Pokey Q1 Growth is History

Another first quarter, another lousy reading for growth…for the third time in five years, the US economy contracted in the first quarter of the year (2011, 2014 and now 2015). If the first time was chance, the second time a coincidence, is the third time indicative of a pattern? “The evidence of a seasonal quirk in the first-quarter GDP growth figures is pretty overwhelming,” according to Paul Ashworth of Capital Economics. While conspiracy theorists maintain that the government is manipulating the data (why on earth would they want to show slower growth?), the larger and more important issue, says Ashworth is “whether real GDP growth (and consequently productivity) is being mis-measured.” Some economists believe that the larger role that technology is playing in the economy is not reflected in the GDP report.

We’ll probably need a few more years of data to understand whether or not the government needs to adjust its models. At this point, it’s fair to say that the combination of bad winter weather, the West Coast port shutdown and shrinking investment in the energy sector due to lower oil prices, did a number on Q1 growth.

This rationale is consistent with Fed Chair Janet Yellen’s recent assessment, “my guess is that this apparent slowdown was largely the result of a variety of transitory factors that occurred at the same time…and some of this apparent weakness may just be statistical noise. I therefore expect the economic data to strengthen."

Hopefully, like in past years, after a rough first three months of the year, the subsequent three quarters will show improvement. With the first quarter now behind us, and two months into the second quarter, there are some encouraging signs that growth has snapped back, with estimates running at about a 3 percent annualized pace. That’s not exactly a breakneck pace, but we’ll take it.

Growth needs to continue to accelerate in order for employers to add to their payrolls. This week, the BLS will release the May employment report and analysts expect that the economy added 225,000 new jobs and that the unemployment rate will remain at 5.4 percent. Once again, all eyes will be on average hourly earnings, which only increased by 2.2 percent from a year ago, as of the April reading. Economists are waiting to see whether the employment cost index, which showed acceleration, will finally show up in average hourly earnings.

Greece is the word…again: Five years after the first bailout, Greece, euro zone and IMF officials must find a way to restructure $1.74B in debt before June 19th. Although Greek Prime Minister Alexis Tsipras said that a deal could come over the weekend, IMF Chief Christine Lagarde said that a Greek exit from the euro zone remained a possibility. While international markets are in better shape today than they were five years ago, a Greek default/Grexit would most certainly cause global financial tremors.

MARKETS:

• DJIA: 18,010, down 1.2% on week, up 1% YTD
• S&P 500: 2107, down 0.9% on week, up 2.4% YTD
• NASDAQ: 5,070 down 0.4% on week, up 7% YTD
• Russell 2000: 1246, up 0.2% on week, up 3.5% YTD
• 10-Year Treasury yield: 2.1% (from 2.21% a week ago)
• July Crude: $60.30, up 1% on week
• August Gold: $1189.80, down 1.2% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.73 (from $2.74 wk ago, $3.66 a year ago)

THE WEEK AHEAD:

Mon 6/1:

8:30 Personal Income and Outlays 9:45 PMI Manufacturing Index 10:00 ISM Mfg Index

Tues 6/2:

Motor Vehicle Sales

10:00 Factory Orders

Weds 6/3:

8:15 ADP Private Sector Job Report

8:30 International Trade

9:45 PMI Services Index

10:00 ISM Non-Mfg Index

2:00 Fed Beige Book

Thurs 6/4:

8:30 Productivity and Costs

Fri 6/5:

8:30 May Employment Report

3:00 Consumer Credit