‘Welcome to the recession:’ Most of Wall Street still sees trouble ahead for the U.S. economy

Thursday's report on first-quarter gross domestic product bought a mixed bag of indicators: A headline number showing 1.1% annualized growth, but internal figures pointing to consumer demand in aggregate that was strong despite higher-than-expected inflation. In fact, excluding the drag from inventories, GDP growth actually would have been closer to 3.4%, well above trend. However, most economists and strategists on Wall Street think the U.S. economy is still on the path to recession. Here's a sample of reaction from the experts: Ian Shepherdson, chief economist at Pantheon Macroeconomics "The headline GDP print was depressed by a 2.3 percentage point hit from a huge downswing in inventory-building, while final demand rose at a 3.4% rate, led by a 3.7% surge in consumption. That looks solid, but the increase in final demand was flattered by much warmer-than-usual weather in January and February. ... In short, the economy barely grew in the first quarter, but it is likely to shrink outright in Q2 and Q3. Welcome to the recession." Mike Loewengart, head of model portfolio construction, Morgan Stanley Global Investment Office "The weaker-than-expected Q1 GDP reading highlights one of the downsides of the Fed's inflation-fighting campaign -- a slowing economy. This was the initial estimate, so the final number could change, but it suggests an economic "soft landing" may be more elusive than many investors had hoped, and the market environment could continue to be volatile." Andrew Hunter, deputy chief U.S. economist, Capital Economics "The disappointing 1.1% annualized rise in first-quarter GDP indicates that the economy had less forward momentum at the start of this year than previously thought. We continue to expect the drag from higher interest rates and tightening credit conditions to push the economy into a mild recession soon." Veronica Clark, Citigroup economist "People can feel bad about the economy and they feel bad because there's high inflation and all of that, but as long as people have a job and the unemployment rate is 3.5%, then people don't really act like it. You're still going out and spending. ... We do have a recession call now starting for Q4 of this year and continuing into next year. But it looks like it's taking longer to get there because we are coming from such a strong place." James Knightley, ING chief international economist "Looking to 2Q GDP growth and we have to expect a reversal in consumer spending given recent retail sales trends while the softening in non-defence capital goods orders ex aircraft suggests business investment will remain subdued ... Our current expectation is for 2Q GDP to record growth of 0-0.5% with the clear threat of negative GDP prints in 3Q and 4Q as the most rapid and aggressive series of Federal Reserve interest rate increases in 40 years are more fully felt and the tightening of lending standards intensifies in the wake of recent bank stresses." Joseph Brusuelas, chief economist, RSM "The capacity of the American household to respond to easing goods prices remains stout and should result in further squawking from the hawks at the Federal Reserve who are agitating for a rate hike in May and another in June. ... The 'R Word' that one should use when discussing the American economy over the past two years should be resilient, not recession." Jim Baird, chief investment officer, Plante Moran Financial Advisors "For all the discussion of recession risk - which is very real - consumers remain willing and able to spend. ... The bottom line? Recession risks remain elevated; the first estimate of Q1 GDP confirms that the economy continues to slow. It also serves as a poignant reminder of a key truism for the U.S. economy: don't underestimate the power of the consumer sector." Alexandra Wilson-Elizondo, co-head of portfolio management for multi asset solutions, Goldman Sachs Asset Management "In our view, pulled all together, the conflicting data signals to us that we are in the "bend, not break" phase of the cycle. We continue to expect a 25bp hike in May with a 'hawkish hold' message from the Fed. This complicates both the ability to estimate the timeline to recession, and ultimately the breadth and depth of one. Further, it is hard to price the ultimate outcomes which is why we believe we are seeing conflicting messages from equities and fixed income." Michael Gapen, U.S. economist at Bank of America "Incoming data continue to point to a slowing US economy, led by fixed investment ... the sequential slowdown in consumer spending after the January surge suggests that consumption growth will probably to be much weaker in 2Q. However, inventories, which were the major drag on 1Q growth, could prove to be a tailwind in 2Q. In summary, while the details of the 1Q GDP print were more encouraging than the headline figure suggests, the opposite is likely in 2Q."