US Growth at Robust Levels, Inflation in Check, Confidence Still Irrationally Low, Manufacturing Slowing

- Advance 1Q GDP rose 4.8% versus estimates of a 4.9% increase and a 1.7% gain in 4Q.
- Advance 1Q GDP Price Index rose 3.3% versus estimates of a 2.7% gain and a 3.5% rise in 4Q.
- Advance 1Q Personal Consumption rose 5.5% versus estimates of a 5.0% increase and a .9% gain in 4Q.
- 1Q Employment Cost Index rose .6% versus estimates of a .9% gain and a .8% rise in 4Q.
- Final Univ. of Mich. Consumer Confidence for April fell to 87.4 versus estimates of 89.0 and a prior estimate of 89.2.
- Chicago Purchasing Manager for April fell to 57.2 versus estimates of 58.0 and a reading of 60.4 in March.

BOTTOM LINE: The US economy expanded in the first quarter at an annual pace of 4.8%, the fastest in more than two years, led by resurgent consumer spending and the biggest jump in business investment since 2000, Bloomberg said. A healthy labor market and rising wages boosted shopping at retailers and auto dealers, while businesses purchased equipment and software at the fastest pace since before the bursting of the stock market bubble in 2000. Nominal GDP rose at an 8.2% annual pace to $13 trillion. The 5.5% gain in consumer spending was the highest since the third quarter of 2003 and significantly above the long-term average of 3.3%. Business spending on new equipment and software rose 16.4%, the most since the first quarter of 2000. The core PCE index, the Fed’s favorite inflation gauge decelerated to 2.0% from 2.4% during the fourth quarter. I expect GDP growth to moderate to average levels through year-end as a slowdown in consumer spending more than offsets increased business spending.

Confidence among US consumers declined this month as rising gas prices siphoned money from people’s wallets, Bloomberg reported. The decline was muted by a strong job market and the fastest economic growth in 2 years. The current conditions component of the index, which reflects American’s perceptions of their financial situations and whether they believe it is a good time to buy large items, rose to 109.2 from 109.1 in March. The expectations component of the index fell to 73.4 from 76 the prior month. I still expect this reading to join the Conference Board’s Consumer Confidence reading and reach cycle highs by year-end as stocks rise, housing moderates to more healthy levels, energy prices fall from current levels, the job market remains healthy, interest rates remain low and the situation in Iraq improves.

Manufacturing growth in the Chicago area slowed in April from the highest level this year as orders eased, Bloomberg reported. The new orders component of the index fell to 60.8 from 62.2 the prior month. The employment index fell to 47.2 this month from 55.6 in March. The prices paid index rose to 77.2 from 71.1 in March. Finally, the measure of order backlogs fell to 44.8 from 51.6 in March. I expect manufacturing to slow from recent robust rates as economic growth slows to average levels. I continue to believe the most cyclical stocks that have recently posted the strongest gains are at the greatest risk of underperforming going forward.