The initial read on GDP was released on 4/27/18 and it was better than expected (2.3% reported vs. 2.0% expected). Although this report is lower than the pace set in the previous 3 quarters, I believe the Fed will continue on the path of raising rates. Concern of rising rates will continue into the summer months and investors should also expect to see a further flattening yield curve.
Today’s GDP and PCE reports are important pieces of a bigger picture, but it is important to combine these data points with additional, recently released information to get a better handle on what is really going on in the economy.
Consumer spending eased in Q1 versus prior quarters. As a consumer driven economy, that does draw some concern. Countering that data point, wage growth in the private sector was the strongest since 2008. So, if geo-political issues scared off spenders during Q1, it looks like we may get another shot at improving those figures. Employers continue to have a hard time finding the proper skilled labor in many cases. That dynamic promises to shore up the wage pressure for the time being. It also keeps the Feds head on the proverbial swivel.
The fun isn’t over yet! Moving on to the ‘Trump Tax Cut’. We are years away of understanding the full impact of the tax cuts, but there’s recent data that could point to positive economic impacts because of the cuts. There were concerns that companies might use the tax cuts towards buy backs vs. capital expenditures. In an article published on BloombergMarkets (source: Bloomberg), Lu Wang wrote:
“Among the 130 companies in the S&P 500 that have reported earnings this season, capital spending increased by 39%, the fastest rate in seven years, data compiled by UBS AG show.”
The article went on to note that corporate buybacks were growing at a much slower pace!
The tax cut in 2017 may actually be finding its way to where most would like to see it; capital expenditures.
In conclusion, nothing was earth shattering about GDP figure. Growth slowed a bit, but it was still above expectations. Cost pressures are picking up, as seen by the core PCE hitting its highest level since 2011. Again, that’s enough to keep the Fed on target for the next hike. Today’s report might have been enough to keep the curve in flattening mode, as well.
As we look ahead, Q2 will be the focus as to how the economy responds to a modest slowdown. Consumer spending should likely rebound, but that’s not a given at this point. The interest rate environment will no doubt play a factor. How will the investors ultimately react to increasing cost pressures? The synchronized global growth story is at stake. Investors want reasons to believe the growth story is still intact. But as we saw in Q1, their patience has been replaced by anxiety.
The data will hold the answer. We’re keeping a close eye out for clues. Stay Tuned!
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