BMO Financial Group

BMO Financial Group
BMO Harris Private Banking

BMO Harris Private Banking

August 17, 2012 07:30 ET

Harris Private Bank Report: Housing and Manufacturing Adding Momentum to U.S. Recovery

- Housing and manufacturing sectors showing signs of life

- Americans focusing on increasing household savings and paying down debt

- Foreign markets continue to face a number of fiscal challenges

- Growth in profits will pick up following lower energy and commodity input costs in third quarter

TORONTO, ONTARIO and CHICAGO, ILLINOIS--(Marketwire - Aug. 17, 2012) - While the U.S. economy continues to face an uphill recovery, a variety of sectors are witnessing significant growth, according to the Fall Outlook for Financial Markets report by Harris Private Bank, a part of BMO Financial Group.

The report revealed that in the second quarter of 2012, the U.S. economy slowed to an annualized 1.5 per cent growth rate - down from a 2.0 per cent pace in the previous quarter. However, there were some positive indicators:

  • The housing sector continued to stabilize as a result of low interest rates and early recognition of troubled loans.
  • The manufacturing sector made gains through inventory building, rather than user demand, focusing on stock as current inventory levels are below historic norms.

Overall, incomes in the U.S. rose 0.5 per cent, pushing the nation's savings rate to 4.4 per cent as consumer spending stagnated.

"This trend we're seeing toward saving and debt reduction, while good on an individual level, can have a disastrous effect on the larger economy if everyone does it," said Jack Ablin, Chief Investment Officer, Harris Private Bank. "Consumption accounts for more than two-thirds of domestic economic activity and, as such, is a major driver to this economic recovery."

Global Markets Face Numerous Challenges

The report also noted that the U.S. is not alone in its economic challenges, with China, India, Brazil and Europe all facing issues. The U.S. Treasury's benchmark 10-year note closed July at an all-time low yield of 1.47 per cent, and sovereign bonds in perceived havens such as Germany, Austria, Finland and Japan all reported 10-year yields below 1.5 per cent.

In the Eurozone - despite policymakers' best intentions - bond yields in Spain and Italy remain at crisis levels which could make a bailout necessary in both countries. Meanwhile, China and India posted slowed growth results in the last quarter; as well, Brazil also stalled in the face of its stronger currency.

Equity Markets Show Volatility

In the energy and commodity sectors, widespread declines caused profits to decrease more than 15 per cent; basic materials companies witnessed a profit setback of nearly 19 per cent. However, the report noted that reported growth in the U.S. should pick up once lower energy and commodity input costs filter into third quarter income statements.

The S&P 500 benchmark index gained nearly 12 per cent in 2012; however, foreign markets have had less positive results. The MSCI EAFE index of advanced economy stocks gained approximately five per cent this year, while emerging market equities have seen growth of slightly more than six per cent for the year.

Investors Wise To Consider Corporate Bonds

As investors clamor for U.S. Treasuries, anxious buyers have driven bond yields to record lows, virtually ensuring a negative return once inflation is taken into account,. With this in mind, Mr. Ablin encouraged investors to research corporate bonds as an alternative.

"We believe that if yields move higher, both corporate bonds and Treasuries could be subject to principal losses," said Mr. Ablin. "The incremental yield available in high-quality corporate bonds could buffer some of that pain, making the sector a sensible substitute for government bonds."

The full report can be found at:

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