Economic analysis


Vanishing wealth, pinching pennies and pipsqueak profits

EconowatchOn the day that General Motors declared bankruptcy, the Dow Jones Industrial Average surged by 220 points. Take a look at that again, if you would, because if some person from 1970 (or 1999 for that matter) were to step out of a time machine and read that sentence it would be unfathomable—like one of those hackneyed newspaper headlines in science fiction movies, meant to convey that The World Has Changed buddy. On the day that GM—once the biggest company in the world, and the very heart of American industrial power—collapsed into the arms of its new majority owner, the U.S. government, Wall Street traders were more focused on the ISM manufacturing index (up for a fifth straight month), and the fact that durable goods orders and incomes are on the mend.

That’s the perverse silver lining of the GM story: by the time it reached its sad climax, most had changed the channel. It used to be said that “as GM goes, so goes America,” but not anymore. In fact, it’s become clear that the old saying ought to be reversed: GM isn’t America so much as America is GM. And that is a problem.

Like GM, the U.S. government has gone a long time spending more than it makes, limping from crisis to crisis, piling on debt and failing to keep pace with more innovative competitors. GM believed for decades that its sheer size would ensure its survival. It didn’t have to worry all that much about innovation because millions of its customers would rather go to the local pub pantless than show up driving an import. Change was to be avoided whenever possible; quality was negotiable; and efficiency was something its weaker rivals needed to concern themselves with. GM believed it was too big to fail, and if you listen to the optimists—the ones who insist that runaway deficits pose no real threat to America’s global economic power—you will hear echoes of GM’s arrogance.

Uncle Sam has assumed responsibility for the future of the U.S. auto industry. The task is not about restoring GM’s glory days, because they are as far gone as the sublime 1957 Chevy Bel Air. This is about building an entirely new company for a completely new and competitive world. It can be done, but it will require less crisis management, more realistic objectives, less arrogance, and a fundamental commitment to new ideas and new products. It’s only fitting that GM now stands for “Government Motors,” because America’s economic challenges are much the same.

GRAPH OF THE WEEK: Vanishing wealth

For 20 years we’ve seen our collective net worth—which represents the value of what we own minus what we owe—surge like never before, as both stocks and house prices soared. But as this graph shows, that’s all over now, and now our wealth is evaporating at a frightening rate. In 2008 alone, more than $280 billion vanished, and the trend shows no signs of abating soon.

Vanishing wealth


Remembering ’91

Canada’s gross domestic product declined at an annual pace of 5.4 per cent in the first quarter—the worst plunge since 1991. Exports are down 30.4 per cent, and business investment fell at the fastest pace since 1982. It doesn’t sound like good news, but economists were expecting worse, and recent data suggests the first three months of this year were the recession’s nadir.

Hot commodities

Strategists like to joke that copper has a Ph.D. in economics because its rises and falls so often predict the direction of the economy, and right now the professor is pointing higher. Copper hit a seven-month high of over US$5,000 per tonne this week, on optimism that industrial production is slowly ramping back up around the world. Copper is now up 60 per cent this year, and other commodities, especially oil, aluminium and steel, are also sharply higher.

Feeling durable

Orders for durable goods (things that are meant to last at least three years) rose by 1.9 per cent in the U.S. in April—much more than expected. When combined with a fifth straight rise in the ISM manufacturing index, there’s new hope that American factories are slowly coming back to life.

In the money

The job market in both Canada and the U.S. is still dismal, but for the majority who have jobs, things are getting better. In the U.S., personal incomes rose 0.5 per cent in April, the first such rise since September. In Canada, employment income rose by 0.5 per cent in March, even as the number of jobs fell.


Pinching pennies

U.S. consumer spending edged 0.1 per cent lower in April despite rising incomes. For now, consumers are pocketing most of the tax relief and benefits flowing from the stimulus program, driving the savings rate to 5.7 per cent, the highest since February 1995.

Straw houses

Stop me if you’ve heard this one before: North America’s housing markets are still in rough shape. Existing home sales in the U.S. rose slightly in April but remain stuck in the range of 4.6 million, and prices are still drifting lower with inventories high. In Canada, median home prices are down 5.8 per cent from a year ago according to the Teranet-National Bank house price index, with Vancouver suffering the biggest drop of all major cities (down 9.6 per cent in a year).

Pipsqueak profits

Canadian companies reported total first-quarter profits of $55.1 billion, a decline of 11.8 per cent from a year earlier. That’s bad, but the worst damage was in the oil patch, where plunging prices drove energy profits down 33.5 per cent from a year ago.



  • There has been speculation for months that slowing container traffic on the high seas would delay the $US5.25-billion project to widen the Panama Canal. But project managers confirmed this week that they remain on schedule to complete the job by 2014 as planned. This is good news for Panama and for shipping companies, but bad news for port workers in Los Angeles and for U.S. railways, which will see some of their traffic disappear.
  • It should be safe to look at your next mutual fund statement. According to the Investment Funds Institute of Canada, mutual fund assets have rebounded by about five per cent since the end of March, reflecting increased fund sales as well as the rebound in world stock markets. Fund assets remain 27 per cent below where they were at this time last year, however.
  • Dow Jones & Co. dropped General Motors and Citigroup from its benchmark stock index on Monday—the same day that GM filed for bankruptcy protection. The move would have been unfathomable just two years ago, and removes two icons of American corporate power from the Dow. Robert Thomson, managing editor of the Wall Street Journal (which maintains the Dow), said he hopes that a restructured Citigroup might one day return to the index.
  • Food Banks Canada released a survey this week suggesting use of its services has risen by 20 per cent in the past year. According to the report, 704,000 Canadians accessed a food bank in March. The weak economy and widespread job losses are to blame.


The Canadian loonie recently chalked up its biggest monthly gain against the U.S. greenback in nearly 60 years, shooting up to more than 90 American cents. Economists attribute the upswing mainly to new signs of weakness in the U.S., rather than strength in Canada, and the surge seemed to catch most market-watchers off guard.

Don Drummond“We’re not seeing a big recovery in commodity prices, and this is a very important distinction from the last time the Canadian dollar went on a tear. So, in many respects, this hurts a lot more because Canadian producers don’t have the offset of high commodity prices.” —Don Drummond, chief economist, TD Bank

“The timing couldn’t be worse.” —Derek Holt, vice-president and economist at Scotia Capital

“Cleaning up the fiscal mess is going to take years . . . I think the U.S. dollar is going to remain on a fundamental downtrend, and the Canadian dollar against that backdrop will be on an uptrend.”—David Rosenberg, chief economist and strategist, Gluskin Sheff + Assoc.

“We’re forecasting parity, and we think we’ll hold around par until the early part of next year.”—Shaun Osborne, chief currency strategist at TD Bank

Avery Shenfeld“This is problematic for the Bank of Canada, which wants monetary conditions to be highly stimulative. If this currency rally persists, and is not accompanied by an equivalent rally in our export prospects, the bank could step in by selling the Canadian dollar.”—Avery Shenfeld, chief economist at CIBC World Markets

“We’re always concerned when there are fluctuations in the value of the Canadian dollar, and it has been relatively rapid in the past few weeks.”—Finance Minister Jim Flaherty


Wednesday, June 3: The Institute for Supply Management will report on the health of the U.S. services sector—which represents most of the U.S. economy. Manufacturing has been improving and analysts are expecting a similar gain from the services index.

Friday, June 5: Canada’s labour market report is expected to show modest job losses and a small increase in unemployment.

Tuesday, June 9: The manpower employment outlook for both Canada and the United States will be released.

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