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High Spending and Low Inflation to Boost Q2 Growth: 5 Picks

Nalak Das

On Apr 29, the Department of Commerce reported that the U.S. consumer spending surged in March to its highest in nine and half years. Meanwhile, personal consumption expenditure (PCE) price index -- the Fed’s most-favored inflation gauge -- increased at the lowest rate in one and half years. The movement of these two Economic metrics in opposite direction indicates a strong GDP growth in the second quarter, followed by robust first-quarter GDP.

Consumer Spending in March Jumps

Consumer spending rose 0.9% in March, following an increase of 0.1% in February and 0.3% in January. The metric is highly important as it constitutes two-third of U.S. GDP.  Consumer spending was up 2.9% year over year in March. Last week, the Bureau of Economic Analysis reported that personal consumption grew 1.2% in the first quarter of 2019, resulting in 3.2% growth in the GDP.

A high rate of consumer spending confirms that the economy is in a strong footing to likely result in solid second-quarter growth. Moreover, consumer and business spending are expected to get a boost ahead. The core durable goods data in March rose 1.3%, its highest in eight months. This is a closely watched metric for business spending plans. Notably, business spending accounts for 12% of U.S. GDP.

Benign Inflation Data

The PCE price inflation grew by 0.2% in March compared with 0.1% in February. Year over year, PCE price inflation grew 1.5% in March compared with 1.3% in February. However, the core PCE inflation (excluding volatile items like food and energy prices) remained flat in March. Year over year, core PCE inflation grew by 1.6%, way below the Fed’s target rate of 2%. Notably, household inflation – measured by core Consumer Price Index data -- grew 2% year over year in March, in line with the Fed’s target rate.

Fed Likely to Maintain Dovish Monetary Stance

On Apr 10, in its FOMC minutes, the Fed stated that the majority of its members have decided to stick to the central bank’s March decision of not hiking interest rate, signifying that the benchmark interest rate will remain within its existing range of 2.25-2.5%.

The U.S. labor market remains robust. Unemployment rate is at its 50-year low level of 3.8%. Job data for March also revealed that the average wage rate increased 0.14%. The wage rate increased 3.2% year over year in March.

Despite a record-low unemployment level and rising nominal wage rate, inflation remains within the target level of the central bank. This compelled the Fed to stick to its stand of not raising interest rate in 2019. In fact, the Trump administration earnestly wants the central bank to reduce interest rate. President Trump claimed earlier that the U.S. economy might have grown well more than 3% instead of 2.9% in 2018 had the Fed refrained from raising rate by 1% throughout the year.

Our Top Picks

The U.S. economy is likely to maintain its long-term growth albeit at a slow pace. Consequently, investment in stocks with a strong growth potential will be lucrative. Our selection is backed by a Growth Score of A and Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows price performance of our five picks year to date.

Lululemon Athletica Inc. LULU designs, distributes, and retails athletic apparel and accessories for women, men, and female youth.  The company has an expected earnings growth rate of 22.7% for the current year. The Zacks Consensus Estimate for the current year has improved 7.3% over the last 60 days. The stock has surged 46% year to date.

G-III Apparel Group Ltd. GIII designs, sources, and markets women's and men's apparel in the United States and internationally. The company has an expected earnings growth rate of 15.4% for the current year. The Zacks Consensus Estimate for the current year has improved 5.1% over the last 60 days. The stock has surged 56.5% year to date.

Upland Software Inc. UPLD provides cloud-based enterprise work management software in the United States, the United Kingdom, Canada, and internationally. The company has an expected earnings growth rate of 29.4% for the current year. The Zacks Consensus Estimate for the current year has improved 3.8% over the last 60 days. The stock has surged 71.4% year to date.

Clean Harbors Inc. CLH provides environmental, energy, and industrial services in North America. It operates through two segments, Environmental Services and Safety-Kleen.  The company has an expected earnings growth rate of 37.3% for the current year. The Zacks Consensus Estimate for the current year has improved 3.6% over the last 60 days. The stock has surged 52.3% year to date.

Herc Holdings Inc. HRI operates as an equipment rental supplier primarily in the United States and internationally. The company has an expected earnings growth rate of 85.6% for the current year. The Zacks Consensus Estimate for the current year has improved 31.4% over the last 60 days. The stock has surged 84.3% year to date.

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