Q2 GDP Faltered, But The Personal Consumption Component Strengthened

|
Includes: AMZN, BBBY, TGT, WMT, XRT
by: Seth Golden

Summary

Q2 2016 GDP grew at a subdued and underwhelming pace, missing economists' forecasts.

Personal consumption accelerated during the Q2 2016 period, highlighting the strength of the consumer.

More economic data will be presented about the consumer and the strength of the labor market this week.

Last week's economic data landed with a thud as second quarter's first look at GDP showed the economy grew at a much slower pace than economists anticipated. This week, investors and market participants are looking for more key data points with respect to the strength or weakness of the U.S. economy. GDP doesn't seem to be moving the markets very much. In reviewing the GDP numbers in advance of this week's non-farm Payroll report, we come to find some good and some bad. In an article centered on the personal consumption data within the latest Census Bureau's read on GDP, I noted the following:

The U.S. economy was expected to have grown 2.6% in the second quarter, but the Census Bureau reported that not only did the US economy grow at only 1.2% in the quarter, but Q1 GDP was revised lower from an already poor 1.1% to just 0.8 percent. Having said that, personal consumption, which accounts for more than two-thirds of economic output, expanded at a 4.2% rate. This metric was the best gain since late 2014. Outlays on goods advanced 6.8%. Spending on services climbed 3 percent in the second quarter. With those data sets in mind, the consumer remains healthy in spite of the subdued total GDP results. Below is a chart of quarterly GDP performance since 2012. The chart very much identifies that the economy has been faltering since 2014, albeit still growing at a muted pace.

It wasn't a pretty Q2 2016 GDP print, but the underlying strength showed that the bulk of the U.S. economy that is centered on consumer spending remained healthy. It is with this in mind that tomorrow's economic data will be of even greater importance. Tomorrow, investors will be offered a closer look at July's personal income and consumer spending data. The reason that the consumer reports will way more heavily than in the past is because a great deal of consumer spending has been going toward healthcare and away from discretionary goods and autos. Tomorrow's report may shed some light on this trend and assist investors who may hold consumer discretionary and auto stocks.

I'm of the opinion that discretionary spending has improved even if ever so slightly month-over-month. Retailers of scale will begin reporting their respective Q2 2016 results next week with the likes of Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) set to round out the reporting cycle for retailers in the subsequent week. With no major retailer of consequence issuing cautionary statements during the Q2 2016 period, I would believe my sentiment for retailers to be inline with expected favorable results from the retailers. But that remains to be seen.

Recognizably, however, via the SPDR S&P Retail ETF (NYSEARCA:XRT), investors can better visualize the sentiment surrounding the consumer and the retail sector. Shares of the XRT have surpassed my $44 expected share price level of achievement for which I desired to short the instrument. But during the last 30-day period, the strength in the XRT was supported by favorable economic data on the consumer and issued quarterly results from the most heavily weighted instrument in the ETF, Amazon.com (NASDAQ:AMZN). Moreover, last week the National Retail Federation raised their forecast for retail sales. "The National Retail Federation boosts its forecast for 2016 U.S. retail sales to 3.4% from a prior estimate of 3.1%. The 3.4% mark matches the pace of retail sales from last year. The NRF pegged retail sales at 4% for the first half of the year (ex-gas stations, restaurants and auto dealers), so a slowdown in the back half is anticipated." As such, I avoided taking a short position in the ETF in favor of realizing and assessing greater sample sets of economic data. Sometimes it pays to wait and avoid speculating with greater risk.

There is a good deal of economic data to be released this week and to the benefit of investors. The table below, from MarketWatch, identifies the economic data release for the week ending August 5. The table also reiterates the results from the economic data presented on Monday August 1st that came in lower than anticipated across the board.

MONDAY, AUG. 1

9:45 am

Markit manufacturing PMI

July

52.9

--

52.9

10 am

ISM manufacturing

July

52.6%

53.0%

53.2%

10 am

Construction spending

June

-0.6%

0.5%

-0.1%

2 pm

Senior loan officer survey

TUESDAY, AUG. 2

8:30 am

Personal income

June

0.3%

0.2%

8:30 am

Consumer spending

June

0.4%

0.4%

8:30 am

Core inflation

June

0.1%

0.2%

Varies

Motor vehicle sales

July

17.5 mln

16.6 mln

WEDNESDAY, AUG. 3

8:15 am

ADP employment

July

--

172,000

9:45 am

Markit services PMI

July

--

10 am

ISM services

July

56.0%

56.5%

THURSDAY, AUG. 4

8:30 am

Weekly jobless claims

7/30

263,000

266,000

10 am

Factory orders

June

-1.7%

-1.0%

FRIDAY, AUG. 5

8:30 am

Non-farm payrolls

July

185,000

287,000

8:30 am

Unemployment rate

July

4.8%

4.9%

8:30 am

Average hourly earnings

July

0.2%

0.1%

8:30 am

Foreign trade deficit

June

-$43.2bln

-$41.1bln

3 pm

Consumer credit

June

--

$19 bln

Click to enlarge

As noted in the table above, the non-farm payroll report will be delivered on Friday and to much anticipation given the outsized beat from the June non-farm payroll report. With the S&P 500 achieving record highs on Monday and before pulling back to end the trading day, investors will likely look to the economic data and earnings reports to guide their capital investments at these levels.

As it pertains to the consumer and consumer spending, my opinion remains that consumer spending has strengthened in the Q2 period and thus justifies my latest upgrade on shares of Bed Bath & Beyond (NASDAQ:BBBY) from Underweight to Neutral. Additionally, my opinion supports my avoidance with regard to shorting shares of XRT in favor of a more defined consumer spending trend that would serve to benefit retail and consumer discretionary stocks.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.