Consumers and businesses helped the U.S. economy expand at a healthy pace for a third straight quarter late last year. Consumer outlays in particular improved on a steady job market and healthier household finances, while the recently-passed tax overhaul policy is expected to give spending another boost this year.
Business also perked up, with outlays increasing on equipment. Investments in new housing jumped significantly as well. Hence, it seems judicious to invest in areas where consumers have led the way and businesses have ramped up investments.
Economy Doing Just Fine
Though fourth-quarter economic growth missed estimates, the economy is doing just fine. The nation’s GDP increased at a seasonally adjusted annual rate of 2.6% in the final three months of 2017 following gains in the previous two quarters of more than 3%, per the “advance” estimate released by the Bureau of Economic Analysis. In fact, this marked the economy’s strongest stretch of growth since the expansion started in mid-2009.
The economy also expanded at a rate of 2.3% for all of 2017 following a discouraging 1.5% increase in 2016. The growth topped the 2.2% average of the last eight-and-a-half-year old recovery from the Great Recession of 2007-09. But, the most encouraging sign is that the economy showed resilience. After all, growth surpassed the coveted 3% mark in the third quarter in spite of the hurricane damages in Texas and Florida.
Consumer Spending – A Key Catalyst
The economy, nonetheless, was driven by solid consumer spending in the fourth quarter. The main engine of the economy grew at 3.8% over the quarter after a 2.2% gain in the third quarter. Consumer outlays, thus, registered the fastest pace of growth in the fourth quarter in almost two years. Americans have spent on a range of items from new cars and trucks to clothing and health care.
Consumers are, largely, benefitting from a low unemployment level and rise in income. Jobless rate remained at an ultra-low level of 4.1% and workers’ pay has increased 2.5% from December 2016 to December 2017. To top it, the National Employment Law Project showed that minimum wage is poised to increase in 18 states and around 20 cities in the United States. This will reach employee wage closer to $15 an hour, which is known as “living wage.”
In fact, the massive tax cuts approved by the Republican-controlled U.S. Congress could further stoke consumption this year. Such tax cuts will drive household income and in turn increase the propensity to consume (read more: GOP Passes Landmark Tax Bill: Best & Worst for Stocks).
Businesses Are Investing More
Companies have ramped up spending in the fourth quarter, up 6.8%. A resurgent global economy helped businesses to step up their outlays. Equipment outlays rose 11.4%, while investments in new housing climbed 11.6% after two months of decline. More number of single family houses is being built in response to a long-term housing shortage.
Among other bright spots, government spending increased at a clip of 3%. Government outlays were supported by a solid 6% rise in defense outlays and a robust increase in federal as well as state and local spending.
Inventories Decline, Trade Gap Widens
Drop in inventories and a big trade gap, in the meantime, dented fourth-quarter GDP by 1.8 percentage points. If these factors are excluded, GDP will top 4% growth, something which President Trump is aiming for. However, this fall in inventories doesn’t mean that businesses are pessimistic about future demand. In fact, they failed to adequately forecast demand in the fourth quarter and had to sell out from their stockpiles.
The other factor that dragged GDP was trade. But in the fourth quarter, exports were healthy, climbing 6.9%. It’s just that imports were stronger, rising 13.9%. Nevertheless, the economy continues to be in good shape and has expanded for ten straight quarters since the recession.
5 Biggest Gainers
As consumers continue to increase their spending on big-ticket items, auto and auto parts stand to gain. In fact, durable goods have an extended product life and are not typically worn out within a short span of time. Consumers have also increased their spending on healthcare and garments, thus, investing in stocks from such areas seems prudent.
Significantly higher equipment spending and a rise in residential investment call for investing in such a space. We have, thus, selected five solid stocks from the aforesaid areas that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Advance Auto Parts AAP provides automotive replacement parts, accessories, batteries, and maintenance items for domestic and imported cars, vans, sport utility vehicles, and light and heavy duty trucks. The stock has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings increased 0.2% in the last 60 days. The company, which is part of the Automotive – Retail and Wholesale – Parts industry, is projected to give a solid return of 25.6% in the next quarter. Advance Auto Parts has outperformed the broader industry in the last three months (+50.8% vs +24.2%).
The Children's Place PLCE operates as a children's specialty apparel retailer. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings increased 4.4% in the last 60 days. The company’s expected growth rate for the current year is 44.9%, in contrast to the industry’s projected decline of 3.1%. Children's Place has outperformed the broader industry over the last three months period (+45.7% vs +31.1%).
Diplomat Pharmacy DPLO — a Zacks Rank #1 company — operates as an independent specialty pharmacy in the United States. The company stocks, dispenses, and distributes prescriptions for various biotechnology and specialty pharmaceutical manufacturers. The Zacks Consensus Estimate for its current-year earnings advanced 1.2% in the last 60 days. The company’s expected growth rate for the current year is 13.3%, in contrast to the industry’s projected decline of 4.1%. Diplomat Pharmacy has outperformed the broader industry in the last three-month period (+29.5% vs +17.9%). You can see the complete list of today’s Zacks #1 Rank stocks here.
Oshkosh OSK manufactures, and markets specialty vehicles and vehicle bodies. The company’s Access Equipment segment provides aerial work platforms and telehandlers for use in various construction, industrial and general maintenance applications. The stock has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings increased 3.3% in the last 60 days. The company, which is part of the Automotive – Original Equipment industry, is projected to give a solid return of 26.3% and 10.6% in the current quarter and year, respectively. Oshkosh has outperformed the broader industry over the last three months (+7.4% vs +7.1%).
BRT Apartments BRT is a real estate investment trust that owns, operates and develops multi-family properties. The company has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings rose 11.8% in the last 60 days. The company, which is part of the REIT and Equity Trust – Residential industry, is projected to give a sturdy return of 12.5% and 26.9% in the next quarter and the current year, respectively. BRT Apartments has outperformed the broader industry in the last three months (+32.1% vs -6.5%).
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