NEW YORK (April 26th) - Gross Domestic Product growth for the first quarter of 2018, or “2019Q1 GDP”, printed at a stunning 3.2%, smashing well past the consensus estimate of 2% by 120 bps. That’s 100 bps above the final 2.2% reading of the last quarter and also the 2.2% of the comparable period last year.
Average GDP growth for the last four quarters printed at 3.3 percent. That compares to average GDP growth for the prior four quarters (2017Q2 to 2018Q1) was 2.6%.
We had anticipated growth in the first quarter, at between 1.9 and 2.4 percent growth, in line with the consensus. (We had lowered the range in our March jobs report by 10bps)
The biggest gainer in GDP categories were Net Exports (“NEX”) and Gross Domestic Investment (“GDI”).
We’re always circmspect about the NEX number as it is the one that is most frequently revised, and especially since the percentage change in 2019Q1 NEX is substantially higher than other quarters in recent years.We did not see substantial changes in the first two months of 2019Q1 to warrant confidence that the U.S. is moving into an export boom. As illustrated below, it is mostly a strong recovery from a negative prior 2018Q4 and thus merely a timing difference.
GDI had excellent growth in Intellectual Property (0.39%) and non-residential construction (0.39%).
Personal Consumption Expenditures, or PCE, growh declined by more than half, to just 0.82%, from 1.66% in 2018Q4, but above the paltry 0.36 percent from 2018Q1, what had been the lowest PCE quarter in recent years. We had anticipated PCE to grow in the range of 1.2 to 1.7 percent thoughout 2019, and be a bigger contributor to the economy, but the precipitous dip in consumer confidence during the government shutdown (12/22/2018 to 1/22/2019) likely affected PCE.
We were not surprised to see 2018Q4 print in the lower end of the range we predicted. But we were,frankly, stunned by this morning’s print.
Still, based on all we see, we expect 2019 Q2 to print only in the range of 2.5 to 3.0 percent. Watch for our monthly jobs reports, where we go through multiple datapoints, for revisions up or down on that number.The IBD/TIPP index of Economic Optimism for April dropped to just 54.2, just moderately expansionary.
We continued to be troubled by continuing volatility and flattening in the 3Mo/10Yr yield curve, which has been narrowing, on-and-off, since the end of 2017. In March, the two terms had inverted a handful of times and continue to remain very narrow, at less than 15 bps or less for all but one day of April. It ended at just 11 bps on Thursday. Moreover, the 10 year seems to be continuing its overall decline and struggles to keep above the 2.5% rate. The continuing decline in the 10 year shows (A) that investors are moving toward bonds; moving cash from equities to Treasuries.and (B) slow European and Asian economies are moving to US treasuries as dollar flows are moving toward the US.
M2 velocity is still fairly flat, though up somewhat from 2017Q3.
We remain somewhat pessimistic over the medium term because we see recent distinct signs of a slowing economy and the extraordinarily high NEX number this quarther is likelly an outlier.
Inflation remains low, seemingly inapposite to the dogma of the Philips Curve. Likewise, a low interest rate environment, and a low M2 velocity in a relatively high-growth economy seems contrary to the Quantity Theory of Money (MV=PQ, sometimes written as MV=PT). We’re of the view that both of these rules are affected -- and possibly obsoleted by -- the Fed now paying interest on excess reserves, something in had not done prior to 2008. This is because more of money is being kept in the banking system, at the Fed, than in the regular economy. We’ve never had that before; some older economic theorems may now be consigned to the dustbin. .
We expect exports and consumer spending to return to rates consistent with the averages of the results we’ve seen in prior results we’ve seen since the Great Recession, +/- 50bps. We expect similar levels of inventory build, which would make GDP much more modest, in the 2.3 to 2.8 percent range, or lower, in mid-2019.
Our long-term view of the economy, beyond 2022Q1, remains unchanged.
Aside from AI, there’s very little in this economy we see on the horizon to create rapid, robust, growth; the “next big thing” in the way of a product or service that ramps up a sustained, substantial, uptick in production and consumption to drive growth.
President Trump’s more protectionist trade rhetoric could add foreign-owned domestic production to drive GDP growth, particularly in the GDI category. But, so far, that rhetoric has mostly been a threat to induce more fair trade policies from our trading partners. Much remains to be seen.
Direct foreign investment in the USA has actually declined as trade issues ramp up. Absent growth from some major consumer-oriented innovation, or some significant reshoring of manufacturing or other direct foreign investment in the USA, we anticipate managers will look for growth in certain low-margin industries and consolidate to realize cost savings. We also expect internet retailers, like Amazon, to realize enhanced growth by adding to their business of selling “stuff” to their nascent business of selling “experiences” - concert tickets, airlines, cruise lines,car rentals, theme parks, hotel chains, etc. INVESTMENT SUMMARY:In equities, we’re mostly inclined to stand pat with these sectors from our 2018Q4 summary, but in less proportion, and with some changes, as follows:
- Outperform: Consumer discretionaries in the mid- to high-end retail sector; trucking on speculation of consolidation and acquisition; companies or REITs that own real estate in sectors identified as "opportunity zones" under the Tax Cut and Jobs Creation Act of 2017; CHF.
- Perform: Consumer staples, energy, utilities, telecom, and materials and industrials. Lower-end consumer discretionaries, like dollar stores; the asset-light hospitality sector on speculation of stabilizing franchisee property values and room rental costs; certain leisure and hospitality; healthcare.
- Underperform: Financials; and technology; lower-end, low-quality QSRs (e.g., MCD, DPZ,Yum, etc.)on greater US delivery competition and a slowing economy; lower end hospitality on gasoline prices; currencies of developing nations, such as INR; and the GBP and EUR.
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