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Data released today showed the US economy rose at a 3.2% rate during Q1, well above consensus expectations. According to National Bank of Canada analyst, Krishen Rangasamy, the upside surprise came from government spending (mostly state/local), but also from inventory accumulation which was significant. After “this explosive start to the year prompts” they upgraded their 2019 US GDP growth forecast by two ticks to 2.5%.  

Key Quotes:

“Despite the upside surprise on government spending, final domestic demand (i.e. GDP excluding trade and inventories) grew just 1.5% annualized, the weakest since 2015.”

“The growth gap between real GDP and final domestic demand in Q1 was the largest in six years. The last time there was such a gap was in 2013Q1, a quarter that was then followed by a slump in growth. Could the same thing happen in 2019? To be sure, the accumulation of inventories does not bode well for Q2 production. And yes, as in 2013Q2, imports will likely bounce back and hence subtract from real GDP growth in the second quarter. But don’t write off Q2 just yet. Consumers, which account for roughly two-thirds of U.S. GDP, are expected to bounce back after a dull Q1.”

“While second quarter GDP growth will soften to more sustainable levels, we don’t anticipate a collapse à la 2013Q2.”