The most recent evidence of the first quarter seasonal weakness came in the form of disappointing March retail sales numbers, which not only missed consensus estimates but also included downward revisions to prior months’ readings.
However, the chart also highlights the trend for second-half recoveries in growth. Notwithstanding these seasonal characteristics, the ongoing improvements in labor markets fueling rising incomes, falling oil prices boosting disposable income growth globally, and the rising confidence of business for capital expenditures and investments all point to a recovery in growth in the second half.
Market Realist –
The GDP (gross domestic product) estimate seems bleak, but there are several reasons why the gloomy GDP estimate is not cause for panic. The slowdown in GDP growth seems to be a temporary setback.
A harsh winter
The unusually harsh winter seems to have contributed to the slowdown, restricting growth in consumer spending (XLY) (XLP) to 1.9%, as you can see in the above graph. Spending on cars and clothing declined in the quarter since consumers preferred to stay indoors on account of the cold climate.
On the other hand, the weather induced increases in expenditures on gasoline- and energy-related products (XLE), housing (IYR), and utilities (XLU) with growth of 5.6% and 4.6%, respectively. The breakdown in consumer spending is consistent with weather-related headwinds, indicating that the slowdown was transitory.
The above graph shows how business spending declined in the previous quarter. Total business investment spending declined 3.4% for the quarter due to headwinds from the mining and energy sector (XLE). However, BEA (U.S. Bureau of Economic Analysis) data indicate that not all components were negative.
Research and development, software, and transport equipment rose by 12.3%, 5.8%, and 23.7%, respectively. The adverse effects of the oil price slump are likely to decline as we progress into the year, which should help propel business spending higher.
Consumer sentiment continues to remain buoyant. The April preliminary estimate for the University of Michigan’s Consumer Sentiment Index came in higher than expected at 95.9. This was higher than the March estimate of 93.
Consumer sentiment is likely to propel consumer spending now that the climate has settled down. Consumers also have more purchasing power in hand due to low oil prices (USO). This should help spur spending going forward.
The housing sector
The housing sector (VNQ) seems to be shaking off the effects of the weather as well. According to the National Association of Realtors (or NAR), existing home sales for March increased by 6.1% to an annualized rate of 5.19 million. This is the highest since September 2013. Single-family home sales increased to an annualized rate of 4.59 million, an increase of 5.5% according to the NAR.
The IMF (International Monetary Fund) estimates that the US economy will grow at a healthy 3.1% in 2015. The outlook is brighter than the current estimate, and a rebound is likely next quarter.