6 Reasons the Economy Will Heat Up this Spring

Reason #1: Q4 GDP Results Bode Well for Q1

In the fourth quarter the U.S economy grew at a 2.6% annual pace, up from economists’ previous estimate of 2.4%. This was actually a major surprise, since economists expected the final reading of fourth-quarter GDP to be revised down to a 1.6% annual pace. A boost in consumer healthcare spending to 3.3%, up from a previous estimate of 2.6%, was the primary reason for the upward GDP revision. This spike was largely attributable to the rollout of ObamaCare and may continue to boost GDP growth in the upcoming quarters, due to complications associated with the rollout. An upward revision in the growth of U.S. goods and services to 2.7%, up from a previous estimate of 2.3%, was also a factor in the GDP revision.

Many economists now anticipate that U.S. GDP growth will accelerate to a 3% annual pace or higher in 2014. If this plays out, this will be the first time we’ve seen such a fast pace since 2005. However, we’ll need to see how things play out during the second quarter, which should capture much of the economic growth due to the warmer temperatures.

Reason #2: Rising Home Prices and Homebuilding Activity

In February new home sales declined 3.3% to an annual rate of 440,000, down from January’s annual pace of 455,000. Economists had predicted an annual rate of 430,000, so these results beat estimates. Meanwhile, the supply of new homes is now running at 5.2 months relative to the annual sales pace; this bodes well for continued price appreciation. The fact of the matter is that harsh winter weather hindered new home sales in February, especially in the Northeast. So like other industries, the spring thaw should increase overall new home buying activity in the upcoming months.

Reason #3: Transportation Goods Orders Are Surging

In February, durable goods orders rose 2.2%, more than double the 1% gain forecast by economists. Transportation orders dominated the increase, as commercial plane orders surged 13.6% and vehicles orders rose 3.6%. Excluding transportation, durable goods orders climbed 0.2%. Some components of the durable goods report were soft, such as heavy machinery, computers, network and electrical equipment, while others were strong, such as primary metals. This report was significant because it represents the biggest gain in durable orders in three months. Overall, businesses remained cautious during the tail end of winter, but new orders should continue to rebound in the upcoming months.

Reason #4: Jobless Claims at a 4-Month Low

Last week, jobless claims fell 10,000 to an annual rate of 311,000. Given that economists had forecast a rate of 330,000, this was a much larger-than-expected drop. Meanwhile, the four-week moving average dropped 9,500 to a rate of 317,750. With the latest results jobless claims are now at a four-month low. The significant decline in the four-week moving average suggests that this is more than just a blip in the week-to-week data.

Reason #5: Consumer Sentiment Warms Up

In March, consumer confidence rose to 82.3, up sharply from a revised 78.3 in February. Economists had expected the index to retreat to 77.8 so March’s reading was better than expected. Helping to drive overall consumer confidence was that the Conference Board’s expectations component, which rose to 83.6 in March, up from 76.5 in February. Not only did March bring a significant increase, overall consumer confidence is now at the highest level in over six years. Clearly consumers are cheering up and it should be evident in their spending patterns in the upcoming weeks and months.

Reason #6: Personal Incomes and Spending On the Rise

In February, personal income gained 0.3% following a 0.2% increase in February. This was better than expected as economists had expected income to remain unchanged over February. Meanwhile, personal spending advanced 0.3%, also above economists’ estimates of a 0.2% rise. The personal savings rate climbed from 4.2% in January to 4.3% in February. This was a positive report. While spending was modest due to severe winter weather, it still beat estimates. As with many other pockets of the economy, I look forward to see how income and spending fares during the spring.

Have a nice weekend,

Louis Navellier

Louis Navellier

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