On the surface, the economy’s 3.2 per cent annualized growth rate in Q1 is robust. It was the strongest first quarter growth rate in four years, according to the Commerce Department. It was particularly impressive against the backdrop of a government shutdown and a Q4 market selloff. White House economic advisor Larry Kudlow called Q1 GDP a “blowout number.”

We call it quotidian. Our economy’s most recent quarterly advance was fueled in large part by ephemeral factors like rising exports, falling imports and a buildup of inventories. Consumer spending and business investment, two staples of sustainable growth, were weak. Consumer spending advanced at a 1.2 per cent annualized rate, less than half the 2.5 per cent rate registered in Q4/18. Fixed investment, a barometer of business spending on plant, property and equipment, edged 1.5 per cent higher; that’s down from 3.1 per cent in the previous quarter.

One of the best ways to gauge how the economy is performing at any point in time is new orders minus inventories. Conditions are strong when new orders are high and inventories are low, suggesting that demand growth is outstripping supply. A weak order book coupled with massive inventory building may display well from a GDP perspective, but reflects underlying weakness. The 3-month moving average of orders less inventories is currently situated in the 22nd percentile of its historical range. This suggests current conditions are “neutral” and comfortably above recession territory (which is below the 5th percentile).

Our bottom line: notwithstanding the White House’s approbation, the economy is good, not great; but it’s growing at its potential rate. An economy that’s growing at its potential could expand indefinitely.

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