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U.S. GDP: Is the Economic Sky Falling?

Economics / US Economy Jun 27, 2014 - 06:11 PM GMT

By: Investment_U


Tom Sandford writes: The U.S. economy just came out on top of one of the biggest financial upsets in decades, but you might not know it from the latest report on America’s gross domestic product (GDP).

According to the U.S. Commerce Department, GDP nosedived by 2.9% during the first quarter of 2014. It also set the record for the worst first-quarter performance in five years. Naturally, the news has some investors shaking in their boots.

Truth be told, it’s not that bad. Sure, the rate of droppage was more than double the 1.7% predicted by economists.

But the economic sky isn’t falling. According to economic analysts, the massive GDP plunge was essentially a speed bump brought on by the perfect storm of unlikely occurrences. A blip in the grand scheme of investments.

Job growth has held steadily at about 200,000 per month. Inventory and shipments are up. Consumer spending is still up 1%.

Though analysts had some choice words for the rate change, the report was read and then dismissed. Investors followed suit, and stocks actually rose.

"Despite the awful start to the year, the U.S. economy is nowhere close to recession," said BMO Capital Markets senior economist Sal Guatieri, in an interview with the BBC.

So why all the economic huffing and puffing? Here’s what you need to know about the GDP drop, and why analysts have already moved on.

The Ho-Hum of All Fears

The GDP drop is unique for a number of reasons that are not expected to reoccur in the near future.

For one, experts blamed an unusually long period of cold weather that sent a chill through a number of economic channels. There’s no exact way to tell how many prospective buyers skipped out on retailers, restaurants and car lots in lieu of a warm couch.

But the report comes close. Consumer spending underwhelmed analysts by increasing by just 1%, rather than the 3.1% they expected. That stung since more than two-thirds of U.S. economic growth comes from consumer spending.

Not surprisingly, analysts have blamed the frost for keeping profits down in retail and causing a slowdown in restocking, as well as domestic and foreign shipments. Exports dropped by 8.9%, which likely lobbed off 1.53% of GDP growth. It did not, however, limit economists’ optimism.

"The larger contraction in GDP in the first quarter is not a sign that the U.S. is suffering from a fundamental slowdown,” Capital Economics senior U.S. economist Paul Dales told CNN. “It was still largely due to the extreme weather.”

It may sound farfetched, but there is scientific proof. According to a study by the National Center for Atmospheric Research (NCAR), even the slightest inconveniences from inclement weather can take a toll.

NCAR researchers concluded that bad weather could have driven the GDP down by as much as 3.4%. When translated to banknotes, that would equal more than $485 billion in economic losses.

At the same time, cuts to food stamp programs and the expiration of unemployment benefits also cut deep. When coupled with a weaker-than-expected increase in healthcare spending, economists saw the writing on the wall.

In addition, growing store inventories amounting to $45.9 billion kept profits shelved. While it sits, 1.7% in GDP growth sits with it.

Nowhere to Go But Up

If economists’ nonchalant attitudes are any clue, the economy is expected to rebound in the near future for a few reasons. It turns out optimism might carry some value, especially in the minds of investors who look to leading analysts for guidance.

“If the optimists turn out to be right, the world's largest economy should show a return to growth in the second quarter,” says BBC New York analyst Michelle Fleury. “The U.S stock market's positive reaction shows investors seem willing to buy into that idea.”

While optimism alone is not solid ground for an investment decision, the proof behind it can be. For one, the cold weather has subsided, shipments are steady and inventory is poised to fly off shelves.

And the job market is holding steady, with around 1.1 million jobs added in the last five months. That’s consistent with an economy expecting to expand by 1% to 3% per year.

“This sets us up for a very solid Q2 payback, but how much remains uncertain," Deutche Bank chief U.S. economist Joseph LaVorgna told CNN.

Investors should not hesitate to trade stocks based on these GDP numbers, but if you’re looking to invest in a trade with a steadier track record, look to the services sector. Buoyed by increased business activity in June, the sector expanded at its fastest rate in 4 1/2 years.

"Companies are reporting strong demand for goods and services, linked to growing confidence among households and business customers,” says Chris Williamson, a chief economist at Markit - the company that developed the index. “And setting the scene for further robust economic growth as we move into the second half of the year."

Investors should look to invest in solid service industry leaders like Spar Group Inc. (Nasdaq: SGRP), RLJ Entertainment Inc. (Nasdaq: RLJE) and Command Security Corp. (NYSE: MOC), which were up by 17%, 3.3% and 7.5% by market close on June 26.


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