We get the first look at Q1 GDP tomorrow.

And it should be negative.

Going in, the latest reading on the Atlanta Fed’s GDP model has the economy tracking at a 2.7% contraction in the first quarter (the green line).

But the Atlanta Fed also estimates that Q1 GDP has been dragged down by more than 5 percentage points because of the impact of imports.

GDP equals consumption + investment + government spending + net exports.  In the current case there has been a massive pull forward of imports to get ahead of tariffs.  And that means a big negative “net exports” drag for GDP.

The good news:  If we normalize for this anomaly in net exports, using 2024 average net exports, GDP for Q1 would be closer to 2% growth (working with the projections in the Atlanta Fed model).

But that won’t stop the media from hand wringing over a negative GDP number.

And then we’ll get the April jobs report on Friday.  And thus far, we haven’t seen the government job cuts reflected in the monthly labor report.  But as we’ve discussed over the past few months, a labor market shock is coming.

Who is on high alert to “unexpected weakness” in the labor market? 

The Fed.

Add to that, we’ll also get the Fed’s favored inflation gauge tomorrow, PCE for the month of March (its inflation target is 2% headline PCE).

And it should be disinflationary. 

Remember, the March CPI came in earlier this month at 2.4%.  And the last time we saw a number that low was September of last year — which happens to be the month the Fed kicked off its easing campaign, with a 50 basis point rate cut.

And based on the CPI and PPI reports, Fed Governor Waller has already given us the Fed’s estimate of where PCE will come in tomorrow.  In a prepared speech on April 14th, he said PCE should be flat for March, and fall to 2.3% for the year-over-year number.

That said, the Fed meets on rates next week.  The market is now pricing in a rate cut for June (a resumption of the easing cycle).  But a negative GDP number, a soft inflation number and a negative surprise on jobs over the next few days would make the Fed meeting next week more eventful.