The U.S. economy unexpectedly fell 1.4% on an annualized basis in the first quarter, missing the consensus expectations for an increase of 1.0%, and was well below the fourth quarter pace of 6.9%. On a nominal basis, first quarter growth was 6.5%.
Additionally, net exports carved off 3.2 percentage points from real, or inflation-adjusted, gross domestic product (GDP) as imported goods surged (think backordered goods). Excluding net exports, real GDP rose a respectable 1.8%. Also, business inventories shrank, slicing off another 0.8 percentage points, since those backordered goods were simply delivered rather than accumulated for future sales.
More importantly, overall demand remained strong. Consumer and business spending reaccelerated, which are among the reasons we believe that the U.S. economy will avoid a recession. Unfortunately, we expect hotter inflation will persist, which means it will continue gouging real GDP for the next few quarters, though not as badly as the first quarter.
The U.S. economy slipped to $19.7 trillion in real GDP terms in the first quarter. Still, that’s 2.8% higher than the pre-pandemic level. On a nominal basis, the economy expanded to $24.4 trillion.
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