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    Mixed US Data Signal Economy Nearly Shrank in Q1, Outlook Slightly Brighter

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    Weak corporate earnings and inventory figures for Q1 suggest the US economy teetered on the edge of recession in Q1, while stronger job market figures for the second week of April contradicted the Fed’s business confidence measure for the same period, stirring concern about the health of the US economy.

    A view of the Federal Reserve
    © AFP 2019 / BRENDAN SMIALOWSKI
    Kristian Rouz — As the US corporate earnings season comes to an end, the results have been a disappointment, with most companies reporting rather weak performance figures. However, earlier predictions had been even gloomier due to market volatility and the dollar's appreciation, along with uncertainty regarding forthcoming Federal Reserve policy, meaning select enterprises outperformed certain expectations in Q1. General corporate despair has meant the economy is balancing on the edge of contraction. Meanwhile, the US labor market strengthened to its best position since 1973 in mid-April, suggesting the slower pace of broader economic expansion might be short-lived, and a pickup in economic activity might follow as soon as in Q2.

    Commercial profits reported for Q1 turned out to be mixed, while earlier predictions have proven to be excessively pessimistic. However, Wall Street posted losses on Thursday, as lackluster corporate sector performance during the period supported allegations of an imminent recession.

    "Earnings have been decent, outperforming, but outperforming expectations that have been dramatically lowered," Charlie Johnson of Philadelphia-based Greentree Brokerage Services said. "So it's like a shell game."

    Listed enterprises in nine out of ten of S&P sectors posted weak performance figures, and the telecommunications sector, after having fared far better than other industries over the past several quarters, suffered losses to its market value amidst anxiety stirred by recession expectations. However, 77% of S&P-listed companies exceeded the previously muted market expectations. Despite this, there was little cheering in the corporate sector — absolute numbers remain weak.

    US telecom provider Verizon suffered losses due to an employee strike, which disrupted its normal functioning. Alphabet Inc., the owner of Google, reported below-expectations Q1 profits, while Microsoft's quarterly report also frustrated investors. On the average, S&P-listed companies are forecast to post a 7.2% in Q1 earnings, followed by a 2.6% decline in Q2, bringing the total to four consecutive quarters of corporate losses. Meanwhile, US economic history has demonstrated that merely two consecutive quarters of losses are an indication of a looming recession.

    "We think the market has already discounted the weak first quarter and possibly even some negative earnings in the second quarter," Paul Christopher of Wells Fargo Investment Institute said. "If the second quarter were [to be] as disappointing as the first quarter, you'd see another downturn."

    Weak corporate performance falls in line with dismal governmental figures. Previously, the Commerce Department said Q1 wholesale inventories dropped 0.5%, worse than previously expected, and indicating a greater weakness in personal consumption, the key to US growth. Subsequently, JPMorgan Chase & Co. estimated US Q1 growth at an annualized 0.2%, while the British bank Barclay's lowered their forecast to 0.3% from 0.4%, and Goldman Sachs downgraded their outlook to 0.9% from 1.2%.

    The US government's GDP report is due on 28 April.

    However, labor market developments suggest that US growth might stabilize in Q2, as official unemployment fell to its lowest since November 1973 in mid-April, with initial jobless filings dropping 6,000 to 247,000.

    "The labor market continues to improve. If the apparent slowing in GDP in the first quarter was truly a sudden change in trend, we should have seen something happen in claims by now," Jim O'Sullivan, of Valhalla, NY-based High Frequency Economics said.

    Initial unemployment filings have held steadily below 300,000 for 59 weeks. However, as labor participation rates decline, this hardly constitutes comprehensive evidence of the job market's health. According to a report by the Federal Reserve Bank of Philadelphia, its business conditions index dropped into the negative in early Q2, to —1.6 in April from 12.4 in March.

    US consumer spending might accelerate on labor market confidence, yet, negligible gains in salaries and wages, along with a lingering threat of disinflation are restraining the US growth potential.

    That said, the US can still avoid a recession by implementing a major policy shift, including supply-side fiscal stimulus and the prudent inflation-adjustment of monetary policies. In other words, it takes spurring business confidence by lowering taxes and easeing bureaucratic regulations, allowing private sector enterprises to create competitive jobs at home. Meanwhile, new hikes in borrowing costs are unnecessary and harmful, as each time they push the dollar higher, exacerbating disinflationary pressures. 

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    market review, economy, GDP, Federal Reserve System, Verizon, United States
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