INDICATOR: First Quarter 2014 GDP and April ADP Job Estimates
KEY DATA: GDP: +0.1%; Consumption: 3.0%; Housing: -5.7%/ADP: up 220,000;
IN A NUTSHELL: "Growth came to a grinding halt early this year but with consumers spending and payrolls expanding, the future looks a lot brighter."
WHAT IT MEANS: Well, all those fears about a really weak first quarter came true as the economy froze solid. How much of the blame can be placed at the feet of Mother Nature is unclear. Yes, housing activity fell again but the recent data have yet to show any major upturn in home construction. We still don't have the April numbers so I will hold off judgment on this sector for now. Consumer spending was solid, helped by a jump in health care and housing and utilities. I suspect some of that increase went to pay for the heating and hopefully the spring will bring a more balanced consumption pattern. Meanwhile, business investment was very cautious and spending on equipment fell for the first since fall 2012. Again, why that might be occurring is not obvious right now. That businesses cut back on inventories did not cause any surprise since stocks had been built up too rapidly much of last year. Meanwhile, government is finally getting out of the way as activity was largely flat. But the real issue was exports. Instead of adding sharply to growth, overseas sales fell, subtracting over one percentage point from activity. In contrast, exports added about 1.25 percentage points to growth. That 2.25 percentage point swing pretty much explains the slowdown from the 2.6% growth rate posted in fourth quarter 2013 and the no-growth number in this year's first quarter. On the inflation front, it remains totally tame.
Looking forward, it is still all about jobs and the news on that front was good. ADP indicated that private sector hiring was quite solid in April, reinforcing the yesterday's Paychex report. In addition, there was a rise in the number of want ads online, though the gains were nothing special. Nevertheless, we seem to be setting up for a very good employment report on Friday.
MARKETS AND FED POLICY IMPLICATIONS: The Fed is completing its two-day meeting and while the no-growth first quarter might seem to be a complication, it really isn't. Chair Yellen wants to go slow with tapering and starting rate hikes and the GDP report just ads strength to her position with the inflation hawks. There is minimal inflation and growth isn't so strong that pricing power is going to break out across the economy anytime soon. With the employment report coming in two days and the GDP report looking backward not forward, it is doubtful that investors want to stake out any major new positions on the economy. If as I suspect that the job gains are closer to or even above 250,000 and the unemployment rate comes down, the GDP numbers will be forgotten quickly. Indeed, that is my suggestion. Look at the report but move on quickly from it.