“Stagflation” is the word of the day after a shockingly disappointing first-quarter gross domestic product (GDP) reading has some on Wall Street bracing for a potential stock market crash.
The U.S. economy grew at an annualized rate of 1.6% in Q1, per the Bureau of Economic Analysis’s advanced GDP estimate. Not only is this is less than half the 3.4% growth rate seen in Q4 of last year, it’s the lowest level of economic growth since 2022. This suggests a significant slowdown in production in the first quarter of the year.
“This report pours cold water on the misleading narratives of a reaccelerating economy,” noted EY Chief Economist Gregory Daco.
Consumer spending took a notable step back in Q1, decelerating to 2.5% annualized from 3.3% in Q4. The Federal Reserve’s contractionary monetary policy, likely combined with stubborn inflation pressure, may be starting to pinch the previously resilient consumer, reversing the economy’s expansionary trajectory.
“This report was the worst of both worlds: economic growth is slowing and inflationary pressures are persisting,” wrote Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance. “The Fed wants to see inflation start coming down in a persistent manner, but the market wants to see economic growth and corporate profits increasing, so if neither are headed in the right direction then that’s going to be bad news for markets.”
Stock Market Crash Concerns Fly Amid Stagflation Rumors
With inflation also moving in the wrong direction, per the March consumer price index (CPI), some on Wall Street believe the country may be tumbling toward dreaded stagflation. This includes macroeconomist Craig Shapiro.
“Weaker than expected GDP and Personal Consumption but higher than expected Core PCE Index and better labor data. That’s a stagflationary mess for folks begging for the Fed put to be activated,” said Shapiro, per Benzinga.
Stagflation refers to an economic condition marked by high inflation, high unemployment and low economic growth. It’s a worst-case scenario for an economy, something the U.S. has luckily only truly experienced back in the 1970s.
While it’s likely too early to make any definitive stagflation judgements, worrying GDP and inflation data has dramatically raised its possibility.
What Does Today’s GDP Report Mean For Stocks?
Today’s GDP report has also put additional pressure on stocks, especially ahead of tomorrow’s crucial personal consumption expenditures (PCE) inflation report.
Predictably, Wall Street responded poorly to the GDP print, with stock indices closing in the red across the board.
The Dow Jones Industrial Average in particular dropped as much as 1.7% following the release of the GDP report, putting the index on track for its biggest drop of the year. Luckily, the industrial index shored up some of its losses later in the day. In the end, it slipped 0.98% on today.
“We’re looking ahead to tomorrow’s PCE numbers because slowing inflation is the number one issue for the Fed and the rate cut (or even rate increase) debate has been heating up and that’s what’s injected so much uncertainty into bond and stock markets lately,” wrote Zaccarelli.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
