Weak GDP in Q1 Will Give Way to a Brighter Business Outlook in Second Half

The U.S. government reported troubling news in May, the overall economy as measured by the gross domestic product, slowed significantly in the first quarter of 2015. GDP, after being restated, contracted at a 0.7 percent annual rate, down from a positive 2.2 percent growth rate in the fourth quarter of last year. The Commerce Department was expecting a weaker performance as a strong dollar, the West Coast Port strike and harsh weather on the East Coast took its toll on growth to start the year. But don’t get to concerned about these numbers, last year’s Q1 GDP came in at a negative 2.8% and we ended the year with GDP up 2.6% for all of 2015.

While Economists were projecting a strong a rise in consumer spending in Q1 due to the robust job creation in 2014 and the lower cost for gasoline, consumers instead disappeared and spending grew at an anemic 1.9%. It was the worst performance in the past 12 months and was down sharply from a 4.4 percent gain in the fourth quarter of last year.

However, consumer spending had a slight rebound in March, increasing 0.4%, which was the strongest gain since last year and the saving rate rose to 5.8%. The Commerce Department reported in June that we created 280,000 jobs in May, beating even the most optimistic projections and it appears that momentum has begun to pick up. The Fed believes that consumers will be back in stores looking ahead to spring and summer.

So now all the attention turns back to the Federal Reserve and what Janet Yellen will do with interest rates in September, the period when pundits think rates with move up for the first time in seven years. The consensus coming out of the Fed’s policy meeting in May was that this dip in GDP will be temporary and the economy will get back on track in the second quarter. No matter what happens, even if they raise rates, it will be gradual and rates will stay at historically low levels through all of 2015.

Economists believed that the Q1 earnings season would be a disaster for Wall Street and while valuations are high and the strong rise of the dollar has impacted corporate profits, most companies beat lowered expectations and all seems well right now with the stock market. .Surprisingly, the Dow and the S&P 500 are at record levels through early June as the bull market is now in its seventh year, soon to enter the history books as the longest bull market run ever. There were a number of hedge fund managers predicting that a major correction would occur in the first half of 2015, they were wrong through mid year, but the threat still remains.

I know that the daily news can be quite depressing but keep this in mind as you look out to year end and beyond, the unemployment rate is at an eight year low at 5.5% and the stock market index’s are at an eight year high. Housing starts increased to their highest levels in over 7 years in April and building permits were also off the charts. Case Shiller has reported housing prices up in most markets and that always encourages consumers to spend on products like appliances, electronics and furniture.

Rising wages, lower gas prices, 3.1 million new job created in 2014, low inflation, housing set to build a million living units and the onset of summer with two of the biggest holidays of the year fast approaching in July and September, we have in place all the ingredients for  strong growth in the second half of this year.