The Market Today

Economy Grew 2.3% in the First Quarter as Wage Pressures Picked Up

by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR – Economy Grew 2.3% in the First Quarter as Wage Pressures Picked Up: As expected, growth in the first quarter slowed from the brisk pace that closed out 2017. The economy grew a still-respectable 2.3% to start 2018, slightly stronger than the 2.0% pace expected but down from 2.9% in 4Q17. Within the details, a pullback in personal consumption combined with slower private fixed investment and softer government spending to more than offset a positive swing in inventories and external trade. Personal consumption rose a dispirited 1.1% in 1Q after a stellar 4.0% pace in the final three months of 2017 and registered its weakest quarter since 2Q13. The slowdown shaved a full 2% from headline growth relative to 4Q17. While a disappointment, the better retail sales results in March, stronger reading on auto activity recently, continued strength in consumer confidence, and estimated effects from the tax cuts all create the expectation for a pick-up from 1Q’s disappointing pace.


In the fixed investment categories, business spending slowed from 6.8% to 6.1% and residential activity was unchanged after a 12.8% gain in the previous quarter. Business spending on equipment slowed from 11.6% to 4.7% and was enough to offset an improvement in outlays on structures and intellectual property. In the non-fixed business category, inventories rose $33.1B in the first quarter which added 0.4% to the headline figure, representing a nearly 1% swing in the contribution compared with last quarter (+0.43% vs -0.53%).


As for trade, a drop-off in imports was consistent with slower consumer spending and steep enough to make trade a positive contributor to growth even as exports slowed. Total trade added 0.2% to growth after subtracting 1.2% in 4Q17. Government spending slowed at both the federal, state, and local levels. As a result, total government spending added 0.2% to growth compared with 0.5% in the previous quarter.


Bottom Line: There was a moderation of activity in the first quarter as can been seen by final sales to domestic purchasers, which removes the effect of some more volatile categories, slowing from 4.5% in 4Q17 to 1.6%. This was due in large part because of significantly slower consumer spending. But as mentioned above, the expectation is for consumers to come back in coming months. The slower pace for business spending is consistent with softer trends in capital goods activity but our expectation has been for the tax-related boost to investment to come in the second half of this year and beyond. Government spending is expected to pick up as a result of the recent budget deal and should give a resulting boost to overall growth. As a result, we expect second quarter growth to show an improvement from the slow start to the year.


In an equally as important report, the BLS’s employment cost index rose 0.8% in the first quarter, better than the 0.7% expected and equal to its best pace of the cycle. The index, which tracks how much employees are costing companies, considers cash wages as well as other forms of compensation such as benefits and training costs. As a result, it is generally considered to be a better gauge of wage inflation than average hourly earnings. Encouragingly for the Fed, wage growth was a primary reason why. For private industry workers, total compensation was up 2.8% from a year ago as wages rose 2.9%, the fastest since 3Q08. Benefit costs were also stronger. The report affirms that a tightening labor market and stronger economy are starting to support higher wages. For the Fed, this should add to their confidence that they can continue with gradual rate increases.



Yesterday – Earnings Lifted Stocks and Rates Dialed Back the Pressure: Thursday proved to be a big day for U.S. equities as positive earnings boosted sentiment and yields pulled back to provide less of a headwind. The S&P 500 gained just over 1% Thursday as shares of technology companies rallied to lead a day of broad-based gains. The tech sector, with Facebook out in front, moved up 2.27% in its best day in more than two weeks. Facebook, which has been hampered lately by privacy concerns, moved up 9% in its single biggest daily gain since January 2016. The company reported better-than-expected revenue and earnings and stable user activity. Consumer discretionary was the second strongest sector, with shares of Chipotle (best daily performer in the S&P) notching their biggest gain in company history after a positive earnings report. Treasury rates also got out of the way as the 10-year yield pulled back 4.5 bps to close below 3.00% at 2.98%. Yields had moved lower overnight with European sovereigns as investors awaited the ECB’s latest decision. The ECB left policy unchanged and Draghi balanced the bad with a good in a relatively down-the-middle press conference. The 2-year Treasury yield was essentially flat at 2.48%. The Dollar firmed for a seventh time in nine sessions to a 15-month high.


Overnight – Mixed Equities and Lower Yields as BoJ Holds and U.K. Data Disappoints: Global equities improved modestly overnight, taking their cue from yesterday’s tech-led U.S. rally. Asian markets were exclusively higher but the Stoxx Europe 600 was flat as steep losses for Italy’s MIB offset modest gains elsewhere. U.S. equity futures were mixed before this morning’s 1Q GDP and employment cost index data. The Dow was trailing the S&P, both were negative, while the Nasdaq reflected continued strength for tech. Also ahead of the U.S. economic data, the Treasury curve had inched lower and flatter with the 2-year down 1.0 bps at 2.47% and the 10-year down 1.7 bps at 2.97%. That trend was consistent with shifts in other sovereign curves. The Japanese 10-year yield pulled back from a two-month high after the BoJ kept its policy unchanged and continued to (unofficially now) expect below-target inflation until at least fiscal 2019 (April 2019-March 2020). Just before that decision, core inflation in Tokyo, seen as a leading indicator for national trends, edged back to 0.6% YoY. Also drawing attention in the region was positive peace talk from the leaders of the Koreas after a historic meeting between the two. U.K. Gilts were leading the way lower for yields across Europe, after data showed growth in the 1Q was the weakest since 2012.

The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
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