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Market Wire
US Economy Loses More Momentum 

Karl Schamotta December 21, 2018

Evidence of a slowdown in the US economy continued to accumulate this morning, with both durable goods orders and a final gross domestic product reading coming in weaker than expected – raising the odds on a pause in monetary tightening by the Federal Reserve in the early new year.

Orders for big-ticket manufactured goods rose seasonally-adjusted 0.8 percent in November, but the gain was entirely driven by the military aircraft category – suggesting that weakness originating in the October report has continued. Markets had expected a 1.3 percent gain.

With the transportation sector excluded, orders dropped 0.3 percent in November from the prior month.

New orders for non-defense capital goods excluding aircraft – a proxy for business investment – fell 0.6 percent from October, suggesting that trade uncertainties and rising supply chain costs are triggering a slowdown in the manufacturing sector. Domestic activity levels remain relatively robust, but exports of products manufactured in the United States have fallen sharply this year.

Separately, the final reading on third-quarter gross domestic product came in at 3.4 percent – slightly lower than the previously-estimated 3.5 percent, and well below the 4.2 percent expansion achieved in the previous quarter. Consumer spending and exports were revised lower, but the overall trend suggests that the economy will end the year with its best performance since 2005.

In Santa’s workshop, the economy expanded by 0.3 percent in October, after shrinking 0.1 percent in the previous month. Numbers from Statistics Canada show a 0.7 percent rise in Canadian factory output, with a 0.9 percent gain in finance and insurance helping to lift the headline to a five-month peak.

Oil and gas extraction rose 3.6 percent in the month as maintenance shutdowns ended, providing limited evidence of the lagging effects of energy price weakness.

Construction fell 0.1 percent in October.

Retail sales rose a little less than expected in the month, with overall sales up 0.3 percent – against consensus forecasts for a 0.5 gain.

Chinese policymakers signalled a shift toward more stimulative fiscal and monetary policy when a critical economic planning meeting wrapped up last night. The annual Central Economic Work Conference ended with a statement saying that taxes and fees will be cut on a “larger scale” in 2019, and that “prudent monetary policy should be neither too loose nor too tight, keeping liquidity reasonably ample and improving the monetary policy transmission mechanism.”

Leaders including Xi Jinping are expected to loosen policy in the year ahead, slowing down an effort to reduce domestic leverage in the face of a decelerating economy and an external trade shock.

Bottom Line: With financial markets caught in a psychological doom loop, today’s strong-but-clearly-decelerating economic numbers will do little to reverse the cycle. With markets suffering the biggest losses since the global financial crisis, and a decade-long expansion losing momentum, and streets Wall and Main look set to end the year on a grim note.

Note: With both the Advent and economic data calendars winding down, our Market Wires will become less frequent until early January. Happy holidays!

Karl Schamotta
Chief Market Strategist

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