In a recent HBKS Wealth Advisors webinar, Chief Investment Officer Brian Sommers provided a comprehensive analysis of the current economic landscape, characterized by heightened volatility and uncertainty. The first quarter of 2025 has been particularly challenging for investors, with markets responding dramatically to policy announcements and economic indicators that sometimes send contradictory signals.
Q1 GDP Contraction: Not the Full Story
The U.S. economy experienced a 0.3% contraction in the first quarter of 2025, as measured by real GDP. While this negative growth figure might typically raise recession alarms, Sommers emphasized that this single data point may not accurately reflect the actual state of economic growth.
“The reason for that is the impact of the back and forth tariff announcements,” Sommers explained during the webinar. “There was a surge in imports during the first quarter, and typically a rise in imports usually indicates lower economic growth and a shift away from domestic production. But that probably wasn’t the case this time as businesses pushed purchases forward in order to get ahead of the expected tariffs.”
This surge in advance purchasing artificially inflated import figures, which in GDP calculations, translate to negative growth. Despite this contraction, the Atlanta Fed’s GDPNow projects a robust rebound to 2.4% annualized growth in the second quarter of 2025, suggesting the economy may not be headed for recession despite posting one negative quarter.
The Divergence: Soft Data vs. Hard Data
One of the most confusing aspects of the current economic environment is the significant divergence between “soft data” and “hard data”—a distinction critical for investors to understand.
Soft data refers to surveys and sentiment indicators that gauge how consumers, businesses, and manufacturers feel about future economic conditions. These include consumer sentiment surveys, manufacturing surveys, and other forward-looking metrics that attempt to predict economic behavior.
Hard data, by contrast, consists of actual reported economic metrics—employment figures, consumer spending, wage growth, and other tangible measures of economic activity.
“What is confusing to everyone, including the Fed, is that there appears to be a divergence in the economic data between what the soft data shows and what the hard data shows,” Sommers noted.
Currently, soft data indicators show increasing pessimism. Consumer sentiment reveal growing concerns about the future, largely driven by uncertainty surrounding government policies and potential inflation pressures. These sentiment measures suggest consumers might pull back on spending in the near future.
Yet the hard data tells a different story:
- Real wages are near their highest levels in five years, bolstered by the significant drop in inflation since 2022
- Consumer spending continues its upward trend despite negative sentiment
- Employment remains solid with the unemployment rate at 4.2%, still low by historical standards
- Job creation continues at a healthy pace, with recent reports exceeding expectations
This disconnect creates a challenging environment for policymakers, particularly the Federal Reserve, which must balance these contradictory signals when making monetary policy decisions.
Inflation Concerns and the Federal Reserve’s Dilemma
While inflation has decreased substantially from its 2022 peak, it appears to be stalling around 2.5%—still above the Federal Reserve’s 2% target. This “sticky” inflation presents a dilemma for the Fed, especially in light of the Trump administration’s tariff policies, which the International Monetary Fund (IMF) warns could push inflation higher.
In their most recent meeting, the Federal Open Market Committee kept interest rates steady but noted that “uncertainty around the economic outlook has increased” and that “the risks of higher unemployment and higher inflation have risen.” This statement acknowledges the growing risk of stagflation—a troubling combination of slowing growth and persistent inflation.
This puts the Federal Reserve in a precarious position, caught between its dual mandate of maintaining price stability and maximizing employment. If economic weakness intensifies while inflation persists, the Fed faces a difficult choice: cut rates to stimulate growth or maintain higher rates to combat inflation.
The Uncertainty Index
Economic policy uncertainty has soared to levels not seen since the height of the COVID-19 pandemic. The Economic Policy Uncertainty , which measures policy-related economic uncertainty, has spiked in recent months.
“Uncertainty can be a problem in and of itself,” Sommers warned, “because it can act as an impediment for both businesses and consumers who face tough decisions. It’s really hard to commit to a large purchase or an investment for either consumers or businesses in the next few months, let alone the next few years.”
This uncertainty stems from various factors, including:
- The Trump administration’s tariff policies and potential trade disruptions
- Concerns about leadership changes at the Federal Reserve
- The Department of Government Efficiency (DOGE) and its impact on federal spending
- Questions about whether these policies will lead to higher inflation and slower growth
Looking Ahead
While the odds of a recession have increased, Sommers believes a recession remains unlikely based on the current hard data. Consumer spending, which accounts for approximately two-thirds of GDP, continues to show resilience. As long as real wages remain healthy and employment stays strong, there’s reason to believe the economy can weather the current uncertainty.
However, Sommers acknowledged that the soft data could eventually materialize in the hard data if uncertainty persists, potentially leading to a weaker economy in the second half of 2025.
“The only thing that we can say for certain,” Sommers concluded, “is that the uncertainty is going to continue for the rest of this year.”
For investors navigating this complex environment, understanding the distinction between sentiment-driven market movements and actual economic fundamentals will be critical in making sound investment decisions in the months ahead.
This article is based on a May 2025 webinar presented by Brian Sommers, CIO of HBKS Wealth Advisors. While the information presented is believed to be accurate, individual financial circumstances vary, and readers are encouraged to consult with their financial advisor before making investment decisions.
