Recession Likely Looms for U.S., Even If Today’s Tone Is Bullish

With Microsoft MSFT up 9.2% in pre-market trade, and Meta Platforms META adding 6.6%, my call to sell the Magnificent Seven, and U.S. stocks in general, ain’t looking too hot.

We also have an inkling from Chinese state media that the U.S. side is reaching out to China. It’s a tentative attempt to start trade talks on what’s currently the hottest front line in the global trade war initiated by the White House.

Strong numbers from Microsoft and Facebook are encouraging investors to shake off the disappointing data showing the U.S. economy contracted for the first time in three years last quarter.

But I think those figures are worrying. U.S. Gross Domestic Product shrank 0.3% for Q1, at an annual rate, the first contraction since Q1 2022.

U.S. picture likely to worsen

I’ve seen some descriptions of the data as “corrupted” or “muddied,” implying that the numbers aren’t meaningful. They are.

The numbers do look particularly bad because there was a massive increase in imports, as companies tried to race ahead of Trump administration policy, and the higher tariffs on goods from Canada, Mexico and China.

Imports leapt 41.3%, leading to an almost 5% hit to GDP from “net exports,” the difference between imports and exports.

There was also a decrease in government spending as Elon Musk took his chainsaw to various departments. That trend may wane now Musk is being edged out of the White House inner circle. But it may take time for the impact of those cutbacks to filter through. 

But let’s not forget. The Q1 numbers don’t show any of the effect of the Rose Garden event. U.S. President Donald Trump’s chart indicating an unprecedented escalation in “reciprocal” tariffs, globally, doesn’t factor in at all. That only took place on April 2.

So this is only the start. If Q1 saw a slight dip, we will see far greater disruption in Q2, particularly as U.S. companies and their international suppliers started to struggle with the implications. Even with the 90-day stay on those dramatically escalated tariffs, most nations are dealing with an extra 10% tariff, far higher than before. Prior to Trump’s intervention, the average U.S. tariff was 3.3%, per World Trade Organization data, which falls to 2.2% when adjusted for volume.

Service providers better off

Companies like Microsoft and Meta are better poised to handle these headwinds. As service providers, first and foremost, they’re not quite as embattled as companies that deal in hard goods, whether manufacturing or selling physical items to the public.

That’s why we’re seeing General Motors GM shelve its profit guidance today. It’s the quintessential U.S. manufacturer, and the sector Trump likely has top of mind when he’s thinking about stimulating U.S. manufacturing.

But GM says auto tariffs have clouded the outlook. That rips into shreds the net income forecast of $11.2 billion to $12.5 billion forecast that it gave in January for this year.

“Because the original guidance didn’t include impact from tariffs, prior guidance can’t be relied upon,” CFO Paul Jacobson told reporters on a call.

A U.S. tariff of 25% on autos went into effect on April 3. That was one of the factors encouraging companies and consumers to step up their purchases of imports in the first quarter. Trump yesterday announced some temporary sweeteners exempting U.S. manufacturers for some duties if they assemble vehicles on U.S. soil using imported parts.

Too many trade talks at one time

We are far from over the tariff story. A tripling of U.S. duties to 10% across the world would be disruptive enough. But we now have 90 days from April 9 until they escalate as high as 50%, depending not on what tariffs other countries charge but on the simple balance of exports vs. imports with that nation.

The White House is also attempting to pull off the impossible by negotiating trade deals with as many as 100 nations at the same time. Past U.S. trade deals have taken 18 months to negotiate and 45 months to implement, according to Torsten Slok, the chief economist at Apollo Global Management.

There aren’t enough trade negotiators to pull off 100 deals at once, in other words. Southeast Asian nations are already realizing that their initial talks “look likely to disappoint and suggest a long and bumpy road ahead for any deals,” Nomura states. One of the thorny and complex issues there is the rerouting of exports from higher-tariff jurisdictions like China into Southeast Asian countries for assembly or modification before shipping to U.S. markets.

India, Japan, Korea up first

India, Japan and South Korea appear to be the farthest along in the process. Let’s see what terms are achieved if and when one of those deals is struck before we believe those will proceed smoothly.

The Bank of Japan today cut its growth forecast for the year ending March 2026 to 0.5%, from a 1.1% rate it predicted three months back. It also scaled back prospects for the March 2027 year to 0.7% growth instead of 1.0%. The economic uncertainty encouraged it to keep rates steady, with BOJ chief Kazuo Ueda warning the risks are to the downside.

Given the current 10% tariff, it seems unlikely that countries will strike better terms than they had before the Rose Garden event. I’m all for global free trade, and these trade taxes simply raise prices, introduce inefficiencies, and cause massive uncertainty for companies trying to plan ahead.

Just look at GM. Look at Apple, forced to charter flights at great expense to air lift iPhones from India to U.S. shores. Investors who do want to play U.S. markets would do best to avoid manufacturers and retailers, and stick to service providers.

The markets in Asia are treading water for now. They don’t always follow their normal pattern of reflecting yesterday’s Wall Street trade, depending on the geopolitical developments of the day.

U.S. 'has actively contacted China'

Today, we hear that the Trump administration has been seeking to contact Beijing to initiate trade talks, according to an account on the Weibo messaging app that’s affiliated with state-owned broadcaster China Central Television (CCTV).

The U.S. side “has actively contacted China through multiple channels in recent times, hoping to negotiate with China on tariffs,” according to the statement on the Yuyuan Tantian account, often used by CCTV.

It’s important to China that the White House reach out first, since the initial hiking of tariffs was on the U.S. side. The Trump team has indicated it is keen to talk with Beijing. I’m not sure who is going to pick up the phone first, but I detect frantic scurrying behind the scenes to get a call connected between Trump and Chinese President Xi Jinping. Only then will we see movement on that front.

It is a holiday today for Labour Day in much of the world. Around 150 nations honor workers on May 1. Only the United States and Canada celebrate Labor/Labour Day later in the year. Stateside, May 1 was considered too politically charged given the U.S. strikes organized for that date in 1886, leading into the deadly Haymarket affair that transpired in Chicago on May 4 that year.

In Asia, there’s been no trading in China, Hong Kong, India, Indonesia, Malaysia, Pakistan, the Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam. I’ll be watching to see if today’s Mag Seven bullishness feeds through next week.

At the time of publication, Alex Frew McMillan had no position in any security mentioned.