Steady growth and low inflation are a good mix for equities, even when big names such as Intel stumble. Intel’s results are not symptomatic of the broader trend, reflecting firm-specific issues. The semi-conductor industry is shifting away from memory chips. Last September’s top for the S&P 500 was expected to offer more resistance: in the end, equities managed to hit new highs despite a big drop in the Philly Sox index.
Both software and R&D rose to fresh highs as a share of real GDP in Q1. The R&D numbers are likely to be revised higher too. Some of the big drivers of R&D last year have posted strong results.
The rise in the GDP estimate for software investment and R&D helped offset a big slowdown in spending on equipment. The dip in consumer spending on goods (-0.7% q/q, annualised) needs to be treated with some caution too: retail sales fell in December, but have since recovered, rising 2.0% in the three months to March.
The focus for markets will now shift to the payroll report on Friday. A pick-up in average hourly earnings growth may fuel concerns that inflation will head higher. The Q1 core consumption deflator should provide some reassurance: in annualised terms, the q/q increase (1.3%) marked a big deceleration from Q4. Innovation will be key to the US recording its longest economic expansion since official records began, in 1854, while keeping inflation low.
