Economy Grows Only 1.6% in First Quarter
The advance release of the U.S. first-quarter gross domestic product (GDP) rose a meager 1.6%, less than the 2.0% expected by the market and well below MMS International's forecast for a 3.0% rise. The shortfall in GDP relative to estimate was widespread, as service consumption, investment spending, and government spending all were below estimates.
Highlighting the point was the ironic 1.5% drop in defense spending in the first quarter after rising between 7% and 14% for five straight quarters. Also taking away from real growth was the chain price index, which jumped 2.5% in the period vs. expectations for a gain on par with the 1.8% rise seen in the fourth quarter. While strength related to rising energy costs was expected, there was surprising firmness through most components -- with the stand-out a 7.8% jump in government prices vs. the 1.6% gain in the fourth quarter.
Overall, if nothing else, the unexpected weakness in the first quarter should provide an easier hurdle to clear in the second quarter. Consumption rose only 1.4% in the first quarter, which should prove to be an easy figure to beat in the second quarter given the strong starting point, thanks to the robust March retail sales data. In addition, the 4.4% decline in equipment and software spending marked the worst figure in six quarters and likely reflected the temporary drag from the "3 W's" (weather, war, and worry).
Consumer Sentiment Improves
The University of Michigan consumer sentiment index rose to 86.0 for the final April reading compared with the 83.2 preliminary print (77.6 in March). Both current conditions and expectations rose on the period, as the current series improved to 96.4 from a preliminary 94.8 and March's 90.0, while expectations climbed to 79.3 from a preliminary 75.7 and March's 69.6. The data were better than expected, but really aren't surprising given the successful outcome of the war.
The improvement on the month is yet another indication that the lift of some geopolitical uncertainty and the sharp rebound in the stock market over the last few weeks is providing a boost to consumers's assessment of conditions. This is also in agreement with other related measures of consumer sentiment, as the most recent reading from the ABC News/Money Magazine consumer comfort index rose to the best level in 7 months, while the 4-week gain of 13 points is the largest since April, 1986.
Overall, the rebound in sentiment in recent weeks suggests that some of the more pessimistic fears regarding the economy are probably unwarranted. The data also suggest some upside risk to our current April forecast for the Conference Board's consumer confidence measure, which we project to rebound to 75.0 from 62.5.
New Home Sales Rise
U.S. new home sales jumped 7.3% to a 1.012 million pace from a revised 943,000 rate (854,000 previously) in March. A surge in sales in the Northeast (82.5%) paced the better than expected increase, virtually confirming the weather story (after falling 38% in February). This is the fastest sales pace since the record rate seen last December.
Existing home sales fell 5.6%, however, to a 5.53 million pace after a revised 5.86 million pace (previously 5.84 mln). This was weaker than expected, and declines were spread relatively evenly across the same four regions, falling between 4.3 and 7.4%.
Overall, while the decline in existing home sales was a bit disappointing, the pace of sales activity remains quite robust. Moreover, housing starts rebounded smartly during the month with the return to more normal weather, and mortgage rates remain lean on a historical basis despite having drifted higher from mid-March lows.
Indeed, the key driver of the residential housing sector in recent years, mortgage rates, remains historically lean. While an improving economy will likely push rates higher by yearend, rates will probably not rise enough to cause any significant slowing in building or buying activity. Also, given growing expectations among households rates are not going any lower, some potential home buyers may be tempted to jump into the market in order to secure a mortgage in advance of expected rate gains.
From MMS International