This morning, the Bureau of Economic Analysis released its first estimate of real GDP growth for the first quarter, which showed the economy did grow, but only slightly at 0.2%. Most economists were looking to see around 1%, so exactly what these guys and gals were looking at to come up with those forecasts has us both scratching our heads, as we've been talking about how awful the economic data have been relative to expectations for much of the past six months.
As usual, the handy excuse has been the weather coupled with the union work slowdowns that crippled West Coast ports and energy sector pains. There's some truth in there; Hawkins herself has had to wait longer than she'd like for her new dining set from Crate & Barrel, thanks to the backlog at the ports, and Versace hasn't stopped kvetching about the cold in the East, but it isn't all about that.
We'd argue that the full impact of the falling-oil-price-driven energy sector contraction on top of a strengthening dollar has yet to be fully realized, which makes the continuation of economic surprises to the downside even more concerning. So far in April alone, initial unemployment claims have come in weaker than expected -- twice. Markit's manufacturing PMI and services PMI both came in weaker than expected, as did Empire manufacturing. It was the same story for the Kansas City Fed and Dallas Fed.
Watch for the energy sector weakness to spread into housing as Houston alone counts for just under 6% of the national total for single-family building permits. On that note, despite all the rosy news we hear about a rebound in housing, the U.S. home ownership rate continues to fall; in the first quarter it was down to 63.7% from a prior print of 64%, a level not seen since 1990. The real story behind rising home prices isn't want ... it is lack of supply and affordability!
If we break down the GDP report a bit, much of the GDP growth was driven by an increase in inventories, from about $80 billion in Q4 to over $110 billion in Q1. Real personal consumption expenditures rose 1.9% vs. 4.4% in Q4, with the savings rate rising to 5.5%, despite the strengthening dollar helping Americans get more for less from abroad. This helps confirm consumer confidence coming in below expectations at 95.2 vs. an expected 102.2. That strong dollar hit the industrial side, with exports taking about 1.5% off growth.
If we take a step back and look at the bigger picture, it is difficult to see just what is going to drive this rebounding growth that everyone continually anticipates. Looks like even the Fed is getting more skeptical as the Federal Open Market Committee report today offered not only no change to its zero interest rate policy, but also removed all calendar references in its post-meeting statement, further confirming our suspicions that any rate hike this year will be much later, if at all.
The strong dollar and low oil prices are hitting an ever-widening swath of the economy, such as U.S. steel companies, which are facing prices that have fallen to their lowest levels since the financial crisis. Yesterday, U.S. Steel (X) reported a loss and lowered its pretax 2015 earnings forecast by about half a billion, driven by low oil prices, higher volume of imports and excess inventories -- remember that big chunk of GDP from inventory buildup? AK Steel (AKS) and Nucor (NUE) also presented disappointing results.
We are seeing similar pain in the tech sector with companies that have international exposure such as Qualcomm (QCOM), Amazon (AMZN), Google (GOOGL) and others. Companies with meaningful international exposure like GM (GM), 3M (MMM) and PepsiCo (PEP) have all cited similar dollar-induced pain. Here's the issue: Year-over-year dollar strength will continue in the current quarter, and that will restrict corporate revenues.
The yawn-inducing growth isn't just a U.S. story, as yesterday we learned that UK real GDP growth has fallen to the slowest pace in three years at 0.3%, half the prior quarter's growth. In the greater Eurozone area, consumer confidence fell to -2.2 from -1.8. We'll be watching closely later this week when we get data on Europe's unemployment rate, and next week we'll get info on the region's retail trade as we look for signs of growth getting solid footing.
Putting it all together, we are seeing countries around the globe struggling to get their economies growing at a sufficient pace, with most using some form of currency-weakening strategy to help boost growth while the U.S., on the other hand, is no longer actively weakening with QE, but talking about raising rates, which would further strengthen an already strong dollar. This strong dollar makes U.S. exports less attractive, which hurts the domestic economy.
Then we have an aging U.S. population with much of the largest generation, the baby boomers, either in or headed into retirement, a time during which they need to generate income from their savings. The low rates in the U.S. make that much more difficult than for prior generations ... and this generation doesn't have nearly the savings it needs and is likely to live longer, requiring greater retirement funds.
At the other end of the demographic spectrum, we have the millennials, who prefer not to own life's major acquisitions like cars and homes, preferring Uber and the flexibility of renting, after having experienced the devastation from the home-price collapse during the Great Recession, and facing enormous student debt levels.
On top of that, the number of people actually working in the private sector is only 116 million, while 159 million people in the U.S. are receiving one or more kinds of government benefits such as Social Security, Medicare and food stamps. That means for every person working in the private sector, 1.4 are receiving aid -- that math can't go on indefinitely!
In this economic climate investors need to be particularly cautious and look for those areas that are likely to benefit from these strained conditions, such as health care, consumer staples and the like.