflation risks, and the labor market to guide future policy decisions.

Key Decisions for Investors

• Investors should prioritize forward-looking indicators such as monthly labor reports and inflation data over the backward-looking Q1 GDP, as these metrics will more directly influence Federal Reserve policy and near-term market direction.
• Given the sharp rebound in durable goods orders following tariff reductions, consider monitoring or adjusting positions in trade-sensitive sectors like industrials, as they remain highly reactive to developments in US-China trade policy.
• The significant downward revision in consumer spending to a four-year low warrants a cautious stance on consumer discretionary stocks, pending further data on the health of the labor market and household spending.
• With the Fed described as divided and key economic drivers heavily influenced by fiscal and trade policy, investors should anticipate continued policy-driven market volatility and maintain a flexible portfolio posture.