A wide array of statistics and policy actions were reported this week that failed to satisfy the gloom and doomers. Economic statistics, while weak, are generally not falling off a cliff, and continue to support my view that we can avoid an economy wide recession. It’s still too early to declare victory over the gloomy ones, but many parts of the economy are looking stable, and in fact, looking up.
One big report covered first quarter GDP, showing a first quarter rise in real GDP of 0.6%, matching the fourth quarter increase. Not a big increase, but also not the decline typically associated with recession. The employment report for April showed a small drop in payroll employment of 20,000, but it also showed a reversal of prior rises in the unemployment rate, falling to 5% from March’s 5.1%. Certainly not the kind of big gains associated with vibrant economic growth, but also not the nosedive I would associate with a slide into recession.
We got another read on inflation. The broadest measure of inflation, annualized change in the GDP price index, showed a rise of 2.6% in the first quarter with the “core” (excluding food and energy) GDP price index up 2.0%. Both inflation measures are lower than in the fourth quarter. Continued low inflation gives the Federal Reserve room to cut interest rates, and they did, dropping the fed funds rate to 2% on Wednesday. They also announced further actions to shore up bank balance sheets today.
As I have said before, I still remain very concerned about the direction of oil prices and the dollar exchange rate. Oil prices well above $100 per barrel, continue to place a heavy burden on U.S. consumers. They are responding by cutting back, with gasoline use, compared to last year, down the last three months. Consumers are also slowing other purchases. The dollar may be bottoming; it hit a record low in mid-March and, like the equity markets, subsequently moved higher. Lower oil prices and continued dollar gains would, I think, be very beneficial to the economy and financial markets.
On the company earnings front, with 371 of the S&P 500 companies having reported, total earnings are down 14% compared with Q4 2007, but the decline is concentrated in the financial sector, where earnings fell 69%. Eight of the remaining nine sectors show increases, ranging from a high of 23% in Technology to a low of 4% in Health Care. (The other earnings decline was in Consumer Discretionary.) Adding it up, the entire non-financial group was up about 10%. Forward earnings expectations are for another overall decline in Q2 (more financial sector write-downs) and then gains in Q3 and Q4; the Q4 2008 earnings growth expectation is a rise of 53%. That huge rise is mainly due to the very depressed earnings level in Q4 of 2007, but it does show how large the financial sector hit has been.
All in all, it has been a pretty good couple of months for equity markets, earnings and the economy. While we are still down about 1.9% on the Dow and 4.0% on the S&P500 year to date, we are up a fair amount from the lows in mid-March. We are near the end of the first quarter “earnings season” for S&P 500 companies and are again seeing a major divergence – excluding financials, company earnings look strong. I will continue to watch all of these indicators closely, but for now at least, I think things are looking up. As always, please call me with any questions or concerns.