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Q2 GDP Beats Estimates on Strong Consumer Spending: 5 Picks

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During the second quarter, GDP slowed from the pace set at the start of the year, but still exceeded most expectations. A report from the Commerce Department released on Jul 26 revealed that while economic growth has slowed, fears of a near-term recession are grossly overblown. In fact, the report’s fine print indicates that the economy has strengthened over the past three months.

A severe slump in business investment shaved off nearly 1% of the headline GDP number during this period. However, a spurt in consumer spending ensured that the record-long phase of expansion continued largely unhindered. With job growth remaining solid and wage gains staying steady, investing in consumer discretionary stocks looks like a smart choice.

Q2 GDP Slows But Exceeds Expectations

According to the Department of Commerce’s first estimate, the U.S. economy expanded at an annualized rate of 2.1% in the second quarter. This represents a considerable decline from the 3.1% rate experienced in the first quarter. At the same time, it is significantly higher than the estimated level of 1.8%.

This is still the lowest increase since the first quarter of 2017, when Donald Trump ascended to presidential office. However, the pace of growth was enough to dispel recessionary fears which have been doing rounds at the Federal Reserve. An economic slump now seems unlikely even in 2020.

Robust Consumer Spending Powers Headline Number

The decline in the pace of second-quarter GDP was attributable almost entirely to a slump in business investment. During this period, gross private domestic investment declined to 5.5%. This was the lowest rate recorded since the fourth quarter of 2015. Notably, expenditure on structures dropped 10.6%.

Happily, personal consumption expenditures jumped 4.3% in the second quarter. This was the highest increase experienced in six quarters. Consumer spending alone contributes nearly two-thirds of U.S. GDP. This is why the increase in consumer expenditure was enough to fuel GDP in the April-June period.

Analysts believe that consumer expenditure may not be able to grow at such a furious pace in the quarters ahead. At the same time, the job market remains robust and wage gains are flowing in steadily. These factors are likely to boost spending appreciably over the rest of the year as well as in 2020.

Concerns About Business Investment Overblown?

Optimists think that fears arising out of a decline in business investment are largely overstated. Such analysts think that businesses as a whole are in good shape. According to Chris Rupkey, chief financial economist at Mitsubishi UFJ (MUFG), “Companies are ordering a record number of equipment. The economy is firing up in all cylinders.”

Rupkey points out that this is “a 2% growth economy, not a 1% subpar economy.” A 1.9% surge in non-defense capital goods excluding aircraft in June bears evidence that business spending is continuing at a steady pace. He thinks that it is unrealistic to expect a searing pace of growth from this metric so far into the economic expansion.

Our Choices

Despite a decline in pace from the first quarter, second-quarter GDP has exceeded most estimates. A slump in business investment has shaved off an entire percentage point from the headline number. However, leading economists think that this metric is chugging along at a pace which is sufficiently high for a record-long economic expansion. 

The steady pace of second-quarter GDP was largely attributable to a spurt in consumer spending. Investing in consumer discretionary stocks looks prudent. However, picking winning stocks may prove to be difficult.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.

BJ's Wholesale Club Holdings, Inc. (BJ - Free Report) is a warehouse club on the East Coast of the United States.

BJ's Wholesale Club has a Zacks Rank #1 and VGM Score of B. The company’s expected earnings growth for the current year is 12.6%.The Zacks Consensus Estimate for the current year has improved by 1.4% over the past 30 days.

Laureate Education, Inc. (LAUR - Free Report) offers higher education services and programs through a number of universities and higher education institutions.

Laureate Education has a VGM Score of B. The company’s expected earnings growth for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved by 1.9% over the past 30 days. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Rent-A-Center, Inc. (RCII - Free Report) is the largest rent-to-own operator in the United States offering durable goods such as consumer electronics, appliances, computers, furniture and accessories.

Rent-A-Center has a Zacks Rank #2 (Buy) and VGM Score of A. The company’s expected earnings growth for the current year is more than 100%.

Whirlpool Corporation (WHR - Free Report) is one of the largest manufacturers of home appliances in the world.

Whirlpool has a Zacks Rank #2 and VGM Score of A. The Zacks Consensus Estimate for the current year has improved by 3% over the past 30 days.

Electronic Arts Inc. (EA - Free Report) is a leading developer, marketer, publisher and distributor of interactive games (video game software and content).

Electronic Arts has a Zacks Rank #2 and VGM Score of B. The Zacks Consensus Estimate for the current year has improved by 0.3% over the past 30 days.

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