GDP Revision Swings Negative Due To Port Strike

First quarter GDP was revised down to -0.7 percent from the initial +0.2 percent estimate. Is it time to panic? Not really. The source data shows that the port strike had a bigger negative impact on the economy than originally thought.

Nevertheless, this is the first contraction in GDP since the first quarter of 2014 when GDP fell -2.1 percent due to the polar vortex and the fact that half the U.S. was covered in ice.

Here is the updated infogram of U.S. GDP. Hover your mouse over the line to see the underlying data.

Deutsche Bank’s Joe LaVorgna predicted back in February that the port strikes could reduce Q1 GDP by up to 1 percentage point.Source:

Folks, I’m not too worried about Q1 2015 GDP. Notice that it marks the cycle low. Basically the cycle low was a bit lower than originally thought, it’s still the cycle low. Every year for at least the last 5 years, the GDP puts in a cycle low in either Q4 or Q1. The GDP rises in Q2 and Q3. What I’m looking for is the swing high in Q2 and Q3. If the Federal Reserve’s transitory thesis is correct, we would expect a big swing move up in GDP in either Q2 or Q3.

Also, keep in mind that the port strike is over so that was indeed a transitory factor that pushed down the GDP by as much as -1 percent.

Remember, good traders are not Chicken Littles running around claiming the sky is falling. Let the market guide your thinking. Clearly the major indices are NOT showing that the sky is falling. Ignorant traders say, “See this market is fake! How can the market not sell off with a negative GDP number? This market must be so overvalued”. Smart traders know that port strikes pulled down the GDP by as much as -1 percent and that the port strikes are over so that indeed was a transitory factor. Remember, the market is betting on the future GDP, not the past.

Jobless Claims Signal Great Strength In the Labor Market

Initial jobless claims rose 7,000 in the May 23 week to 282,000. This is still very low.

Continuing claims, up 11,000 in trailing data for the May 16 week, are also very low at 2.222 million.

Initial jobless claims are signaling great strength in the labor market, and that layoffs are at record lows.

I have updated the Jobless Claims infogram. Hover your mouse over the line to see the actual underlying numbers.

The Jobless Claims chart looks good. If any perma-Bear tells you otherwise, and they claim that it’s just low paying service sector jobs that are being created, they are flat wrong. Jobs are increasing across most industries, just look at the last Employment Situation report. Also, it’s perfectly normal to have most job creation in the service sector industry. This is where an understanding of economic cycles comes in handy. Remember the consumer consumption cycle.

I don’t want to mention names but a popular perma-Bear claimed to be an “economist” on his YouTube channel. Fine, no one questioned that. On YouTube, anyone can be whatever they want. But then he got a little to aggressive with his ego and claimed he was an “economist” on Wikipedia. Immediately people questioned that claim and Wikipedia asked for collegiate proof that he was actually an economist. He failed to produce that proof and Wikipedia removed the claim that he was an “economist” from the Wikipedia page. Got to love that free Wikipedia market where viewers have a say! I’m not going to say the name of the famous perma-Bear who claimed to be an economist on Wikipedia, that’s just mean and not very Christ like, especially when you consider that the person is not present to defend themselves. Folks, my higher point is that there are a lot of charlatans masquerading as economists when they are no such thing. You have to be careful of that. Always ask to demand certified proof that someone is an economist if they claim to be one. This is important if you are making investment decisions based on what this so called “economist” is saying.

I digress. Here is the typical path of consumption by the U.S. consumer during an improving economy.

Consumer Spending Path To Strong Economy

So of course service sector jobs are moving first. People have a little bit of extra money and so they go out to eat more. That creates jobs in the restaurant and fast-food space.

What I’m watching for is the movement of consumption. If we see cars and houses really start to take-off, then we know that the U.S. consumer is indeed enjoying increased purchasing power.

Forget about the silly perma-Bear argument that job creation is mostly in lower paying service sector jobs. We already know that and that’s perfectly normal. In my opinion, the real focal point is in movement from service sector jobs into food, cars, and housing. If Janet Yellen’s thesis that the slow down in Q1 2015 is nothing more than a transitory phase, then we would expect the consumption to move according to the chart above, later this year.

Market Sells Off On Durable Goods Orders Report

Markets sold off big on May 26, 2015 after the Durable Goods Orders report was released. The consensus range was -3.0% to 1.8%. The actual number was -0.5%.

Business investment is slowly picking up after one of its worst stretches since the recession, a sign the U.S. economy may be poised for a turnaround following a dismal start to the year.Source:

Even though durable goods orders fell -0.5% in April, orders for capital equipment showed gains for a second straight month, a possible sign that business investment could pick up in the second half of the year.

In the end, it does not matter what perma-Bulls or perma-Bears think about this report. The wisdom of the stock market is telling us how the “smart money” feels about the Durable Goods Orders report.

The Durable Goods report today does NOT support the Federal Reserve’s thesis that the slow down in Q1 2015 is a transitory phase. As the Wall Street Journal said, it MAY signal a turnaround but right now, the -0.5% for April does not signal a turnaround at this time.

Durable Goods Orders

The chart is not THAT bad. It shows a sideways pattern more than anything else.

Durable Goods Orders in the United States averaged 0.35% from 1992 until 2015, reaching an all time high of 22.50% in July of 2014 and a record low of -18.30% in August of 2014.

Federal Reserve Chair Janet Yellen Speech in Rhode Island

Janet Yellen gave a speech about the U.S. economy from Providence, Rhode Island.

In my opinion, this was the most important part of her speech as it relates to the stock market:

Because of the substantial lags in the effects of monetary policy on the economy, we must make policy in a forward-looking manner. Delaying action to tighten monetary policy until employment and inflation are already back to our objectives would risk overheating the economy.

For this reason, if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy. To support taking this step, however, I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2 percent over the medium term.

Janet Yellen also stood by her view that the slow down in the U.S. economy in Q1 2015 was transitory in nature and that this will pass.

I think the hike will be further down the road, probably December. Yellen is a dove more than a hawk, and she’s not in a real rush to raise rates. She wants to do it, but she wants people to be preparedSource:

Yellen made it clear she believes that inflation will ultimately move to 2 percent as the economy strengthens and that rates will be raised by the end of 2015.

Another REALLY important aspect of Janet Yellen’s speech today was that this interest rate hike cycle will be very different from previous rate hike cycles. The speed of rate hikes will be very slow and dependent on economic data. The Fed will make meeting to meeting assessments before hiking rates. Rumor on the street is that the coming rate hike cycle will be the “loosest tightening” in the history of central banking.

CPI Shows Core Inflation Inching Closer to Feds 2% Goal

The headline number for the U.S. Consumer Price Index (CPI) is up only 0.1 percent in April but the core is strengthening nicely. Excluding food and energy, core prices rose 0.3 percent. This is the highest since January 2013. The year over year rate for the core is plus 1.8 percent which is getting closer to the Fed’s inflation target of 2.0 percent.

The core CPI continues to show a surprising pick-up so far this year… Compared with a year earlier, overall prices actually fell 0.2% and core prices rose 1.8%.Source:

The year over year rate for the headline CPI is down 0.2 percent which seems deflationary. But the lack of pricing power is due entirely to energy which is down a very deflationary -19.4 percent year over year. Energy prices are bound to firm given the recent move in oil from the high $40s for WTI to $60. Keep in mind too that I called the bottom in the energy sector here and how you can play it.

U.S. consumer prices moderated in April on poor gasoline prices, but rising shelter and medical care costs improved underlying inflation pressures, which should keep the Federal Reserve on course to raise interest rates later this year.

The modest rise in overall consumer prices kept worker incomes, adjusted for inflation, from falling in April. Over the year, incomes are up decently and the gains are slowly accelerating.

The question on traders minds is, is the CPI strong enough to convince the Fed it can safely increase interest rates despite other poor economic reports? The pattern of costs is changing, even though inflation isn’t a major concern right now. It used to be difficult to find any category in the CPI report where prices were going up but now the opposite is true: Most categories are posting increases.

Shelter inflation could continue to increase in the months ahead as rising household formation boosts demand for rental accommodation. That, together with a tightening labor market, should put upward pressure on the core CPI.

The medical care index rose 0.7 percent, the largest rise since January 2007. There were also increases in the cost of home furnishings, which posted their biggest increase since September 2008.

Philadelphia Fed Business Outlook Survey May Be Stabilizing

The Philadelphia Fed Business Outlook Survey came in at 6.7 in May. Is this finally the end of the scary plunge that began in November 2014 with massive layoffs across the energy sector from the rising U.S. dollar?

It does appear the Philadelphia Fed Business Outlook Survey is stabilizing from both a fundamental and technical perspective. There was finally a small uptick in new orders, to 4.0 from 0.7. Shipments rose to 1.0 from -1.8, and employment came in at 6.7.

The 6-month outlook came in at 33.9 which is down slightly from April’s 35.5 and up from 32.0 in March.

From a technical chartist point of view, the survey appears to be basing:

Philadelphia Fed Survey

The Philadelphia Fed Business Outlook Survey is an index of manufacturing conditions within the Philadelphia Federal Reserve district. Stock traders follow this survey because it’s an early read on manufacturing sector trends and it is correlated with the ISM manufacturing index and the index of industrial production.

Sofi AI Market Sentiment Gauge

Sofi AI Market Sentiment Gauge

Market is overbought.