The Canadian economy has answered a lot of questions for us in the past few months. Our housing market stumbled, but didn’t go into free fall. Our mining, manufacturing and construction industries suffered, but did not collapse. Retail sales slowed, but you won’t see row upon row of boarded-up stores when you venture out holiday shopping next month. And, of course, it turns out our banks are a fair bit more solid than many gave them credit for.
All of that must qualify as welcome and somewhat surprising news, and the latest bit of encouragement came last week with the release of September jobs figures. As the kids headed back to school, the employment situation in the U.S. continued to worsen—another 263,000 jobs vapourized as the world’s largest economy searches for a way to staunch the bleeding. But in Canada, 31,000 jobs were created, a second straight month of improvement, far outpacing even the rosiest projections on Bay Street.
Even the details were encouraging. Whereas recent months had seen only gains in part-time work and self-employment, this time the hiring was driven by full-time jobs. The most embattled sectors (manufacturing up 26,100, construction up 24,600) were the ones showing the most dramatic turnaround. And Ontario, the province that has suffered the worst by far in this downturn, saw employment rolls swell by 62,000 full-time positions.
Another question answered, right? Well, maybe. There remains one huge element of uncertainty in this recovery, and the rosy jobs figures point directly to it. In September the gains were led by the public sector, while private employers laid off another 17,000. In other words, this surprise surge in employment represents your tax dollars at work. The stimulus spending is indeed doing its job, creating publicly funded infrastructure and building projects that serve to bolster economic activity when it’s needed most. But everybody knows that a government can’t single-handedly drive an economy for long, and that is precisely what it’s doing now.
That is the one question that remains, and the only one that matters: what happens when the stimulus stops and interest rates rise? We’re going to have a huge debt to pay, and that’s when we find out exactly what is left of private sector demand, and just how deeply we are tied to the fate of our number one trading partner. Perhaps we will be pleasantly surprised again.
GRAPH OF THE WEEK: No more easy money
With tightened lending and mounting job losses, the amount of consumer credit outstanding has plummeted. U.S. households are retrenching, which is good, but until consumers start borrowing and buying again, a real recovery may be a long way off.
With interest rates at record lows, and house prices a shadow of their former selves, Americans are diving back into the housing market. An index that tracks U.S. mortgage applications surged last week by 16.4 per cent to its highest level since May, according to the Mortgage Bankers Association. Rates on a 30-year fixed mortgage have dipped below five per cent, a four-month low.
Debt be gone
America’s new-found frugality isn’t good for carmakers and restaurants, but it’s working wonders for households’ shattered balance sheets. The amount of consumer debt outstanding fell $11.9 billion to $2.46 trillion, the seventh straight monthly drop. The biggest decline showed up in credit card debt, which fell $9.9 billion, or 13 per cent.
There is a glimmer of hope for U.S. retailers. The biggest chain stores in the country posted their first sales increase in a year, jumping 0.6 per cent in September compared to the same month last year. The result was higher than expected, and a hopeful sign leading into the all-important holiday shopping season—though analysts still caution that overall sales may remain weak.
Canada saw exports and imports fall in August as it posted a trade deficit of $2 billion. Exports declined 5.1 per cent and imports were off 2.8 per cent. It was the fifth consecutive month the country has recorded a trade deficit. The biggest decline was in the export of aircraft and telecommunication equipment. The trade surplus with the United States also narrowed.
After promising signs that Canada’s housing market has stabilized, the number of new housing starts fell 4.6 per cent in September. The Canadian Mortgage Housing Corp. said the drop was the result of a slowdown in multi-unit home construction.
The Canadian dollar surged past US97 cents this week. Analysts now say it could reach parity with the U.S. dollar within the year. While the rising loonie is a vote of confidence in the Canadian economy, it could also further dampen trade and restrict overall economic growth going forward.
The number of Canadians filing for bankruptcy in August was up 37 per cent compared to the same period last year. The bankruptcy rate showed some improvement compared to July, but economists warn that the numbers are still very weak, especially in a month that traditionally sees fewer filings.
SIGNS OF THE TIMES
- The Italian fashion design firm Gianni Versace is closing its boutiques in Japan after 30 years. The move reflects the deep slump in demand worldwide for luxury goods, like Versace’s pricey handbags. Louis Vuitton has also seen sales fall in Japan—once one of the most important luxury markets in the world. It recently cancelled plans to open what would have been its largest store in Tokyo.
- Google has long been known for the generous perks it grants employees, like the free meals at company cafeterias. But in the wake of the recession, the company is looking to change that image. In the current climate, employees are simply grateful for their well-paying Google jobs, company CEO Eric Schmidt said recently. Google co-founder Sergey Brin echoed those comments, adding, “I think it’s important to reset the culture from time to time.”
- The U.S. has launched some ambitious stimulus programs—like cash-for-clunkers and the home tax credit—aimed at getting consumers spending again. Now, some economists and politicians are floating the idea of a whole new kind of program—a tax credit for companies that create new jobs. Economists say a little help from Uncle Sam might be the one thing that can get companies hiring again.
- At least one banker is still trying to atone for his industry’s role in the financial crisis. Stephen Green, chairman of the global banking giant HSBC, said in a recent interview that the banking industry “owes the real world an apology.” It also needs to learn lessons about not just governance, but ethics and culture, he said.
In what is the surest sign yet that the Canadian economy has finally turned a corner, the unemployment rate fell to 8.4 per cent in September, from 8.7 per cent the previous month. The economy added 31,000 jobs, beating even the most optimistic forecasts. It was the largest increase since May 2006.
“This was undoubtedly a strong report, and suggests that positive momentum in the Canadian labour market is gaining steam.”—Millan Mulraine, economist, TD Securities
“At 8.4 per cent the unemployment still implies considerable slack in this economy.”—Dawn Desjardins, assistant chief economist, RBC
“Even though we have some good jobs news today we are not out of the woods yet . . . Just as Canada was dragged into recession through no fault of our own, our recovery could be affected by economic events beyond our borders.”—Prime Minister Stephen Harper
“This is the sound an economy makes when [it] recovers.” —Douglas Porter, deputy chief economist, BMO Capital Markets
“Canadians can be thankful that public stimulus spending propelled a surprisingly strong labour-market rebound in September.”—Erin Weir, economist, United Steelworkers
“We’re on the road to recovery but it’s definitely going to be a slow road.”—Meny Grauman, economist, CIBC World Markets
THE WEEK AHEAD
Friday, October 16: Statistics Canada will report its Consumer Price Index for September. The index has been declining this year.
Tuesday, October 20: Retail sales figures for August will be released by Statistics Canada. Sales fell unexpectedly in July after two months of gains, but analysts expect more growth again.
Tuesday, October 20: The U.S. Census Bureau will report new housing starts for September. Starts were up slightly in August.