April showers bring May Flowers! Well, only if they are not frozen out or as in a large section of the country, April showers actually existed. Spring is coming much later in the North and East this year. In Minnesota we have had one day over 70 so far this year and only 4 days in April over 60. The drought in the Midwest appears to be continuing. It is so bad in some areas that even the dandelions are not popping up. Yes, in spite of most opinions, the dandelion is a flower.
The GDP drop for the first quarter may have been a shock. Information embedded into the numbers does raise some questions. The first thing to note is that the fourth quarter GDP was a torrid 6.9%. That would set the stage for a high probability of a miss as the denominator in the next quarter would have to be pretty high. Another hurdle that the economy faced was a strong US Dollar. The dollar has hit highs against virtually every other currency in the past quarter that have not been seen since 2002. The dollar strength makes it more expensive to buy our products which drove down the export levels.
Defense spending dropped by 8.5% during the first quarter which drove the GDP down by at least 1/3%. But that was just part of the government spending news. Across the board, state, federal and local spending was off as pandemic spending abated. Supply chain issues also impacted the amount of goods sold during the first quarter. While durable goods orders were up in March, they were muted due to a drop in vehicle sales due to production issues.
On the brighter side, the consumer spending grew by 2.7% during the quarter. While manufacturing accounts for 12% of the overall economy, consumer spending accounts for 66% of the overall GDP. Spending increased in services including travel and other related areas as the pandemic restrictions were lifted. The big question is Will the consumer continue to spend in light of the inflation levels? The consumer continues to hold onto record levels of liquidity, there is a widening gap between various segments in the population. Those who are trained and have a career path are doing extremely well. Those who are untrained have limited options and are quickly falling behind. However, the outlook for the future is a key indicator of the level of spending. Right now, over 70% feel the economy is struggling so there is a bias toward maintaining higher cautionary balances. We will have to watch the consumer spending levels carefully in the coming months.
Higher gas prices are here to stay. Supplies of all levels of distillate products remain flat in spite of President Biden selling from the oil reserve and opening up oil leases on public land. Had the oil lease news actually meant something, the markets would have priced in an increase supply in the future. As it was, the industry balked at the uncertainty of a sustained policy shift as well as the higher price the leases would be charged at. They essentially did a hard pass on the offer. The refining industry made a quiet but massive shift in the past two weeks which will also impact gasoline prices. For the first time ever, the prices in the market make it more profitable to refine diesel and aviation fuel. The industry shifted away from gasoline which will cause a supply drop creating higher prices for summer travel. Exactly what we did not want to hear.
Lastly, the Fed Manufacturing reports for April are coming out. Overall, the reports are flat to showing slightly lower growth than March. Based on these numbers, the ISM Manufacturing report to be released later today on May 2 will likely drop from the March number of 57.8 to 56.
Have a great week.
