5 Top Picks On Three Key Takeaways From Q2 U.S. GDP
Zacks Investment Research | Jul 29, 2019 07:58AM ET
On Jul 26, the Bureau of Economic Analysis released an advance estimate of U.S. GDP for the second quarter of 2019. The growth rate of U.S. GDP declined to 2.1% from 3.1% reported in the first quarter, marking the slowest growth since the first quarter of 2017. However, the figure was better than the consensus estimate of 1.8% despite facing tariff war and a slowing global economy.
A closer look at the second-quarter GDP will help us to make three important inferences, which are expected to give guidance on the economy and stock market in the near term.
Consumer Spending Jumps – Recessionary Fears Overblown
The most important positive feature of second-quarter GDP is that personal consumption expenditure jumped 4.3%, the highest since the fourth quarter of 2017, after growing a mere 1.1% in the previous quarter. Consumer spending grew on new cars and trucks, food and drinks, and clothing.
Moreover, government consumption expenditures and gross investment increased 5%, reflecting its fastest pace since the second quarter of 2009. Hike in federal outlay after the end of a record 35-day partial government shutdown, which significantly affected the first quarter, has given a major boost to the second quarter.
Notably, personal consumption expenditure constitutes nearly 70% of the U.S. GDP. A robust labor market, which added 172,000 jobs per month on average in the first half of 2019, a record-low unemployment rate of 3.7%, and gradual increase in wage rate are likely to sustain U.S. consumer expenditure, thereby eliminating the chance of a recession any time soon.
Business Spending Nosedives – High Probability of Rate Cut
In second-quarter 2019, gross private domestic investment plunged 5.5%, the largest decline since the fourth quarter of 2015. Spending on structures (like office buildings, manufacturing plants and drilling rigs) plummeted 10.6%. This resulted in nearly 1% decline in second-quarter GDP.
Moreover, fixed investment dropped 0.8%, reflecting its biggest decline in three and a half years. Expenditure on residential housing fell 1.5%, marking slowdown in homebuilding industry and exports tumbled 5.2% due to global slowdown and a strong dollar. Finally, decline in inventories led to a nearly 0.9% decline in GDP. Notably, business spending constitutes more than 12% of U.S. GDP.
In this respect, a rate cut by the Fed, in its upcoming FOMC meeting scheduled Jul 30-31, is highly likely. In June, Fed chair Jerome Powell expressed his concerned about declining business expenditure and slowing global growth. A drop in the benchmark lending rate, which is currently at 2.25-2.5%, will provide cheaper funds to businesses for investment.
Further, lower interest rate will also reduce the price of U.S. dollar, raising the competitiveness of U.S. exports. As of Jul 28, per the CME FedWatch, 81% respondents expect a rate cut of 25 basis points, while 19% expects half a percentage cut.
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Economy to Support Earnings in Near Term
With the advent of July 2019, the U.S. economy officially entered into the longest stretch of expansion at least since 1854. Although the pace of economic growth has reduced, it still can deliver a lot of good things.
A growth rate of more than 2% is always a healthy number. Moreover, the core PCE price index –- Fed’s favorite gauge of measuring inflation – grew 1.8% in the second quarter from 1.1% in the previous quarter. It is still below the central bank’s 2% target level.
Moreover, recently released economic data such as durable goods orders, industrial production, manufacturing and service PMI indicate that the fundamentals of the economy are not as bad as projected by some economists. Likewise, expectation for second-quarter earnings has been gradually increased in July. Solid foothold of the U.S. economy is likely to provide higher profitability for U.S. corporates.
Our Top Picks
At this stage, it will be prudent to invest in stocks with strong growth potential and a favorable Zacks Rank. We have narrowed down our search to five such stocks, each with either a Zacks Rank #1 (Strong Buy) or 2 (Buy), Zacks Investment Research
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