According to the Bureau of Economic Analysis’ final estimate, U.S GDP increased 4.2% in the second quarter, unchanged from the earlier estimate. The fastest pace of growth in almost four years was powered by increases in investment and expenditure across several categories.
The Trump administration’s tax cuts program was the primary force that powered the expansion in the second quarter. Some economists think the pace of growth will decelerate in the third quarter, primarily due to tariff tensions between the United States and China.
However, the economy is still on track to meet Trump administration’s annual growth target of 3%. Meanwhile, the increase in consumer spending remained unchanged at 3.8%. Considering that it accounts for more than two-thirds of total economic activity, it makes sense to bet on consumer discretionary stocks.
Consumer Expenditure Remains Firm
The final estimate of second quarter GDP revealed that the U.S. economy expanded at an annualized pace of 4.2% during the period, unchanged from the second estimate released in August. Higher spending and business investment was somewhat offset by a fall in private inventory investment.
The second quarter witnessed the fastest pace of growth since the third quarter of 2014. It is also a major improvement from 2.2% pace of growth recorded in the first quarter. Overall, the economy grew 3.2% in the first half of 2018, primarily due to the Trump administration’s substantial tax cuts.
Meanwhile, consumer spending, which accounts for more than two-thirds of all economic activity, increased 3.8%, as previously estimated. This is the highest increase recorded since 3.9% logged in the fourth quarter of 2017 and the best growth in around four years.
Annual Growth Likely to Hit 3% Target
Another reason for the strong pace of growth in the second quarter was a major front-loading of soybean exports. These shipments were expedited to avoid China’s retaliatory import tariffs and contributed around 1.2% to the headline figure. Economists believe that the third quarter could witness a slowdown in growth due to the fallout of the U.S.-China trade war.
However, the annualized rate of growth is still expected to clock in at around 3%. While the Atlanta Fed projects a much faster pace of 4.4%, a more conservative reading from a CNBC survey estimates the economy will expand 3.3% in the third quarter.
And several economic gauges indicate that this might indeed be the case. Small business optimism is hovering around record levels. Corporate profits remain strong and durable orders jumped 4.5% in August. Most notably, consumer confidence hit an 18-year high in September. This clearly indicates that the engine of U.S. economic growth is still humming along comfortably.
Our Choices
The strong showing by GDP in the second quarter is indicative of the robust state of the U.S. economy. Though a slowdown is expected in the next quarter, growth is still expected to be considerably high. The increase in consumer expenditure and the recent spurt in consumer confidence show that the spending power of the American consumer remains intact.
Investing in consumer discretionary stocks looks like a smart move at this point. 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 a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Guess?, Inc. GES designs, markets, distributes and licenses casual apparel and accessories for men, women and children as per the American lifestyle and European fashion sensibilities.
Guess?’s projected growth rate for the current year is 48.1%.The Zacks Consensus Estimate for the current year has improved 3% over the past 30 days.
Rent-A-Center, Inc. RCII is the largest rent-to-own operator in the United States offering durable goods such as consumer electronics, appliances, computers, furniture and accessories.
Rent-A-Center’s projected growth rate for the current year is more than 100%.The Zacks Consensus Estimate for the current year has improved 11.4% over the past 30 days.
Johnson Outdoors Inc. JOUT is a designer, manufacturer and marketer of watercraft, diving, outdoor equipment and marine electronics products on a global basis.
Johnson Outdoors’ projected growth rate for the current year is 46.4%.The Zacks Consensus Estimate for the current year has improved 11.4% over the past 60 days.
Summer Infant, Inc. SUMR is a designer, marketer and distributor of branded durable juvenile health, safety and wellness products (for ages up to three years), which are sold principally to large U.S. retailers.
Summer Infant’s projected growth rate for the current year is more than 100%The Zacks Consensus Estimate for the current year has improved 50% over the past 60 days.
Vista Outdoor Inc. VSTO develops, manufactures and distributes optics, accessories and eyewear.
Vista Outdoor’s Zacks Consensus Estimate for the current year has improved 15% over the past 60 days.
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