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Welcome to February! Will the next 30 days be the inverse of the previous 30 as we just experience the worst January since 2009, the height of the financial crisis? As commented last week, I think the economy/markets are at a transition point. Will growth re accelerate or will the deceleration continue?
In my view, the initial release of fourth quarter GDP is not suggesting the domestic economy is falling off the proverbial cliff. Initial estimates suggest the economy grew by 0.7%, close to the pace expected. For the second consecutive year, the economy expanded by 2.4%. As all recall 2015 started out poorly because of weather. Will 2016 be the inverse?
For the quarter, consumer spending rose by 2.2% versus the consensus view of 1.8% adding 1.46% to growth. For 2015 consumer spending rose by 3.1%, the fastest pace in a decade. Final sales to domestic purchasers—GDP less inventories and trade—rose by 1.6%
Because of the rising dollar, trade subtracted 0.47% from GDP. Inventories reduced growth by another 0.45%, down from a 0.71% drag in the previous three months.
One of the greatest hindrances on the economy is the total collapse in energy infrastructure spending, down 38.7% for the period and 35% for the year, the greatest implosion since 1986.
I think first quarter growth has the potential to be the inverse of the previous three years, defined as a meaningful acceleration. My reasons are simplistic.
First, I think the decimation in energy spending is essentially over. Second inventory destocking has run its course. Third, I think further gains in the dollar are limited. Fourth, residential building is surging given the shortage of new homes. Fifth and most importantly, after tax income adjusted for inflation climbed 3.5%, the most since 2006.
Is this Pollyannaish thinking? Typically homebuilding, consumer income and jobs lead the economy.
Speaking of jobs Friday is the release of January’s employment data. What will it suggest? Jobs growth was relatively strong during the fourth quarter, a strength that in some regards was reflected in the GDP data as relating to consumer spending.
Commenting about Friday’s market activity, stocks surged on the unexpected policy change in Japan. Equities were also aided by further gains in oil.
Last night the foreign markets were down. London was down 0.95%, Paris down 1.05% and Frankfurt down 1.0%. China was down 1.04%, Japan up 1.98% and Hang Sang down 0.45%.
The Dow should open moderately lower on disappointing Chinese data. As widely discussed Friday’s gains were the greatest in four months, I think the result of short covering and algorithmic trading. The 10-year is off 4/32 to yield 1.94%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.