U.S. stocks bounced between gain and loss for most of day but hovered close to the flat line, until traders decided to push prices higher with about an hour left in the session.

I couldn’t determine what sparked the late-day rally, maybe it was confirmation by the Commerce and Labor Departments that economic growth has weakened and initial jobless claims continue to rise (biting sarcasm alert).   Sure, there were more good earnings reports yesterday, but when one adjusts for the industries that are benefiting from QE-induced commodity-price spikes (a situation that is in the process of creating economic harm) earnings growth is cut in half.  Besides, without meaningful economic growth the profit cycle hits a wall.  And again, I’m sorry for the tone – it’s getting old even to me – but this expansion is so artificially manufactured it’s silly; and even with the Fed more aggressive than at any time in its history and several iterations of fiscal stimulus, we can’t even manage an average rate of economic growth.

Financials, consumer staples and utilities led the broad market higher.  Energy and tech were the losers, the only two of the 10 major sectors that fell for the session.

The dollar lost more ground yesterday – blah, blah, blah stock traders don’t care.   However, commodity traders do care, which is evident by the continued rise in most commodity prices.  One supposes consumers also care, but they rarely make the connection between a currency that’s getting zombie stomped by the Fed and rising commodity prices. 

Market Activity for April 28, 2011

Sector Activity for April 28, 2011

GDP

Gross Domestic Product rose at an inflation-adjusted annual rate of just 1.8% in the first quarter, according to the Commerce Department (expected to rise 2.0%, and as of a couple of months ago at 3.5%-plus).  This brings y/o/y economic growth down to 2.3% from 2.8% during the previous four-quarter period -- a pathetic recovery.  I guess if every financial journalist under the sun could call the previous economic expansion (2002-2007) the “jobless recovery” even though the unemployment rate peaked out at just 6.3%, we can call this one the growthless recovery. 

The weak 1.8% print arrived even as inventories and business investment added to growth – I was expecting both to either drag or offer no help.  Trade dragged on the GDP number too, which was expected, but just barely.  What really weighed on the figure was one of the largest declines in government consumption in a long time, which is simply a function of the government moving more of the debt troubles onto the public sector from the private so expect more drag to come over the next couple of years.  The sad thing is even as we’ve engaged in this very damaging affair, the high debt burden on households remains (and when interest rates increase, either voluntarily or by force, debt servicing for both the government and household sectors will become acute.)

So, on the positive side:  

Personal consumption rose at a pretty healthy rate of 2.7% annualized – a particularly nice clip even as gasoline prices powered higher, but then we did have the latest iteration of fiscal stimulus by way of the temporary payroll tax rate reduction.  Business spending on equipment and software rose 11.6% at an annual rate.  And inventories also added to growth as there was a little stockpile rebuilding after the very weak results of the fourth quarter. 

On the negative:

Investment in non-residential structures slid 21.7% at an annual rate, subtracting 0.63 percentage points from GDP.  Residential construction fell 4.1%, but doesn’t amount to much GDP damage anymore.   Government consumption fell 5.2% (there have been only six quarters over the past 55 years that registered a deeper decline), cutting GDP by a full percentage point.  And trade weighed just a little bit (less than a tenth of a percentage point) as imports outweighed exports. 

And the real final sales number, which is GDP minus inventories, fell back to virtual non-existence as it rose just 0.8% at an annual rate.  This figure has averaged 1.6% during this expansion, a number that is usually closer to 4% at this stage in the cycle. 

Jobless Claims

Initial jobless claims just didn’t remain above the 400K mark last week but continued to move in the wrong direction.  Initial jobless claims rose 25,000 to 429,000 for the week ended April 23 (expected to fall to 395K).   This marks the third-straight week above 400K when we desperately need it to fall to 350K. 

The four-week average popped back above 400K for the first time since mid-February, printing 408,500.

Continuing claims keep moving in the right direction though as the total number of people collecting unemployment benefits for more than two weeks (they extend out to 99 weeks) fell 144,000 to 7.805 million. 

Although, with continuing claims falling 2.3 million over the past year, while just 1.3 million jobs have been added, that leaves a full million people that have exhausted their jobless benefits without finding a job. 

Pending Home Sales

Contract signings to purchase an existing home rose 5.3% in March, which portends that previously-owned home sales may rise in April as those contracts close – the sales are officially counted at that point. 

If sales do officially rise in April that will mark two months of increase.  However, the mortgage applications number from the Mortgage Bankers Association that I like to watch (and report on each Thursday morning) has shown apps slide again in April.  Thus, we’re not likely to see the streak extend to three months. 

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Have a great weekend!

Brent Vondera, Senior Analyst