U.S. GDP growth came in above expectations, jumping at a 5.8% annual rate in the first quarter. This is its fastest growth in two years, but economists remain wary that this signals a recovery.

“U.S. advance GDP numbers came in significantly above expectations, and inflation remains a non-issue in an environment of large excess capacity,” notes RBC Financial. “This is the strongest quarterly rate of growth since the end of 1999. The composition of growth was also encouraging. Although it was expected that a weaker inventory drawdown would feed GDP growth, what was unexpected was the strength in final sales, which exclude inventories. The inventory drawdown, however, was only about one-third of the record pace in Q4 and suggests that weakness in inventory investment is drawing to a close which points to renewed inventory investment as a driver of growth in future releases.”

CIBC World Markets reads the inventory numbers a little more cautiously, noting, “Dig beneath the headline, however, and the economy is not bursting out of the blocks with quite the force that the GDP number would suggest. Over half of Q1’s growth came from a scaling back of the record inventory cuts which slammed the economy in the second half of 2001. Beyond the lift from inventories, mild weather also bolstered Q1 output.”

“The trade balance, in a familiar role, played the spoiler, shaving about 1.1% from GDP,” says CIBC. “The huge discrepancy between the 15.5% rise in real imports and the 6.8% gain in exports suggests at some of the fillip from the inventory swing went to foreign products. Disappointing hopes that the numbers might show light at the end of the capital spending tunnel, business fixed outlays tumbled at a 5.7% rate.”

BMO Nesbitt Burns also say, “One thing is clear: the figures don’t provide the basis for certainty about strong growth going forward. Business investment was weak. Some strong items don’t look sustainable. Inventories were a big plus in an obviously self-limiting correction. Imports are out of control, rising 15.5%, or about five times the rate of final sales growth. Foreign producers are feasting on the rise of U.S. demand in a trend that has staying power due to the overvalued dollar. Inflation remains great.”

“This set of U.S. GDP figures convincingly show the recession is over but does much less than the strength of the headline would suggest to confirm a robust recovery is in place. It’s on to the spring numbers to see where we go next,” suggests BMO Nesbitt.

CIBC agrees that the second quarter will be much weaker. “While the economy is not at this state at risk of a double dip — consumer spending, among other things, continues to hold up — a deceleration in growth to something nearer the economy’s 3%-3.5% potential means the Fed still has latitude to hold off re-tightening until the August FOMC.”

RBC also notes that in separate releases, U.S. consumer spending came in at 3.5%, and the University of Michigan’s consumer sentiment survey came in with a final April reading of 93.0 which was below a consensus call of 94.5 and weaker than 95.7 in March. “This confirms the view that consumer confidence has faltered somewhat after earlier improvements. The drop takes place in the context of higher energy prices and stock market volatility and continues to point to risks to the outlook.” it says.