U.S. GDP declined by 0.3% in the first quarter. This is the first GDP contraction since the first quarter of 2022.
Last month our market commentary was titled: “Many Very Large Moving Parts”. That theme carries forward here. The headline GDP report appears to be a relatively small number but there were several significant changes in large components of the GDP calculation. The two most significant:
- Imports soared 41.3% which subtracted 4.8 points from GDP
- Gross private domestic investment surged 21.9% which added 3.6 points to GDP
One of the largest components of GDP is consumer spending. Personal consumption expenditures increased 1.8%, versus 4.0% in the fourth quarter. The PCE component contributed 1.21 percentage points to real GDP growth in the first quarter versus 2.70 percentage points in the fourth quarter. This slowdown is one of the warning flags we pointed to a month ago, when evaluating the increasing odds of a recession. Consumption continues, but at a slower pace.
Here is a Broader Summary of the First Quarter GDP Components:
Exports increased 1.8% versus decreasing 0.2% in the fourth quarter. However, Imports soared 41.3% versus decreasing 0.2% in the fourth quarter. The surge in imports is tariff related, as companies sought to front run the cost increase. Net exports subtracted 4.83 percentage points from real GDP growth.
Personal consumption expenditures increased 1.8%, versus 4.0% in the fourth quarter. The PCE component contributed 1.21 percentage points to real GDP growth in the first quarter versus 2.70 percentage points in the fourth quarter.
Gross private domestic investment surged 21.9% after sliding 5.6% in the fourth quarter. Gross private domestic investment contributed 3.60 percentage points to growth versus subtracting 1.03 percentage points in the fourth quarter. While it may seem intuitive to assume this increase in investment is due to companies responding to the changing dynamics of global trade from tariffs, a large portion of the increase can be attributed to Boeing’s strike end. Business investment in equipment surged 22.5 percent in response.
Real final sales of domestic product, which excludes the change in private inventories, decreased 2.5% after increasing 3.3% in the fourth quarter.
The personal savings rate as a percentage of disposable personal income jumped to 4.0% from 3.7% in the fourth quarter.
The PCE price index increased 3.6% versus 2.4% in the fourth quarter. The core PCE price index, which excludes food and energy, increased 3.5% versus 2.6% in the fourth quarter.
Government spending declined 1.4% versus a 3.1% increase in the fourth quarter. Government spending subtracted 0.25 percentage points from growth versus contributing 0.52 percentage points in the fourth quarter. This is the first retraction in government spending since the second quarter of 2022, and a trend that is expected to continue as government spending is paired back from historic highs.
What It Means For Our portfolios
One of the benefits of fundamental asset management is the stability of the strategy, and insulation from much of the noise investors see in the financial media. Rather than chasing short-term trends, which may or may not develop, fundamentally-rooted portfolios are positioned through measurable data and clear-cut developments in the markets and their underlying sectors.
Today, AAMA’s equity portfolios remain focused on large cap companies, with a tilt toward defensive sectors and an emphasis on balance sheet quality. While the market is widely overvalued, there are segments of the market with stronger earnings forecasts and/or lower earnings and price volatility. Healthcare is an example, with a double-digit earnings growth forecast, moderate short- and long-term price volatility, and just half the earnings volatility of the S&P 500.
AAMA’s income portfolios remain positioned in short-term and high-quality debt instruments — a strategy initiated several years ago to reduce the risk to principal in a rising rate environment. The prolonged inflation fight provides confirmation for our fixed income positioning, which has avoided much of the volatility recently seen in longer-maturity bonds.
For additional market insight, we encourage you to download our Q1 2025 Market Update. Click here to find our most recently published commentary.
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The information and opinions in this report have been prepared by the investment staff of Advanced Asset Management Advisors (AAMA). This report is based upon information available to the public. The information herein is believed to be reliable and has been obtained from sources believed to be reliable, but AAMA makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this report constitute AAMA’s judgment and are subject to change without notice. This report is provided for informational purposes only. It is not to be construed as a recommendation to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction in which such an offer or solicitation would violate applicable laws or regulations.
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