Fear of Recession Increases as GDP Contracts

Stocks may struggle to resist selling pressure after soggy U.S. manufacturing data

• Economic data from China, Europe and the U.S. points to rising risk of recession.
• Stocks sank as U.S. GDP contracted and then rebounded sharply to erase the sell-off.
• But market resilience may struggle to hold up on soft U.S. manufacturing data.

Macroeconomic data from the world’s most consequential economies is signaling the march toward recession is accelerating. Figures from China, the Eurozone and the U.S.—which together account for 58% of global gross domestic product (GDP)—suggest a broad-based downturn may now be inescapable.

First, official purchasing managers’ index (PMI) data from China showed the economy slowed to near-standstill in April, marking a three-month low for activity growth. Perhaps most critically, the manufacturing sector shrank at the fastest pace since December 2023 as efforts to front-run incoming U.S. tariffs ran out of runway.

Next, a slightly better than expected Eurozone GDP print left the currency bloc in an anemic state. Output grew 0.4% in the first quarter, topping consensus forecasts calling for a rise of 0.2%. The outcome falls near the top of the soggy range in place since the start of 2024, but no more.

Moreover, PMI data flag a slowdown underway in April.

U.S. GDP data disappoints, stoking fear of recession

First-quarter U.S. GDP data posted the first contraction in three years. The world’s largest economy shrank at an annualized pace of 0.3%.

Economists anticipated a 0.3% rise ahead of the release. A dramatic surge in imports helped explain the disappointment, demonstrating once again the rush to stockpile goods ahead of tariff hikes.

Still, there was more to the numbers than an unusually volatile external sector. Growth of consumption also cooled to 1.8%, the slowest pace since the second quarter of 2023. Government spending fell 5.1%, marking the steepest drop since the three months ending March 2022.

Last year, weakness in Europe and China was offset by a buoyant U.S. service sector that powered the North American behemoth to its best performance since early 2022. That momentum has now fizzled while the other two powerhouse economies have been unable to accelerate, leaving global growth without a safety net.

Stocks try to resist selling pressure, but for how long?

Stock markets swooned as the U.S. GDP report came across the wires, with the S&P 500 dropping as much as 2.2%. However, a snappy rebound began less than two hours later, erasing the bellwether index’s daily loss and flipping it to a narrow rise. A similar dynamic played out for the tech-tilted Nasdaq 100 and the small-cap Russell 2000.

Meanwhile, cycle-sensitive crude oil and copper prices are trading near intraday lows as the session’s end approaches after plunging alongside stocks in the GDP data’s aftermath. This hints that recession fears are firmly in play, suggesting that stock markets’ resilience may have more to do with a reluctance to commit ahead of key earnings reports.

The spotlight now turns to a survey of the U.S. manufacturing sector from the Institute of Supply Management (ISM). It is expected to show the second consecutive month of contraction. Moreover, the pace of decline is seen accelerating to the fastest in seven months. A soft result may help wear down stocks’ capacity to resist selling pressure.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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