Weekly Markets Commentary: Expectations of economic growth seen
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fiscal and monetary, is exhausted and withdrawn.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.