Daily Agenda: U.S. Economic Growth Remains Strong Despite Macro Concerns

U.S. third quarter GDP exceeds expectations; Greek election drama continues to unfold; and Russia begins bailing out exporters.


The release of revised GDP figures by the U.S. Commerce Department yesterday provided holiday cheer to many investors as the nation’s economy grew at a 5 percent annualized rate in the third quarter, much higher than consensus forecasts. In response, primary U.S. equity indexes reached new highs during Tuesday’s trading session, including the Dow Jones Industrial Average, which closed above 18,000 for the first time. According to Jefferies & Co. chief financial economist Ward McCarthy, the composition of this latest GDP data is encouraging from a growth standpoint. Among the major components, consumer spending grew by 3.2 percent, up from 2.2 percent in the second estimate. A heavily anticipated upward revision in health care spending played a major role, but durable goods consumption was also revised higher, increasing 9.2 percent, up from an earlier estimate of 8.7 percent. In a note following the release yesterday, McCarthy wrote that consumer and fixed investment spending “have been the drivers to-date in this cycle and will continue to be the primary drivers of growth going forward.” As the holidays kick off in earnest around the globe, the U.S. economy appears poised to continue to outperform on a relative basis as consumer spending, aided by cheap gasoline and a still accommodative credit environment, shrugs off macro headwinds.

Russia begins bailout. One day after Standard & Poor’s placed its sovereign ratings on CreditWatch negative, Russia has begun an aid program to help private sector creditors deal with nonruble debt. Media reports this morning indicate that the Central Bank of Russia is offering U.S. dollar– and euro-denominated credit facilities to exporters struggling with foreign debt. The total amount of debt held offshore by the Russian private sector that will come due in 2015 is estimated to exceed $100 billion.

Samaras struggles in Greece. After failing to get a majority backing for his chosen candidate, Greek Prime Minister Antonis Samaras is coming under increasing pressure to make concessions to antiausterity party demands to secure support. According to a research note this morning by Société Générale strategist Michel Martinez, a new government will likely be able to secure some concessions from the troika. “Euro area leaders will probably find a way to prevent the worst-case scenario (Greek exit) from coming to fruition,” he writes. Martinez goes on to say that, in light of looming national elections in Spain and Portugal in the new year, political instability in Greece is a reminder of austerity fatigue and the political risks that abound.

Portfolio Perspective: Cautiously Optimistic on Existing Home Sales — Michael Dolega, TD Economics

Existing home sales slumped by 6.1 percent in November, to 4.93 million units, the slowest pace in six months. The number fell well shy of the 5.2 million expected by the market. The report was a disappointment, as the improving trend experienced over the last several months saw a sharp downturn. But given the increased seasonality during the November through March period, as well as the unseasonably cold November this year, we are skeptical to read too much into the decline.


In fact, we are cautiously optimistic on the housing market. Price gains have moderated and mortgage rates have tracked lower recently — the 30-year fixed rate was just 3.8 percent last week. As a result, affordability remains good; coupled with an improving labor market, this bodes well for existing home sales going into 2015.

Still, we expect the improvement to be relatively measured. Investors are increasingly taking a back seat as prices have risen. First-time home buyers — whose median age is currently 31 — do not yet appear to be in a position to occupy the driver’s seat. The fortunes of the housing market are inherently dependent on a millennial generation that has yet to see robust income gains and remains laden with student debt. Nonetheless, we believe that as the labor market improves, so should incomes, with the desire to own eventually manifesting in stronger existing home sales.

Michael Dolega in a senior economist for TD Economics in Toronto.