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US: Financially conditioned for growth – BMO CM

The U.S. economy keeps rolling with the punches as all the major economic releases last week topped expectations, explains Sal Guatieri, Senior Economist at BMO Capital Markets.

Key Quotes

“October retail sales built on an earlier impressive (though mostly flood-related) jump, suggesting decent momentum heading into the holiday shopping season, which is likely to be the best in three years. With a mighty wind at its back, industrial production accelerated, led by solid increases in business equipment. A storm-related bounce pushed housing starts to their highest levels of the year. A pop in the NAHB index to its second-best level in a dozen years suggests the housing market has legs. The data releases support our estimate of 2.9% annualized GDP growth in Q4. This means the economy likely racked up three straight quarterly advances of around 3% or more for the first time since the mid-2000s (i.e., the credit/housing boom). And, with tax cuts and higher wages looming on the horizon, households are well positioned for the new year.”

“To be sure, interest rates are rising (albeit slowly) and household debt has surpassed 2008’s peak (though not relative to income). These are modest hurdles. The big picture is that households, businesses and the economy are poised for continued above-potential growth. In fact, financial conditions have never been more supportive of the economy since at least 1999, according to our estimate, and since 1994, according to the Chicago Fed. This is largely because of still-low interest rates, record stock prices and rising house prices, with assists from easier lending standards, thinner credit spreads and a softer dollar. The last four times that financial supportive of the economy (1977, 1994, 2005 and 2014) real GDP grew faster than 3%. Conditions will turn less supportive next year as interest rates climb and equity and house values throttle back to a brisk trot. But that’s a second-half of 2018 story given their lagged effects on growth. The coming quarters could be knockouts, especially if Congress manages to approve tax reform.”

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