After Friday's GDP report, many economic pessimists again degraded the first quarter annual growth rate of 3.2% as being all due to inventories, and made the case that GDP growth based on inventories is unsustainable.  Rush Limbaugh was one of these pessimists.  On his radio show, he said, "Excluding inventories the economy expanded at a 1.6 percent rate following a 1.7 percent pace in the fourth quarter.  So there was no economic growth... it was just inventory adjustments, not real growth.  One-point-six percent is nothing to write home about."

Rush is right that economic growth from inventories is not sustainable over the long run; it's a short to medium term phenomenon at best.  However, he's wrong about it not being real economic growth.  The fact is, inventory-related economic growth is just as good as any other kind of growth, in terms of generating jobs and income (worker compensation and corporate profits).

The chart above shows the 3 quarter moving average of how much the change in inventories contributed to real GDP (with recession shading).  As you can see, each recovery is characterized by a big contribution from inventories.

Looking ahead, after the current quarter (Q2), inventories are not going to contribute to growth like they have since the middle of 2009.  But the other components of real GDP will combined, starting this quarter, contribute much more to growth.  Real consumer spending should continue to grow at about a 3.5% annual rate and business investment in equipment will be growing at about a 10% annual rate.  Home building will also be growing and commercial construction should no longer be falling as it has in the past year.

So while it's true that a large portion of Q1 GDP was due to the change in inventories, saying it's not real economic growth is way off base.