The rating downgrade of Spain and a slew of broadly favorable
earnings reports will try to grab investors' attention today, but
they are unlikely to take the spotlight away from this morning's
mixed first quarter GDP report. Despite the GDP reading's strong
internals, the 'headline' miss will likely be the major driver of
today's trading action.
The disappointing aspect of the report is that it is not weak
enough to warrant Fed action, but also not strong enough to make
investors feel good about the Fed economy. My overall takeaway from
the report is that looking at it from the perspective of 'what
Bernanke will do,' it is not QE-friendly.
In its first read on the fourth quarter of 2011, the commerce
department reported that the U.S. economy expanded at a weaker than
expected 2.2% pace in the first quarter of 2012, down from the
fourth quarter's 3% growth rate. The expectation was for the GDP
number to be up 2.5%, though many were looking for growth rates
above that level.
While 'headline' growth rate missed expectations and dropped
from the preceding quarter's level, the composition of growth
improved. Weak spending by governments and businesses offset
surprise strength on the consumer spending front to give us the
Personal consumption expenditures (
), or consumer spending, which accounts for close to 70% of the
economy, increased by 2.9%, compared to the 2.1% increase in the
fourth quarter. Households spent more on non-durables and services
compared to the fourth quarter, driving the strong PCE gain. The
major negative contributor to growth during the quarter was
government spending, which declined 5.6% in the quarter following a
6.9% drop in the fourth quarter. Contribution from state and local
governments was also negative.
The weakness in government spending may not be that worrisome or
problematic, though it has a bearing on overall growth in the
economy. But the deceleration in business spending during the
quarter does not look promising. Non-residential fixed investment
was down 2.1% in the quarter, compared to the 5.2% increase in the
Corporate spending on software and equipment decelerated
materially from the fourth quarter's 7.5% growth pace to an
increase of only 1.7%. Inventories were less of a growth
contributor to growth this quarter, adding only 0.59% compared to
the 1.8% growth contribution in the fourth quarter.
On the earnings front,
) positive earnings surprise this morning will add to the
impressive numbers from
) after the close on Wednesday. Ford is announcing lump-sum buyout
offers to its salaried retirees and former employees vested in its
pension program as a way to bring down its pension liabilities. The
quarterly result reflected strength in North America helped Ford
offset European and Asian weakness during the quarter.
But not all earnings reports in the positive column.
Procter & Gamble's
) first quarter results were overshadowed by its lowered guidance
for the full year.
) beat on EPS, but its top-line number was a tad short.
) reported better-than-expected earnings after the close on
Wednesday, but its same-store sales numbers were on the weaker
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