The annualized 2.9% contraction in first quarter U.S. GDP was among the worst of the postwar era and the only one of its size that did not occur during a recession. But coincident and leading indicators suggest that a recession is highly unlikely.
From the coincident perspective, the pickup in the pace of hiring, modest as it has been, contrasts with the deceleration of payroll gains that have regularly preceded recessions. Year-over-year movement in the leading economic indicator has been a solid recession predictor, and it is nowhere near contraction territory now. Stocks agree, as they typically begin to lose ground in the latter stages of expansions, and there has been no sign of the overheating in cyclical segments that typically precedes recessions.
Looking through three-month-old GDP data from the first quarter would therefore seem to be the right investment approach.
The silver lining for investors is that soft growth will preserve accommodative policy settings. As long as recession is avoided, any pullback in stock prices should be viewed as a correction, not the end of the bull market.