The first reading of the U.S. GDP for the first quarter of 2018 shows that consumer spending dropped to 1.1%. The figures may look dismal but it seems Americans chose to focus more on saving in the first two months of the year, while spending picked up only in March. Also, the impact of President Donald Trump’s tax cuts could be felt only in March.
However, consumer spending increased for the first time in three months in March. Meanwhile, both disposable personal income (DPI) and personal income increased, which seems to have propelled higher consumer expenditure in March. Moreover, the employment cost index too rose significantly in the first quarter.
Understandably, the U.S. economy is stepping up, which is a good sign. Higher disposable personal income, increasing consumer expenditure, a low jobless rate and steady GDP growth, all indicate a bullish economy. Given this scenario, it makes good sense to invest in consumer discretionary stocks that are poised to gain from the solid DPI and PCE data.
First Increase in Three Months
According to estimates released by the Bureau of Economic Analysis, U.S. consumer spending advanced 0.4% in March, the first such increase experienced in three months. Personal consumer expenditure, which makes up almost 70% of total GDP, increased 0.4% to $61.7 billion or in March, according to the Commerce Department. The leading contributors to the increase were purchases of cars and recreational goods and services like spending on household electricity and gas.
That said, the decline in consumer spending is a stark contrast to a 4% increase in the last quarter of 2017, the largest in three years.
Impact of Tax Cuts to Kick in Later
Naturally, the figure looks a shade disappointing at first glance but it seems that Americans focused more on saving and paying off bills during the first two months of the year, while started spending generously in March. Also, it is likely that unusually cold weather acted as an impediment to spending. Understandably, rising incomes are helping Americans to spend more. This saw consumer saving dropping to 3.1% from 3.3% in March.
Further, consumers started reaping in the real benefits of Trump’s tax cuts only in March due to delayed refunds. Understandably, the higher consumer spending is because of increasing wages that has resulted in higher disposable personal income.
Meanwhile, disposable personal income increased 6.2% in the first quarter compared with 3.8% in the previous quarter. More wealth, in the hands of consumers will likely bolster personal spending going forward. (Read: 5 Top-Ranked Value Stocks to Brave Decline in U.S. GDP)
Higher Wages to Spur Greater Spending
According to the Commerce Department, disposable personal income increased 0.3% to $39.8 billion in March. Also, personal income grew 0.3% to $47.8 billion in the month under review, indicating that wages increased substantially in the last month of the first quarter. This can be supported by the rise in the employment cost index. According to data released by the Bureau of Labor Statistics, the employment cost index rose 0.8% in the first three months of the year, marking its fastest pace since 2008.
Also, the cost of worker compensation advanced to a yearly pace of 2.7%, the largest increase since 2008. This is a logical outcome given that unemployment is a 17-year low of 4.1%. Although GDP increased only 2.3% in the first quarter compared with 3% experienced during the last three quarters of 2017, consumer-related indicators show signs of improvement. Moreover, the Consumer Confidence Index rebounded in April, increasing from 127 to 128.7, which is an indicator of rising consumer spending.
The fall in consumer spending in the first quarter may be disappointing after impressive growth in the last quarter of 2017. However, the uptick in consumer spending in March indicates that consumer confidence is rebounding with an increase in wages and higher disposable personal income.
Moreover, first-quarter GDP has come in above estimates despite growth slowing down from the last three quarters in 2017. But that may be just a temporary phenomenon given that consumer spending picked up only in March.
Additionally, a low unemployment rate, wage growth and the impact of tax cuts is likely to boost consumer spending in the quarters ahead. Adding consumer discretionary stocks to your portfolios looks like a prudent option at this time. However, picking winning stocks may be difficult.
This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.
We have narrowed down our search to the following stocks, each of which has a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a good VGM Score. You can see the complete list of today’s Zacks #1 Rank stocks here.
Tailored Brands, Inc. TLRD is a specialty retailer of men's suits and provider of tuxedo rental product primarily in the United States and Canada.
Tailored Brands has a Zacks Rank #1 and VGM Score of A. The company has expected earnings growth of 12.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.8% over the past 30 days.
Rocky Brands, Inc. RCKY is a leading designer, manufacturer and marketer of premium quality footwear and apparel.
Rocky Brands has a Zacks Rank #1 and VGM Score of A. The company’s projected growth rate for the current year is 29.3%.The Zacks Consensus Estimate for the current year has improved by 7.1% over the past 30 days.
Las Vegas Sands Corp. LVS is a leading international developer of multi-use integrated resorts primarily operating in the United States and Asia.
Las Vegas Sands has a Zacks Rank #1 and a VGM Score of B. The company’s projected growth rate for the current year is 21.2%. The Zacks Consensus Estimate for the current year has improved by 4.5% over the past 30 days.
Columbia Sportswear Company COLM is a global leader in design, sourcing, marketing and distribution of active outdoor apparel and footwear, with operations in North America, Europe and Asia.
Columbia Sportswear Company has a Zacks Rank #2 and VGM Score of A. The company’s projected growth rate for the current year is 12.4%.The Zacks Consensus Estimate for the current year has improved by 3% over the past 30 days.
Sony Corporation SNE develops and manufactures consumer and industrial electronic equipment.
Sony Corporation has a Zacks Rank #2 and VGM Score of A. The company’s projected growth rate for the current year is 17.3%. The Zacks Consensus Estimate for the current year has improved by 2.4% over the past 30 days.
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