Real GDP for Q1 2016 came in at a 0.5% annualized pace, continuing both a string of weak first quarter numbers and a not so subtle reminder to market wags that the economy is dull at best. The first quarter has been the weakest reading in five of the last seven years, though this year the excuse of miserable winter weather is not part of the narrative. Instead, the business investment environment has been dismal, especially due to a continued drag from the energy sector. Households continue to do better than businesses, with consumer spending in real terms growing close to 2.0% and housing activity strong.
The story around economic growth in recent years has been continued disappointment and the migration to a lower growth target. Consensus has moved to the neighborhood of 2.0% growth, which we believe is probably the Federal Reserve’s number as well. Given that productivity growth has averaged only 0.5% per year over the last five years, the fear is that the 2.0% consensus growth target may actually be too high.
Yet, it’s important to keep in mind that employment has seen a rebound. This is significant, because it means the economy is not likely to slow – it just isn’t growing very fast. So the question becomes: given job gains, is the consumer capable of powering the economy to better times?
Part of the answer is that in the same week as the anemic GDP release, the Federal Reserve Open Markets Committee (FOMC) endeavored to weigh in that they really will raise rates, and they are hopeful that they can, just as soon as the opportunity presents itself. We are all directed to look for this opportunity in the economic data: in particular, for signs of growth and inflation.
The markets were unimpressed with the subtlety of the FOMC statement and did not respond. It seems clear that the Fed is data dependent, but we believe markets may await an unequivocal notice from the Fed as to their intentions. This would be something similar to the speech Fed Chair Yellen gave last December when she laid out their plans. Like that speech, something explicit may need to be signaled, as reading between the lines of an FOMC statement for a signal no longer prompts action.
All of which leads back to investors reading the tea leaves depicting our current economic trend line. Optimists might wish to interpret the GDP and Q1 corporate earnings news of the last few weeks as “the end of winter”. Now that we are witnessing an uplift in commodity prices and signs of consumer firmness, are these green shoots of spring? We do not yet know. April auto sales are the next interesting data point and exactly the kind of signal, a cluster of which would be necessary, to get the Fed to consider an interest rate move at their June meeting.
As investors anxiously await the data, we offer this insight: reflecting on the current market environment is a useful endeavor, but it’s important to remain focused on long-term goals. Ultimately, the truth is that spring always comes eventually, even if it sometimes catches us by surprise. But as the groundhog knows, attempting to determine the exact timing of any transition is an inherently flawed exercise.
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