Economy Turns Down

The Commerce Department released its second estimate of first-quarter GDP this morning, and as expected, a disappointing quarter has gotten worse. Where the first estimate showed that the economy had grown by just 0.2 percent last quarter, now Commerce estimates that it actually contracted by 0.7 percent.

One of the primary factors in the revision was that imports grew much faster than originally estimated. With the dollar still strong, it's no surprise that Americans have been buying more cheaper imported goods lately. Meanwhile, U.S. exports declined by the most since the first quarter of 2009, in the middle of the recession.

This result marks the third time since the end of the recession that the economy has shrunk for a quarter, following the first quarter of 2014 and the first quarter of 2011. Both those turned out to be temporary blips; let's hope this one is too.

A Shortage of Stocks

Here's a hidden factor as to why the market has continued to increase: All those buybacks have created a shortage of stock shares for sale. According to the Market Technicians Association, the number of "investible" publicly traded companies, which they defined as those with a share price above $5 and a market capitalization of more than $25 million, has fallen by 25 percent over the past 13 years.

Over that same time frame, the average share price of the 500 largest U.S. stocks has doubled from $40 to $80. In addition to stock buybacks, the Market Technicians blame mergers and acquisitions, which also reduce the number of a company's shares.

The dealmaking trends show no signs of easing up, either. In the first quarter, companies bought back a record $247 billion of their own stock, and according to Thomson Reuters, global M&A for 2015 has already totaled $1.5 trillion, up 23 percent higher from the same time period in 2014.

Home Prices Chugging Along

The housing market keeps chugging along: According to the S&P/Case-Shiller Home Price Index released yesterday, American hosing prices have now climbed for 35 consecutive months. While historically home prices have risen about 1 percent a year, they're currently rising at 4.1 percent on an annual basis.

But the rate of increase has been slowed significantly. In the first three months of this year, home prices nationwide gained just 0.8 percent. That’s down from 1.2 percent during the first three months of last year and 2.8 percent in the same period of 2013.

The hottest cities for home prices include San Francisco, where prices increased 10.3 percent in the past year, and Denver, where they increased 10 percent. There isn't a market in this index in New Jersey, but the New York City market was the only one to post a decline in the past month, of 0.1 percent, although it still increased by 2.7 percent in the past 12 months.

Wall Street Takes a Nap

We may have just gotten done with a long holiday weekend, but it was last week when Wall Street took a vacation. A week ago Monday, the S&P 500 index ticked up 0.3 percent - and that turned out to be the biggest move of the week. There were three days when it moved less than 0.1 percent.

One factor was the very low volume, which suggests that brokers had already begun their summer vacations. On an average day, about 6.3 billion shares are traded, but the trend was lower than that all week, dropping to 4.9 billion shares by Friday.

The sleepiness of this stock market is a fairly recent trend; prior to last week, the S&P had actually been pretty volatile. There have already been 15 days when the S&P has moved by more than 1 percent this year, compared with 19 for all of last year.

Thoughts for Memorial Day

“Better to die fighting for freedom than be a prisoner all the days of your life.” ~ Bob Marley

“The greatest glory of a free-born people is to transmit that freedom to their children.” ~ William Harvard

 “Courage is contagious. When a brave man takes a stand, the spines of others are stiffened.” ~ Billy Graham

April's Inflation - or Deflation - Report

For the past 12 months, the Consumer Price Index in the U.S. has actually dropped by 0.2 percent, according to the figures released by the Labor Department this morning. CPI actually notched upward by 0.1 percent in April, but that wasn’t enough to prevent the largest year-over-year decline since October 2009.

Core CPI, which includes the more volatile food and energy costs, is moving upward, although not in any great dramatic fashion. That measure increased by 0.3 percent in April and is up 1.8 percent over the past 12 months.

Gas prices dropped by 1.7 percent in April, while food prices were unchanged. The aspect of consumer spending that increased the most was the medical care index, which rose by 0.7 percent, its largest monthly increase since January 2007. Prices of household furnishings and used cars also rose; prices of airline fares and apparel dropped.

The Fed Makes It (Almost) Official

At the beginning of this year, the smart money said that the Federal Reserve was likely to finally raise interest rates at its meeting in June. But events this year have made that possibility more and more remote, and the minutes of the Fed's April meeting, released yesterday, made it almost official:  Federal Reserve officials don't expect to raise rates at their next meeting in June

The good news is that the Fed doesn't expect  the first-quarter economic slowdown to last. They blamed the weak quarter on the weather and noticed the recent pattern of subpar first quarters. They did also say they were surprised that the drop in gas prices hadn't resulted in a splurge of consumer spending.

The Fed expects the economy to return to a “moderate pace” of growth in the second quarter, although the economic signals have been mixed. Since the meeting, payrolls figures have improved, while weaker-than-forecast data on manufacturing and retail sales prompted some economists to tamp down their second-quarter expectations.