Q1 GDP Growth - Leading Index Improves
ECRI leading index at the start of the year implied Q2 and Q3 would be terrible quarters for the economy. Now the index is showing signs of green shoots.
As you can see in the chart below, the year over year growth rate improved to 1.4% in the week of April 19th. The index actually fell from 148.6 to 147. But the growth rate improved because of the easier comp.
ECRI, the company, is still cautious about the economy because the leading index has been pushed higher by the stock market. Official word from the firm is that the ECRI leading index needs to be used in concert with its other propriety metrics. Since we don’t have access to those, I can’t say anything other than that they must be more bearish than this public index.
To be clear, this index is only saying the slowdown will end later this year. It’s not saying growth will be extremely strong in early 2020. Finally, it’s notable that the coincident indicator’s growth rate fell from 2.5% to 2.1% in March. This is expected because the economy is in a slowdown.
Investors expect the growth rate to keep falling in the next few months. Last cycle it bottomed at about 1%
Q1 GDP Growth - Big GDP Report, But The Details Were Weak
Real quarterly GDP growth was 3.2% which beat estimates for 2.3%. This was the fastest first quarter growth rate since Q1 2015. Furthermore, the yearly growth rate was also 3.2% making this the fastest growth in 4 years. Quarterly GDP growth has been above 2% for 8 straight quarters which is the longest streak since 2005.
Unfortunately, this report was weak because the beat was driven by a low GDP deflator, high inventories, and trade. Real final sales growth was weak. Specifically, real final sales to domestic purchasers’ growth was only 1.5%. That was the lowest growth rate in 6 years and it was 0.8% below the post-recession average.
As you can see from the chart below, nominal growth has been falling for 2 straight quarters.
Overall price growth was 0.9% which missed estimates and last quarter’s reading of 1.7% growth. Core price growth was 1.3% which missed estimates for 1.6% growth and was below Q4’s growth of 2%. Inflation is definitely falling, but many economists argue that it isn’t falling as quickly as the deflator indicates.
Q1 GDP Growth - Weak Consumer Spending Growth & Negative Residential Investment Growth
There isn’t much to like from this report. Real consumer spending growth fell from 2.5% to 1.2% which slightly beat estimates for 1.1% growth. Consumer spending added 0.82 points to GDP growth. Spending on durables hurt GDP growth by 0.38 points even though the new durable goods orders report showed orders for motor vehicles were up 2.1% in March.
On the other hand, spending on non-durables helped GDP growth by 0.24 points and spending on services helped GDP growth by 0.96 points.
As you can see from the chart below, residential investment’s contribution to real GDP growth was -0.11. It contracted at an annual clip of 2.8%. That’s the fifth straight decline. Potential improvement in the housing market have been suggesting real residential investment growth will be positive in Q2. Especially because of a strong spring selling season. We will see in the next 3 months of housing starts reports how true that thesis ends up being.
Q1 GDP Growth - Trade and inventory growth drove this GDP reading
Which isn’t ideal because they aren’t sustainable.
Lower imports can help GDP, but they mean the consumer is weak. A weak consumer implies the build up in inventories might not be desired. Specifically, net exports contributed 1.03 points to GDP growth. Imports helped GDP by 0.58 points which was the biggest quarterly contribution in 6 years.
March trade data was imputed, so it’s possible this positive impact won’t stand the test of time. First revision to this GDP report will be on May 30th. An inventory build up helped this report as inventories added 0.65 to GDP growth.
Business investment growth was strong at least as it was 2.7% and added 0.88 to GDP growth. Government spending growth was 2.4% which added 0.41 to GDP growth. Defense spending was up 4.1% and non-defense spending was down 5.9%. Since President Trump was elected, defense spending has been strong.
Q1 GDP Growth - Great Q1 Earnings Season
Alphabet stock ended up falling 7.7% on Tuesday which was its worst decline in over 6 years. Outside of this one off weakness, earnings season has been fantastic when you consider the worries about an earnings recession when it started. I always knew
Earnings Scout data wouldn’t show a decline because its estimates at the start of the quarter were only slightly negative. I’m interested to see how FactSet’s data turns out as growth was expected to fall 4% on March 31st. As of April 26th, blended estimates were for a 2.3% decline. Even if earnings end the quarter down about 1%, this isn’t a true earnings recession. Revenue growth is expected to be 5.1%.
As you can see from The Earnings Scout table below, as of Tuesday morning when 269 S&P 500 firms had reported results, EPS growth was 7.07%. That’s a mile away from an earnings recession.
Average EPS surprise has been 7.10% which is above average. 78% of firms have beaten estimates. Industrial sector is the furthest along its earnings season as 73% of those firms have reported. Utilities are the least far along as only 25% of that sector has released results.
Q1 GDP Growth - Conclusion
ECRI leading index is headed in the right direction. Final sales calculation tells us the GDP report was weak despite the headline beat.
More importantly, this earnings season has been great because the EPS surprise rate is high and Q2 earnings estimates are falling at a much lower clip than Q1 estimates did last quarter. They support this market which has refused to fall this year. I’m not necessarily a buyer, but I’m certainly not a seller because of these great earnings beats.
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