by Louis Navellier

May 3, 2022

I have a lot of suspicion about last Thursday’s report that the U.S. economy contracted by 1.4%. First, if the U.S. is truly in the midst of negative first-quarter GDP growth – despite corporations continuing to announce record earnings – then it definitely messes with the Fed’s battleplan to raise key interest rates.

Secondly, it certainly messes with the Biden administration’s coming election plans. Since two quarters in a row of negative GDP growth is the definition of a recession, the Fed is now in quite a pickle, since they do not normally raise key interest rates amidst a recession, especially going into an election. It’s clear the Biden team will do all they can do to turn this negative GDP number into a positive report – fast!

And third, most of the March economic indicators released last week certainly don’t point to a recession:

  • The Commerce Department announced that durable goods orders in March rose 0.8%, following a revised 1.7% decline (down from -2.2% first reported) in February. Excluding defense, durable goods orders rose an impressive 1.2%. Core durable goods orders rose by a healthy 1% in March. The auto industry notched a 5% increase in March orders. Strong consumer demand plus order backlogs from supply chain disruptions continue to boost orders, which have risen in five of the past six months.
  • The Commerce Department also announced that personal consumption expenditures rose 1.1% in March, while personal income rose by 0.5%. Anytime consumers spend more than their income by drawing down savings or incurring new debt is a sign of rising consumer confidence. Also, spending on services, like restaurants and travel, rose considerably. Spending on food and gasoline also rose.
  • On Thursday, the Labor Department announced that weekly unemployment claims declined to 180,000 compared to a revised 185,000 in the previous week. Continuing unemployment claims declined to 1.408 million, compared to a revised 1.409 million in the latest week. Overall, the labor market remains very healthy, since weekly unemployment claims are at the lowest level in 52 years.
  • The Conference Board reported that its consumer confidence index slipped slightly to 107.3 in April, down from 107.6 in March. The present situation component declined to 152.6 in April (down from 153.8 in March), but the expectations component rose to 77.2 (up from 76.7 in March). That means consumers are optimistic, and that is why the U.S. has been able to avoid a recession so far.

Another indication that the -1.4% GDP figure is premature (if not bogus) is that the Atlanta Fed on Friday issued its initial second-quarter GDP estimate at a +1.9% annual pace. The consensus of most economists ranges from a 1.7% to a 4.8% annual pace, so the Atlanta Fed is currently below the median estimate. If the supply chain bottlenecks diminish in the second quarter, I expect GDP growth to resurge.

Another piece of good news is that there is mounting evidence that inflation peaked in March as crude oil and other commodity prices soared then and have since moderated. The fact that China’s Covid lockdown has spread outside of Shanghai and now is in Beijing means that another big Chinese province will likely incur more draconian lockdowns. Already, China’s energy demand has fallen by approximately 20% due to its Shanghai lockdown, so crude oil prices have moderated substantially, near-term. Supply chain bottlenecks have gotten even worse as widespread Covid outbreaks bring entire cities to a halt, and food hoarding is becoming common, since citizens do not know how long the lockdowns will persist.

I’d say that the most immediate impact of the Commerce Department’s first-quarter GDP estimate is that it could cause the Fed to be a bit more cautious when it comes to their FOMC policy statement this week. Longer-term, the $64,000 question is when the Fed will stop raising key rates. Most economists expect the Fed to raise the Fed funds rate to 2.50% to 2.75%, which they could reach by year’s end.

In earnings reports, most of the biggest tech stocks reported last week, and that was why the market was so volatile. Microsoft posted better-than-expected earnings after the close on Tuesday, which temporarily helped to firm up FAANG stocks. Google posted 23% annual revenue growth but missed estimates a bit due to slowing YouTube growth (to a 14% annual pace). However, Facebook/Meta Platforms beat analyst expectations, while Amazon posted disappointing results. Rounding out the old FAANG results, Apple posted record results, but then warned that it was not immune to supply chain bottlenecks.

The Housing Indicators Are Mixed

The news on the housing front was mixed. The Commerce Department on Tuesday announced that new home sales declined 8.6% in March to an annual pace of 763,000. In the past 12 months, new home sales have declined 12.6%. As for urban home prices, the S&P Case-Shiller 20-city index through February reported a 20.2% annual price gain. Tight inventories continue to fuel home price appreciation, but higher mortgage rates are anticipated to slow the pace of home price appreciation in the upcoming months.

The National Association of Realtors on Wednesday announced that pending home sales declined 1.2% in March as all four major regions reported a decline. Between tight inventory, higher mortgage rates, and affordability issues, pending home sales have declined for the past five months and have declined 8.2% compared to a year ago. This is an example of the kind of soft landing that the Fed is hoping to engineer.

Navellier & Associates owns Apple Computer (AAPL), Microsoft (MSFT), and Alphabet (GOOG), in managed accounts. A few accounts own (AMZN) and Meta Platforms (FB) per client request only, in managed accounts. Louis Navellier and his family own Apple Computer (AAPL), and Alphabet (GOOG), via a Navellier managed account, Apple Computer (AAPL), and (AMZN) in a personal account. He does not own Microsoft (MSFT) or Meta Platforms (FB) personally.

All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.

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Louis Navellier

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