1Q GDP - Soft Print; Trade Deficit & Inventories Mask Consumer Strength

1.4% GDP contraction. U.S. GDP contracted at an annualized pace of 1.4% in the first quarter compared to analyst expectations for 1.0% growth and decelerating from +6.9% in the fourth quarter. On its face, the headline number is decidedly soft, but underlying details show still-solid household demand and business investment, which aligns with the commentary we’ve been hearing from management teams on first quarter earnings calls. Looking under the hood, a widening trade deficit and softer inventory growth subtracted about 4 percentage points from headline growth, masking an otherwise solid picture of consumer and business demand. Personal consumption, the biggest component of our economy, expanded 2.7% in the first quarter compared to 2.5% last quarter.

Fed ahead. Against a backdrop of elevated inflation we don’t think today’s report will cause any deviation in the Fed’s aggressive tightening plan and we continue to expect a 0.5% rate increase at the conclusion of next week’s FOMC meeting.