US GDP was higher than expected in Q3, printing 3% against expectations of 2.7%, remaining broadly unchanged over the year so far at 3% in Q1 and 3% in Q2. This latest reading comes despite the economic destruction caused during a particularly harsh US storm season over August and September. The damage caused by the storms is visible in the decline in residential investment and business spending on structures, though other areas of the economy remained buoyant as consumer spending is up 2.4% and business investment up 8%.
GDP growth is forecast to remain above-trend in Q4 boosted by resurgent economic activity post- storm season. Indeed, there is already evidence of pickup in personal spending over September as consumers were quick to replace cars damaged during the storm, pushing auto sales higher over the month.
Housing Stalled Ahead of Storms
In looking at declines in residential investment over the period, it is clear that not all of it is weather related and that the housing recovery which has been picking up over the last few years, had stalled ahead of the storm season. Housing starts and existing home sales had each declines over the two prior quarters with existing home sales marking a one year low in August.
A fall in pending home sales clouds the outlook for a near-term rebound and other elements, such as low inventories and higher interest rates are also going to dampen demand. However, the residential construction outlook is slightly more positive. Homebuilder confidence is close to cycle highs, and firm permit issuance is a signal of stronger activity in the area that is responsible for all of the recent slowdown in housing starts. Construction is also likely to see a near-term pickup due to rebuilding in the wake of the storm season. Across the board, a number of elements should keep the housing outlook underpinned.
Fed on Course to Raise Rates in December
The Fed kept policy unchanged over November, and the updated statement contained little in the way of changes except for mentions of transitory hurricane effects higher inflation, lower employment and a strong Q3 GDP print despite the weather disruption. Inflation is still forecast to reach the Fed’s 2% target over the medium term. Although the policy statement gave no clear signal that the Fed will raise rates in December, the meeting didn’t fuel any repricing in rate odds for December.
The Fed’s forecasts from the September meeting have been largely fulfilled with some upside surprise in Q3. Inflation continues to lag expectations but is not too far from what the Fed had projected for year-end. In all, the data looks likely to be enough to see the majority of FOMC members vote in favour of a hike at the end of year meeting, and market pricing has a .25% increase almost fully priced in.
New Fed Chair Selection Adds Uncertainty
The Fed’s rate path is expected to remain at a gradual pace, in line with the Fed’s own guidance. However, the dot plot shows a clear split in views and a change in leadership in February adds extra uncertainty to the outlook. If Jerome Powell is nominated, this will likely increase the chances of the status quo remaining than if any name outside of the Fed is selected. Powell has been on the FOMC since 2012 and has served most of his time under Yellen with the two members viewed as sharing a similar policy approach.
The current rebound in the USD Index has taken price to just below the first key resistance which is the 38.2% retracement of the decline from 2016 highs, around 95.92. Above there and focus will be on the 50% retracement at 97.34.