Global Daily – US GDP more confidence for Fed

by: Maritza Cabezas

Global-Daily-Insight-25-November.pdf (213 KB)
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  • Second estimate US Q3 GDP growth revised higher…
  • …confirming strong domestic demand
  • US home prices continue to show gain in momentum

 

Second estimate US Q3 GDP growth confirms strong domestic demand

Although this is a short work week in the US given the Thanksgiving holiday, it is a heavy week on data releases that will offer more insight on the economy before the rate lift-off. The second estimate of third quarter GDP growth showed that the economy expanded at 2.1% a faster pace than the first estimate suggested (1.5%), but below the 3.9% reported in Q2. This revision was mainly the result of an upward adjustment in inventories, which now represent a drag of 0.6ppts, compared to 1.4ppts, initially reported.  Consumption growth was revised down a bit, but remains the main motor of growth. Consumer spending increased by 3% in the third quarter, down from an initial estimate of 3.2% and from the 3.6% pace in the second quarter. As for residential and non-residential investment spending, they were revised modestly higher. Meanwhile, net export growth in this report continued to disappoint after a further downward revision. The trade report released on Tuesday, however, suggests that the trade deficit narrowed in October, which is positive for the fourth quarter growth forecast.

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All in all, the revisions in Q3 GDP suggests that domestic demand remains solid, offsetting the weakness in foreign demand. This should give confidence to Fed policymakers that the US economy is on the right path. Looking forward, we expect consumer spending to remain robust and to be the main driver of economic activity, supporting slightly above trend growth in 2016.

US home prices continue to show gain in momentum

The US housing market recovery has kept upward pressure on prices. The S&P/Case Schiller 20-city home price index, released on Tuesday increased more than expected in September, showing an rise of 0.6% mom and 5.5% on a yoy basis. The rise in prices was broad based. After years of volatility, home price growth appears to have stabilised at an annual rate of around 4-5%. Meanwhile, October’s existing home sales released on Monday, were down 3.4% mom from 4.7% the previous month. Despite the drop last month, existing home sales held above their average and are on track to record their best annual sales in eight years at 3.9% from a year ago. Overall, housing activity has been showing some expansion in the past months. Residential investment growth, for instance, is consistent with a recovery of the housing market.  We expect solid employment growth and a modest wage increase to continue to support the housing market.