The hibernating U.S. consumer showed signs of shaking off its winter slumber and stirring to life last week. In the first quarter of the year, personal consumption was estimated to have grown at a somnolent annualized rate of just 0.3 percent. By comparison, over the past three years personal consumption has averaged 2.9 percent. It was the weakest quarterly pace of consumption in eight years, and followed an average rate of 3.25 percent in the second half of last year. Admittedly, the accuracy of first quarter economic reports has been challenged for several years. But even faulty seasonal adjustments likely don’t fully explain just how weak the quarter was, especially for an economy dependent upon the consumer spending for 70 percent of its total activity. But last week’s retail sales report for April offered some encouragement that the consumer may be starting to spend once again. Retail sales grew 0.4 percent in April. That was less than the 0.6 percent consensus estimate, but March was revised higher to a 0.1 percent gain from an initially estimated 0.2 percent decline, leaving February’s 0.2 percent decline as the nadir of activity so far this year. That the month of February this year was the second warmest in 123 years of U.S. climate history may have had something to do with that. Whatever the cause, the relative improvement since is a welcome development.
Consumer sentiment also continued to show improvement. Following a plunge in February that suggests there was more to that month’s retail sales weakness than just the weather, the University of Michigan’s survey of consumer sentiment has climbed steadily since, including Friday’s preliminary reading for May. The survey remains just below its high for the year reached in January, the highest reading in thirteen years. Inflationary pressures also eased last month, leaving a little more spending power in consumers’ pockets and suggesting that consumption in real terms may be stronger than it appears, despite still only modest wage growth. The year-over-year increase in the Consumer Price Index (CPI) for April slipped to 2.2 percent from 2.4 percent in March. The core rate dipped to 1.9 from 2.0 percent. The yield on the ten-year Treasury note fell to 2.32 percent at week’s end, after hitting a recent high of 2.41 percent on Wednesday, choosing to overlook the higher prices at the wholesale level reported on Thursday. The two-year yield fell to 1.29 percent from a mid-week high of 1.35.
Despite improving economic data, stocks and earnings show mixed results
Despite the relatively good consumer news, and after reaching a new closing high on Wednesday, stocks drifted lower to end the week, pushing the S&P 500 to its first weekly loss in the past four. The decline was modest, just 0.4 percent, but disappointing that stocks declined at all in light of improving economic data and continued strong earnings. With 91 percent of companies having reported, FactSet now estimates first quarter earnings growth of 13.6 percent, as expectations have been consistently exceeded.[i] But shares of department stores were notably weak as sales continued to decline in the face of growing competition online.  And investors were forced to consider the impact on policy of the President’s firing of FBI Director Comey. At the very least, it is a distraction that could delay consideration of economic initiatives including health care, tax reform and next year’s budget.
After starting the year at a forward P/E ratio of 17X, the forward valuation of the S&P 500 rose to 17.9X by early March as the market climbed. Since then, the better than expected earnings growth in the first quarter has lowered the forward P/E to 17.5X, as the index has treaded water. That valuation is still elevated relative to history, but the picture has improved slightly.
There was some modestly encouraging news last week in the oil patch. The U.S. Energy Information Administration (EIA) reported that commercial crude oil inventories declined by a considerable 5.2 million barrels in the week ended May 5. It was the fifth straight weekly fall in crude inventories that has resulted in an overall decline of 2.4 percent. Gasoline inventories also fell. After starting the year at just under $54 a barrel, the price of WTI crude bottomed on May 4 at $45.50 in the face of rising domestic production and bloated inventories. Since then it has rallied modestly, ending last week at $47.84. Yet, despite strong first quarter earnings, and not withstanding last week’s 0.7 percent gain, the sector has languished with the Energy Select Sector Index falling 10 percent on the year.
To start the week, all eyes will be on China which reports April results for retail sales, industrial production, and fixed investment. In the U.S., the calendar this week also includes industrial production, along with housing starts and permits, and leading indicators.
Important Disclosures:   
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
University of Michigan Consumer Sentiment Survey is a rotating panel survey based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected. Interviews are conducted throughout the month by telephone. The minimum monthly change required for significance at the 95% level in the Sentiment Index is 4.8 points; for Current and Expectations Index the minimum is 6.0 points.
The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. Changes in CPI are used to assess price changes associated with the cost of living.
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
West Texas Intermediate (WTI) is a grade of crude oil commonly used as a benchmark for oil prices. WTI is a light grade with low density and sulfur content.
Energy Select Sector Index: This index, ticker IXE, tracks companies in the following industries: oil, gas and consumable fuels, and energy equipment and services.
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[1] FactSet Earnings Insights, https://insight.factset.com/
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