U.S. First-Quarter GDP Increased 3.2%, Pushed Higher By Net Exports and Inventories… The growth rate shot past expectations of 2.3%, but the markets aren’t trading higher on the news.
What it means – The headline rate was incredible, but the devil is in the details. Personal consumption was moderate, which makes the build in inventories a question. If consumers aren’t buying a ton of stuff, then why build it? Investors worry that companies stockpiled parts and materials due to trade war concerns, and now it will take a lot of time to work off the inventory. The same logic applies to the net exports. If the numbers are skewed by trade concerns, they don’t reflect the level of economic activity that can be supported within the U.S.
A cleaner look at the numbers, and one favored by Dr. Lacy Hunt is final sales to domestic purchases. This metric excludes changes in inventory and net exports, looking at just what end users purchase in the U.S. On that measure the economy expanded by a modest 1.4% in the first quarter.
The weak internals of GDP explain why bond yields sank after the report, an indicator that investors think the Fed will lower rates before it raises rates.
Skepticism may be in order. The official CPI is at 1.9% and the Fed’s Underlying Inflation Gauge is at 2.91%. Adjusting for the GDP deflator, real growth stands at 1.56%. Overstating growth contributes to a speculative market environment. Caution is appropriate.
U.S. Equities Reached All-Time Highs… The S&P 500 climbed to 2,940, a new record high.
What it means – Investors drove the markets higher as earnings season got into full swing. The mood has been manic. When companies beat estimates or provide better than expected guidance, investors push their shares up double-digits. But when companies disappoint, investors can’t sell the names fast enough. With large companies like Facebook and Microsoft posting positive numbers, the market indices are doing well.
Among the many names in the news, two stand out. Disney is doing very well, riding the wave of enthusiasm for the new superhero movie, Avengers: Endgame. At the other end, Tesla has had it rough recently. The company widely missed earnings estimates, losing $702 million in the first quarter, and even missed revenue estimates by about $1 billion. CEO and Founder Elon Musk was upbeat about the future as always, but his optimism is wearing thin with investors. The stock is down nearly 20% this year.
Existing Home Sales Fell 4.9% in March… After jumping more than 11% in February, existing home sales fell back a bit, and now sit 5.4% lower than at this time last year.
What it means – The three-month average sales rate is climbing a bit, but that’s not a lot of consolation. Interest rates rolled over at the end of 2018 and the economy, while not exploding, has remained on solid footing. It’s not that real estate prices or activity are falling dramatically, it’s just feels like the market is getting stuck in a low gear. The median home sales price inched up to $259,500, only 3.8% over last year.
New Home Sales Up 4.5% in March… The monthly increase was the best rate since November of 2017.
What it means – While new home sales look like they directly offset the drop in existing home sales, the two aren’t equal. New home sales represent about 11% of the market, so while it’s great that builders had a good month, it’s definitely the low end of the market. The median sales price of a new home dropped almost 10%, which could represent discounting by builders to get inventory out the door, but it could also be that builders are focusing on lower-priced homes, which is where there is a lot of demand.
Durable Goods Orders Up 2.7% in March, Up 0.4% Excluding Transportation… Airplane orders increased 60%, while vehicle sales were up 2.1%.
What it means – With all of Boeing’s 737 MAX issues, it’s hard not to look at the headline number and ask, “Yeah, but what about April?” But even without planes, vehicle sales rose 2.1% and orders excluding transportation were respectable. This ended a several-month drought of positive news in durable goods orders.
And to make it even better, orders for core capital goods (non-defense, excluding aircraft) shot up 1.3%, reflecting a nice jump in business investment. This might not add a lot to first-quarter GDP, but if orders keep rolling in, the economy will show respectable growth in the second quarter.
Medicare Will Be Broke in 2026, Social Security in 2035… The new report by the Board of Trustees for Social Security and Medicare extended the timing for Social Security to go broke by one year, from 2034 to 2035.
What it means – The two programs never run out of money because they always bring in new tax revenue. However, both have tidy trust funds that have built up over time as workers paid in more than was required to cover current benefits. That has changed.
For years Medicare has paid out all taxes received, plus interest earned on its trust fund and some of its principal. The program is quickly depleting the trust fund. Social Security pays out all the taxes it receives and began spending the interest on its trust fund earlier this decade. Next year, Social Security will start eating into the principal of the trust fund, exhausting it by 2035.
Fixing these programs is easy. Spend less, tax more, or do some combination. Finding the political will to tackle them is something else entirely.
German Study Finds that Electric Cars Emit More Carbon Than Comparable Diesel Models… (“Who’d a thunk it?”) German scientists published a paper in the IFO Institute showing that, considering both vehicle production and fuel during use, electric cars emit more carbon than diesel vehicles. The problem with electric vehicles is the battery, which requires lithium, cobalt, and manganese. Mining these minerals is dirty, nasty work that creates a lot of pollution. The battery production issue is made worse by the electricity required to run the cars. Germany uses coal-powered plants to meet demand during peak times or when renewables don’t work (when the sun doesn’t shine or the wind doesn’t blow). The coal-generated electricity carries a heavy carbon cost.
The authors suggest a much greener approach would be to migrate to natural gas-powered cars as an interim step toward hydrogen or green-sourced methane powered cars. These fuels create near zero emissions when burned and can be used in traditional combustion engines. Renewable power plants could be employed to transform the hydrogen and methane into usable fuel, and such plants could run when renewable energy was available. The stored hydrogen and methane would effectively take on the role of storing renewable energy.
Data supplied by Dent Research/Delray Beach Publishing
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