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Weekly Markets Commentary: Expectations of economic growth seen

By Staff | Nov 3, 2009

The advance estimate of third-quarter gross domestic product (GDP) will

be released Thursday with a widespread expectation that the economy grew

for the first time since the second quarter of 2008. Consensus estimates for

the pace of growth center around 3.0 percent at an annualized rate.

While positive growth will be welcome indeed, the components of that

growth also will be important. Consumer spending certainly will be boosted by

the “cash for clunkers” program, but what level of spending otherwise

occurred is uncertain.

The impact of changes in inventory levels, government stimulus spending,

and relative stability in housing activity will provide insight into the

underlying health of the economy. Doubts persist regarding the strength of

final demand. Many point out that, so far, evidence of strength mostly exists

on the supply side of the economy, driven by special circumstances and

targeted stimulus. Proponents of an economic “double dip” scenario argue

that private demand will not be sufficiently robust once this stimulus, both

fiscal and monetary, is exhausted and withdrawn.

Thursday’s report will begin to clarify some of these questions, but it

will not answer them. It is far too early in the recovery to know either the

strength of the consumer contribution over time, or for how long monetary

policy will remain as accommodative. At the very least, the report should show

that the recession has indeed ended. How robust and how lasting the recovery

will be will remain uncertain.

Earnings Reports

Third-quarter earnings continue to show most companies exceeding bottom-

line expectations. In fact, at roughly 80 percent, this quarter is on pace to

exceed the record results of the second quarter. Despite that, stocks edged

lower last week across the board, with the exception of tech and telecom. The

dollar continued to edge lower as well, helping to push commodity prices of

all types higher.

The Week Ahead

Although the GDP report will dominate the economic headlines this week,

there are several other reports that will be watched closely. The S&P/Case-

Shiller Home Price Index for August will be released on Tuesday. It is

expected to show the fourth-consecutive reading of higher prices. During the

previous three months home prices rose 3.6 percent after bottoming in April.

Unfortunately, they remain 30 percent below their July 2006 peak.

It is hoped that, when released on Wednesday, new home sales for

September will show the same buoyancy that existing home sales showed last

week. September durable goods orders and the Chicago Purchasing Managers Index

are also scheduled for release.

With the Federal Reserve’s next meeting looming on the horizon for next

week, it is fair to say that this week’s data releases will be mere

curiosities in comparison. What the Fed has to say about its intentions,

especially with so much skepticism regarding real demand circulating about,

will likely dominate the near-term psychology of markets.

David Joy is the chief market strategist at Riversource Investments, a unit of

Ameriprise Financial, member FINRA/SIPC.