A Surprising End to a Perplexing Quarter

We’ve finally closed the book on a perplexing first quarter.

Gross domestic product (GDP) rose 3.2% last quarter, as shown in the LPL Chart of the Day, the best first-quarter gain since 2015. That figure was also above the highest Bloomberg consensus estimate for growth, an appropriate end to a quarter full of surprises.

First Quater GDP Growth Beats Estimates

However, the components of first-quarter output show a weaker base under the strong number. Net exports contributed 1% to overall GDP and inventories added another 0.7%, while consumer spending only added 0.8%.

Net exports and inventories are volatile components of output. The swift inventory buildup over the past three quarters could reverse as demand continues to recover, and net exports’ gain could eventually moderate as global trade activity normalizes. Excluding inventories and trade impacts, GDP increased 1.5% in the quarter, its weakest “real final sales” growth since the end of 2015.

“Overall GDP growth was impressive in the first quarter, but a deeper dive suggests growth wasn’t as strong, especially when considering the contribution from inventories and the disappointment in consumer spending,” said LPL Research Chief Investment Strategist John Lynch. “Recent signs of growth, particularly the recovery in retail sales, point to a firming in the second quarter.”

History shows last quarter’s robust GDP growth could hint to a strong year. The first quarter has typically been the weakest of all four quarters in this expansion, while the second quarter has been the strongest. Seasonality in GDP growth has been more evident in recent years, too. Output has grown the most in the second quarter in each of the past five years, as the economy bounced back from first-quarter weakness.

For more of our thoughts on today’s GDP report, check out next week’s Weekly Economic Commentary, which will be published April 29.

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