It’s been years since our operating philosophy was “it’s the economy, stupid,” but perhaps it’s time to return to it. Economic growth spiked upward in a quarter usually known for its retreats, hitting an annualized rate of 3.2% growth in Q1. That’s a full point above 2018Q4’s disappointing 2.2% growth rate:

Real gross domestic product (GDP) increased at an annual rate of 3.2 percent in the first quarter of 2019 (table 1), according to the “advance” estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2018, real GDP increased 2.2 percent.

The Bureau’s first-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see “Source Data for the Advance Estimate” on page 2). The “second” estimate for the first quarter, based on more complete data, will be released on May 30, 2019.

The increase in real GDP in the first quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, state and local government spending, and nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased (table 2). These contributions were partly offset by a decrease in residential investment.

Not only does it show a recovery from a disappointing previous quarter, it breaks a Q1 trend that had developed over the last few years. For some reason, economic growth measures in the first quarter became oddly depressed; the last three years, the Q1 GDP turned out to be the worst reading of each year, sometimes dramatically so as in the past two years.

That’s not to say that there aren’t some potential dark clouds on the horizon. Personal income didn’t increase as much in Q1 as it did in the previous quarter despite the higher growth rate. Disposable personal income only increased at an annualized rate of 2.4%, just over half the Q4 rate of 4.3%. That may have led to a falloff on the rate of growth for consumer spending (PCE), which fell from 3.5% in 2018Q3 to 2.5% in Q4, and again to 1.2% in Q1.

If consumer spending expansion didn’t drive the quarter’s growth results, what did? A significant drop in imports helped, falling 3.7% from the previous quarter. Exports also grew 3.7%, which doubled the impact from trade. Business investment had a strong quarter, growing 5.1%, mainly in intellectual-property investment. The growth rate of 2.5% for final sales to domestic purchasers shows that inventory expansion played a significant role in the overall GDP number too. However, with income and consumer spending growth slowing, those factors may well be too transient to expect them to last into Q2.

The Washington Post cheers the report with a headline that it “smashed expectations,” but also notes the longer-term issues:

The U.S. economy expanded at a strong 3.2 percent annualized rate from January through March, the U.S. Commerce Department said Friday, mainly because of companies beefing up their inventories and a smaller trade deficit, factors that aren’t expected to last.

Better-than-expected growth, the ongoing strength in the job market and fresh stock market highs this week are allaying fears that a recession or severe downturn is on the horizon.

Many economists initially predicted anemic growth at the start of 2019 as the partial government shutdown and a rash of extremely cold weather caused many businesses and consumers to hit the pause button on big purchases, but forecasters raised their estimates to 2.3 percent as it became clear companies were re-stocking their shelves. Growth ended up coming in almost a full percentage point higher than expected, the best start to the year since 2015.

Over half of the strong first quarter growth was driven by a surge in inventories and U.S. exports to other nations. State and local government spending also boosted growth by the biggest amount in three years.

Bloomberg highlighted weaker demand in the report:

Gross domestic product expanded at a 3.2 percent annualized rate in the January-March period, according to Commerce Department data Friday that topped all forecasts in a Bloomberg survey calling for 2.3 percent growth. That followed a 2.2 percent advance in the prior three months.

But underlying demand was weaker than the headline number indicated. Consumer spending, the biggest part of the economy, rose a slightly-above-forecast 1.2 percent, while business investment cooled. A Federal Reserve-preferred inflation measure, the personal consumption expenditures price index excluding food and energy, slowed to 1.3 percent, well below policy makers’ 2 percent objective.

Even so, the data showing faster growth and tame inflation helped push U.S. stock futures higher and Treasury yields lower on Friday.

Overall, it’s good news. It might just not be quite as good as the top-line GDP growth rate suggests. If any of the cautionary figures are still dealing with the Q1 reporting blues, however, we might see a very big Q2.