The economy’s slowing. That’s old news. What’s fresh is the revelation that the pace of downshifting is quite a bit steeper than some have been expecting.
The government this morning advised that first quarter GDP grew by a meager 1.3%, based on an annualized real pace. That’s sobering for a number of reasons, starting with the fact that it’s materially below the fourth quarter’s 2.5% rate. In fact, 1.3% is below every quarterly GDP change since the first quarter of 2003. Meanwhile, the consensus forecast called for something much higher today, at roughly 2.0%, according to TheStreet.com.
Judging by recent history, when GDP’s pace falls this low, it’s not a good sign about the future. Akin to a plane with a stalled engine, there’s a risk that the momentum may stall. It’s not fate, but only a fool would ignore the danger.
Yes, today’s GDP report is the first of three estimates on the nation’s economy, offering the possibility that subsequent updates may revise the growth rate upward. But let’s not gloss over the fact that consumer spending–the single-large factor in the economy–is showing signs of age in the latest quarterly profile. Although personal consumption expenditures (PCE) rose by 3.8% in the first quarter, that’s down from 4.2% previously. That’s hardly a problem, but the question is whether Joe Sixpack is now inclined to slow his pace of spending? For the moment, erring on the side of caution seems reasonable, at least from an investing perspective.
To be sure, a fall in exports and a rise in imports, combined with a drop in federal government spending all conspired with a slower rate of PCE to put the brakes on GDP in this year’s first three months. But there are other warning signs, including the upward drift in initial jobless claims, as we discussed yesterday. Meanwhile, Thomson Financial is expecting earnings growth for the S&P 500 to come in at slightly above 7% for the first quarter, according to USA Today. If so, that would end the run of double-digit earnings growth that’s prevailed for more than three years in quarterly updates.
Economists will no doubt argue endlessly over where the economy goes from here. No doubt there are more surprises on the way, both pro and con. But it’s clear that strategic-minded investors should watch closely for rebalancing opportunities coming their way in the weeks ahead if perceptions give way further to fresh data. As we’ve observed for some time now, all the asset classes have been rallying. That’s a wonderful trend, but it’s unusual and it can’t last.
Rest assured, more turbulence is coming on the macro level. Or so San Francisco Fed President Janet Yellen suggested yesterday when she the central bank may be facing the twin challenges of slowing growth and inflation. “The inflation risks are skewed to the upside,” she observed, via Bloomberg News. At the same time, she’s expects growth to slow. In fact, she said growth had slowed to a “crawl.” The ongoing fallout from housing is a factor. It may turnaround later in the year, she offered, “I…wouldn’t want to bet on it,” she added.
What to do? She recommended “watchful waiting,” for policy makers. That may or may not be prudent for an institution charged with fighting inflation. But for investors, it’s just what the doctor ordered, at least for those of us with an overweighting in money markets burning a hole in our portfolio pocket.