The final first quarter GDP reading showed that the economy contracted in the first quarter at a slower pace than previously estimated. According to the “third estimate” of the Bureau of Economic Analysis (BEA), the economy contracted at an annual rate of 0.2% in the first quarter, in line with the consensus estimate and compared favorably with “second estimate” of a 0.7% decline.
A wider trade deficit, decline in business spending, decrease in corporate profits and a harsh winter were the main reasons behind the contraction. However, factors including upward revision of consumption expenditure and increase in residential investment restricted the first quarter GDP to decline further.
Reasons Behind Contraction
The wider trade deficit in the first quarter was one of the main reasons behind the decline in the GDP number. According to the report, export of goods and services declined 5.9% over the first quarter, in contrast with the 4.5% fourth quarter gain. However, the rate of decline was revised upward from earlier estimate of 7.6% drop.
Meanwhile, import of goods and services surged 7.1% in the first quarter, significantly higher than the previous estimate of a 5.6% rise. The stronger dollar was the main reason behind this wider trade deficit, which subtracted around 2% from the GDP number.
Moreover, a surge in the U.S. dollar also had a negative impact on corporate profits, which was evident from the dismal first quarter earnings results. The report showed that corporate profits post-tax, which include inventory valuation and capital consumption adjustments, declined 8.8% over the quarter. Also, a severe winter weighed on the corporate performance.
Meanwhile, stronger dollar and low level of oil prices dragged down business spending in the first quarter. According to the report, real nonresidential fixed investment declined 2% over the quarter, compared to a 4.7% increase in the fourth quarter. This was also the worst performance of this section since 2009. Moreover, the price index for gross domestic purchases declined 1.6% in the quarter, significantly wider than the 0.1% decrease in the fourth quarter.
Bright Spots
According to the BEA, real personal consumption expenditure rose 2.1% during the quarter, revised upward from the ”second estimate” of 1.8%. Though the rate of increase was lower than the fourth quarter’s 4.4% increase, the upward revision indicated that the consumer spending is gradually gaining ground on the back of strong labor market recovery and low level of oil prices.
Meanwhile, real residential fixed investment jumped 6.5% in the first quarter, higher than 3.8% increase in the fourth quarter. The rate of growth was also higher than the earlier estimate of 5% rise. This indicated that housing market attracted a significant portion of consumer spending during this quarter. Separately, the federal government expenditure remained flat from the previous quarter, in contrast with 7.3% decline in the fourth quarter.
Sectors to Gain
An increase in spending in housing made that sector the best performer in the GDP report. Moreover, recently released housing data indicated that this important section of the economy has recovered at an impressive rate over the past few months.
While existing home sales in May surged at the highest pace since Nov 2009, May’s new home sales figure hit the highest level since Feb 2008. Also, most of April’s housing data were encouraging, indicating a strong recovery in housing market.
Additionally, improvement in consumer spending numbers confirmed that a strong labor market and prevailing low levels of oil prices are helping consumers spend and save more. The Labor Department reported that the economy generated 280,000 new jobs in May, continuing the positive trend of job additions. Also, the unemployment number declined 5.7% in January to 5.5% in May. Though oil prices have shown some signs of stability over the past few months, they remain significantly low from the year-ago level.
Consumer spending is likely to increase further in the near future, banking in this favorable economic scenario. Retail is one of the main sectors that benefits from higher consumer spending as expenditures in retail represents almost 30% of the consumer spending. Moreover, the U.S. Department of Commerce reported that retail sales increased 1.2% in May, significantly higher than the April’s revised gain of 0.2%. Also, retail sales rose 2.1% year over year through the March to May period.
4 Prominent Picks
In this scenario, we highlight two retail stocks and two housing stocks that are likely to benefit from the favorable economic environment. Each of these stocks has a favorable Zacks Rank. Also, with our style score system we have identified the key statistics to pay close attention to. The attractiveness of these companies as an investment option at this stage is confirmed by its Style Score of ‘A’ or ‘B.’ Hence, investors may consider these stocks to strengthen their portfolio.
Retail Picks
American Eagle Outfitters, Inc. AEO is a specialty retailer of all-American casual apparel, accessories, and footwear for men and women.
This Zacks Rank #1 (Strong Buy) company has a Value Style Score of ‘B’ and an impressive forward P/E ratio of 18.66. AEO has a current year growth estimate of 51.2%, compared to the industry growth rate of 6.5%. The Zacks Consensus Estimate for the current year EPS has been revised 10.5% upward over the last two months.
Express Inc. EXPR is a specialty retailer of women's and men's apparel in the US. EXPR also sells its products through its e-commerce website, express.com.
Apart from having a Zacks Rank #1 (Strong Buy), the retailer has a Value Style Score of ‘A’ and a strong forward P/E ratio of 15.77. The company has a current year growth estimate of 47.8%, significantly higher than the industry growth rate. The Zacks Consensus Estimate for the current year EPS has been revised 14.3% upward over the last two months.
Housing Picks
M/I Homes, Inc. MHO is one of the nation's leading builders of single-family homes. Their homes are marketed and sold under the trade names M/I Homes and Showcase Homes.
The Zacks Rank #2 (Buy) company has a Value Style Score of ‘B’ and a solid forward P/E ratio of 13.80. MHO has a current year growth estimate of 35.1%, compared to the industry growth rate of 17.7%. The Zacks Consensus Estimate for the current year EPS has been revised 8.4% upward over the last two months.
Owens Corning OC is a world leader in building materials systems and composite solutions. This Zacks Rank #2 (Buy) is involved in manufacturing and selling glass fiber reinforcements and other materials for residential and commercial buildings.
The company has a Value Style Score of ‘B’ and a forward P/E ratio of 19.69. It has a current year growth estimate of 21.3%. The Zacks Consensus Estimate for the current year EPS has been revised 1.4% upward over the last two months.
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