1-Q GDP Growth Falters

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Includes: DWDP, PEP, PG, S, XOM
by: Zacks Investment Research

The day's major event is the sub-par GDP report for the first quarter, which came in line with expectations. We also have a disappointing Jobless Claims report this morning, reversing the gains that we have been seeing in this key report. These unfavorable reports will weigh on the market today, reversing the positive momentum of the last few days.

U.S. economic growth momentum weakened significantly in the first quarter, producing a sub-par growth rate of 1.8%, in line with consensus growth expectations. The economy grew at a 3.1% pace in the fourth quarter and a 2.6% rate in the third quarter of 2010.

While the headline number is disappointing, the first quarter slowdown likely resulted from temporary factors that are expected to reverse in the coming quarters. The key negatives were international trade, business investments in structures and government spending. International trade has been a very erratic variable in the GDP accounting in the last few quarters; it was a positive contributor to growth last quarter after being in the negative column the preceding two quarters.

Consumer spending was also much lower than in the fourth quarter at 2.7% vs. 4%. This deceleration reflects the impact of rising fuel and food prices, which brought down 'real' consumption outlays as the 'nominal' consumption numbers for the quarter are comparable to the fourth quarter pace. The labor market momentum and the ISM surveys indicate sustainable underlying strength in the economy, which should help reverse the first quarter softness.

The Fed Chief in his news conference yesterday alluded to the 'transitory' nature of the first quarter GDP softness. And this is reflected in consensus GDP growth expectations for the coming quarters. While Bernanke's media event yesterday did not produce any surprises, he reiterated the end of the QE2 program per schedule and did not think that further quantitative easing would be as effective given the recent upsurge in inflation readings.

On the earnings front, we had better than expected numbers from Sprint (NYSE:S), Exxon (NYSE:XOM) and Dow Chemical (DOW). Pepsi (NYSE:PEP) barely managed to come in line with earnings expectations as rising input costs were a drag on margins. The commodity-price inflation also appeared to be a factor in the Procter & Gamble (NYSE:PG) earnings miss. We have Microsoft (NASDAQ:MSFT) reporting after the close today.

The day's economic reports, both GDP as well as Jobless Claims, are soft and unfavorable. The best that can be said about them is that they represent temporary factors and do not a reflect a definitive slowdown in the economy. This may not be enough to cheer stocks, though -- at least not today.