Everybody expected the latest GDP report to be bad, and it was (though not nearly as terrible as a lot of folks had feared). Growth fell at a 3.8 percent annualized rate, better than the 5.5 percent drop economists were expecting. That's the good news. Unfortunately, capital spending and consumption are still weak, and economists generally say that while quarterly growth was less bad, the damage could simply move into the first quarter of 2009. Some interesting takes on the numbers (bold is mine):
Action Economics: "One hates to say that a massive GDP overshoot of market forecasts, as seen in this morning's U.S. Q4 GDP report, "doesn't matter." Yet, the gap entirely reflects diverging assumptions between the BEA and market economists over the allocation of observed price declines between Q4 and Q1, leaving a report that has robbed Peter (Q1) to pay Paul (Q4)."
High Frequency Economics extends that theme, noting a surprise rise in inventories will have to reverse by some amount which "makes us more bearish for Q1 . . . In short, we are not comforted."
Goldman Sachs outlines what the report says about consumer spending: "An interesting and potentially meaningful aspect of this report is the sharp 8.9% annualized decline reported for nominal consumer spending. This is the largest quarterly setback on record (since 1947) and it is the only such occurrence that combines declines in both real spending and the PCE price index. In essence, this says that US consumers took lower gasoline prices to the bank instead of using them to increase their acquisitions of real goods and services, which they have routinely done in the past."
At any rate, stocks are falling today even on a better headline number for the GDP. The report isn't really what's moving stocks, since fears of a terrible Q4 have been around for months. Instead, here's a quick list of mixed earnings reports that are behind today's drop, especially in the drug and consumer sectors:
Exxon Mobil (XOM) earnings fell by a third in the fourth-quarter to $1.55 a share, but that was a dime ahead of forecasts and even though crude prices were sinking in the quarter, the oil giant managed a record profit for the year. Chevron (CVX) beat estimates too, and said project costs are coming down faster than expected.
Procter & Gamble (PG) said the slowing economy is having an impact on sales, and it cut its full-year earnings outlook. Shares slipped after it predicted organic sales would grow 2-5 percent vs. an earlier forecast of 4-6 percent.
Meanwhile, Reuters takes a broad look at this year so far for stocks and outlines the earnings season so far:
With 223 of the S&P 500 companies having reported earnings so far, 70 companies or about 31 percent have missed expectations. Investors have taken a hatchet to companies that have disappointed, slashing their stock price and market capitalization. Microsoft, for example, fell 12 percent - its biggest one-day drop in eight years - on Jan. 22, after it reported fiscal Q2 sales and revenues that missed analysts' estimates. Yesterday, aircraft-maker Textron plunged 32 percent for its biggest decline in over two decades, after it reported a quarterly loss and warned that 2009 net income would miss estimates.
These adverse reactions imply that the earnings bar for a number of companies has not yet been sufficiently lowered despite the year-long recession.
While much of the damage in stocks was done in late 2008, there's still little clarity and even less good news to begin making a case for a new bull run.