The weaker-than-expected report on the U.S. economy was a surprise because economists were expecting to see modest growth, particularly after the economy closed last year running at a solid pace. But importers rushed to bring products into the country before tariffs could raise their prices, which helped drag on the country's overall gross domestic product.
Such data raises the threat of a worst-case scenario called “stagflation,” one where the economy stagnates yet inflation remains high. Economists say it's terrible because the Federal Reserve has no good tools to fix both problems at the same time. If the Fed were to try to help one by adjusting interest rates, it would likely make the other problem worse.
“Even if today’s weak GDP may have partially reflected companies trying to get ahead of tariffs, it was still a stagflation warning shot over the bow of the economy,” according to Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management. “This type of data won’t soothe the markets, and it won’t make the Fed’s job any easier.”
The Fed got some better news later in the morning when a report said the measure of inflation that it prefers to use slowed in March. Inflation decelerated to 2.3% in March, closer to its goal of 2%, from February's reading of 2.7%. Stocks erased some of their losses following the report. The S&P 500 was down as much as 2.3%, and the Dow had dropped 780 at one point.
Still, much of Wednesday's economic data pointed to a weakening. A separate report on the job market from ADP suggested employers outside the government may have hired far fewer workers in April than economists expected, less than half.
It’s discouraging because a relatively solid job market has been one of the linchpins keeping the U.S. economy stable. A more comprehensive report on the overall job market from the U.S. government will arrive on Friday.
Wednesday’s reports compound worries that Trump’s trade war may drag the U.S. economy into a recession. The president’s on-again-off-again rollout of tariffs has already created deep uncertainty about what’s to come, which causes damage on its own.
The uncertainty created historic swings in financial markets, from stocks to bonds to the value of the U.S. dollar, that battered investors through April. The S&P 500 at one point dropped nearly 20% below its all-time high set earlier this year, with some scary headlines earlier warning of the worst April since the Great Depression.
But the uncertainty has been two-sided, and hopes that Trump may relent on some of his tariffs and reach trade deals with other countries helped the S&P 500 claw back much of its losses. It's set to finish April with a 2.4% loss, which would be milder than March’s, and it's roughly 11% below its record.
Stronger-than-expected profit reports from big U.S. companies have also helped to support the market in the meantime, and Seagate Technology jumped 9% for one of Wednesday's biggest gains after the maker of data storage joined the parade.
But potentially discouraging trends on profit within the artificial-intelligence industry were helping to offset the gains for storage makers. AI stocks have pulled back sharply on worries that their prices shot too high in prior years, when a frenzy around the industry drove broad U.S. stock indexes to repeated records.
Super Micro Computer warned that some customers delayed purchases in the latest quarter, which caused the maker of servers used in AI and other computing to slash its forecast for sales and profit. Its stock tumbled 17.7% for the largest loss in the S&P 500.
Other AI-related stocks also fell, including a 3% drop for Nvidia. Because the chip company is so huge in size, its loss made it the single heaviest weight on the S&P 500.
Starbucks sank 6.9% after the coffee chain fell short of analysts' forecasts for revenue and profit in the latest quarter. Starbucks did log its first quarterly sales increase in more than a year, but acknowledged that its turnaround effort is far from complete.
In the bond market, Treasury yields eased further. The yield on the 10-year Treasury fell to 4.17% from 4.19% late Tuesday.
Yields have largely been sinking since an unsettling, unusual spurt higher earlier this month rattled both Wall Street and the U.S. government. That rise had suggested investors worldwide may have been losing faith in the U.S. bond market's reputation as a safe place to park cash.
In stock markets abroad, indexes were mixed among mostly modest moves across Europe and Asia.
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AP Business Writers Matt Ott and Elaine Kurtenbach contributed.
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