FINANCIAL NEWS HIGHLIGHTS OF THE WEEK
- The House’s impeachment of President Trump did little to detract from broader economic optimism. U.S. equity markets reached new highs this week.
- Housing and consumer spending data released this week confirmed the narrative of resilient U.S. household demand.
- Hopefully the recent progress on Brexit and U.S.-China trade relations are signs that headwinds to global growth will diminish in the New Year, giving the global economy a necessary jolt of goods news after a somber 2019.
Hope for Good Tidings in 2020
Politics dominated headlines this week as the House voted to impeach the President. Impeachment proceedings are set to move on to the Senate. Nevertheless, financial markets appear to have largely shrugged off political uncertainty, at least for the time being. U.S. equity markets reached new highs this week, while yields marched a bit higher on a greater sense of economic optimism.
Data received this week remained consistent with the narrative of household resilience. November housing starts beat forecasts for a more subdued increase. Both single family and multi-family units rose in the month. Moreover, permits – a leading indicator of residential construction activity – improved for the seventh consecutive month. Housing starts have risen and persisted above the rate of household formation for several months, and all signs point to this trend holding into early next year as well.
The signal of health from existing home sales was a little less positive. November sales fell 1.7%, bringing the level back to a still healthy 5.35 million units annualized. Improved affordability, largely due to a decline in borrowing costs, has been a major driver for the recovery in existing home sales in the second half of this year (Chart 1). However, a dearth of inventory in many regions has put upward pressure on prices lately, tempering strong demand.
Consumer spending on goods and services plus housing form the key pillars of our U.S. outlook that foresees the economy expanding 2.0% next year, a slight cooldown from 2.3% this year. Underlying this view is that the labor market should continue to improve, absorbing more and more workers while wage growth is also expected to hold at fairly robust levels. Add lower interest rates and you get all the ingredients for household spending to rise at a sustainable clip in the year ahead.
In contrast, business investment is expected to be less supportive of the outlook. Manufacturing output has been in a slump globally this year, and recently in the U.S.. Despite a Phase 1 trade deal with China, we don’t anticipate that trade policy uncertainty will diminish enough to see a big resurgence in private investment. Outstanding trade disagreements remain with China, the EU, and other nations. What’s more, political uncertainty associated with next year’s election is likely to hamper plans by businesses to expand capacity until further clarity on the likely direction of future policies.
Weak foreign demand combined with elevated economic uncertainty does not bode well for a quick recovery in global industrial production. Instead, it raises concerns about whether consumers worldwide will remain stalwart in the face of persistent uncertainty (Chart 2). The global economy this year is expected to grow 2.8%, the slowest pace in a decade. In the year ahead, we anticipate a slight uptick to 3% largely due to more supportive government policies. The hope is that the recent progress on Brexit and U.S.-China trade relations are signs that headwinds to growth will diminish in the New Year. The global economy could definitely use some good tidings after a somber 2019.
Fotios Raptis, Senior Economist | 416-982-2556
This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.