Lower, but steady, economic growth expected in Q4

This week brings the last significant snapshot of the U.S. economy in 2016. It’s expected to show continued moderate growth, a solid housing recovery and a nascent rebound for business investment.

Existing home sales have been on a tear lately, rising for three straight months and notching the highest level in nearly a decade in November. That strong reading likely reflects homeowners who scrambled to lock in low borrowing costs before a rise in interest rates, says Nomura economist Lewis Alexander. But, he notes, pending home sales fell modestly recently, indicating closings may have softened in December. Economists estimate the National Association of Realtors will announce Tuesday that existing home sales dipped 1.1% last month to a still-solid seasonally adjusted annual rate of 5.6 million.

New home sales also have been healthy, recording a 5.2% jump in November. Sales of new homes represent about 10% of the total market but help set the course of housing starts, a driver of construction employment and economic growth. Single-family building permits, a harbinger of housing construction, picked up noticeably last month, suggesting “that demand in the housing market remained steady,” Alexander says. Still, economists expect the Commerce Department to report Thursday that new home sales retreated slightly in December after the strong gain, slipping 1% to a sturdy annual rate of 586,000.

Fed: Economy grew modestly in late 2016

While housing has been a pillar of growth, weak business investment has been the economy’s biggest drag for nearly two years. The oil-price crash hammered crude producers and a weak global economy and strong dollar hurt U.S. exports. But last year’s climb in oil prices spurred the beginnings of a rebound for the oil industry. Capital orders for non-defense big-ticket items, excluding aircraft – a proxy for business investment – is down nearly 4% for the year but rose 0.9% in November and is up two straight months. Some economists believe the development signals a turnaround. Economists reckon Commerce will report Friday that those capital goods orders, the key component of its durable goods report, increased 0.3% in December.

That rebound in business capital spending helped the economy grow at a 3.5% annual rate in the third quarter, its biggest gain in two years. Yet it was mostly consumer spending that drove the expansion, with households benefiting from steady job and income growth, reduced debt and cheap gasoline. In the fourth quarter, business investment likely posted another modest gain while company stockpiling added to growth for a second straight quarter, Alexander says. Meanwhile, consumer spending is set to post another solid increase, but weak exports probably tempered growth. RBC Capital Markets says. Economists figure Commerce will report the economy grew at a 2.1% rate last quarter, in line with the recovery’s measured pace.