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Updated 6:10 p.m. EST
There has been considerable debate regarding the likelihood of a recession in 2025. Those who think it's unlikely point to a historically low unemployment rate and wage growth remaining above inflation, while those in the recession-is-likely camp point to sticky inflation, cracks in the jobs market forming, and tariff uncertainty.
The latest economic activity data, released on April 30, increased the potential for a recession this year.
Related: Veteran fund manager resets stock market forecast after oversold rally
Gross domestic product, or GDP, clocked in at a negative 0.3% in the first quarter, according to the advance estimate from the Bureau of Economic Analysis.
The contraction in first-quarter activity sent shockwaves through the stock market, which had been clawing back losses from early April following President Trump's "Liberation Day" tariff announcement.
The S&P 500 and tech-heavy Nasdaq Composite opened 2% and 3% lower, respectively, before recouping most of their losses on the realization that the GDP figures may be less worrisome than they appear.
The S&P 500 finished trading up 0.15%, and the Nasdaq Composite closed down 0.09%.
The US economy walks a tightrope.
The economy was already showing signs of fatigue before President Trump's tariffs, given that sticky inflation and unemployment were creeping higher.
The tariff announcement, however, included reciprocal tariffs much higher than most economists and market participants expected, forcing them to reset their outlooks for corporate revenue, profit growth, and stock market valuation.
The 23% rally in the S&P 500 index in 2024 was primarily driven by the twin forces of expectations of a shift in the Fed's monetary policy to focus on jobs rather than inflation and artificial intelligence spending growth, which fueled tech stock returns.
Unfortunately, neither of those things is helping stocks this year.
Last fall, the Fed shifted to interest rate cuts to prop up the jobs market, only to hit the pause button when inflation showed signs of re-exerting itself. Meanwhile, concern is mounting that AI spending is due for a reset after a massive surge that substantially increased compute capacity.
Tariffs adding gasoline to the inflationary fire, while unemployment worsens, puts the U.S. economy (and the Fed) in a tough spot.
The Fed's dual mandate to drive low inflation and unemployment is often at odds; this year, the dynamic is arguably more challenging than in the past.