Brian Jacobsen

GDP revisions don’t revise our expectations

AdvantageVoice® Blog—8-29-13
Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist

Second-quarter real gross domestic product (GDP) increased at a 2.5% annualized rate, according to the second estimate from the Bureau of Economic Analysis, up from the advance estimate of 1.7%. First-quarter real GDP increased at a 1.1% annualized rate. Export growth, increased nonresidential fixed investment, and smaller decreases in federal spending drove second-quarter GDP growth higher than first-quarter GDP growth.

Our projections are still that instead of seeing accelerating economic growth for the second half of the year, the second quarter may represent the high watermark of growth. While this could be disappointing news for the economy, it might not be all that bad for the markets. 

Of the components of GDP, exports and imports were revised the most, with exports increasing more than first estimated and imports increasing less than first estimated. It is the change in the difference between these two—net exports—that feeds into calculating the change in GDP.

Investment in nonresidential structures increased 16.1% in the second quarter after decreasing 25.7% in the first quarter. Residential fixed investment increased 12.9% in the second quarter. These tend to be sensitive to interest-rate changes. Because GDP measures the value of final goods and services produced, existing home sales don’t contribute much to GDP except for the brokerage commissions that are paid. New home sales do contribute directly to GDP, and we’ve already seen mounting evidence of weakness there. While housing contributed to growth in the first half of the year, it might not contribute much to the second half.

The effect of the sequester on federal spending may be mostly behind us. After decreasing 8.4% in the first quarter, real government consumption expenditures and gross investment declined 1.6% in the second quarter. A lot of government spending is actually a redistribution of income (think of Social Security) rather than direct purchases of goods and services. While government spending can grow, government purchases of goods and services—which count toward GDP—may not contribute meaningfully to GDP growth.

Corporate profits in the second quarter increased $78.3 billion after declining $26.6 billion in the first quarter. Both financial and nonfinancial corporations posted higher profits in the second quarter after seeing declines in the first quarter. For the S&P 500 Index, a subset of U.S. corporations, second-quarter earnings per share (EPS) increased 2.3% (un-annualized). Only the information technology (IT) and materials sectors had quarterly declines in EPS. Year over year, there were declines in energy, IT, materials, and telecommunication services, while consumer discretionary and financials had double-digit increases.

Despite slow economic growth, sales per share are growing for S&P 500 companies. Sales per share increased 2.4% in the second quarter and 3.4% compared with a year ago. Profit margins are still robust at 9.51%. There do not appear to be many forces to push those margins lower. Since September 2010, operating margins have stayed in excess of 8%, averaging more than 9%. With EPS increasing, sales growing (slowly), and profit margins staying high, valuations for stocks should be able to bounce back from any temporary declines.

The views expressed are as of 8-29-13 and are those of Chief Portfolio Strategist Brian Jacobsen, Ph.D., CFA, CFP®, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.


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