No Growth?

Takeaway: Domestic economic growth remains fairly anemic with mounting risks to the downside as we progress through the balance of the year.

The Good: With the inclusion of this morning’s [fairly soft] personal income and spending data, Real PCE (~70% of GDP) is averaging +3.2% YoY for Q1-to-date (up from ~2.8% in Q4). That remains supportive of our #Quad1 forecast for 1Q15.

No Growth? - Personal Income   Spending

The Bad: Outside of housing, not one key economic indicator category is accelerating on both a sequential and trending basis. This pervasive lack of economic momentum will become a major headwind to annual growth rates once base effects become unsupportive throughout the following two quarters. Our full-year estimate of +2.4% real GDP growth – which is already well below the Street and below the Fed’s latest downwardly revised target(s) – could have a 1-handle on it by the time Q3 GDP is reported if growth surprises our expectations to the downside over the next 3-6 months.

No Growth? - U.S. Economic Summary Table

The Ugly: If GDP comes in at the +3% YoY midpoint of our GIP Model forecast range in 1Q15 (up from +2.4% in Q4), the QoQ SAAR growth is likely to be in the +0.2-0.3% range (down from +2.2% in Q4). As always, we should not anchor on any QoQ SAAR forecast given its sensitivity to even the most marginal changes in our YoY growth rate forecast range, but just being in the area code of 0% sequential growth is not good. It’s worth noting that “forecast” is perfectly corroborated by the Atlanta Fed GDPNow Model, which many FOMC and market participants anchor on.

No Growth? - UNITED STATES

The Conclusion: We reiterate our bullish bias on long-term Treasuries – a view we’ve held for over a year now – as the Fed is likely to continue downwardly revising their “dot plot” closer to subdued market expectations, at the margins. 2015 is shaping up to be the 2nd straight year in which long bonds bulls outperform their counterparts in the equity market: TLT and EDV appreciated +23.6% and +39.6%, respectively in 2014 vs. a return of +11.3% and +7.5% for the SPY and DIA, respectively. For those of you who must remain long of U.S. equities, we reiterate our preference for domestic revenue and EPS exposure in lieu of international exposure, which translates to favoring small-caps (IWM) over large-caps (SPY), as well as being long of Consumer Discretionary (XLY) and Housing (ITB) stocks.

No Growth? - FOMC Dot Plot

No Growth? - S P 500 Revenue and EPS Growth

Best of luck out there,

Darius Dale

Associate