Steady as she Goes



Last week was a busy week in terms of economic data releases, which collectively suggest that in spite of a difficult first quarter, economic growth is continuing at a moderate pace. The initial estimate for Q1 of 2014 US GDP was worse than expected showing economic activity slowed to an annualized rate of 0.1% versus 2.6% in Q4 of 2013. A survey of economists had projected 1.2% growth. April’s employment report was much more upbeat, indicating that 288 thousand (288k) Americans found work. The market anticipated a gain of 210k for the month. In addition, the March figure was revised modestly higher to 203k from 197k. The April gain was the fastest pace of job growth since February of 2012.

The weak GDP report was driven by sharp drops in exports and business investment. This was largely attributed to the unusually disruptive winter weather. It is important to note that the first estimate of GDP is predominantly dependent upon data from the first two months of the quarter. Much of the March data has not yet been reported to the Bureau of Economic Analysis. In this particular quarter, it is not hard to understand why the estimate was disappointing, as much of the harsh winter weather took place in 2014’s first two months. While this initial GDP estimate was weak, many analysts expect it will ultimately improve as the result of subsequent revisions. They also anticipate stronger second quarter economic performance.

The better-than-expected jobs report continues the improving trend in the labor market and adds some confidence to the thesis that economic activity is finally starting to gain some momentum. So far this year, every month’s Non-Farm Payroll report has been revised higher and the gains have been broad-based throughout the economy. While the lower unemployment rate continues to be attributed to workers leaving the work force, there has been clear net job growth year-to-date.

Against this backdrop, the stock market continues to trade near its all-time high. Despite the negative implications of weak first-quarter GDP growth, a general sense of optimism about company prospects in this economic environment remains the central theme. In general, the market appears to be placing more weight on the labor market’s continued positive news. As investors, monitoring macroeconomic trends is part of the process we use when analyzing individual securities and constructing client portfolios.