Is the U.S. Economy On Steady Track? 3 Consumer Picks - Analyst Blog

Some data recently is indicative that the U.S. economy may be poised to slow down in the first quarter. While, manufacturing activity in the U.S. expanded at the slowest pace last month in almost two years, stronger U.S. dollar raised concerns about multinationals’ first quarter earnings results. Continuous drop in oil prices also dragged energy shares down. Further, severe winter dented consumer spending, which adversely affected retail sales. These developments have prompted various experts to cut first quarter GDP estimates.

Waning Q1 GDP Projections

The Federal Bank of Atlanta trimmed growth projections for first quarter to zero percentage, a big drop from an earlier forecast of 1.9%. The Goldman Sachs Group, Inc. GS also reduced its first quarter GDP forecast to 1.8% from 2%.

First quarter GDP estimates are considerably less compared to the final revision of the fourth quarter economic growth. The fourth quarter GDP came in at 2.2%.

March Job Additions Hits 15-month Low

On the other hand, hiring boom fizzled recently. The Bureau of Labor Statistics (BLS) reported job additions in the U.S. touched a 15-month low of 126,000 in March. Job additions fell below 200,000, bringing an end to the unbroken run of 12 such successive monthly gains. Additionally, data for both January and February was revised downward, which means 69,000 less jobs were added during these months taken together. Labor force participation rate also touched a 37-year low of 62.7%.

Separately, unemployment rate remained at a six and a half year low of 5.5% in March. The “U-6” rate also came in at 10.9% in March, the first time it has gone below 11% since Aug 2008.

Hourly Wages: Silver Lining

However, the only silver lining in March’s nonfarm payroll report is that of hourly wages, which gained a solid 0.3% in March from prior month and 2.1% from a year earlier. Meanwhile, McDonald's Corp. MCD, Wal-Mart Stores Inc. WMT and Target Corp. TGT plan to hike workers pay above the minimum wage.

Consumer Spending to Rise

Improvement in workers earnings levels lays ground for an increase in consumer spending. A study by the Chicago Federal Reserve Bank showed income rises by about $250 per quarter and spending by $700 per quarter after a minimum wage hike. Strong U.S. auto sales numbers in March also indicate consumers are willing to shell out more money. Further, consumers are expected to spend more during spring.

Among economic data, the Conference Board’s recent data on Consumer Confidence Index also rose to 101.3 in March from 98.8 in February. Separately, retailers have benefitted from the decline in initial claims as it will eventually boost consumer spending. According to the U.S. Department of Labor, jobless claims touched a nine-week low of 268,000 last month.

The housing sector also showed improvements as sales of new single-family houses jumped 7.8% to hit a seven year high of 539,000 in February. Meanwhile, Fed Chair Janet Yellen is “cautiously optimistic” about economic growth this year. Yellen believes unemployment rate will drop further and consumer spending will increase “at a good clip”.

3 Consumer Stocks to Buy

Consumer spending is already in a bright spot as it witnessed its biggest quarterly gain in the fourth quarter 2014, since the first quarter of 2006. Below we present three consumer stocks that possess a good Zacks Rank and Growth Style Score of ‘A’ or ‘B’.

The Growth Style Score combines conventional growth metrics with a thorough analysis of the company’s income statement, balance sheet and statements of cash flows to evaluate its financial health and the sustainability of its growth trajectory. Back-tested results show that stocks with Growth Style Scores of A or B when combined with Zacks Rank of 1 or 2 offer the best upside potential.

Hanesbrands Inc. HBI is a consumer goods company that manufactures and sells a range of apparels for men, women and children in the U.S.

Hanesbrands holds a Zacks Rank #2 (Buy) and has a Growth Style Score of ‘A’. The company has projected earnings growth of 44.5%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 20.91.

Darden Restaurants, Inc. DRI owns full service restaurants which it operates in the U.S. and Canada.

Apart from a Zacks Rank #1 (Strong Buy), Darden Restaurants has a Growth Style Score of ‘B’. The company has projected earnings growth of 46.3% and has a P/E (F1) of 26.76x.

Pool Corp. POOL distributes swimming pool related equipments and related leisure products in North America, South America, Europe and Australia.

Pool holds a Zacks Rank #2 (Buy) and has a Growth Style Score of ‘A’. It has an expected earnings growth of 14.8% and has a P/E (F1) of 24.22x.

 

 

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