The U.S. Economic Month at a Glance: November 2, 2012
The U.S. economy continues to chug along at a 2 to 2.5 per cent pace. Most indicators suggest that while the economy is improving, it will continue to require support from monetary authorities as well as Congress and the president, whoever that may be. Once the November 6 election is over, the government must get back to work quickly to ensure that the economy doesn’t tumble off the so-called “fiscal cliff” at the beginning of 2013. We expect real GDP to expand by a modest 2.4 per cent next year, assuming that the government takes the necessary steps to lower future deficits to more sustainable levels while not pushing the economy over the fiscal cliff.1
Hurricane Sandy’s impact on fourth-quarter GDP will depend on how quickly repairs can be made to badly damaged infrastructure in many parts of the Northeast. Initial estimates suggest that the economic loss attributable to the storm will range from $10 billion to $20 billion. Because the storm hit the Northeast coast during a weekday and was very slow moving, the value of output lost due to interruptions in business will probably exceed the cost of damaged property. Some businesses—from New York City down to parts of Virginia—have been closed since the storm hit on October 29. Many homes are still without electricity. And air, rail, and subway services have been severely curtailed. The Northeast region accounts for some 10 per cent of U.S. GDP, implying that the loss in output and household spending will be significant.
Hurricane Sandy’s impact on fourth-quarter GDP will depend on how quickly repairs can be made to badly damaged infrastructure in many parts of the Northeast.
There was a slight improvement in real GDP growth in the third quarter of this year. The economy expanded at a 2 per cent pace, up from a gain of only 1.3 per cent in the second quarter. The improvement was mainly a result of higher consumer and government spending. As well, a narrowing of the U.S. trade deficit meant net exports were less of a drag on the economy. The economy will continue to expand at a modest pace over the near term, with growth accelerating to 3 per cent by the end of 2013. This depends crucially on Congress and the administration successfully avoiding the fiscal cliff and implementing a credible plan for fiscal sustainability. An agreement between Congress and the White House should set the stage for a pick-up in hiring as some of the uncertainty weighing on businesses starts to recede.
The long-anticipated improvement in housing markets has finally arrived, and this will boost the economy’s growth prospects over the short term. While sales of existing homes weakened somewhat in September, they remain well above where they were in the spring and early summer of this year. Other signs of a strengthening market include a drop in the monthly supply of homes on the market to levels consistent with a housing market that is finally returning to some sort of normality. Even more encouraging is that the supply of distressed homes is diminishing, a development that should help stabilize home prices in many regions of the country. (Homes in foreclosure have generally sold for 25 per cent below market, and this factor has put downward pressure on home prices since the market collapsed in 2009.)
The housing market will receive a lift from the latest employment numbers. A higher-than-expected 171,000 new jobs were created in October and the unemployment rate remained below 8 per cent for the second straight month. Also encouraging was the fact that job figures for both August and September were revised up by 84,000. Construction and manufacturing positions increased and there were also gains in many sectors of the service industry. Confidence in the labour market is slowly improving, as evidenced by the increase in new entrants into the labour market and the number of workers who are quitting their positions voluntarily. We expect the economy to generate around 2.5 million new jobs in 2013, up from an estimated 2 million in 2012.