IDRV - GDP Rose 1.1% In Q1; Can We Dodge A Recession?

2023-05-02 06:05:00 ET

Summary

• Slowing consumer spending was cited as the primary reason for decelerating GDP growth in Q1, but the most depressing component was that gross private domestic investment fell 12.5%, driven by declines in business equipment and residential housing.
• The Conference Board announced that its consumer confidence index declined to 101.3 in April, down from 104 in March. This big drop was primarily attributable to the expectations component, which plunged to 68.1 in April, down sharply from 74 in March.
• The S&P CoreLogic Case-Shiller National Home Price Index showed home prices rose 0.2% in February - the first monthly price increase in the past seven months, as the tight inventory of homes has apparently helped to firm up home prices.

Last Thursday, the Commerce Department announced its initial first-quarter GDP estimate of a 1.1% annual growth rate. Slowing consumer spending was cited as the primary reason for decelerating GDP growth in the first quarter, but the most depressing component was that gross private domestic investment fell 12.5%, driven by declines in business equipment (down 7.3%) and residential housing (down 4.2%).

Mirroring this official number, the Atlanta Fed on Wednesday lowered its estimate for first-quarter GDP growth to 1.1%, down from 2.5%. The lower trade deficit added 0.3%, but Atlanta’s estimate fell sharply due to lower personal consumption expenditure growth as well as lower gross private domestic investment.

Earlier in the week, on Tuesday, the Conference Board announced that its consumer confidence index declined to 101.3 in April, down from 104 in March. This big drop was primarily attributable to the expectations component, which plunged to 68.1 in April, down sharply from 74 in March; but the good news is that the present situation component rose to 151.1 in April, up from 148.9 in March. It is refreshing that consumers can feel better currently, even though they are negative on the future outlook.

The S&P CoreLogic Case-Shiller National Home Price Index was also announced on Tuesday, and it showed home prices rose 0.2% in February - the first monthly price increase in the past seven months, as the tight inventory of homes has apparently helped to firm up home prices. The 12-month annual change slowed to a 2% annual pace through February, down from a 3.7% annual pace in January. Also, the 10-year Treasury bond yield is down to 3.4%, so lower mortgage rates should help boost future home sales.

On Wednesday, the Commerce Department reported that durable goods orders surged 3.2% in March, due largely to a 78% surge in aircraft orders. Excluding the 9.1% increase in transportation orders, the rise was just 0.3%. Unfortunately, business investment based on core durable goods orders declined 0.4%. This is the fourth time in the last five months that business investment has declined. In the past 12 months, durable goods orders have risen 2%, down appreciably from an 11% annual pace a year ago.

The Commerce Department also reported on Wednesday that the trade deficit declined 8.1% in March. Exports increased by $4.9 billion (+2.9%) to $172.7 billion, while imports declined 1% ($2.5 billion) to $257.3 billion, even though consumer imports rose by 2.4%. The trade deficit is now at a four-month low.

On Thursday, the Labor Department reported that weekly unemployment claims declined to 230,000 in the latest week, down from a revised 246,000 the previous week. Continuing unemployment claims declined to 1.858 million in the latest week, down from a revised 1.861 million the previous week. The four-week moving average of continuing unemployment claims is now at the highest level since late 2021, which likely has the Fed’s attention - which may cause them to pause raising key interest rates.

Overseas, the European Union’s ((EU)) statistics agency reported on Friday that their GDP expanded at an annual 0.3% rate in the first quarter for the 20 eurozone nations. What was notable was that the EU’s factory output remained strong despite higher energy costs. So, China, the EU, and the U.S. all showed positive economic growth in the winter, and growth will likely pick up in the spring and summer months.

ChatGPT Update

Microsoft ( MSFT ) announced better-than-expected sales (a 3.5% surprise) and operating earnings (9.9% surprise) last week. A weaker U.S. dollar is helping sales. The highlight of Microsoft’s first-quarter results was its cloud business growth, but in upcoming quarters, ChatGPT’s impact will be closely scrutinized, as well as AI’s overall impact on boosting efficiency and sales throughout Microsoft. The company’s investment in ChatGPT is raising excitement about upgrades to all of its software, especially its search engine, Bing.

The rumblings are that Samsung ( SSNLF ) is planning to replace Google ( GOOG , GOOGL ) with Bing as its preferred search engine, and that is also fueling speculation that ChatGPT will improve Bing’s search ability and help Microsoft become an AI leader. Since the Bing-ChatGPT alliance did not begin until February, not a lot of business divisions were able to benefit immediately from Microsoft’s AI push in the first-quarter report.

Microsoft’s capital expenditures rose to $7.8 billion in the first quarter, which was substantially more than the $6.57 billion that analysts expected. Nvidia ( NVDA ) is an immediate winner from this ChatGPT cap-ex push, since Microsoft’s Chief Financial Officer, Amy Hood, said, “We will continue to invest in our cloud infrastructure, particularly AI-related spending, as we scale to the growing demand driven by customer transformation.” CFO Hood added, “Capital expenditures have a material sequential impact on a dollar basis driven by investments in Azure AI infrastructure.” Since Nvidia’s chips are used in Microsoft’s Azure AI platform, Nvidia stock surged in the wake of Microsoft’s first-quarter results.

The Biden Team Continues to Bungle its "Green Dream" Agenda

The Biden Administration is aggressively trying to transform the electricity grid. The latest example is the Environmental Protection Agency trying to get natural gas power plants to capture their carbon dioxide emissions. EPA spokesperson Maria Mochalos said that the EPA is “moving urgently to advance standards that protect people and the planet, building on the momentum of President Biden’s Investing in America economic agenda, including proposals to address carbon emissions from new and existing power plants.”

The EPA is not expected to mandate the use of carbon capture equipment - an unproven and expensive technology. Instead, the EPA is expected to set caps on pollution rates for electric utilities, chemical plants, and refineries. These proposed regulations are designed to encourage natural gas power plants to switch to hydrogen, which does not emit carbon dioxide. However, since hydrogen is hard to transport and is a very small molecule that often "leaks," the proposed regulations could require more carbon capture technology.

Since the U.S. is essentially “the Saudi Arabia of natural gas,” it is very odd for the EPA to try to put the natural gas industry out of business, so the pushback from lobbyists and the Republican-led House of Representatives is expected to be massive. Since green hydrogen is cost-prohibitive, most hydrogen these days is being made from natural gas, so the EPA’s proposed carbon dioxide emission limits are nonsense.

I expect many in Congress to vigorously fight the EPA’s proposed limit on carbon dioxide emissions.

Tesla ( TSLA ) announced that it is building a new factory in Shanghai, China, to build a large-scale battery for electricity storage, called the Megapack. California is another big market for Tesla’s Megapacks, which are made with cheaper iron phosphate (LFP) batteries sourced from CATL. It will be interesting just how fast electricity storage facilities expand across the U.S., since it typically causes electricity rates to rise.

Down under, Australia has been shutting down all its coal plants and expanding its electricity storage.

In Chile, Sociedad Quimica y Minera de Chile S.A. ( SQM ) is the second-largest lithium mining company in the world and it should benefit from the new EPA rules, plus the rise in energy storage facilities with LFP batteries as well as electric vehicles (EVs). However, the chronic shortages of lithium, nickel, and cobalt have made EVs more expensive than equivalent vehicles with internal combustion engines. This is preventing new EV manufacturers, like Lucid ( LCID ) and Rivian ( RIVN ), from reaching profitability.

General Motors ( GM ) announced better-than-expected first-quarter operating earnings last week. What is not being talked about very openly is that the key to GM’s profitability is that they are slower to build EVs than rival Ford ( F ). Although GM sells a lot of Bolt EVs and has announced a lot of new EVs, GM trails Ford in EV sales, so it is more profitable! GM is trying to cater to everyone, but its new EVs, like the Cadillac Lyriq and Hummer, are very costly. LG Energy Solution is currently GM’s primary lithium-ion battery supplier. LG has been slow in supplying GM with new batteries, so GM’s EV production is constrained.

Interestingly, GM has decided to stop manufacturing its Bolt EVs at its Orion assembly plant by the end of this year to make room for the Chevrolet Silverado EV and GMC Sierra EV at its Detroit-area plant. GM also announced a $3 billion battery plant with Samsung, so both Samsung and LG will be GM lithium-ion battery suppliers. Now that GM is shifting away from the Bolt EV, all of its EVs (moving forward) will be built on the Ultium platform, which should help GM cut costs and be more competitive. Long term, however, GM needs an iron-phosphate (LFP) battery supplier if it wants to sell more EVs and compete with Ford, since lithium-ion batteries cost more, due to the fact that they utilize nickel and cobalt.

Exxon Mobil ( XOM ) reported record first-quarter earnings on Friday that were more than double the same quarter a year ago and above analyst expectations. Specifically, the company’s earnings rose 118% to $11.43 billion, or $2.79 per share, compared to $5.48 billion, or $1.28 per share. Excluding extraordinary items, Exxon Mobil’s operating earnings were $2.83 per share. The analyst community was expecting operating earnings of $2.60 per share, so the company posted an 8.8% earnings surprise. Exxon Mobil’s production rose 300,000 barrels per day, thanks to an impressive 40% increase from Guyana and the Permian Basin.

In other energy news, the Energy Information Administration ((EIA)) reported on Wednesday that crude oil inventories in the latest week declined by 5.1 million barrels to 460.9 million barrels, which was well below analysts’ consensus expectation of a 1.5-million barrel decline. Gasoline and distillate inventories also declined by 2.4 million barrels and 600,000 barrels, respectively. Despite these declining inventories, crude oil prices declined sharply on Wednesday due to fears of slower economic growth.

A warmer-than-normal winter in the Northeast cut the demand for heating oil. As a result, refineries could make more diesel than heating oil (both are distillates), so the price of diesel has finally fallen below that of gasoline in many states. Additionally, lower demand from the trucking industry and businesses is also putting downward pressure on diesel prices. Many stores remain overstocked, so until demand picks up, diesel prices should remain low, since demand from the trucking industry is the key price determinant.

Interestingly, crude oil inventories have been falling in recent weeks, so I still anticipate significantly higher prices at the pump by Memorial Day. Multiple energy experts are now raising their price targets to $100 per barrel. The Biden Administration can release more crude oil from the Strategic Petroleum Reserve ((SPR)) to try to curb soaring crude oil prices, but the SPR has been drained to over a 40-year low and the U.S. is now in the midst of soaring seasonal demand that will be much stronger in the summer.

Russia’s crude oil exports are going predominantly to India, China, Turkey, Italy, Saudi Arabia, and the UAE. The U.S. and its allies imposed a $60 price cap on Russia’s crude oil, which is a heavy, sour crude that typically trades at a discount, since it requires more energy to refine. The Wall Street Journal reported last week that the price of Russia’s crude oil is now getting dangerously close to the $60 price cap, up from about $55 per barrel according to Argus Media, so European and U.S. officials say they are stepping up enforcement efforts to make sure the $60 price cap is enforced. The primary reason the price for Russia’s crude oil is rising is due to seasonal demand as well as more refinery capacity for heavy, sour crude oil.

Navellier & Associates Inc. owns Sociedad Quimica Y Minera De Chile S.A. ((SQM)), Nvidia Corp. ((NVDA)), Exxon Mobil Corp. ((XOM)), Microsoft Corp. ((MSFT)) in managed accounts, and a few accounts own Tesla ((TSLA)) per client request in managed accounts. We do not own Ford Motors ((F)), Rivian Automotive ((RIVN)), General Motors Corp. ((GM)), Alphabet Inc. ((GOOG)), or Lucid Group ((LCID)). Louis Navellier and his family own Sociedad Quimica Y Minera De Chile S.A. ((SQM)), Nvidia Corp. ((NVDA)), and Exxon Mobil Corp. ((XOM)) via a Navellier managed account. He does not own Tesla ((TSLA)), Microsoft Corp. ((MSFT)), Ford Motors ((F)), Rivian Automotive ((RIVN)), General Motors Corp. ((GM)), Alphabet Inc. ((GOOG)), or Lucid Group ((LCID)) personally .

All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.

Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.

Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.

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