By David Nelson
For the last several days leading into Tuesday’s final GDP reading economists were rapidly cutting their estimates in anticipation of a downward revision. Well it looks like they weren’t even close.
Gross Domestic Product (GDP) for the first quarter was revised down to -2.9%. We came into the year looking for 3% and then as the harsh weather took hold estimates were continually cut. In the end we morphed into a nearly unprecedented contraction in a non-recession period.
Don’t Jump
As bad as these headline numbers look it’s not the end of the world for stocks. A few of the more volatile categories were down substantially. Defense came in at -31% and non-defense aircraft came in at -4%. Given the geopolitical concerns building around the world I think Defense will hold this quarter and aircraft is always a lumpy number. I’m not particularly concerned for companies like Boeing (BA) and others where there’s a large secular tailwind to replenish the fleet.
The most surprising revision came from healthcare. Originally the Bureau of Economic Analysis (BEA) was pointing to a 9.9% increase in healthcare spending under Obamacare but instead it plunged to -1.4%. It’s probably still too early in the game to know where healthcare is going to come out. Obviously the models are broken and it seems these agencies don’t have a good handle on the numbers.
We already knew weather was going to be an issue so it’s not surprising that consumption, fixed investment and construction were hard hit.
No More Excuses
Most economists are looking for a big payback in Q2 with many pointing to a 4% GDP. Despite their optimism I think it is unlikely that we can get back all of the first quarter decline. Ok, No more excuses. We aren’t going to have the weather put to fall back on. We need to see economic data that matches the optimism of the Wall Street community.
Wall Street vs. Main Street
We often talk about the economic recovery and analysts like me can point to enormous gains in asset prices in the last 5 years. The market is at all-time highs so Wall Street is happy.
The view from Main Street isn’t quite as rosy. The job recovery is sub-par at best. The number of Americans who left the workforce almost equals those who’ve found a job. The labor participation rate is at all-time lows. Wage growth has been stagnant for many during the last decade.
What concerns me most is the future of our children. Unemployment for young people is well into double digits. On top of that, they are taking on a debt burden in the form of college loans to get an education for jobs that just aren’t there.
What’s good for Wall Street isn’t necessarily good for Main Street. Part of the recovery in the last several years has come from increased productivity at U.S. corporations. They’ve simply learned how to do more with less and that usually means less employees.
When we put this all together we are slowly moving forward. However, this is the weakest most uneven recovery in generations. There’s talk of a potential one-time tax holiday to encourage U.S. corporations to repatriate cash held overseas. It seems to enjoy bipartisan support. Hopefully it’s a step toward a more competitive tax structure that will help limit the amount of jobs we export.
