Thursday, May 26, 2011
Today’s negative economic reports will add to the growth concerns that have been weighing on stocks and commodities in recent days.
Contrary to expectations, the first quarter GDP growth number was left unchanged, indicating that the economy’s growth pace had stalled. And Jobless Claims again reversed their downward trend of the last two weeks, raising doubts about the sustainability of the labor market recovery.
In a surprise report, the Commerce Department left the initial read for the first-quarter GDP growth rate unchanged at 1.8%. The expectation was for the growth rate to go above the 2% rate, with some estimates as high as 2.5%.
The internals of the GDP report were equally unsettling, with nothing positive that could reassure us on the growth front. Granted this is a backward looking report. But it nevertheless adds to concerns that the economy had far less momentum going into the second quarter than earlier believed. I would expect GDP growth estimates for the current quarter to start trending down in the coming weeks. We had seen some early signs of that trend in recent days already, with a couple of major brokerage houses cutting their estimates.
In another negative surprise for the market, weekly Jobless Claims jumped 10 thousand for the week to 424 thousand. The four-week average dropped by 1750 to 438.5 thousand.
Claims had spiked last month above the important 400 thousand level after consistently coming down to the under-400 thousand level earlier in the year. A number of non-fundamental reasons were given for the the upswing, ranging from issues related to the start of a new quarter to the Good Friday holiday and emergency benefits in Oregon. The jump today, after the drop over the last few weeks, puts a question mark on those explanations.
Claims under the 400 thousand level are generally associated with steady job gains in the economy. For the economic recovery to move on to a sustainable trajectory and for the current ongoing growth jitters to subside, we need claims to fall below, and stay, the 400 thousand level in the coming weeks.
The earnings calendar is almost over, but we did have a few major earnings reports this morning. Big Lots (BIG), the close-out retailer, modestly beat EPS expectations, met revenue expectaions, but guided lower. Ketchup maker, Heinz (HNZ) missed EPS expectations by a penny, came inline with revenue expectations, and raised its dividend. Tiffany (TIF), the high-end jeweller, handily beat EPS and revenue expectations and raised outlook. NetApp (NTAP), the data storage firm, also came ahead of earnings and revenue expectations and guided higher.
Today’s GDP and labor market reports add to the growing list of indicators that appear to be telling us that the economy’s soft patch in the preceding quarter has carried into the current one. This is a significantly weaker view of the economy that what the market was expecting.
Sheraz Mian
Director of Research
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