Market Commentary--Joe Battipaglia, July 31, 2000
gruntal.com
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Edited for ease of reading.
>>>Monday, July 31, 2000
Weekly Perspective
Last week’s strong second quarter GDP report caused much consternation, but a closer look at the numbers shows that consumption spending grew at a more modest pace than any quarter during the past three years. Growth in personal consumption, which accounts for two-thirds of all spending in the U.S. economy, rose at a 3% annualized rate – a significant decrease from the 7.6% rate posted during the first quarter. This deceleration was helped along by six interest rate increases instituted by the Federal Reserve throughout the past year. The slowdown in personal consumption was broad-based and included an absolute decline of –3.9% in durable goods spending and more tepid growth for such categories as consumer non-durables and services.
But as growth in consumption eased, investment by the private sector surged ahead at an annualized rate near 21%. Because of consistently high levels of investment in technology and equipment, gross private investment spending now accounts for over 20% of all spending in the U.S. economy – up from 14% in 1990. Not only has investment spending been the fastest growing segment of the economy for the past ten years, but it also is one of the least inflationary. Since 1997, for example, the GDP deflator for gross private investment spending actually declined by annualized rate of –0.1% versus a 1.6% annualized increase in the overall level of prices in the economy.
The combined effects of slower consumer spending, rising investment demand, modestly higher government spending and a large inventory build amounted to a 5.2% overall annualized rate of growth in real output during the second quarter. While this final number was somewhat higher than expected, several key points stand out:
1. That there continues to be little evidence of mounting inflationary pressures. The GDP price deflator rose 2.5% following a 3.3% rise in Q1. The PCE deflator, that measures changes in consumer prices, rose just 2.3% versus an increase of 3.5% in Q1. Removing the effects of food and energy from the PCE, core consumer prices rose just 1.7% compared to a core reading of 2.2% in Q1. This suggests to me that the first quarter’s jump in consumer prices the result of a temporary rise in energy prices and not a resurgence of cyclical inflation.
2. Growth in consumer spending slowed to a more gradual 3% annualized rate from the strong 7.6% pace experienced during the first quarter. The Federal Reserve has voiced it’s concern about "excessive" growth in consumer spending, so slower growth should help alleviate some of the Federal Reserve’s concerns about imbalances and allow ample room to move to a neutral stance on monetary policy.
3. Investment spending, particularly spending on equipment, software and other technologies, continues to post significant gains despite higher interest rates.
In summary, I continue to see good balance in the economy with stable prices both at both the consumer level and producer level. Oil prices continue to move toward greater stability in the $25-$30 bbl range versus a range of $13-$34 bbl seen during the past three years. Second quarter earnings are also coming through well, and S&P 500 earnings growth for the first half could very well exceed 18% on a year-over-year basis. This is well above the 15% rate I projected for the full year.
With no evidence of rebounding inflation and some easing in consumer spending, I expect concern about the future course of Fed action to abate. Instead, investor focus should to give way to greater investor enthusiasm as the potential for an extended profit cycle well into 2001. I am changing no price targets, earnings estimates, asset or sector allocations at this time. My year-end targets remain 1,625 on the S&P 500 12,500 on the Dow Jones Industrial Average, and 5,500 on the NASDAQ composite.<<< |
