Eye on the Markets

Q4 GDP Revised Upward by Strong Consumer Spending

Recession watchers sigh relief

Weekly market view from LMK Wealth Management. Visit lmkwealth.com

Stocks ended the holiday-shortened week down, snapping their five-week winning streak.

However, losses were mild amid low trading volume before the Easter weekend. For the week, the S&P 500 lost 0.67%, the Dow fell 0.49%, and the NASDAQ dropped 0.46%.[1]

Last week’s economic calendar was highlighted by the third estimate of fourth-quarter 2015 economic growth. The report showed that Gross Domestic Product grew much faster than originally thought- by a 1.4% annualized rate instead of 1.0%.

For all of 2015, the economy grew by a respectable 2.4%- not too shabby considering the headwinds the country faced down last year.[2]

A harbinger of hope?

The revision reflected much stronger consumer spending than originally thought, which is a relief to recession-watchers and could bode well for the economy in 2016. Spending is being supported by a strong labor market and low gas prices. However, the news isn’t all rosy. Business inventories were revised lower, showing that companies are reluctant to tie up cash in the face of uncertain demand. Since stockpiles are still high, it’s possible that weak business spending will eat into economic growth in the first quarter.[3]

Can we trust GDP estimates? That interesting question was recently brought up by a CNBC report, which found that GDP growth estimates could be off by as much as 1.3%.[4] When growth rates are already low, such a large margin of error (if it exists) could have serious business and policy implications.

When growth rates are already low, such a large margin of error (if it exists) could have serious business and policy implications

A large part of the problem may be that many reports used by federal economists to calculate GDP arrive months-even a year-after the initial reports on economic growth go out, forcing them to use estimates. As these reports come in, economists revise the data, long after the relevant quarter matters to investors and policy makers. It’s often a question of trading accuracy for timeliness. That’s one of the reasons why we look at many different indicators and must understand the limitations of each one when we create models.

Terror threat ever-present

A vicious bombing attack on Tuesday killed at least 30 people in Brussels, putting the European Union capital on lockdown. Major cities around the world are bolstering security around transportation hubs in response.[5] The attack brings attention to the ongoing threat of terrorism and highlights the problems Europe is having in sharing intelligence and tracking suspected terrorists. Our thoughts are with the victims and their families.

Looking at the week ahead, we can expect some volatility as investors react to last week’s GDP report, which was released during Friday’s market holiday. While investors may react positively to the better-than-expected growth, we may also see some market turmoil ahead of the end of the quarter. The question is: Did the first quarter of 2016 deliver on expectations?.

Economic Calendar

  • Monday: International Trade in Goods, Personal Income and Outlays, Pending Home Sales Index, Dallas Fed Mfg. Survey
  • Tuesday: S&P Case-Shiller HPI, Consumer Confidence, Janet Yellen Speaks 11:30 AM ET
  • Wednesday: ADP Employment Report, EIA Petroleum Status Report
  • Thursday: Jobless Claims, Chicago PMI
  • Friday: Motor Vehicle Sales, Employment Situation, PMI Manufacturing Index, ISM Mfg. Index, Consumer Sentiment, Construction Spending