U.s. Real Gdp Commentary

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TD Economics Commentary January 30, 2009

U.S.: GDP BAD, BUT IT COULD HAVE BEEN WORSE • • •

The U.S. economy shrank by a huge 3.8% Q/Q ann, but handily beats expectations. Weak consumer spending and slumping investment were the main culprits. All indications are that a turnaround in economic activity remains some way off.

U.S. economic activity declined by its largest margin since the early 1980s (and for the second consecutive quarter), falling by a huge 3.8% Q/Q ann. The decline, however, was far less than the 5.5% M/M plunge expected by the markets, and comes on the heels of the 0.5% Q/Q ann. in Q3. The main culprit this month was consumer spending, which declined for the second consecutive quarter, falling by 3.5% Q/Q ann. and subtracting 2.5 ppts from overall GDP, though the decline in spending was somewhat less than we expected. There was also weakness in investment spending, as gross private domestic investment subtracted another 1.8 ppts from GDP. On the other hand, the performance of net trade was somewhat better than expected with trade adding 0.1 ppt to GDP, which was in contrast to market expectation for net trade to be a significant source of drag in the quarter.

In terms of prices, indications of easing price pressure were everywhere, with the core PCE deflator rising by a modest 0.6% Q/Q ann., which is significantly lower than the 2.4% Q/Q gain in Q3, and was lower than the 1.0% Q/ Q gain expected by the markets. This may speak to a soft core PCE deflator for December, which is out next week. The GDP deflator was also weak, falling for the first time since 1954 with a 0.1% Q/Q drop, coming on the heels of the 3.9% Q/Q gain in the previous quarter. Despite the better than expected print on U.S. economic activity, the fact remains that the U.S. economic recession intensified in a fairly dramatic fashion in Q4. And with the financial sector turmoil and labour markets woes likely to continue for some time, we continue to believe that a recovery in economic activity remains some way off, with the recession expected to drag well into this year. This, despite the significant monetary stimulus that has already been administered to the U.S. economy, and the expected massive fiscal stimulus package that should be unveiled in the coming weeks. Millan Mulraine Economics Strategist TD Securities

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TD Economics Commentary

January 30, 2009