On its surface, the third estimate of Q1 2014 US GDP was bad. GDP contracted by a -2.9% seasonally adjusted annual rate (SAAR), down from the -1.0% SAAR contraction in the estimate’s first revision. Though headlines focused on the drop being the biggest since Q1 2009 (during the last recession), the consensus blamed Mother Nature—a sensible take, in our view. However, a sizable (and noisy) skeptical minority suggested the dip was really a sign the US economy is still inherently weak—leaving it vulnerable to shocks. If it really were in good shape, the winter chill wouldn’t have, um, chilled. If we’d reached escape velocity (whatever that means) we’d rocket right through snow, ice and arctic temps. (NASA technicians would probably suggest otherwise, but perhaps we’re being too literal.) But a look under the hood suggests that while things certainly weren’t rosy, in our view, they seem fleeting. And looking ahead, fundamentals suggest more growth—and bull market fuel.
The polar vortex’s impacts were still easy to see in the final reading. While the dip in residential real estate activity was less severe than initially reported (-4.2% SAAR versus a previously reported -5.0%), non-residential real estate was revised to a bigger drop (-1.6% vs. -1.2%). Consumer spending grew only +1.0%, down from the earlier-reported 3.1% growth. And spending would have fallen further if not for the single biggest positive contributor to GDP, Housing Services and Utilities consumption. Households cranked the heat! Another sign, sales of nondurable goods were revised to -0.3% from +0.4%. Trade was another attention grabber. Exports were revised down from -6.0% to -8.9%, while imports were revised up from +0.7% to +1.8%. Since exports add to GDP and imports detract, both detracted from headline growth, to the tune of 1.5 percentage points. But higher imports suggest domestic demand was healthier than initially thought. And those export figures could be impacted by weather to an extent. Getting stuff abroad or people here (tourism is an export) can easily be hampered by snow at airport hubs or ice in major seaways. None of this is good, but it’s all unsurprising given cold weather can keep shoppers indoors, snow makes shipping goods harder and rain makes constructing homes and office buildings difficult.
Weather isn’t the only culprit: Health care spending got whacked. After a +9.9% increase in the second revision, the latest showed a -1.4% drop—contributing to services spending’s big downward revision from 4.3% growth to 1.5%. But this seems tied to the Affordable Care Act rollout. The enrollment "deadline” was originally March 31. However, due to some technical snafus that hindered many folks from signing up, much less paying for insurance (or for health care services as they were waiting for payments to process), the drop dead deadline was pushed back into Q2.
Some seemingly see Q1’s GDP as the second leg down in the long-awaited, never-arrived double dip. OK, that’s partly our joke, but when you see the dour word choice and hospital patient metaphors used, it seems to us they’re not giving much credit to five years’ economic growth and what was, until Q1, all-time high GDP. Or the fact that we have already seen a dipping quarter in this expansion, to no major ill effect. Or the fact private sector growth has easily outpaced headline GDP through the expansion. No, say these skeptics, the US economy should be strong enough to weather this bad weather, regulatory rollout issues and statistical quirks. But there isn’t any evidence a slower-growing economy is more likely to tip into recession than a fast growing one. The critique we need faster growth to forestall recession rests on the notion that we won’t be out of the woods until we hit some arbitrary rate some deem as the moment you escape gravity’s pull. But GDP isn’t forward-looking and won’t tell you very much about where growth heads. And for stocks, those considering the present cycle may be thinking overall slow GDP growth is bullish.
All this is an interesting-but-irrelevant-for-investors deep dive into old data. Q1 ranged between three and six months ago and, contrary to headlines’ presumptions, stocks are forward-looking, a leading economic indicator, not a coincident or lagging one. And other leading indicators suggest recession and growth worries are overblown. The Conference Board’s Leading Economic Index rose again in May, led by a wide yield curve. The ISM Purchasing Managers’ Indexes remain in expansion with sharp increases in both services and manufacturing new orders. Corporations remain flush with cash, providing fodder for activities like share buybacks and business investment. Retail sales are high and rising, with a still relatively low sales-to-inventory ratio, suggesting orders likely continue their upward trend to replenish shelves.
In our view, investors should just chalk this one up to quirks and be thankful for a spring thaw getting the US economy to escape temperature.