Markets had a positive week, with the major indexes advancing in the +3% range despite a slowing economy and less than stellar corporate reports. As of Friday (May 2nd), the S&P 500 notched its longest daily winning streak (nine sessions in a row) since November ’04, bolstered by a solid jobs report and talk of a thaw in U.S.-China trade tensions.1 12 Still, for the year to date, all the major indexes remain in the red.
Six of the Magnificent 7 advanced on the week led by Microsoft’s (MSFT) +11% and Meta’s (META) 9% advances. Only Apple (APPL) ended the week in the red. Of the seven, only two (MSFT and META) are positive year to date.12
Slowdown
Our past blogs have chronicled the emerging weakness in the economy. So, it wasn’t a surprise to us that Q1 GDP growth showed red (-0.3%).2 3 13 While that alone doesn’t mean the economy has entered a Recession, it does mean that the potential for one is non-trivial. In addition, the initial GDP report has a significant number of assumptions that appear too generous (e.g., capex growth at +22.5% annual rate). So, we expect that Q1 GDP will be revised even lower.
In addition, weakness is now showing up in major corporate earnings reports. For example, in Q1, McDonalds (MCD) saw a -3.6% sales contraction in its U.S. stores and -3.0% for its total worldwide business. Coca-Cola (KO) also saw a -3% volume decrease in its North American operations (and -2% in its total worldwide business). Even Starbucks reported a -3% fall in its total worldwide sales. When the consumer slows such purchases, it has always been a sign of trouble.
The Nonfarm Payroll report indicated that payrolls continued to grow (+177K) in April, very close to the +185K March number.4 Those seem like solid numbers. But, beneath the veneer, things are not all rosy. Challenger Gray and Christmas reported that layoff announcements were +63% higher in April 2025 than they were a year earlier (April 2024), that April’s layoffs were three times the historical April average, and that the only April data that showed up with more layoffs occurred in 2020 (Pandemic), 2009 (Great Recession) and in 2001-03 (Tech Wreck).5 14
Expectations
What is of even more concern are the expectation indexes, as these are leading indicators. The first chart shows the University of Michigan’s Consumer Sentiment Index. The right-hand side of the chart shows a rapid deterioration in sentiment to the levels that persisted during the early days of the pandemic.6
The next chart, from the Conference Board, shows 6-month Expectations regarding business conditions, specifically, expectations for worsening business conditions. Note that such expectations are worse now than they were during the initial days of the pandemic.
As noted earlier, non-farm payrolls appeared to be solid for April. The JOLTS (Job Openings and Labor Turnover Survey), however, seems to indicate a much tighter job market going forward. Job openings fell by -288K in March on top of the -282K February fall.8 And the following chart indicates that consumers expect that there will be fewer jobs available in the near future.7
From these charts it is clear that the consumer has become worried about the economic future, and when that happens, history tells us that savings rise and consumption stagnates/falls. The negative -0.3% fall in Q1’s GDP along with current consumer psychology suggests that Q2’s GDP growth will also be negative. The Conference Board’s Leading Economic Indicators also continue to suggest that the period of economic weakness will be with us over the near-term.
At this point it is impossible to assess what the magnitude of the economic slowdown will be. But, for sure, a slowdown is coming (or has already arrived).
Inflation and the Fed
The “Core” Personal Consumption Expenditure (PCE) Index showed up at 0.0% in March (+2.6% year/year).9 Chairman Powell’s “Super-Core” index (services ex-housing ex-energy) was -0.5% in April and +0.15% for services (smallest services print since November ’20!!).11 The CPI actually contracted slightly in March, the first contraction since July ’22, and its annual growth rate fell to 2.41%.9 A continuation of the March performance for the rest of the year will put the annual rate of inflation at 2.00% in May (this month!) and at a meager +0.35% by year’s end. That will be too low for the Fed, so expect significant easing in monetary policy if such a trend continues.
The Fed meets on May 6-7. Chairman Powell has indicated that the Fed would like to see “hard data” before it acts.11 That is, the sentiment indexes alone aren’t enough to convince the Fed to act, nor apparently, are the Leading Economic Indicators. Since Fed actions take several months to have an economic impact, one would think it would be wise for the Fed to act on those leading indicators rather than wait for the economic slowdown (contraction) to appear. This way the impact of those actions will be better timed to the slowing economy. Our view is that the Fed should continue to lower rates, the sooner the better. Nevertheless, based on Chairman Powell’s rhetoric, we would be surprised if that were the outcome at the Fed’s May meeting.10
Final Thoughts
The economy is like a freight train in that it takes quite some time from an initial stimulus to have the desired effect. The slightly negative Q1 GDP along with the poor readings in the sentiment indexes should be enough of a signal to the Fed to continue to lower rates, as economic momentum is clearly slowing.
At this writing, market odds for a May rate cut are miniscule (3.2%). For June’s meeting, the market odds appear better (36.7%) but still on the low side.10
(Joshua Barone and Eugene Hoover contributed to this blog.)