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U.S. stock ETFs bounced off their worst levels Wednesday after disappointing economic reports reignited concerns over President Trump’s trade war and its economic impact.
According to the Bureau of Economic Analysis, the U.S. economy contracted at a 0.3% annualized pace in the first quarter, worse than the 0.2% decline economists were expecting and the first negative quarter in three years. While the headline was undeniably weak, the underlying details of the report were more mixed. In a rush to get ahead of Trump’s tariffs, companies front-loaded imports, leading to a staggering 41.3% annualized surge in goods from abroad. That surge subtracted a whopping 5 percentage points from GDP.
At the same time, those imports helped boost inventories, which added back 2.3 percentage points. Strip out these large, temporary swings, and the economy looked healthier beneath the surface.
Harvard economist Jason Furman estimates that “core GDP”—defined as Final Sales to Private Domestic Purchasers—rose at a 3% pace in Q1, supported by a 1.8% increase in personal consumption, a 9.8% jump in business fixed investment, and a 1.3% rise in residential investment. Still, he warned that some of the strength in business spending may have come from companies pulling forward demand in anticipation of higher tariffs.
Adjusting for that, Furman sees real growth likely in the 2% to 3% range.
Economic Glass Half Full?
That may help explain why markets took the GDP report in stride. The SPDR S&P 500 ETF Trust (SPY) was last down 0.8%, after falling as much as 2.3% earlier in the session. Even at its lows, SPY remained well above its April bottom, with the ETF up more than 10% from that level.
A separate report showing that private employers added only 62,000 jobs in April, well below the expected 115,000, also failed to rattle investors. The official nonfarm payrolls report from the Bureau of Labor Statistics is due Friday, with economists forecasting a gain of 135,000 jobs.
Despite the weaker data, investors appear to be betting that Trump will either backtrack on tariffs or soften their impact enough to avoid tipping the economy into a recession. Hopes are especially high that the administration will scale back the draconian 145% tariffs currently applied to Chinese goods.
Skeptics argue that the damage may already be done or that Trump won’t reverse course. Reports of plunging shipping volumes and deteriorating supply chains add to those fears.
Time will tell which camp is right. But, for now, investors choose to see the glass as half full.