It’s Friday and that means it’s time to review the latest economic data and identify which pockets of the economy are heating up and which are slowing down. Don’t worry about catching every headline and every report throughout the week—I recap all of the most important news impacting your wealth right here every Friday. Let’s take a look at this week’s big headlines:
First-Quarter Contraction Sets Stage for Second-Quarter Rebound
On Thursday, the Commerce Department revised its first-quarter GDP estimate down to a 1% annual contraction, down from its initial estimate of 0.1% annual growth. The primary catalyst for this downward revision was a weak housing market (detracting 0.18% from GDP growth), a shrinking government sector (minus 0.15% GDP growth), a bigger trade deficit (minus 0.95% GDP growth), and a massive drop in inventories (minus 1.62% GDP growth). Economists had expected first-quarter GDP to be revised down to reflect a 0.5% decline so this revision was sharper than anticipated. The headline looks bad for this report, but the details are much more encouraging. First, any time inventories are depleted like they were last quarter, a big resurgence in inventories typically adds to GDP growth in the following quarter. The other good news was that consumer spending in the first quarter was revised up to a 3.1% annual pace, up from an initial estimate of 3% annual growth. Since consumer spending still represents approximately two-thirds of U.S. economic growth, the foundation for continued strong economic growth remains intact.
Durable Goods March Higher
On Tuesday, the Commerce Department announced that durable goods orders rose 0.8% in April; this was due to a surge in defense orders. Excluding the surge in defense orders, non-defense durable goods orders declined 0.8% in April. This was due to commercial aircraft orders declining 4.1%, heavy machinery declining 2.9%, computers slipping 1.1% and vehicle-related orders dropping 1%. Even though the drop in non-defense orders was a bit shocking, it was more than offset by March’s durable goods orders being revised up to a massive 3.6% gain, up from the previously reported 2.5% increase. Core capital orders (indicative of business investment) declined 1.2% in April, but this was also offset by a revised 4.7% surge in core orders in March, up from the 2.9% previously reported rise. Overall, durable goods orders can be volatile from month to month, but when combined with March’s upward revisions, April’s durable goods report was actually very positive.
Consumers More Confident About the Here and Now
The Conference Board also announced on Tuesday that its consumer confidence index rose to 83 in May. This puts consumer confidence higher than the revised 81.7 reading in April, and above economists’ expectations of an 81.5 reading. Consumers became more confident about current conditions, particularly the labor market. Notably, the percentage of people that expect their incomes to increase over the next six months is at the highest level since December 2007 (20.2%). This (plus the similar reading from the University of Michigan’s consumer sentiment index) bodes well for continued strong consumer spending. This is perhaps the biggest reason that I’m not worried about the latest GDP report (which I’ll discuss shortly).
Layoff Metric Falls to Seven-Year Low
The number of Americans filing for new unemployment benefits plunged last week. Initial claims for jobless benefits fell by 27,000 to a seasonally adjusted 300,000 in the week ended May 24, according to the Labor Department. Economists expected 325,000 new claims so this was a better turnout than expected. The four-week moving average of claims declined by 11,250 to 311,500. This is the lowest level for the moving average in nearly seven years. The latest unemployment claims remains consistent with the economic recovery pace. We’ve seen volatile times in the market and employers slowing down hiring activity during the winter months. Recent indicators point toward economic strength and more employers making an effort to step-up hiring.
Consumers Recover from March Splurge
In April, personal income rose 0.3%, or $43.7 billion, meeting economists’ expectations. Meanwhile, consumer spending declined 0.1%, below economists’ predictions of a 0.1% rise. However, after adjusting for inflation, real spending rose 0.2%, in line with expectations. After the surge in personal spending from April, it’s not surprising to see that consumers took a little breather in May. I find it encouraging that personal income and inflation adjusted spending are still rising. This, coupled with rebounding consumer confidence, indicates that the summer should be a strong one for the American consumer.
Have a great weekend,
P.S: I will be speaking at the Tysons Corner Marriott in Vienna, Virginia, on Tuesday, June 3 at 7 PM. I’ll then be speaking at the Long Island Marriott in Uniondale, New York, on Wednesday, June 4 at 7 PM. You may attend at no cost, but please call 800-454-1395 to register. I will review where investors can achieve the highest yields in both bonds and stocks, as well my current market outlook, favorite stock picks and have an extensive question and answer session.