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VERSACE: Watching corporate outlook as GDP views slow
Question of the Day
This week started off slowly in terms of economic data, but what data we did get was mixed at best. A more sober perspective, however, would say that the most recent figures, when coupled with those over the past few months, imply that the country’s rate of economic growth has slowed in recent months. Moreover, as the full impact of higher gas and food prices is felt, growth could be restrained in the near term.
Before we get down to changes in the outlook, let’s set the stage by looking at how the quarter that ended in December fared.
In late March, the Bureau of Economic Analysis released its final view on gross domestic product (GDP) for the last quarter of 2010 quarter. That view, which was based on more complete source data than the prior GDP reading for the quarter, showed that the quarter ending in December grew 3.1 percent over the quarter ending in September. The prior reading for the last quarter of 2010 was growth of 2.8 percent, and the upward revision reflected increased consumer spending, exports and business investment. Factoring in that revision, the bureau also revised its reading for 2010 GDP growth to 2.9 percent, up from a negative 2.6 percent in 2009.
As you can imagine, the question investors pondered at the time was whether the fourth-quarter rate of growth would improve, hold steady or slow in the first quarter of 2011.
GDP expectations for first quarter this year started at about 3 percent, but the economic committee of the American Bankers Association in mid-January increased its GDP forecast for 2011 from 3 percent to 3.3 percent growth. Digging through that revised forecast, we find the group expected the U.S. to grow at a better than 3.2 percent annual rate in each quarter this year.
To be fair to the bankers association, it was not alone. Early in the quarter ending in March, the Federal Reserve raised its domestic 2011 GDP forecast to 3.4 percent to 3.9 percent growth, up from its November view on 2011 that called for GDP growth of 3.0 percent to 3.6 percent. Other analysts and institutions, such as Sean Incremna, an economist at 4Cast Ltd., were also upbeat. At the time, Mr. Incremna pointed to the first quarter of 2011 as “probably a bit stronger” than the fourth quarter of 2010. To his credit, Mr. Incremna raised concern at the time about the ability of consumer spending to remain at 2010 levels.
Again, that was earlier in the year and those forecasts were issued before a number of challenges arose. These challenges included unrest in the Middle East and surging prices for oil, gasoline and other inputs, peak food prices, European concerns, the impact of disaster-related damages in Japan and our own near government shutdown and deficit concerns.
In addition to those issues, we have seen softer if not downright weakness in some of the data over the past few months. Examples can be found in construction spending, the housing market and durable goods orders to name a few. In short, rising commodity prices and flat wages more than offset the latest stimulus plan.
Echoing this souring perspective, the National Federation of Independent Business’ Index of Small Business Optimism gave up 2.6 points in March, falling to 91.9. The prime reason for the drop in the index to levels last seen in the fourth quarter of 2010 was the decline in the percent of owners expecting higher real sales and better business conditions over the next six months. With that context, it’s easy to see why NFIB chief economist Bill Bunkelberg said, “It looks like everyone became more pessimistic in March.”
Given the souring tone, it’s not surprising that we have started to get downward revisions to economic growth expectations for the quarter that ended in March. JPMorgan Chase recently cut its view on GDP growth for the quarter ending in March to 1.4 percent from 2.5 percent, while Bank of America reduced its forecast for the second time to 1.5 percent. Several weeks back, Bank of America reduced its GDP forecast for the quarter from 3.3 percent to 2.2 percent.
While we’re getting those negative revisions, we’re also getting some upwardly revised ones, albeit in the wrong direction for gas prices and food prices. In particular, the U.S. Energy Information Administration now sees gasoline averaging $3.80 per gallon in 2011, up 33 percent year over year. Worse yet, during the April-to-September peak driving season, the agency expects gas prices to peak near $3.91 per gallon in early summer. In other words, buckle up for more pain at the pump.
So what’s the point in all of this, you might be asking. After all, more than the casual observer can see that things are not picking up as quickly as the talking heads claim they are.
Although calculations for the first quarter started this week, the vast majority of earnings data will be hitting the tape over the next few weeks. While companies may deliver earnings in line with expectations, the area I’ll be watching will be in their outlooks and forecasts to see how they might have changed from the last earnings period. Given revised GDP expectations and continued headwinds in the current quarter, odds are that more than a few companies in the major stock market indexes will have to adjust their forecasts. Even casual readers of this column know I like to consider ripple effects, and this one could weigh in on the market and reinforce the seasonal pattern of “Sell in May and go away.”
About the Author
Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...
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