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Retail Sales and Manufacturing to Boost U.S. Q2 GDP: 5 Picks

Nalak Das

The U.S. economy, despite being in its historically longest 11-year stretch, still has ample room for growth. Strong retail sales data and a rebound in manufacturing output in June clearly indicate that a near-term recession is uncalled for in spite of the lingering trade conflict with China and a slowing global economy.

Several strong economic data such as retail sales, manufacturing output and nonfarm payroll are likely to boost U.S. GDP in the second quarter of 2019.   

Strong Retail Sales Data in June

On Jul 16, the Department of Commerce reported that U.S. retail sales in June increased 0.4%, surpassing the consensus estimate of 0.2%. June marked the fourth consecutive month of retail sales growth. Year over year, retail sales grew 3.4% in June.

Moreover, core retail sales (excluding automobiles, gasoline, building materials and food service) jumped 0.7% in June. May’s core retail sales were also revised upward to 0.6% from 0.4% reported previously. Core retail sales increased for the third consecutive month. Notably, this is a key economic metric as it corresponds most closely with the consumer spending component of U.S. GDP.

Strong core retail sales growth in April, May and June indicates an impressive rebound in consumer spending in the second quarter of 2019 after it grew the a slowest pace in any first quarter. Notably, consumer spending constitutes more than 70% of U.S. GDP.

Manufacturing Output Rebounds in June

On Jul 16, the Federal Reserve reported that U.S. industrial production in June was unchanged from the previous month compared with consensus estimate of growth of 0.1%. However, manufacturing output grew 0.4% in June, recording the biggest monthly growth in 2019 and posting the second successive positive growth after 0.2% growth in May.

Within the manufacturing sector, business equipment and construction grew by 0.5% while the consumer goods segment remained unchanged. Despite strong performance in June, year over year, manufacturing output declined 2.2% owing to imposition of tariff and retaliatory tariff, and a rising U.S. dollar. Notably, the manufacturing sector constitutes nearly 12% of U.S. GDP.

Robust Labor Market

On Jul 5, the Department of Labor reported that the U.S. economy added 224,000 jobs in June better-than the consensus estimate of 161,000. The U.S. economy added 172,000 jobs per month on average in the first half of 2019. The unemployment rate edged up to 3.7% from 3.6%. However, the rise is mainly due to a 0.1% increase in labor force participation rate to 62.9%, the highest since March.

What to Expect From Fed?

On Jul 10, in a testimony to the House Financial Services Committee, Fed chair Jerome Powell said that the United States is suffering from a bout of uncertainty caused by trade tensions and weak global growth. Powell reiterated Fed’s commitment to act as appropriate to sustain U.S. economic expansion, providing a clear message for a rate cut possibly in the upcoming FOMC meeting scheduled on Jul 30 - 31.

Market participants are expecting 100% probability of a 25 basis-point rate cut in July while 20% probability of a 50 basis-point rate cut. However, after Powell’s testimony, a series of U.S. economic data like consumer price index, retail sales, manufacturing output in addition to job data raised questions on whether the central bank will reduce benchmark interest rate at all in July.

Meanwhile, on Jul 16, Powell again repeated his pledge to “act as appropriate” to keep the U.S. economic expansion going in a speech delivered in Paris. Per the Fed chair, business investment, housing investment and manufacturing output weakened considerably. Although second-quarter GDP estimate has been raised to 1.4–1.8%, it is still below the 3.1% growth rate of the first quarter. The Fed is likely to cut rate in July but more than a quarter basis point cut is unlikely.

Our Top Picks

At this stage, it will be prudent to invest in stocks from the retail and manufacturing sectors, especially from those segments which performed well in June.

We have narrowed down our search to five such stocks a favorable Zacks Rank and strong growth potential. Each of our picks sports a 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.

Amazon.com Inc. AMZN engages in the retail sale of consumer products and subscriptions in North America and internationally. It operates through the North America, International, and Amazon Web Services segments. The company has expected earnings growth of 31.8% for the current year and 43.9% for the next year.

Expedia Group Inc. EXPE is an online travel company, empowering business and leisure travelers through technology with the tools and information they need to efficiently research, plan, book and experience travel. The company has expected earnings growth of 19.4% for the current year and 17.3% for the next year.

Genesco Inc. GCO operates as a retailer and wholesaler of footwear, apparel, and accessories. The company operates through four segments: Journeys Group, Schuh Group, Johnston & Murphy Group, and Licensed Brands. The company has expected earnings growth of 11.9% for the current year and 12.1% for the next year.

AZZ Inc. AZZ provides galvanizing and metal coating services, welding solutions, specialty electrical equipment, and highly engineered services to the power generation, transmission, distribution, refining, and industrial markets. The company has expected earnings growth of 32.1% for the current year and 21.2% for the next year.

John Bean Technologies Corp. JBT provides technology solutions to food and beverage industry and equipment and services to air transportation industries. The company operates through JBT FoodTech and JBT AeroTech segments. The company has expected earnings growth of 5.8% for the current year and 11.6% for the next year.

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