It's been a few months since I discussed government contractors. Given their very positive performance today, ahead of the Bureau of Economic Analysis (BEA) release of revised historical GDP figures with the new residual seasonality adjustments applied, and the FOMC meeting results, this is a good time to review the subject again.
I don't know what the BEA is going to announce or how much of the residual seasonality adjustment process will be made public, or how it's going to affect the FOMC decision making, or the Atlanta Fed's GDPNow calculation, or a lot of other factors. It's going to take time to figure all that out.
However, something very interesting is happening today. The stock prices of all seven of the largest government contractors are up today, most dramatically.
In descending order, based on market capitalization, their intraday performance at midday is:
-- Boeing (BA), up 1.6% (part of TheStreet's Trifecta Stocks portfolio)
-- Lockheed Martin (LMT), up 2.9% (part of TheStreet's Dividend Stock Advisor portfolio)
-- General Dynamics (GD), up 4.5%
-- Northrop Grumman (NOC), up 7.4%
-- Raytheon (RTN) up 3.8%
-- Science Applications International (SAIC) up 0.3%
-- CACI International (CACI), up 1.4%
With the exception of SAIC, this performance is also much better than the Dow Jones Transportation Average increase of 1.1% today. The transports had been underperforming the industrials until about a month ago, leading to speculation that the industrials would decline further, as I discussed a few months ago.
Within the past month, however, the transports have outperformed the industrials in the positive direction at 3.5% vs. 0.6%, and for the time being relieved the associated pressure on the contactors.
The reason for this aggressive performance of the contractors today, just before the release of a lot of economic data, is so interesting is that the consensus expectation has been that the adjustments made to GDP would result in upward revisions to average annual rates of growth, especially for 2014 and 2015.
If that is to occur, the logical consequence of such should be that the economy is performing better than the previous GDP estimates implied and the pressure to offset the trend toward recession with a fiscal response of increased government spending should be lessened.
I wrote about the potential for the government contractors to perform well due to the increasing potential for an increase in countercyclical government spending last April in the column, "Government Contractors' Windfall Ahead."
Since then, however, the very poor performance of the first-quarter GDP -- which all of the most prominent economists missed on, while the Atlanta Fed's GDPNow estimate got almost right -- blew up into the debate about "residual seasonality."
That group of prominent economists included the FOMC members, and following the release of first-quarter GDP figures by the BEA, the conflicts among Fed staff economists, the FOMC members and the BEA economists were more prominently exposed to the public, vs. the traditional fraternal and nonpublic relationships between them.
The reason for offering everything above is that there have been a lot of conflicting market and economic signals concerning the potential performance of the contractors.
Ultimately, however, the contractor's long-term potential and performance are tied directly to government spending, and an increase in government spending is tied to the political will necessary for it to be passed by Congress, which to a great degree is determined by the perception of strength in the private sector of the U.S. economy.
The performance of the contractors today is implying that speculators believe the adjustments to GDP that will be announced by the BEA will not be as indicative of a positive economic trajectory as those advocating the need for "residual seasonality" adjustments had suggested a few months ago. It appears the markets are beginning to reflect an understanding of that issue.
As it stands now, I am still of the opinion that the economy is going to greatly underperform expectations and that a fiscal response to that situation will be forthcoming with bipartisan support for an increase in government spending this fall.
