A string of weak data portends a weak first-quarter GDP reading, but that doesn’t mean investors should panic about the underlying state of the economy, says Morningstar's Bob Johnson.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Does a string of weak data portend a weak first-quarter GDP report? I'm here with Bob Johnson, he is our director of economic analysis, for his take.
Bob, thanks for joining me.
Bob Johnson: Great to be here today.
Glaser: So, let's start with some of the data we saw this week and why you think it might lead to a pretty weak reading for first-quarter GDP when we get that in a few weeks now. The first was with auto data. This had been a bright spot. Why are these sales going in the wrong direction now?
Johnson: Well, you know, they were really a problem when we saw the data on Friday, and it came late in the day to really talk about it too much. But, certainly, at 16.5 million units, that's kind of below the averages that it's been at, and we're hoping it's kind of a one-month fluke. It's hard to tell right now, but it certainly was a very disappointing number.
I mean, recall last fall, we had numbers as high as over 18 million annualized units. So, clearly, this number in the mid-16s, which was kind of unexpected; it was below consensus, below what dealers thought. It just kind of came in weak at the end and we've got kind of no weather to blame this time. About the only excuse I've really heard is that maybe the way the Easter holiday fell, that people were celebrating Easter rather than shopping for cars. But that's kind of a lame excuse as far as I'm concerned, and it looked like a weak number, and it's an important part of the consumption number and an important part of business spending.
Glaser: When we look at durable goods, that also didn't look so hot.
Johnson: Yeah, we got the full report on manufacturing on Monday of this week and it looked back at the durable goods orders we got a couple of weeks ago and said, you know what, they were even a little worse than we thought. And not only were the orders worse, but the shipments were worse, and that drives the equipment part of the GDP calculation. So, again, a second hit from that.
Glaser: And then trade balance, that also impacts GDP directionally, right?
Johnson: Yeah, piling on, the GDP--the trade balance came in worse than expected on Tuesday and worse than kind of what the government thought just a week ago. I suppose there was one piece of good news in that trade report, which was not a good one, but the good news was that both imports and exports were up for a change. We've been in a pattern where both of them have been down. At least, now, we're all kind of suffering together. But since the imports are a little bit bigger percentage of our GDP, it had a more negative impact.
We think the trade now may take off three [tenths] or four tenths from the first-quarter GDP calculation, a little higher than it was in the fourth quarter. Some people are saying it might be as high as five tenths of a percent. I think that's a little high. But nevertheless, it's a relatively big number. When you're talking a GDP growth rate of 2%, you're talking trade taking off 0.5% all by itself. That's a problem.
Glaser: So, let's add all of this up, what has it mean for this first-quarter GDP reading? Are we looking at something below 1%?
Johnson: Yeah, I think we definitely are looking at below 1%. There is so many consensus forecast right now and some of it--especially, the GDP ones--are kind of taken with a long lag, so it's hard to tell exactly where we are. But I think some of the smarter shorter-term consensus stuff that I see seems to indicate we'll be somewhere between 0% and 1% in the first quarter, and that seems to be relatively logical to me.
The Atlanta Fed's GDPNow forecasts is--I think--is just over about 0.5%, and again that one is not trying to forecast anything, it just adds up what data we have and what correlates to try to get the March estimates that we don't have yet, that we're missing, and so that's not been a bad place to start. And certainly, I don't see any particular reason to argue with them.
Glaser: Is below zero a possibility?
Johnson: It's a possibility. I mean when you've got this--everything lining up in one month, I mean the auto sales will take a big, whole lot of consumption, which already didn't look good because of some of the retail sales data we've seen on January especially. So it's going to be tough to kind of come out of that hole, and now we're kind of looking at government and maybe housing will bail us out from a below-zero number and that's what we're counting on right now.
Glaser: But any way we look at it, it's weak growth. So is this a reason maybe to be concerned about the health of the economy, or is it kind of more of these idiosyncratic factors? Are there any bright spots here?
Johnson: Yeah, there is a couple of things going on. I mean, certainly, the number in the fourth quarter was also revised up. So that makes the comparison a little harder. We're maybe at the same end point or run rate by the end of March. But we've brought back up the starting point a little bit when we raised the fourth-quarter GDP to 1.3%. So, that's kind of hurt part of the calculations, too.
But there are some things--just as a reminder, the first-quarter data always looks unusually weak and kind of the fourth-quarter data always looks unusually strong--at least for the last three or four years. The statistics haven't quite caught up with how people are changing or shifting their spending patterns. So I'm not terribly concerned. And certainly the employment data is certainly something that's been indicating to us that the economy isn't getting dramatically weaker despite what the GDP numbers might be saying.
We had some more evidence this week with the JOLTS' job openings report showing healthy openings, and the hirings increasing. Hirings and openings are together at about the same level, which is great news because for so long the openings have been so high relative to hires, we just looked like we were in a stalemate. Now, it looks like a few more people entered the workforce from the last employment report and those people are finding the openings. So kind of we're getting things to match a little bit better. That's great news.
People are quitting their jobs again, which is good news also. I mean the quits rate at 2.1% is at one of the highest levels of this recovery and kind of the highest in the very long time. So, clearly, people are feeling more confident about leaving to take another job. Certainly, not a sign that the economy is falling apart.
My pet theory about why things are looking weak here in the first quarter is we've got a series of months that had a relatively high number of seasonal business days. We had a leap day in February. So for a lot of the calculations you count how much you sold in February, and now you divide by 29 instead of 28. So it makes the number look small on a daily run-rate basis, which affects the GDP calculation, and I think that's weighed on a couple of sets of data a little bit. And not only was it February but January and March both being 31-day months and the way that months--the days fell and the holiday fell kind of messed up those numbers, too.
Glaser: So, ISM Services data also looks pretty good this week.
Johnson: Yes, and the nice thing about that is, is that that's a set of data that's a little bit more forward-looking. The trade data is from all the way back at February, that's ancient history as far as I'm concerned, but the ISM Data is a little bit more forward-looking and we had the positive number on ISM Manufacturing last week getting back over 50 again, gaining more than a point, and now we had a good number on services. So people just didn't shift where they were spending their money or whatever, but the ISM Data would seem to indicate that the service sector is also picking up steam. So that should be great news, but that's not going to come soon enough to help the first quarter.
Glaser: So that first-quarter number might be scary, but you shouldn't panic.
Johnson: Absolutely.
Glaser: Well, Bob, as always, thanks for your analysis.
Johnson: Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.
