North American EquityStrategyOctober 16, 2013Page 3
U.S. economic growth accelerated in the second quarter to 2.5% from 1.1% in Q1, driven by strength in exports, personalconsumption and residential fixed investment. We expect another 2%+ print for Q3 GDP, as many key economicindicators are pointing to a slowly improving economy. For example, job growth has averaged 184,000 per month over thelast year, helping to push the unemployment rate down to 7.3%, while U.S. initial jobless claims are at the lowest levelssince 2007. The ISM Manufacturing and Service indices continue to improve, with the manufacturing index hitting over a2-year high of 56.2 in August. While auto sales dipped in September to 15.3 million annualized, this was likely do to thefact that there were two fewer shopping days in the month, with a bounce back in sales likely in the coming months(Exhibit 3). We remain constructive on U.S. auto sales given pent-up demand, which should support the manufacturingsector and industrial production into 2014. Additionally, we note that Edmunds, a U.S. auto industry forecaster, ispredicting new-vehicle sales to hit 16.4 million in 2014, the highest level since 2006. For the most part, economic data hasbeen coming in better than expected, with the exception of the housing market, which likely slowed down due to the surgein mortgage rates over the summer. We see the recent moderation in housing statistics as simply a pause in the recovery,as mortgage rates remain historically low, while affordability remains high. Overall, we see key areas of the U.S. economyimproving, which supports our reacceleration thesis. That said, the U.S. government partial shutdown has the potential todent growth in Q4/13, especially if the shutdown lasts longer than we anticipate. TD Economics believes the impact to theU.S. economy will be modest, and is forecasting the U.S. economy to grow at 2.6% in 2014, up from 1.6% in 2013.
Exhibit 3: U.S. Auto Sales Remain Strong; Housing Market Recovery Should Continue into 2014
U.S. Total Auto Sales (SAAR)
Source: Bloomberg Finance L.P. As of October 4, 2013
In Canada, economic growth slowed to 1.7% in Q2, in part due to the Alberta floods and a construction strike in Quebec(Exhibit 4). TD Economics is forecasting a rebound in economic activity in H2/13, as the impact from these one-off eventsdiminish. The outlook for the Canadian economy remains mixed, with weakness from the corporate sector (corporateprofits are down in five of the last six quarters), and exports, being offset by strength from the consumer and residentialconstruction. TD Economics is forecasting growth of 2.4% in 2014, up from the 1.7% expected this year, with growthexpected from the export sector, business capital investment and consumer spending. For us, the key risks to theCanadian economy remain the heavily indebted consumer (Exhibit 4), the “frothy” Canadian housing market and theresource sector, which is being impacted by slowing global growth, particularly in China. Overall, we see growth for theCanadian economy improving but see the potential for the U.S. to outperform the Canadian economy in 2014, which is in-line with TD Economics’ current forecasts.
Exhibit 4: Canada GDP to Improve Into 2014; Key Risk to Outlook Includes Heavily Indebted Canadian Consumer
Canada Real GDP Q/Q Annualized
Source: Bloomberg FinanceL.P., TD Economics. As of October 4, 2013
The U.S. and Canadian economies are expected to improve driven by growth in the labour market,manufacturing and housing for the U.S, and exports, business investment and consumer spending in Canada.
U.S. Existing Home Sales (LHS)S&P/Case-Shiller Home Price IndexSource: Bloomberg Finance L.P. As of October 4, 2013
(in millions) (in thousands)
Canadian Household Debt to Disposable Income Ratio
Source:Bloomberg Finance L.P. As of October 4, 2013