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Investor Warning: First-Quarter Economic Growth to Be 'Washout'

Investor Warning: First-Quarter Economic Growth to Be 'Washout'
(Dollar Photo Club)

Tuesday, 18 April 2017 12:25 PM Current | Bio | Archive

  • INDICATOR: March Housing Starts and Industrial Production
  • KEY DATA: Starts: -6.8%; 1-Family: -6.2%; Permits: +3.6%; 1-Family: -1.1%/ IP: +0.5%; Manufacturing: -0.4%
  • IN A NUTSHELL: “The first quarter looks like a washout as even the manufacturing rebound has slowed.”

WHAT IT MEANS: Housing and manufacturing have been key sectors in keeping the economy going, but conditions in those sectors may be slowing. Housing starts slumped in March. There was a huge pop in construction in February due to unseasonably warm weather in parts of the nation, so a slowdown was expected. But the drop was larger than forecast and the pace was the second slowest in the past six months. The National Association of Home Builders had reported that confidence soared in March, which prompted the belief that construction activity would hold in. (The NAHB did say yesterday that confidence moderated in April.) Activity was up only in the Northeast and really fell in the Midwest and West. We could see a better pace in April, as the permit average for the past three months was above the March construction pace. The March jump in permits simply balanced starts and permits for the quarter, so don’t read too much into that gain.

Industrial production jumped in March, which was hardly a shock. The cold March, after a warm February, that led to a surge in utility output. More importantly, manufacturing activity slowed sharply. Production declines were broad based with only petroleum and computer output up solidly. It is strange to be saying that the energy sector is now a star of the economy, even if it is only a dim one, but that is the case. Slowing sales led to a drop in vehicle assembly rates, which obviously didn’t help. Despite the decline in manufacturing output, it did rise decently for the quarter. That’s good because there was not a lot of other good data when it came to the first quarter.

MARKETS AND FED POLICY IMPLICATIONS: In ten days, we will get some really important news. No, it’s not who the Eagles drafted in the first round, as if that is going to matter much. Actually, it is the first reading on economic growth during the first quarter of the year. As more and more data come in, things are not looking very good.

The Atlanta Fed’s GDP Now forecast has growth at 0.5% while CNBC’s survey is running at about 1%. I think it may be higher and the New York Fed’s Nowcast has growth at 2.6%, though that looks high even for an optimist like me. But the likelihood of another disappointing quarter of growth raises real questions about the equity markets.

The economy clearly slowed in the first part of the year yet the markets have hung on to much of the huge gains posted after the election. As earnings come in that could change, but it is hard to see how profit projections can be optimistic without assuming that a tax cut and spending increases will be implemented soon. But even the Republican leadership is not expecting much, if anything, before the fall or even the end of the year. And with household incomes, adjusted for inflation, going nowhere once again, it is not likely that consumers will be shopping ‘till they’re tired, let alone until they drop. We saw that in the weak retail sales numbers released last week. Basically, unless something changes, we are in for another year of 2.25% or so growth - if we are lucky. Which brings us to the Fed. Inflation moderated in March and growth looks like it was tepid, so a second rate hike in June or July has become less certain. I think most members want to get the rate up further, and I expect them to do so at either of those meetings, but a GDP growth number under 1% could put the FOMC in a bind. The GDP report will be released on April 28th and that should be an interesting day for the stock and bond markets.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.

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The first quarter looks like a washout as even the manufacturing rebound has slowed.
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Tuesday, 18 April 2017 12:25 PM
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