August 26, 2016

Major components of US economic growth (GDP)

Major components of US economic growth (GDP)


The major stock market averages opened higher this morning in front on Janet Yellen’s Jackson Hole speech. The Dow and SPX are currently up 87 pts & .5%, respectively. This is neither a classic “risk-on” nor a “risk-off” day. In fact, nine of ten major market sectors are up by pretty much the same percentage. The VIX Index is trading around 12.7, but the upcoming election is driving up VIX December futures to around 18. That means some volatility as we exit the year. The dollar is flat on the day and WTI crude oil is trading up a bit to $47.69/barrel. Bonds are broadly unchanged. The 5- and 10-year Treasury yields are currently trading at 1.14% and 1.55%, respectively. So Ms. Yellen’s speech simply isn’t riling the bond market. 

Federal Reserve Chair Janet Yellen’s prepared remarks assert that the rate hike case has “has strengthened in recent months,” and the economy is “nearing” the Fed’s targets for full employment and inflation. She was not specific, of course, about the timing of the next rate hike. And she acknowledged that the economic outlook is “uncertain.” Generally speaking, investors are done obsessing over the Fed because the Fed consists of so many dissonant voices that have been wrong more often than not about progression of economic recovery. This may account for the fact that the bond market isn’t moving today. 

Second quarter gross domestic product (GDP) was revised down a bit to 1.1% growth. Believe it or not, the Personal Consumption component of GDP was revised up to a very strong 4.4% growth. So consumer spending is very healthy. In addition, the GDP Price Index, a measure of inflation, was revised up to 2.3% (and the “core” inflation gauge moved up to 1.8%). Unfortunately, GDP was dragged down by 1) weaker corporate profits, 2) lower business investment in equipment, structures and inventory, 3) a dip in residential investment, and 4) lower government spending. So pretty much the only thing propping up the economy is the consumer.  

I need to offer a couple of qualifications/clarifications regarding the GDP report. First, the pace of declines in corporate profits is moderating and it seems very likely that we’ll see significant improvement over the next couple of quarters. That’s crucial, because businesses won’t start investing in equipment and structures until profits rebound. Second, businesses have been working down inventory for a while now and pretty soon they will have to invest in replenishment. Third, the unexpected drop in residential investment is likely temporary because the housing market is strong. And finally, in order for the economy to reach the Federal Reserve’s 2.0% growth target for 2016, GDP is going to have to rebound to 3% in the second half of the year. Currently, the Atlanta Fed’s GDP Now forecast calls for third quarter growth of 3.4%. 

By the way, GDP is typically reported on a quarter-over-quarter, annualized basis. If, instead, you measure second quarter 2016 over second quarter 2015, GDP is currently running at 1.2% growth.

We got some disappointing quarterly results from Tiffany’s (TIF), Dollar General (DG) and Dollar Tree (DLTR) yesterday. Tiffany’s said tourists are spending less even as the company raised prices a bit. Same-store-sales fell 13% y/y in Europe and are down 9% y/y in the Americas. The dollar stores fell short of expectations as well. Lower food prices and cuts in food assistance programs caused same-store-sales growth to slow to 0.7% at Dollar General and to 1.2% at Dollar Tree. Both stocks tanked yesterday. Dollar General’s CEO said for the “overall US population, it seems like things are getting better,” but for dollar store customers “things have not gotten any better…arguably they are worse.” 

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