The economy expanded at its slowest pace in two years in the first quarter, the government reported today, handing pessimists one more piece of ammunition for claiming that a slowdown is upon us.
Economists were generally expecting a real annualized rise in first-quarter gross domestic product (GDP) of around 3.5%. Instead, the number came in at 3.1%, the Bureau of Economic Analysis advised. That’s a long way from the 3.8% logged in the fourth quarter.
For those intent on seeing the glass still half full rather than half empty there was this tidbit: the all-important personal consumption expenditures (PCE) fared slightly better, rising 3.5%. That’s down from 4.2% in the fourth quarter, but the fact that PCE’s still advancing above GDP’s pace keeps hope alive that Joe Sixpack hasn’t written off trips to Wal-Mart and Home Depot just yet.
Meanwhile, the oil market extracted the obvious conclusion from the GDP number early on in today’s trading session. For a time, a barrel of crude changed hands for under $50. Oil prices rebounded later on, but the message remained clear: the threat of decelerating economic growth in the world’s leading consumer of oil has the potential to take the wind out of the energy’s market sails.
But like radiation treatment for cancer and carpet bombing, a slowdown is a blunt instrument for cooling off the high-flying oil market. Blunt maybe, but effective nonetheless. And who says the patient has to die in the process? Not Eric Green, a money manager with Penn Capital Management who spoke with Bloomberg News. “We were bound to slow down, but the outlook for the market looks good,” he reasons. Perhaps, but the stock market seems to think otherwise, considering the S&P 500’s sharp fall today in the wake of the GDP report. Yet Green dismisses today’s market action as “overreaction,” explaining that an economy that’s still growing above 3% gives the bulls incentive to keep buying.
In a perfect world, a slowing economy will bring down the price of oil and yet keep enough momentum going for corporate earnings increases. But is such a sweet spot a reasonable expectation?
Maybe, but it’s going to take more than a day or two to muster confidence on that question. For the moment, the market needs to digest a few additional economics reports to figure out which way the economics winds are blowing. Indeed, the first-quarter GDP casts doubt over the investment outlook. Fresh data in coming weeks will either provide support for the first-quarter snapshot or sow reason for thinking it was less than representative of the morrow.
Hope, in short, doesn’t die quite so easily given the strength of earnings reports in recent quarters. The possibility of one more leg up in stock prices keeps more than a few pundits looking for another rally, or so suggests one analyst looking at the U.S. from an outsider’s perspective in Canada. “You have better than expected earnings, there’s a lot of concern about the economy and the Fed is raising rates, albeit slowly so when you look at the price action in the broad market, it seems to want to move higher but it can’t,” John Johnston, chief strategist at The Harbor Group at RBC Dominion Securities, tells
Can’t or won’t? It’s worth noting that today’s GDP report also reveals that business spending slowed sharply to 4.7% in the first quarter from a blistering 14.5% rate in last year’s fourth quarter. And then there’s the price deflator gauge, a measure of inflation, which accelerated to 3.2% from 2.3%.
Hmmm, slowing business spending, a consumer showing signs of a bit more shopping fatigue, oil prices that remain defiantly over $50 a barrel, and one more indication that inflation’s continuing to inch higher add up to a mix that broadcasts something less than confidence on Wall Street. Looks like the stagflation scare, real or imagined, still has legs.
With that cue, all eyes now turn the Federal Reserve’s interest-rate decision next week. Take it away, Alan.