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VOL. 129 | NO. 94 | Wednesday, May 14, 2014

Mark Sorgenfrei

From Earnings to the Economy

By Mark Sorgenfrei Jr.

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In the second month of the quarter, the focus of investors shifts from the recently completed quarterly earnings season to the more broad economic landscape.

This month is no different, as first-quarter earnings are essentially in the books. For those companies that have reported, earnings are up 1.6 percent compared to first quarter 2013, and revenues are up 0.6 percent.

On the surface, 1.6 percent earnings growth and 0.6 percent revenue growth are paltry figures. However, outside of the finance sector of the S&P 500, earnings and revenue growth were 4.0 percent and 3.3 percent, respectively. The finance sector was a major downward force on first-quarter earnings. Therefore, excluding financials, many companies reported fairly decent numbers.

What about the economy? Here is a recap of some major data points released over the last two weeks:

GDP: The bellwether economic report revealed GDP growth of an anemic 0.1 percent during the first quarter. This was the second-worst quarterly GDP figure since the recession, with the first quarter of 2011 producing actual contraction. Consumer spending actually grew by 3 percent, as American spending on energy (thank you cold weather) and health care (thank you Obamacare) rose by 4.4 percent. Without that increased energy and health care spending, the economy would have contracted, as other components were all net detractors from GDP. The 0.1 percent figure was an initial estimate that will be subject to revision in the weeks ahead, so do not be surprised if the final figure shows contraction. However, 2011’s first quarter contraction was followed by growth for the remaining quarters, and more recent data (see below) suggests that 2014 could follow a similar path as economic growth accelerates again for the remainder of the year.

Institute for Supply Management (ISM) Reports: April’s ISM manufacturing index surged to 54.9 (the highest reading since December), and it could signal that the weather did indeed have a material effect on the economy during the first quarter.

Jobs: April saw 288,000 net jobs added, according to the April employment report, which was the fourth-highest monthly increase since the recession ended. The unemployment rate fell to 6.3 percent, but the decline in the unemployment rate was influenced by a collapse in the labor force (defined as the total number of those working or actively seeking work), as 806,000 people left the labor force in April. The labor force participation rate fell to 62.8 percent, a level not seen since the Carter administration. For context, the participation rate was at 67.2 percent in 2000 and 66 percent in December 2007. Even though some of the decline in the labor force is secular due to demographics, the decline continues to concern, as fewer laborers translate into fewer taxpayers supporting a growing larger pool of benefit recipients.

To recap, first-quarter earnings season has been lukewarm, with the financial companies dragging down overall earnings and revenue figures, but the non-financial companies produced some reasonable results. The first-quarter GDP report was more chilled than lukewarm, but more recent economic reports point to a warming economy that might cause the first quarter to be a blip on the radar rather than the start of a trend.

Sources: Zacks, Wall Street Journal, Marketfield Asset Management, Institute For Supply Management

Mark Sorgenfrei Jr. is vice president and investment analyst for Waddell & Associates Inc.

PROPERTY SALES 116 288 17,672
MORTGAGES 143 337 20,372
BUILDING PERMITS 139 488 36,434
BANKRUPTCIES 43 158 11,322