Last week marked the 3rd revision to 1st quarter GDP. Each revision has just presented more and more bad news. A deeper look into 1st quarter GDP, expectations for the 2nd quarter, and the remainder of the year seems to be in order.
Q4, 2013
Let us start with a reminder regarding 4th quarter 2013 GDP. When initially reported at 3.2% in January, the expectations for 2014 GDP were projected to reach 3%. Keep in mind the average GDP of this expansion has been a meager 2.1% annualized rate[2]. Then came the 1st quarter…
Q1, 2014
Activity during the first quarter was marked by a harsh winter that kept the consumer, housing, and business investment at bay. There have been three estimates released regarding the 1st quarter and they have all progressively gotten worse:
- Initial estimate: .1% annualized growth
- 1st revision: -1.0% annualized contraction
- 2nd revision: -2.9% annualized contraction
The latest revision showed weaker than expected healthcare spending, which attributed to -1.3% of the most recent revision[3]. Needless to say, expectations for 2014 growth began to get lowered with each revision. Something else that has come about has been lofty expectations for the 2nd quarter as a rebound from the harsh 1st quarter results.
Q2, 2014
The problem with this expectation is that consumer spending has not surged as hoped; being 70% of GDP makes consumer spending very important. The expectation is still for positive quarterly growth, but increasingly unlikely that it will be enough to have us in positive territory for year (+2.9% annualized).
There are a few encouraging aspects that could lead to a moderate growth year, but nothing near the 3% originally projected. The recent improvements in the housing market, which I discussed in detail in last week’s blog, https://ffsinv.com/home-sale/. Another major improvement is that merger and acquisition (M&A) activity is at a seven year high of $1.75 Trillion[4].
Global M&A activity is a very strong indicator of business sentiment about future growth prospects. It is a positive trend when companies are willing to part with capital to acquire other companies for the future growth of their business. Not only is it happening, but it is happening at the highest rate since 2007. Another notable fact is that much of the M&A activity of that time was related to erasing accumulated debt, while this year’s M&A activity is cash heavy and viewed as moves to extend the reach of the acquiring companies[5].
H2, 2014
Expectations should become more realistic as 2nd quarter GDP gets released at the end of July, but for arguments sake, say we reach 2.9% annualized, bringing our YTD GDP to zero. We would have to run at a 4.2% rate for each subsequent quarter to reach 2.1% for the year. By the way, 4.2% has only been attained once during this expansion. PMI indicators have progressively been pointing to an improving environment since January, which could help our cause.
PMI indicators are leading in nature and give us a strong idea of the manufacturing and services industries in our economy. Since January these indicators have strengthened each month, which should show a boost GDP for the 2nd half of the year.
Should the economic landscape soften, Janet Yellen, President of the Federal Reserve Board, has made it clear that current economic conditions drive their actions. This could come in the form of a one or two month stay on the current taper program, however unlikely.
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Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services. Broad diversification across several asset classes with a long term holding strategy is the best strategy in any market environment. Any and all third-party posts or responses to this blog do not reflect the views of the firm and have not been reviewed by the firm for completeness or accuracy.