Sentimental About GDP

As Sir John Templeton famously put it, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” And we’d note reactions to Thursday’s US Q1 GDP revision provide a timely milepost to measure sentiment.

US Q1 GDP was revised down from a 2.5% seasonally adjusted annual rate (SAAR) to 2.4%, and reactions seemed as mixed as the data. Some continue latching on to slow growth fears, and they were certainly a vocal contingent. Others, however, basically shrugged at the news, while a cautiously sanguine group saw the numbers as support for their budding optimism. The diversity of opinions nicely reflects current sentiment, which we’d suggest is somewhere between skeptical and optimistic.

The optimistic camp would likely underpin their argument by pointing to the private sector, which largely showed better growth than initially estimated. Consumer spending, generally responsible for about 70% of US economic activity, grew at a 3.4% SAAR (previously estimated at 3.2%). Real, final sales of US goods (excluding unsold goods) were also revised up—to 1.8% from 1.5%. Even data that weren’t fully bullish—like corporate profits, which were revised down—are still hovering near record highs. In fact, without the government spending drag, GDP would’ve grown 3.4%.

Which is where the more negative camp focused. Still-slowing government spending contributed most to the downward revision. Initially, analysts expected government spending to fall at a 4.1% SAAR, but the revision notched a far lower 4.9% decrease, primarily due to defense spending’s 12.1% y/y fall. Additionally, some skeptics claimed the higher consumer spending was a result of higher gasprices. This certainly was a factor, but it seems rather odd to focus on the 0.2% upward increase in the revision and not the overall 3.4% rise, which is certainly not all gas-price driven.

To us, the data are largely positive, but not terribly surprising. Though the US economy has been improving for some time, sentiment’s been relatively late to the game, as usual. These days, some people are optimistic, some pessimistic and some skeptical. And in such an environment, people tend to focus on pet concerns or positives—missing broad trends. Hence, we’ve been in a solid private sector-led expansion, but the US economy is still underappreciated overall.

Perhaps good US data tend to be underappreciated or only appreciated very late because there are so many distractions. Some analysts skeptically note the OECD recently downgraded its global growth forecasts for 2013 and 2014. Some people have overly bullish views on Japan tied to its aggressive fiscal and monetary stimulus (it more needs yet-to-be-seen structural reforms, in our view). It seems a different Fed official hints at potentially winding down QE every week. Optimists point to lagging and less-than-predictive factors like improved US consumer confidence. Skeptics note China’s economy is slowing and the eurozone’s economically weak.

Not that this mixed sentiment is bad. That sentiment remains far from near-uniformly euphoric as the US economy’s better-than-appreciated growth continues is one sign US stocks remain particularly attractive globally.