The Independent Market Observer

4/30/14 – Weak First Quarter: A Surprise, But Not to Worry

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Apr 30, 2014 1:00:00 PM

and tagged Commentary

Leave a comment

Economic growth came in well below expectations this morning, at 0.1 percent instead of the 1.2 percent generally expected. Ouch. Is this something we should be worrying about?

In a word, no. I wrote the other day about different ways to look at data, and this is a great opportunity to do just that. Let’s dig a bit deeper to see what this very depressing number means.

First, the 0.1 percent is a quarter-on-quarter figure, annualized, meaning that the economy was essentially flat from the fourth quarter of last year to the first quarter of this year. Here’s another way to look at it: from an exceptionally strong quarter at the end of last year, the economy managed to stay at that pace despite multiple large hits from very poor weather. In this context, flat isn’t so bad.

Along the same lines, you may remember that the GDP number can bounce around quite a bit quarter to quarter. (If you don’t, check out last year’s figures.) So let’s look at the year-on-year number—slow but much more respectable growth of 2.3 percent, which could be better but is no reason to get upset. Again, remember, this is despite the weather effects.

Diving a bit further into the numbers, major non-weather reasons for the weak performance include lower-than-expected government spending (which can be considered positive in some ways) and an unexpected decline in business investment (which can’t). A drop in exports and housing were the major weather-related factors.

If the trend of weak growth continues, we have a problem. So the real question is, does the current data suggest that? In fact, it does not. As the weather normalized in March, activity appears to have picked up substantially. Today’s ADP employment report, for example, is quite strong, and personal consumption—think consumer spending—actually came in well above expectations as well. Auto sales, another good bellwether, were at multi-year highs for March. The most current data supports the idea that this was a snowdown, not a slowdown.

At this point, we can write off the first quarter as a weather story. What we need to keep an eye on going forward is whether the negative trends look likely to outlast the bad weather. At this point, the answer seems to be no, and I expect that to continue. Things to watch are housing construction and business investment, along with exports. I will, however, be keeping an eye out to see if anything changes.


Subscribe via Email

New call-to-action
Crash-Test Investing

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®