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Consumer Spending and Business Investment Disappoint US Economy

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Consumer spending revised down

Personal consumption expenditure, or PCE, which represents the biggest chunk of economic output, rose at a downwardly revised 1.8% pace in 1Q15, much slower than the 4.4% pace set in 4Q14. The fall in crude oil prices, which has affected commodities and energy ETFs such as the United States Oil Fund, LP (USO) and the VanEck Vectors Oil Services ETF (OIH), provided a windfall to consumers. But consumers have shown no inclination to spend that windfall.

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Tepid consumer spending negatively impacts ETFs including the Consumer Staples Select Sector SPDR Fund (XLP) and the Consumer Discretionary Select Sector SPDR Fund (XLY). XLY invests in companies such as Walt Disney (DIS), Home Depot (HD), and Comcast (CMCSA). Together, these companies form ~20% of the ETF’s holdings.

A strong economy is one of the factors the US Federal Reserve looks at when deciding when to raise the federal funds rate.

Business investment contracts

A contraction in nonresidential fixed investment, or business investment, contributed to the contraction in US economic growth in 1Q15. Business investment fell by 2.8% in 1Q15 after having risen by 4.7% in the previous quarter.

Business investment was hurt by investment in business structures, which dropped by 20.8% in 1Q15, following a 5.9% increase in 4Q14. This double-digit collapse is a result of oil and gas companies reducing investments. A slowdown in mining activity may also have contributed to this fall.

On the other hand, residential fixed investment helped cushion the blow to US economic growth. Investment in this category was up 5% in 1Q15, following a 3.8% rise in the previous quarter. It was driven higher thanks to an upward revision in single-family home purchases.

Corporate profits tank

After-tax corporate profits fell by $125.5 billion, or at a 5.9% quarterly rate in 1Q15. In the previous quarter, profits had fallen by $30.4 billion, or by 1.4%. The 1Q15 slide was led by a fall in domestic profits of nonfinancial corporations, whose profits dropped by $100.4 billion.

The third estimate related to the economic growth rate in 1Q15 will be released on June 24, 2015.

Durable goods orders fell in April. We’ll look at this report in detail in the next article.

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