The naybobs of negativism have a tough time these days when it comes to predicting the demise of growth. The final tally for GDP’s fourth-quarter expansion came in at a 3.8% annualized real rate of increase, the Bureau of Economic Analysis reports today. That’s a bit lower than the consensus outlook of 4.0% that economists expected, but a respectable advance nonetheless. Indeed, 4% to 5% is the average annualized GDP growth rate (based on quarterly data) that’s prevailed over the past ten-plus years, and so it’s not out of bounds to say that the economy’s close to advancing at its average pace.
And the momentum looks set to continue, by some accounts. “The economy at the moment has a pretty good tail wind,” Anthony Chan, senior economist at JP Morgan Asset Management, tells BusinessWeek today. Some economists expect this year’s first quarter GDP will rise by around 4%. If that holds up, when the government’s first estimate of the January-March period hits the street on April 28, the labor market will show respectable gains too, Ken Mayland predicts in the same BW article: “We are going to produce better growth on the job front,” says the president of ClearView Economics.
Mark Vitner, senior economist at Wachovia Securities, thinks the first-quarter GDP will rise by 3.9%. “Real final sales were revised up slightly to a 3.4% annual rate in the fourth quarter, reflecting less inventory building than previously thought,” he writes today. “With inventories already lean relative to sales, production now appears set for slightly stronger gains in 2005.”
What’s driving GDP? As usual, the consumer plays no minor role. Joe Sixpack has been busy handing his credit card around town. We know that because we see him at the malls, the car dealers, and audio shops. He’s not quite sated, and there’s one more credit card application waiting for him in today’s mail. Par for the course. “The major contributors to the increase in real GDP in the fourth quarter were personal consumption expenditures, equipment and software, and private inventory investment,” BEA reports.
Presumably, Joe will be at the forefront of any first-quarter GDP advance as well. But it’s an open question if the stock market sees the same future unfolding. The S&P 500 has slipped 2.5% so far this year. That’s hardly a ringing endorsement of the notion that the economy has continued to hum along this year. True, earnings have been quite strong in recent quarters, but on a valuation basis the trailing price-earnings ratio remains stuck around 20, or roughly where it’s been since last summer.
The view from the equity markets doesn’t get any better if you break stocks into growth and value components. The Russell 1000 Growth Index (a proxy of large-cap growth stocks) is off more than 8% year to date. That’s a steeper fall than the 5.6% loss YTD for the Russell 1000 Value Index, and more than two times the red ink logged by the broad market, measured by the S&P 500.
So what’s an optimist to think? Perhaps he can start with some questions. How about this teaser: Shouldn’t growth stocks be taking the lead over value stocks if the economy is advancing at a healthy clip? Or, are we to conclude from the recent meanderings of the major indices that Mr. Market has stumbled in connecting the macro-economic dots to equities.
Clearly, the stock market was encouraged today by the drop in oil prices and the confirmation that the fourth-quarter GDP exhibited decent growth. But additional declines in oil are needed to inject more life into stocks. Meanwhile, the consumer needs to keep spending. The two may be connected to a degree that some investors aren’t yet willing to accept.
By one measure, there’s reason to wonder if consumers are willing to forge ahead with purchases above and beyond current levels given the still-uneasy outlook for energy prices. “It’s clear that concerns over prices — especially gasoline — are hitting consumer confidence hard,” says Jerry Thomas, president and CEO of Decision Analyst, which today announced that its U.S. Economic Index fell to its lowest since last October. “As long as consumers remain uncertain about the cost of such an essential commodity, it’s hard to see a strong performance for the economy.”
It’s even harder to see the stock market barreling higher without a material fall in energy prices. Indeed, when it comes to energy, gasoline prices offer a closer measure of how consumers will be thinking in the near future. On that score, there’s reason to stay cautious, despite today’s drop in crude oil prices. Gasoline futures, in short, keep flirting with new highs. The sell-off in crude, in other words, has yet to carry over into gasoline. Or do we have that backwards: the sell-off in crude has yet to catch up to gasoline?
Deciphering a proper answer may not be imminent in the divergent paths of two the two fuels. Consider today’s confusing signal in the latest inventory reports from the Energy Department. Crude oil stocks continue to rise, and now reside in the upper half of the average range for this time of year. “Everyone who can produce oil is pumping whatever they can because of these high prices,” John Kilduff, senior vice president of energy risk management with Fimat USA, tells Bloomberg News. But gasoline supplies fell, surprising many analysts who thought a rise was in the offing. Was that just an anomaly in a marketplace where gasoline stocks are otherwise building? Or was today’s gasoline stocks’ drop a sign of continued stress on the nation’s aging, and increasingly overworked refinery system?
For the moment, gasoline’s bull market is offsetting crude’s decline. Crude futures, after dropping sharply, rallied near the end of the session. Crude v. gasoline. Who’s right? Who knows, but we’ll soon find out, and the implications will be something more than trivial for the consumer, and thereby the economy and the stock market. Welcome to the other conundrum.