Wednesday, January 30, 2013
The shock of the negative GDP report likely overshadows the positive ADP report in today’s trading action, but it shouldn’t. The negative print is due to one-off factors that will reverse in the current period and are in no way indicative of more trouble ahead. In fact, core areas of strength in consumer and business spending seem to indicate more momentum in the economy as it exited 2012. The GDP shock aside, Amazon (AMZN) and Boeing (BA) will be in the spotlight, with Boeing coming out with a positive surprise and Amazon’s earnings miss failing to hide the long awaited positive turn in its margins.
The January ADP jobs report came in better than expected this morning, setting us up for a potentially positive surprise in Friday’s January non-farm payroll report. But the negative shocker came from the fourth quarter GDP report – the government’s first read on the last quarter of the year. Since it’s the first read, it will most likely get revised in the coming months as more data becomes available (the government estimates the inventories and trade data for the last month of the quarter). But the sight of a negative GDP print, the first since 2009, is nevertheless a shock for the market, particularly given where stocks have reached in recent days.
The -0.1% contraction in fourth quarter GDP was weaker than the +1% growth that the market was looking for. The sharp deceleration from the third quarter’s 3.1% growth pace is mostly due to factors that are either temporary (effects of hurricane Sandy) or not reflective of underlying momentum in the economy. Lack of private sector inventory accumulation, trade deficit, and weak spending by government dragged down GDP growth. The parts of the economy that really matter – spending by households and businesses – showed acceleration from the third quarter’s pace.
Non-residential fixed investment (or business spending) increased at 8.4% rate, compared to the 1.8% decline in the third quarter. The two sub-categories within this account are non-residential structures and equipment & software. Structures decreased at a -1.1% compared to the ‘unchanged’ reading in Q3 and equipment and software growing at 12.4% compared to the 2.6% decline in the third quarter. Consumer spending, the biggest part of the economy at close to 70% of the total, increased at a 2.2% pace compared to the 1.6% growth rate in the third quarter. All the sub-categories within the consumer spending account, durable goods (+13.9% vs. +8.9% in Q3), non-durable goods (+0.4% vs. +1.2%), and services (+0.9% vs. +0.6%) showed gains.
The spending performance is particularly noteworthy given the headwinds in the fourth quarter of 2012, from a bitterly fought presidential election to ‘Fiscal Cliff’ and anemic jobs market. The key issue going forward on the consumer spending front will be the extent of negative impact that the reversal of the payroll tax cut will have on household budgets and spending. The sharp drop in consumer confidence in the Conference Board and Michigan surveys doesn’t bode well on this front, but the predictive value of these confidence surveys is less than fool proof.
Director of Research