Report on the Economy
In U.S. the Fed left interest rates unchanged at 4.25%. In its statement
the Fed said “ Going forward, the economy seems likely to expand at a
moderate pace”. Friday’s report on economic growth showed that the
economy grew by 1.6% in the third quarter compared to expectation of 2%
growth. This was due to slow down of housing and exports. In fact the
housing slow down subtracted 1% from the economic growth.
U.S. Housing—Coming to grips with reality. The new and existing home
sales reports showed that homebuilders are coming to grips with reality,
while existing homeowners are not. In response to rising inventories,
homebuilders have aggressively slashed prices to move products, learning
the lessons of the auto sector—if you want to clear the lot, offer
incentives. Thus, the price of a new home has fallen by 9.7% y/y, the
largest decline on record back to 1970. This has helped boost sales
activity over the past two months through September. However, existing
homeowners are not so calculating. They are not slashing prices quickly
enough to reflect the new market reality. Presumably, they still hope to
"cash in," or they cannot accept that their home is worth a lot less
than they thought it was. As a result, existing home prices have fallen
only 2.5% y/y. This might be big in a historical context, but it is not
big enough, as existing home sales continue to drop.
Going back to the fed’s statement of forecasting moderate growth in the
fourth quarter, we estimate the growth to be somewhere between 2.5 to 3%
. True that consumer spending is effected by lower house prices,
however, at the same time, ongoing healthy growth in income ( supported
by substantial 4% increase in real personal disposable income) should
prevent consumers from throwing in the towel.
Going forward, as the negative impact of lower housing prices show its
full effect, we believe that the economy would grow by 2% during the
first half of 2007 which although low compared to recent growth, is far
from the recession (negative growth) you hear people on the street
talking about. To stimulate the economy, we expect the fed to lower
interest in the new year.
In Canada we expect the slow down of U.S economy to effect us and as
such we expect Canadian economic growth to go to 2% in the next few
quarters. However given the Bank of Canada view that our economy is
operating at just above full capacity, the Canadian central bank is
likely to lower the rates less aggressively than its American counter
parts.