The Market Today
1Q GDP Jumps 3.2% on Inventory Rebuild, External Trade, Weak Inflation
by Craig Dismuke, Dudley Carter
U.S. Economic Expands 3.2% in 1Q on Trade, Inventories and Weak Inflation: The U.S. economy beat expectations expanding 3.2% in the first quarter, pushing the year-over-year growth rate up to 3.2%, on a rebuild in inventories and a decline in the trade deficit. Inventories jumped $128 billion in 1Q, the strongest quarter since 2014 and likely an unsustainable pace. As such, the GDP boost from the inventory rebuild has likely already been realized with it becoming a drag in subsequent quarters. As for trade, imports fell $33.2 billion while exports rose $23.2 billion, driving the trade deficit down 22% or $56.4 billion in 1Q. As a result, external trade contributed over 1.0% to the GDP growth, something it has done only three times since 2008. Combined, external trade and inventory growth added 1.7% to the final GDP tally, the largest contribution from those two categories in six years.
Apart from these volatile, and likely unsustainable sources of growth, the economy expanded a more modest 1.5% on increases in state and local government spending, strong federal defense spending, tame consumer and business sectors, and another drag from the housing sector. The all-important consumer benefited from a weak inflation deflator in 1Q with consumption up 1.2%, certainly not great but better than the results could have been with all of the uncertainty coming into 1Q. The core PCE deflator fell from 1.8% in 4Q to 1.3%. The 2.7% growth in business investment was modest, but better than it could have been. Residential investment fell 2.8%. Government spending added 0.4% to the GDP tally as state and local spending increased 3.9% and federal defense spending jumped 4.1%. Offsetting some of that strength, federal non-defense spending dropped 5.9%. Real final sales, the bottom-line measurement of how strong real activity in the U.S. economy was during the quarter, rose just 1.4%.
Going forward, the outsized boosts from inventories and external trade are likely to be temporary, weighing on future GDP reports. There remain questions about the consumer rebound, although the signs are generally positive. The recent capital goods data point to business investment accelerating in 2Q and residential investment is likely to see a boost from recently lower mortgage rates. Government spending should continue to be accretive. However, 1Q may prove to be peak growth for 2019 given the headwinds that trade and inventories should become.
Consumer Confidence Expected to Remain Modest: At 9:00 a.m. CT, the University of Michigan’s final revision to April’s consumer confidence report is expected to show a slight tick higher for confidence. Consumer sentiment has rebounded from the year-end drop but remains modest relative to the past 18 months.
Yesterday – Stocks Diverged on Mixed Earnings: The S&P 500 spent Thursday’s session locked in an earnings-driven game of tug of war between media and entertainment companies and industrials. Shares of Facebook surged 5.9% after a strong earnings report Wednesday and lifted the communication services sector to a second-place finish. Shares of 3M posted their largest single-day decline since 1987 on a large miss in current-quarter sales and profits and update to forward guidance that clearly missed the mark. Shares of UPS sank more than 8% and FedEx’s stock fell 4.5% after the former’s earnings missed expectations. The tension between the two sectors, in addition to mixed results elsewhere, left the S&P 500 essentially unchanged for the day. The plunge in 3M shares more than accounted for the Dow’s 135-point drop (-0.5%) while Facebook’s rally helped lift the Nasdaq by 0.2%. Despite the mixed equity performance, Treasury yields drifted gradually higher throughout the day. Yields jumped after capital goods orders signaled positive momentum for business spending heading into 2Q, pulled back as equities slumped early, but recovered modestly during the remainder of the day. An auction of 7-year notes that tailed with a more modest bid-to-cover added to the upward pressure around lunch. The 2-year and 10-year yields both rose 1.4 bps to 2.33% and 2.53%, respectively.
Overnight – Markets Mostly Quiet as Investors Await U.S. GDP: U.S. equity futures were marginally weaker as this week’s mixed-but-mostly-better-than-expected corporate earnings calendar gets ready to wrap up and Treasury yields had ticked lower ahead of this morning’s first estimate of 1Q GDP. Dow futures were leading the decline after Exxon Mobil missed on earnings. Chinese stocks led most major Asian markets modestly lower and the Stoxx Europe has swung around unchanged so far on Friday. Most foreign government bond yields were modestly lower while a notable drop in Italian yields, ahead of a credit update from S&P later today, was leading a larger decline for peripheral European countries. On the economic front, Japan’s jobless rate ticked up more than expected from its lowest level since the early 90’s and industrial production missed estimates. Retail sales, however, exceeded expectations and core inflation in Tokyo rose unexpectedly to 1.3%, the highest since 2015. Yesterday, the BoJ released updated forecasts that showed it expects inflation to reach only 1.6% by early 2022. Trade was back in the headlines with Japanese officials set to visit the White House today for related discussions and China’s President sounding acquiescent on key topics it’s currently negotiating with the U.S. President Xi said at a public forum on Friday that China “will establish a binding enforcement system for international agreements,” and “eliminate improper rules, subsidies and practices that impede fair competition and distort the market.” The 10-year Treasury yield spiked to 2.54% on the immediate announcement of growth of 3.2% but quickly retreated to 2.51% after the details showed underlying domestic demand was a weaker 1.4%.