Last month, the Department of Commerce’s initial estimate for second-quarter GDP pushed the economy’s most widely watched metric below the level recorded for the first quarter. Now, the latest estimate for the gauge has moved even lower, as was widely expected. Economists are attributing the slide to the fallout of the bitter U.S.-China trade war.
The petering out of the impact of Trump’s tax cuts is believed to be another reason for this significant decline in growth. However, GDP still surpassed some estimates, only due to the contribution from strong consumer spending.
This is why it still makes good sense to invest in consumer discretionary stocks, which derive strength from personal spending, universally acknowledged as the engine of the U.S. economy.
Trade War, Receding Impact of Tax Cuts Hurt GDP
Per the Commerce Department’s second estimate, GDP for the second quarter currently stands at an annualized rate of 2%. This is marginally lower than the pace of 2.1% estimated last month. It represents an even more significant slowdown from the 3.1% pace recorded in the first quarter. The economy expanded 2.6% during the first half of 2019.
Economists attribute this deceleration to the U.S.-China trade war. The conflict shows no sign of ending and has reduced business investment and hurt manufacturing. It now threatens to end the 11-year long economic expansion. Another reason for the loss in economic momentum is the receding impact of Trump’s tax cut and government spending drive.
Consumer Spending to the Rescue
Though the Fed Chair thinks that the economy is favorably positioned, the central bank is closely observing events. Jerome Powell has stated time and again that the Federal Reserve will “act as appropriate” to sustain the pace of economic momentum. Last month’s rate cut supports such a view and markets have already penciled in another reduction in rates after the Fed’s September meeting.
At this point, the only saving grace for the economy is the robust pace of consumer spending. The Department of Commerce raised its estimate for growth in consumer spending from 4.3% to 4.7% for the second quarter. The metric, which accounts for more than two-thirds of U.S. economic activity, benefited from higher spending overall, especially on autos, apparel and restaurants.
Strong consumer spending also helped American businesses rack up their first increase in profits in three quarters. The 5.3% rise in adjusted pretax corporate profits was also the first since mid-2014. Higher spending also contributed to a decline in inventory accumulation during the second quarter.
Our Choices
Despite the slowdown in economic growth, the U.S. economy remains in a strong position thanks to a solid burst of consumer spending. With American consumers remaining confident, the trend is likely to be sustained in the quarters ahead.
This is why investing in consumer discretionary stocks remains a prudent choice. However, picking winning stocks may be difficult.
This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.
We have narrowed down our search to the following stocks, each of which has a Zacks Rank #1 (Strong Buy) and good VGM Score. You can see the complete list of today’s Zacks #1 Rank stocks here.
Skechers U.S.A., Inc. SKX designs, develops and markets a diverse range of lifestyle footwear for men, women and children, as well as performance footwear for men and women.
Skechers has a VGM Score of A. The company’s projected growth rate for the current year is 17.4%. The Zacks Consensus Estimate for the current year has improved by 2.1% over the last 30 days.
Rent-A-Center, Inc. RCII is a lessor of household durable goods, which are provided on a rent-to-own basis.
Rent-A-Center has a VGM Score of A. The company’s projected growth rate for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved by 6.6% over the last 30 days.
Crocs, Inc. CROX is a designer, developer, manufacturer and distributor of casual footwear for men, women and children.
Crocs has a VGM Score of A. The company’s projected growth rate for the current year is 62.8%. The Zacks Consensus Estimate for the current year has improved by 12.5% over the last 30 days.
Lincoln Educational Services Corporation LINC is a leading and diversified for-profit provider of a career-oriented, post-secondary education in the United States.
Lincoln Educational Services has a VGM Score of A. The company’s projected growth rate for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved by 15.4% over the past 30 days.
Funko, Inc. FNKO is a pop culture consumer products company.
Funko has a VGM Score of B. The company’s projected growth rate for the current year is 48.9%. The Zacks Consensus Estimate for the current year has improved by 10.7% over the last 30 days.
K12 Inc. LRN, a technology-based education company, is a leading national provider of proprietary curriculum and educational services created for online delivery to students in kindergarten through 12th grade, or K-12.
K12 has a VGM Score of B. The company’s projected growth rate for the current year is 4.8%. The Zacks Consensus Estimate for the current year has improved by 7.1% over the last 30 days.
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