Both economic and earnings news last week were mixed, while the United States debt limit discussions had a relatively muted effect on the week overall. It still appears the market is giving Congress the benefit of the doubt that they will manage to get something done before the U.S. hits the debt limit this week. I, too, believe that we will muddle through, doing as little as possible as late as possible. If Congress doesn't manage to do something in time, the market will probably collapse for a few days as our elected officials eventually get their act together. Given this mess, it's surprising the S&P 500 didn't lose more than the 4% that it did over the last two weeks and the 6% it has lost since the end of April when the market made its high for the year.
More Negative Earnings Surprises Balanced by Reports of Shortages
While the number of upside surprises and overall earnings growth so far appears consistent with S&P earnings growth of over 12%, there seem to be more high-profile misses this quarter than in previous quarters. Last week telecom supplier Juniper (JNPR) joined the ranks of disappointing results that already includes Terex (TEX), Ingersoll Rand (IR), and Caterpillar (CAT).
A softer European market, a modestly slowing China, poor government spending, and poor results relative to anything related to U.S. construction seemed to be some of the common themes among the disappointments. Oddly, a few firms (Terex and PACCAR (PCAR)) indicated that parts shortages (unrelated to the Japanese situation) kept sales from being better. One software company reported a shortage of salespeople kept sales from being better. So while there continues to be softness around the edges of the U.S. economy, some of these anecdotal stories aren't consistent with an economy that is collapsing.
Mixed Economic Data, Again
On the economic front, home prices increased for a second month and unemployment claims made a huge one-week bounce that is probably too good to be true. Pending home sales looked better, boding well for the upcoming existing home sales reports. Meanwhile, new home sales remained deep in recession. Durable goods orders were disappointing even as shipments remained remarkably robust. While the GDP report for the June quarter disappointed some with 1.3% real growth, it actually did slightly better than I expected. Other than another month or two of high car prices, which will boost the inflation rate, the last of the negative effects of the Japanese supply issues should have washed through most of the economic statistics.
Despite relatively benign second-quarter numbers, the statisticians threw us all a huge curve ball, reducing the first-quarter GDP growth rate to 0.4% from 1.9%, based largely on adjustments to inventories and a downward revision to exports. Given that consumption numbers and investment numbers were largely untouched, I am not terribly concerned. However, the data now perversely show that the economy picked up steam between the first and second quarters; this doesn't seem to square with other data including the employment report and company data that are showing a deceleration. The revision will make it more difficult to reach my 2.5% growth rate for the full year, but I still believe it is possible. The need for me to make a downward adjustment will depend on the next two months of employment data.
GDP Grows at 1.3% in Second Quarter, First Quarter Revised Sharply Downward
A low GDP growth number should come as no surprise to our readers, as auto production had a negative impact on GDP in the second quarter after a huge positive contribution in the first quarter. In my mind, the numbers could have been a lot worse for the quarter. Autos touch so many parts of the report that it isn't terribly relevant to tear apart the individual categories. That said, most categories that weren't auto-related didn't show a lot of change versus the first quarter. The big changes were as expected, a large swing in net exports (for Japanese goods and oil imports) and a rebound in defence spending. And construction moved from a negative to a positive. Weather, high oil prices, the Japanese situation, and up and down inflation numbers all served to artificially depress second-quarter numbers. I suspect that growth will sharply accelerate to a rate of more than 3% in the second half as auto production comes on line and Boeing (BA) ramps up shipments of its new jetliners. More favourable weather should also be a factor in third-quarter results, boosting energy and utility demand sharply and raising demand for seasonal goods like fans and air conditioners.
First-Quarter GDP Real Growth Reduced to 0.4% from 1.9%
The BEA also took the opportunity to revise the last five or more years of GDP data with this report. As I suspected, the recession now looks worse and the recovery looks slower. I was surprised at the magnitude of the reduction in the first-quarter 2011 GDP growth rate--down to a mere 0.4% from 1.9%. The majority of the adjustment was related to inventories, with net exports also contributing to the large revision. Consumption and business spending--the key drivers of economic activity--remained virtually unchanged from the previous GDP report. While the reduction looks scary and creates headlines, I am not reading much into the unusually large revision. This week I will update readers with a table detailing the key contributors to this economic recovery.
Initial Unemployment Claims Dip--Is It a One-Time Fluke?
Initial unemployment claims dipped to 398,000 from 422,000 in the previous week. While I will take good news any time I can get it, I suspect that a return of auto workers after the auto industry's summer shutdowns, the end of the Minnesota furloughs, and processing issues in California all contributed to the improvement. Whether a number this low is sustainable is an open question, but I wouldn't panic if the number backs up again for a couple of weeks. On a sad note, I am afraid the improved layoff results are coming too late to aid the July employment report; last week's data came after the July 15 date used for the employment report (the initial claims data was for the week ending July 22, and most U.S. auto plants reopened after their normal summer shutdown on July 18).
