Wednesday, January 30, 2013
The shock of the negative GDP report likely overshadows the
positive ADP report in today's trading action, but it shouldn't.
The negative print is due to one-off factors that will reverse in
the current period and are in no way indicative of more trouble
ahead. In fact, core areas of strength in consumer and business
spending seem to indicate more momentum in the economy as it
exited 2012. The GDP shock aside,
Amazon
(
AMZN
) and
Boeing
(
BA
) will be in the spotlight, with Boeing coming out with a
positive surprise and Amazon's earnings miss failing to hide the
long awaited positive turn in its margins.
The January ADP jobs report came in better than expected this
morning, setting us up for a potentially positive surprise in
Friday's January non-farm payroll report. But the negative
shocker came from the fourth quarter GDP report - the
government's first read on the last quarter of the year. Since
it's the first read, it will most likely get revised in the
coming months as more data becomes available (the government
estimates the inventories and trade data for the last month of
the quarter). But the sight of a negative GDP print, the first
since 2009, is nevertheless a shock for the market, particularly
given where stocks have reached in recent days.
The -0.1% contraction in fourth quarter GDP was weaker than the
+1% growth that the market was looking for. The sharp
deceleration from the third quarter's 3.1% growth pace is mostly
due to factors that are either temporary (effects of hurricane
Sandy) or not reflective of underlying momentum in the economy.
Lack of private sector inventory accumulation, trade deficit, and
weak spending by government dragged down GDP growth. The parts of
the economy that really matter - spending by households and
businesses - showed acceleration from the third quarter's pace.
Non-residential fixed investment (or business spending) increased
at 8.4% rate, compared to the 1.8% decline in the third quarter.
The two sub-categories within this account are non-residential
structures and equipment & software. Structures decreased at
a -1.1% compared to the 'unchanged' reading in Q3 and equipment
and software growing at 12.4% compared to the 2.6% decline in the
third quarter. Consumer spending, the biggest part of the economy
at close to 70% of the total, increased at a 2.2% pace compared
to the 1.6% growth rate in the third quarter. All the
sub-categories within the consumer spending account, durable
goods (+13.9% vs. +8.9% in Q3), non-durable goods (+0.4% vs.
+1.2%), and services (+0.9% vs. +0.6%) showed gains.
The spending performance is particularly noteworthy given the
headwinds in the fourth quarter of 2012, from a bitterly fought
presidential election to 'Fiscal Cliff' and anemic jobs market.
The key issue going forward on the consumer spending front will
be the extent of negative impact that the reversal of the payroll
tax cut will have on household budgets and spending. The sharp
drop in consumer confidence in the Conference Board and Michigan
surveys doesn't bode well on this front, but the predictive value
of these confidence surveys is less than fool proof.
Sheraz Mian
Director of Research
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