US: Q3 GDP revised slightly higher while new home sales plunge
The preliminary Q3 GDP was revised up to 2.2% from an advanced 1.6%. The outcome was stronger than the consensus estimate for a 1.8% increase. However, taking the details into account, the upward revision doesn’t alter the view of the economy and certainly not the outlook going further. Indeed, the upward revision was driven by inventories and net exports. The other revisions were marginal. Inventories contributed 0.2% to growth instead of being a drag according to the advance estimate. This upward revision will likely be at the expense of Q4 and shouldn’t been seen as a positive. The upward revision in net exports was primarily due to lower imports. The GDP deflator was reported unchanged at 3.12%, but the core PCE deflator was revised marginally lower to 2.2% from 2.3%. Also very positively for bonds and equities, labour compensation was sharply revised lower in Q2 and Q3 and this will be reflected in sharply lower unit wage costs and ease concerns that higher wages will fuel inflation. Overall, GDP growth should slow further and somewhat more outspoken than we expected before the Q3 preliminary report.
New Home sales fell much more than expected in October, suggesting that the correction in the housing sector is in full swing amid an overhang of inventories. Indeed, sales dropped by 3.2% M/M to 1004K from a downward revised 1037K, earlier reported as 1075K The downward revision of the previous month is a feature that appears almost every month and is due to the cancellation of contracts by households. These homes come again available for sale, but don’t appear in the inventory statistics. These showed only a marginal decline to a still very high 558 000. Given the decline in sales, the inventories now count for 7 months of sales, up from 6.7 in September and again near the peak (7.2) registered in July. The combination of falling sales and high inventories suggests that it will take quite some time for the homebuilders to get rid of excessive inventories. In these circumstances it is unlikely that housing starts will revive anytime soon. So the drag of housing on the overall economy will take lower. The report contained one positive point: median prices rose 1.9% Y/Y following a 9.2% Y/Y decline in September. It remains to be seen whether this is indeed a positive factor. In September sales rose as homebuilders made price concessions, but have these concessions been scaled back in October? And have households reacted by keeping out of the market?
OTHER NEWS: Momentum in Swiss economy slows
The Swiss KOF leading indicator fell more than expected in November, bringing the index to 1.73 from a downward revised 1.95 in October, earlier reported as 2. The decline suggests that growth has peaked and will slow in the next quarters. However, the index is still at historical high levels and therefore the slowdown from the very high level of about 3% in 2006 will keep growth at a reasonable level in 2007. There is still little reason to expect the SNB to stop abruptly its tightening cycle. However, later in 2007 there may be some risks on the downside for rates if global growth slows further.
