If predicting an economic recovery were as simple as 2+2= 4, it would be a cinch to pinpoint exactly where we are on the arc from recession to growth. Simply take the barrage of economic data bombarding us every day, punch it into a spreadsheet, and voila! In six months you’ll have your job back and your house will be worth 20 per cent more than it was last year. Congratulations.
It’s nothing like that, of course. The economy is a messy amalgam of contradicting inputs and outputs, raw human emotion and a whack of wild guesswork and flawed data.
Yet only a few weeks ago, most economists, after tallying up the evidence—improved consumer confidence, retail sales, factory orders and housing markets—believed the third quarter would mark the end of Canada’s recession. It was a view many Canadians were tempted to buy into (even if it didn’t jive with what they were experiencing first hand). Somehow it all just seemed to add up.
Only it didn’t. First came news that the economy shrank in August by 0.1 per cent, after flatlining in July. We won’t know until the end of this month how Canada fared in September, but the Bank of Canada’s forecast of two per cent growth in the third quarter looked overly hopeful. Now that Canada’s economy shed 43,000 jobs in October when it was supposed to add jobs, the bank’s forecast simply looks wrong. It’s becoming increasingly clear that Canada faces a longer and tougher slog to recovery than first thought.
The arithmetic of Canada’s recovery is likely to become even more disappointing as the U.S. powers ahead. Yes, America also suffered heavy job losses last month, pushing the unemployment rate above the double-digit barrier for the first time since the early 1980s. But the U.S. economy has already posted a respectable 3.5 per cent gain in the third quarter (even if it was largely paid for by Uncle Sam). Expect much hand-wringing in Canada in the coming months if the gap between the two countries continues to widen. After all, Canada’s economy was in a stronger position than the U.S. before the recession, and when the financial crisis hit, our banks didn’t fail, our housing market shook but did not collapse, and our unemployment situation never got as grim. Doesn’t that add up to something?
We shouldn’t get too hung up on that, though we inevitably will. What’s more important is to realize the economy is gradually improving. Just don’t count on any predictions of an early recovery.
GRAPH OF THE WEEK: More misery
Compared to past recessions, the misery index, which adds the inflation and unemployment rates to give a measure of the pain felt by the average consumer, isn’t so bad. But when you include losses in household net worth, the misery level has never been higher.
THE GOOD NEWS
Big businesses are regaining their confidence as the economy sputters back to life. For the second month in a row, the Conference Board of Canada’s confidence index posted a double-digit increase, climbing to a level not seen since 2007. More than half of survey respondents said they believed the economy will rebound in the next six months.
If you build it
The Canadian real estate market continues to gain strength, providing a foundation for the country’s economic recovery. Construction of new homes in Canada rose 5.4 per cent in October.
Less is more
If there’s a bright side to the recession, it’s that relentless cost-cutting by businesses has dramatically improved efficiency. The productivity of U.S. workers rose 9.5 per cent in the most recent quarter, more than four times the average growth rate over the last 25 years.
The all-important U.S. consumer is finally returning to high-end shops and discount stores alike. U.S. retailers reported a 1.8 per cent increase in sales in October, the best showing in more than a year. It was also the second straight month of gains for a sector that’s been badly in need of a boost.
Earnings are expected to fall 20 per cent across six major industry sectors in Canada this year. Hardest hit are retailers and food services, according to a recent forecast by the Conference Board of Canada. The transportation and warehousing sector has also been dealt a heavy blow. The lone bright spot is food and beverage manufacturing, which posted a small annual gain.
No more loans please
The amount of U.S. consumer credit dropped by more than 7.2 per cent in September, marking the eighth straight month of declines. That was more than analysts had expected and suggests that U.S. households are opting to pay down existing debt instead of borrowing money to buy everything from cars to smaller purchases typically charged to credit cards. The concern is that the trend, if it continues, could slow any economic recovery.
Out of cash
Consumer bankruptcies in the United States are still rising, despite the early signs of an economic recovery. The number of people who filed for personal bankruptcy in October jumped nine per cent compared to a month earlier, as Americans grapple with continued job losses and high levels of debt related to credit cards and home mortgages. Overall, bankruptcies are expected to exceed 1.4 million in 2009, the highest level since 2005, and up nearly 30 per cent from last year.
SIGNS OF THE TIMES
- This holiday season the office bash is likely to be a much tamer affair, assuming you’re even fortunate enough to get one. A survey by Challenger, Gray & Christmas found only 62 per cent of American companies are planning to hold a year-end party, down from 90 per cent in 2007. Those that are also expect to cut back—roughly a third plan to spend less this year.
- Unemployed hedge fund managers and destitute real estate speculators can still channel their inner sommeliers. They just have to walk past the hot-dog warmer first. 7-Eleven in the U.S. has launched its own wine label, Yosemite Roads, with two offerings: a “fresh and zesty” Chardonnay and “full-bodied” Cabernet Sauvignon, both selling for a recession-friendly $3.99 each. What’s next? Merlot slurpies?
- Lavish golden parachutes are a thing of the past. Or not. When Stanley Works and Black & Decker Corp. merged their toolsheds last week, B&D’s CEO Nolan Archibald turned down a US$20-million severance. Don’t cheer this new era of corporate restraint yet. As executive chairman of the new company, Archibald is due US$45 million if costs (read: jobs) are cut by US$350 million over three years.
- In L.A., realtors are holding “open mansions,” a luxurious play on the old open house concept, as a way to unload multi-million-dollar homes in a dismal market. One 9,691-sq.-foot home is going for US$21.9 million. And being seen at “open mansions” is becoming a new pastime for the well-heeled crowd.
Each time it seems like the recovery is getting a toehold, another round of grim North American employment data sets it back. In Canada, roughly 43,000 workers lost their jobs in October, pushing the unemployment rate to 8.6 per cent. In the U.S., unemployment hit 10.6 per cent, the highest since 1983, after 190,000 more workers lost their jobs.
“The guy on the street is going to ask, ‘What recovery?’ ”—Stuart Hoffman, economist, PNC Financial Services Group
“The Canadian economy had been adding labour at a much faster pace than could be sustained.”—Ian Pollick, strategist, TD Securities
“Considering the lacklustre performance in the [Canadian] economy during the third quarter . . . it’s not a complete surprise to see firms maintaining a tight leash on staffing.”—Andrew Pyle, portfolio manager, ScotiaMcLeod
“What we have on our hands is the mother of all jobless recoveries” —David Rosenberg, economist, Gluskin Sheff + Associates
“The healing process will be a slow one, and [U.S.] households will be contending with weak income growth and balance sheet issues for some time.”—Joshua Shapiro, MFR Inc.
“It will probably be 2012 before there starts to be real job creation.” —Richard Trumka, president, A.F.L.-C.I.O.
“People are hurting, but if you can get past the sticker shock of the unemployment rate and look at the guts of the report, they are still very consistent with a recovery.”—Michael Darda, economist, MKM Partners
THE WEEK AHEAD
Friday, November 13: Statistics Canada will release new motor vehicle sales figures for September, which are expected to stay flat.
Monday, November 16: U.S. retail sales numbers for October are due out. Economists expect a 0.8 per cent gain over September.
Wednesday, November 18: The consumer price index will be updated for both Canada and the U.S., with both countries showing either flat or slightly negative inflation.