In the first quarter, the U.S. economy expanded at the fastest pace in four years. GDP easily exceeded estimates, boosted by exports, inventories and government spending. However, some economists expressed worry at the deceleration in consumer spending growth.
However, the increase in personal spending was enough to boost the overall outlook. Analysts predict that consumer demand will rebound in the second quarter.
Evidence of a steady pickup can be gleaned from the strong retail sales rebound in March. This is why it makes sense to invest in select consumer discretionary stocks at this time.
GDP Shatters Estimates in Q1
U.S. GDP increased at 3.2% in the first quarter of 2019, exceeding the consensus estimate of 2.1% by a wide margin. The figure is also significantly higher than the pace of 2.2% recorded in the last quarter of 2018. This is also the first time since 2018 that first-quarter GDP has breached the 3% barrier.
The surge in the first quarter was powered by three major factors. Firstly, exports increased while imports declined sharply. Meanwhile, inventories increased from $96.8 billion to $128.4 billion. Experts are divided about the source of this substantial inventory buildup.
Finally, a significant upsurge was witnessed in local and state government expenditure. This pickup in spending was likely an outcome of the 35-day long partial government shutdown extending from late December to Jan 25.
Consumer Spending Dips, Pickup Likely in Q2
Consumer spending is the largest component of U.S. GDP, contributing nearly 70% of the overall figure. This key metric increased by 1.2%, coming in below most expectations. An increase in expenditure on nondurable goods and services was negated by a decline in spending on durable items.
In the fourth quarter of 2018, consumer spending had increased by 2.5%. The slowdown at the start of this year was attributable to the delay in tax refunds arising from the partial government shutdown. However, investment management company PIMCO believes demand “will likely rebound” in the second quarter.
The increase in consumer spending was still enough to improve the overall outlook. After a slump in February, retail sales surged in March, providing initial evidence that the economy was picking up steam. The metric increased by 1.6% last month, the sharpest gain registered since September 2017.
New York Federal Reserve Raises Q2 GDP Forecast
In a related development, the New York Federal Reserve’s Nowcast model revised its projection for second-quarter GDP growth upward on Apr 26. According to the new estimate, the economy will expand at an annualized pace of 2.08% during the second quarter, higher than last week’s forecast of 1.92%.
The upward revision was largely attributable to strong data on new home sales and durable goods orders. According to data released on Feb 25, durable goods orders increased by 1.3% in March, rising at the highest pace in eight months. Data released a week earlier revealed that new home sales increased by 4.5% in March to touch a 16-month high.
Our Choices
First-quarter GDP numbers smashed expectations, leading to fresh optimism about the U.S. economy. Though growth in personal expenditure slowed, it was enough to brighten the overall outlook.
There is sufficient evidence to suggest that consumer spending will gather steam in the ongoing quarter. This is why it makes sense to invest in consumer discretionary stocks. However, picking winning stocks may be difficult.
This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.
We have narrowed down our search to the following stocks, each of which has a Zacks Rank #1 (Strong Buy) and a good VGM Score. You can see the complete list of today’s Zacks #1 Rank stocks here.
G-III Apparel Group, Ltd. GIII is a leading manufacturer and distributor of apparel and accessories under licensed brands, owned brands and private label brands.
G-III Apparel Group has a VGM Score of A. The company’s expected earnings growth for the current year is 15.3%. The Zacks Consensus Estimate for the current year has improved by 5.1% over the last 60 days.
K12 Inc. LRN is a leading national provider of proprietary curriculum and educational services created for online delivery to students in kindergarten through 12th grade, or K-12.
K12 has a VGM Score of A. The company’s projected growth rate for the current year is 23.5%. The Zacks Consensus Estimate for the current year has improved by 7% over the last 30 days.
Acme United Corporation ACU is a provider of cutting, measuring, first aid, and sharpening products for school, office and home use.
Acme United has a VGM Score of A. The company’s projected growth rate for the current year is 12.3%. The Zacks Consensus Estimate for the current year has improved by 0.7% over the last 30 days.
Rent-A-Center, Inc. RCII is the largest rent-to-own operator in the United States, offering durable goods such as consumer electronics, appliances, computers, furniture and accessories.
Rent-A-Center has a VGM Score of B. The company’s expected earnings growth for the current year is 80%. The Zacks Consensus Estimate for the current year has improved by 1.4% over the last 30 days.
Sinclair Broadcast Group, Inc. SBGI is a television broadcasting company in the United States.
Sinclair Broadcast Group has a VGM Score of B. The Zacks Consensus Estimate for the current year has improved by 5% over the last 30 days.
