Transitionary times call for vigilance
If I had it my way, I would love to spend my days watching markets and analyzing economic news. Poring through investment trends and economic data is my professional happy place. Reality though is clients need planning and service, teammates need collaboration and decision making, and I typically have three to five schedule items a day. Not to mention the always overflowing email box providing a constant stream of noise and busyness in the background.
So, when the headline flashed over the screen "GDP shrinks in the first quarter," all I had time to do is think "here we go" -- the recession flashing since 2022 has finally arrived. For a quick refresher, Gross Domestic Product or GDP is the measure of domestic production and consumption in an economy. This is obviously a difficult metric to measure, so the government typically releases GDP in an advance estimate and then the numbers are later revised, sometimes considerably, over time. These headlines involved the advance GDP estimate, indicating economic output in the U.S. had contracted 0.3% in the first quarter of 2025.
My email box filled up. Investors already anxious from recent stock market volatility and the non-conventional Trump administration felt validated and were further agitated by the headline. I spent the better part of my unscheduled afternoon time responding to nervous clients. That's the job.
It was days later when I got to go to my happy place and dig into the headline to see what this 0.3% contraction looked like under the rug. I like to go to the Bureau of Economic Analysis directly for the deeper dives to GDP, as the myriad of pundit coverage of news involving economics has turned excessively inflammatory during the early months of the Trump administration. Unbiased analysis is difficult to find.
The first thing noticed when looking below the headline is the 0.3% negative change in GDP was an annualized number -- the actual contraction during the first quarter was less than negative 0.1%. Understanding the nature of GDP revisions, a "print" this small was not likely to persist through the entire revision process, so I was already doubting the usefulness of the headline.
Moving deeper into the BEA release, the contraction in economic activity was clearly identified as a result of higher imports and lower government spending. It's a bit confusing, but imports sold into the U.S. are actually a negative contributor to GDP calculations. Because GDP measures economic output of goods and services produced in the United States, anything produced outside the U.S. and consumed here is subtracted from domestic production numbers. Strange, I know, but also consistent across time.
The BEA's website noted a surge in imports in the first quarter as importers attempted to front run the tariff conversation and build inventories before the effect of these new policies went into force, which of course makes perfect sense, and is also a little less scary than the headline indicates.
The second contributor to the negative GDP headline was a decrease in government consumption. Interestingly, the decrease in government spending was not sourced in local or state governments, which showed increased spending in the quarter, but was instead totally concentrated in Federal expenditures.
This also makes sense, considered in the context of DOGE and some of the very important changes occurring at the Treasury department. While Federal downsizing of employment rolls and some of the more provocative cuts with departments like Education and USAID get all the attention, fundamental reform is also occurring with government payment and information management systems which is likely to continue to lead to spending contractions.
I recently watched an interview with Treasury Secretary Scott Bessent in which he stated nearly a third of payments processed by the U.S. Treasury in 2024 were issued without an appropriation tracking process, which said simply means no one is documenting where the funding was authorized or why the payment was issued.
While the conspiracy theorist in me envisions hidden underground government bases and secret UFO testing programs, reality is more likely fraud and waste. As payment systems within the government are modernized, continued reductions in spending are the likely result. As every dollar spent by the Federal government is taken from someone in the private economy, I can't see how this is a bad thing.
Scrolling through the BEA release further indicated that outside the expansion of imports and contraction in Federal spending, private consumption and business investment both increased during the quarter, so if there is a recession percolating it's not presenting in the private sector just yet.
At the end of the closer look at the GDP headline, I decided there wasn't enough clarity in the advance estimate to impact investment strategies. Our nation and economy continue to be in a transitionary period, and transitions are marked by volatility. As I've said before, investing during 2025 is likely to be more challenging, but sometimes challenging environments can also be more productive. Stay active and stay vigilant.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
