First Quarter 2015 Letter
April 9, 2015, By: Harris L. Kempner, Jr., President

The quarter ending March 31st was much weaker than earlier projections. We believe that real GDP growth in the U.S. economy will be only 1 1/2 – 2% in the first quarter of 2015. Nevertheless, this is not sufficient to vitiate our earlier estimate of 3 1/2 – 4% U.S. real GDP for full calendar 2015.

Why not? This year’s first quarter was similar to every first quarter for the last five years. In each one of those the first quarter was a disappointment, but the next several quarters were surprisingly ebullient. This could be partially due to poor seasonal adjustments by economists, but also due to weather and economic specifics. This was particularly true of the first quarter of 2015.

• February and March were the coldest in history for many states in the Midwest and Northeast.

• More important was the overwhelming snow conditions in multiple states, which added a special inhibitor to this year’s economic progress.

• In addition, an ongoing strike at the West Coast ports impacted commerce activities all quarter long, though this has finally been resolved in the last several weeks.

• Another economic reason for the slowdown was the rapidly increasing strength of the dollar, which equaled lower exports and impingcc on manufacturing.

• The oil price drop continued throughout the quarter. This negatively impacted employment and manufacturing in oil producing states such as Texas and North Dakota, but is only now beginning to benefit employment activity in other areas.

Multiple economic indicators weakened during the middle of this quarter, and then the recovery that we expected began. The listing below shows the recovery of multiple economic statistics from their low in the quarter (provided by Evercore)



Recent Weakest


Rail Car Loadings



Hotel Revenues



Mortgage Applications



Unemployment Claims



Evercore ISI Company Surveys



ECRI Leading Index



Composite PMI



Vehicle Sales



Vehicle Production



Furniture Buying Index




Finally, and perhaps most importantly, labor markets have continued to be strong during the period. Despite a weak March, the average increase in jobs for the last six months was 262,000 per month — a healthy number indeed. Again, multiple current statistics indicate that the steady, strong growth in job creation will continue as the largest single contributor to the overall strength we see going forward in the U.S. economy.

Internationally, the picture is much cloudier. According to global statistics provided by governments, the purchasing manager index numbers are below 50%, indicating contraction in over 48% of the countries in the world, including such major players as China, South Korea, Canada, France, Russia and Brazil. This presents a much weaker than normal picture for international markets, and, as we have said before, particularly in such major countries as China, Brazil and Russia, this financial drag will reduce the probability that most commodities will not rise in price, including oil going forward throughout the rest of the year.

Europe is a general exception to this, with the largest economies, Germany and the UK paralleling the strength shown in the United States. On balance, Europe looks in fact considerably stronger to us than it did at the start of the year, which is an assist to the U.S. picture.

Japan is still a country that looks as if it is going to move into a recession; and will not contribute much, if any, to world economic growth this year.



The weakness in multiple overseas areas will affect internationally derived earnings of many companies. This has contributed to an overall lowering of earnings expectations during 2015. We think the estimates of earnings reductions are overdone, but it remains to be seen whether the markets will accommodate this or not.

Of course, we are still waiting to find out what will happen with Federal interest rate increases during the year. Stock markets tend to react negatively, at first, to the beginning of rate increases, although in every instance in the past, the equity markets recover any short-term losses from the time that the Fed begins to raise rates.


For the past two quarters we have stated that increased interest rates historically await wage inflation. We noted that there had been very little wage inflation in the five-year recovery and that continues to be true today. Remember that wages are about 70% of the cost of the U.S. economy. If they start to accelerate, inflationary pressures can materialize quickly. Everyone is trying to figure out when this might begin, which is why we think it is useful to have the insight provided by Nancy Lazar of Cornerstone Macro, who observes that “During the last two (economic) cycles, AHE (average hourly earnings) started to accelerate relatively sharply once unemployment declined to 5.5%.” That is where we are at this writing. If our labor participation rate does not increase soon, this point could be reached in the next twelve months. We now know that Fed tightening and higher interest rates will almost certainly occur by the end of the year.


Despite the weakness in the first quarter, we are still maintaining our 3 1/2 – 4% real economic growth projected for the U.S. in 2015. We expect the economy to follow the pattern of the past five years, showing much improvement in the last three quarters. There are still concerns about what may happen in the rest of the world, and we will be keeping an eye on international economies and events, but we think they will not be enough to derail the U.S. economic engine.

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