KEY DATA: GDP: -0.7% (down from +0.2%); Profits: -8.7%
IN A NUTSHELL: “The winter, a dock strike, lower energy prices and a strong dollar combined to hurt growth.”
WHAT IT MEANS: Oh, my, the economy contracted in the first quarter. Get out the towels for all those crocodile tears that I am shedding. Yes, my sarcasm has reached new heights. As it was in 2014, first quarter growth was negative. It wasn’t a big deal last year and it isn’t a big deal now. The biggest reason for the negative number was a widening in the trade deficit that subtracted nearly two percentage points from growth. The ending of the dock strike led to a sharp increase in imports and the strong dollar hurt some sales. The dock strike’s impacts are fading and the dollar seems to have largely peaked. Don’t be surprised if the April trade deficit, which comes out next Wednesday, is much lower than the huge gap recorded in March. The second big problem was business investment in structures. Lower energy prices led to a collapse in oil patch spending on rigs. But the rising energy prices have largely halted that reduction. The recent durable goods orders report points to rising business investment. Finally, the cold restrained consumer spending. That segment of the economy remains somewhat uncertain as the latest retail sales numbers were unimpressive. Those numbers, though, don’t include services, which just happens to account for nearly 40% of the economy. Services demand was solid in the first quarter. Also, the “softness” in vehicle sales is hardly supported by the positive comments coming out of the vehicle makers. May sales come out early next week and I suspect they too will point to improving household demand. Interestingly, the income side of the ledger actually posted a 1.4% rise, so maybe things really weren’t that bad in the first part of this year. Inflation remains in check.
Corporate profits tanked, also not a major surprise. The strong dollar in the first part of the year affected sales and currency translations.
MARKETS AND FED POLICY IMPLICATIONS: There are all sorts of issues with the first quarter GDP numbers that have been highlighted recently. It seems the economy is always weaker to start the year, for whatever reason that may be. It could be seasonal adjustment issues or measurement issues or whatever, but this has been a pattern for quite some time and the Bureau of Economic Affairs is trying to figure out why. That said, the real issue for the Fed, interest rates and the equity markets is where do we go from here. Recent data point to the economy picking up steam and next week we get May vehicle sales and job growth and April consumer spending and trade deficit. Most of those could be pretty good and that would change the thinking about the state of the economy. Basically, if you don’t like the economic numbers, wait a week and they will change. The decline in first quarter activity happened last year and the economy was strong for the final three quarters and I would not be surprised if a similar pattern was repeated this year.