In last week’s column, it was mentioned that the market was sort of marking time ahead of three major events and that this week’s column would discuss them in further detail and what their effect on stocks turned out to be.
The first one of these major events was the initial estimate for the first quarter of 2014’s G.D.P. growth. The word “growth” was certainly stretching it as the U.S. economy advanced by just 0.1 percent during the first three months of the year, which was well below market expectations. It was the worst quarter of growth since the last three months of 2012, when the economy also eked out a 0.1 percent advance.
Obviously the miserable weather that subjected much of the country to record amounts of snow, sleet and frigid temperatures was not very conducive for consumers to go out and shop. Some observers regarded this slowdown as a sort of breather from the strong growth in the second half of 2013, when G.D.P. averaged 3.3 percent.
On the other hand, some things cannot be explained away by poor weather as capital expenditures on durable goods declined and exports collapsed by $40 billion due to weak overseas demand. But consumer spending, which makes up 70 percent of the economy, rose by more than four percent, which was the fastest pace since the second quarter of 2000. Unfortunately, much of this increase was attributed to spending on utilities, as people stuck at home had to turn up the heat and electricity. Expenditures on health care rose by a large $443 billion.
Government spending also took its toll, as it has for 12 out of the past 15 quarters, with the biggest slowdown coming from state and local jurisdictions, in addition to national defense spending.
The good news is that much of this weather-induced slowdown should reverse itself with the advent of warmer weather, and we have already seen new economic reports that justify this line of thinking, as economists are now predicting second-quarter growth in the 2.5–3 percent vicinity.
The second major event also took place last Wednesday as well, with the latest statement from the Federal Reserve on the state of the economy and the outlook for interest rates. Since they obviously had the numbers before they were released to the public, their statement looked past this dismal reading of first-quarter G.D.P. and they actually gave a mostly upbeat assessment of the economy’s prospects at the same time that they announced another taper of their bond-buying stimulus program.
Their prepared statement said that recent information “indicates that growth in economic activity has picked up after having slowed sharply during the winter in part because of adverse weather conditions.” They added that “household spending appears to be rising more quickly, although business investment edged down.”
The central bank has now reduced its monthly bond purchases by a cumulative $40 billion in four consecutive steps. This gradual tapering will bring an end to a period in which their balance sheet quadrupled to more than $4 trillion through three separate purchase programs that were put into effect to deal with the financial crisis and the recession that followed. The projected end of the programs next year will then raise the question of when they are going to move the federal funds rate above the near-zero level it has been at since late 2008. They said that they will keep this overnight target rate between zero and .25 percent for a “considerable time” after the bond buying ends, which will be in the autumn of this year.
The third major event was last Friday’s April jobs report, which turned out to be a real whopper, once again completely removed from what various economic “experts” had predicted. An astounding 288,000 positions were created last month, the most in more than two years, and there was an upward revision of 36,000 in February and March. This was now the third straight month of more than 200,000 jobs being added.
Unfortunately there were some shortcomings here as well, as average hourly earnings remained unchanged and the decline in the unemployment rate down to 6.3 percent, the lowest since September 2008, was strictly a function of the shrinkage of the size of the labor force by 806,000. The labor force participation rate, which is the share of working-age Americans who are employed or unemployed but looking for a job also fell by 0.4 percent to 62.8 percent, which matched the lowest level in 36 years that was also reached last December.
Gains were led by the services industries which added 75,000 and by construction which added 32,000. This average gain of over 200,000 jobs for the past three months compares to the gain of 194,000 per month last year and does show a slight recent improvement.
Meanwhile, as was mentioned previously, some economic reports recently released do show that the economy is coming out of its winter slump as the April Chicago Purchasing Managers’ Index rose to its highest level since last October, March personal spending increased to its highest in four and a half years, the April ISM Manufacturing Survey rose for the third straight month and most importantly, the April ISM Non-Manufacturing Survey, which covers more than 80 percent of the economy, showed the fastest growth in eight months.
It was no coincidence that the Dow Jones Industrial Average finally closed at its best level ever last week at 16,580, joining the S&P which reached its own record high early last month at 1891. It would appear that with first-quarter earnings coming in much better than recent expectations, with a profit growth of 4.6 percent with almost 80 percent of the S&P members having reported and inflation remaining under control and a still friendly Fed at the market’s back, stocks can continue to chop irregularly higher with modest setbacks along the way.
The supposed negative market impact from the goings-on along the Ukrainian-Russian border appears to be more of a media “explanation” to justify any recent down-days that we have had and none of this really affects our economy. As an example, oil prices have recently pulled back below $100 a barrel due to record U.S. inventories and bond yields are at multi-month lows, which makes the ownership of stocks more attractive on a comparative basis between these two asset classes.