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Barclays

GDP growth in Q1 may set the bar for Q2

Adam Shell
USA TODAY
A pedestrian carries a Zara shopping bag on March 2, 2015 in San Francisco.

Everyone knows the U.S. economy grew at a snail's pace in the first quarter.

Barclays estimates gross domestic product (GDP) growth in the first three months of the year at 1.1%. David O'Malley, CEO at Penn Mutual Asset Management, thinks the pace of growth was even slower, or 0.5%, because of severe winter weather and the strength of the U.S. dollar earlier this year.

So it's not like Wall Street pros are looking for some big upside surprise when the government reports Wednesday how fast the economy grew in the January-through-March period.

But if the number surprises to the downside — say, close to zero or even negative growth — that could roil markets as it could create question marks about whether a second-quarter and second-half rebound will occur, O'Malley says. "Any chance of a negative number is pretty remote, but if there was ... that would be troublesome," he says.

GDP is a backward-looking number, but investors will extrapolate what the first-quarter data tell them in coming quarters.

If GDP comes in at zero or negative, it will make it harder for Wall Street to see full-year growth rebound to 3%. "It almost becomes a math problem," O'Malley says, as growth in later quarters will have to come in even stronger.

A weaker-than-expected number should push the "data-dependent" Federal Reserve's rate hike out to September, he adds.

Investors will also get a chance to see the latest thinking from Fed policymakers later Wednesday when they release their statement at the conclusion of their two-day policy meeting at 2 p.m. ET.

Looking ahead to the second quarter, investors will be watching Friday's reading on the pace of April manufacturing.

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