Economic analysis


A weekly scorecard on the state of the economy in North America and beyond

EconowatchBeing right is much, much better than being wrong. In business being right can make you rich, and being wrong is often a firing offence. And right now, on Bay Street, Wall Street and in every other financial capital, the world is dividing into two camps. One is right, the other is wrong, and no one really knows for sure which group is which.

On one side are the bulls. They believe the worst of this economic and market crisis passed months ago, and the worldwide efforts to stimulate trade and commerce are working—not perfectly, but adequately. Sure, the recovery might be pretty anemic, and jobs will continue to disappear for some time. But by the end of the year, they say, the world will feel like a much more stable place. For the past three months, the bulls have been talking (and talking and talking) about “green shoots” and early signs of an economic spring. Fuelled by a strong rise in stock markets, this optimistic thesis has become the dominant storyline.

On the other side are the bears—grumpy pessimists with increasing hostility toward the happy talkers. The bears remain convinced that there is at least one more painful chapter to this downturn, and maybe more. This week, the economic gods seemed to confirm their warnings. David Rosenberg, Gluskin Sheff’s renowned chief economist and one of the dominant males in the bear clan, offered a list of five “brown shoots” suggesting that the market and the economy are headed for an unpleasant reality check in the months ahead. These include a surprise drop in consumer confidence in June; continued declines in U.S. house prices; deteriorating chain store sales at the end of last month; and the fact that the Canadian economy was still shrinking in April. Then came the 467,000 jobs lost in the U.S. in June—far more than expected.

Maury Harris, an economist with UBS in New York, issued a plea for calm on behalf of the bulls last week, urging clients not to read too much into last month’s labour market massacre. That about sums up the bullish case: this is but a pebble on the path to recovery.

Perhaps Mr. Harris and the bulls are right. We should certainly hope that they are. But commodity prices have lurched into reverse lately, and both the Dow and the S&P/TSX have fallen a little over six per cent since the beginning of June. That’s a swoon. We will soon find out whether it’s the beginning of a fall. Being wrong has never been such an unpleasant prospect.

GRAPH OF THE WEEK: Worse than we thought

In January, the Obama administration released a chart showing its forecast for the U.S. unemployment rate with and without the recovery plan. The line in red shows the actual unemployment rate since then. Some say this proves the stimulus package isn’t working—others say it proves we’re not doing enough.

Worse than we thought


Recovery pending
For the fourth straight month, pending home sales rose in the U.S., which could finally signal the end of real estate’s free fall. The National Association of Realtors’ pending sales index, which tracks contracts signed to buy previously owned homes, eked out a
0.1 per cent gain in May. Many experts took it as a sign that buyers are being lured back by low prices and attractive interest rates.

Better service
Coming on the heels of June’s brutal jobs report, an improvement in the ISM non-manufacturing index got no love from investors. Still, the index, which measures America’s service sector, rose to 47 from 44 in May, beating expectations. While the sector is still in negative territory (50+ equals growth), employment and exports both showed marked improvement.

GM rising
The company formerly known as America’s economic engine, or GM, got clearance from a judge to sell most of its assets to a new entity. The decision removes a major hurdle to GM’s emergence from bankruptcy protection. Good thing. Washington said it won’t offer any more bailout money after July 10.


Falling behind
Remember all that reassuring talk about how Canadians are better at managing our money than Americans? It’s getting harder to say that with a straight face. As of the end of May, the number of Canadians late in making their credit payments had shot up 19 per cent, to 450,000, according to Equifax. Things are especially bad in B.C. and Alberta, where delinquency rates rose 26 and 27 per cent respectively over the year before.

Gloomy again
Using words like “surprised” and “unexpected,” economists received word that U.S. consumer confidence slid in June after rising in recent months. The Conference Board’s consumer index fell to 49.3 in June from 54.8 in May.

Less bad still isn’t good
In April, Canada’s economy shrank by 0.1 per cent, marking the ninth straight monthly decline. While some took heart that the decline wasn’t worse, most signs point to at least another two months of contraction. Economists now expect the GDP in the second quarter to fall at a rate of three to 3.7 per cent.

Not so driven
Americans are sticking with their old wheels. U.S. vehicle sales in June plunged 28 per cent to 860,000 from the year before. Annualized, that’s about 9.5 million cars, far less than the decade average of 16 million a year. Washington’s new cash-for-clunkers program might get people buying, but it won’t come for another few months.



  • Can you hold it? The state of Virginia is planning to close nearly half of its roadside rest stops, and many other states are following suit. Cash-strapped governments argue the pit stops are increasingly irrelevant given the number of large gas stations dotting interstate highways. Unfortunately for the weak-bladdered traveller, the lowly rest stop has become an easy target for budget cuts.
  • Crabtree & Evelyn Ltd., the Connecticut-based company that sells expensive soaps, candles and fragrances, filed for bankruptcy protection in the U.S. Over the last 10 months, sales at its 126 U.S. outlets have been on the decline as consumers have avoided buying the kinds of pricey gifts the store is known for. It seems that in a recession, aromatherapy is one of those things that consumers can grudgingly do without.
  • Call it the Fourth of July fizzle. In cities across the United States, skies were dark after costly fireworks celebrations were cancelled by municipal governments desperate to save money. At least there was a small silver lining in Montebello, Calif., which decided to take it’s $40,000 fireworks budget and donate it to local food banks.
  • The gargantuan suburban home known as the McMansion has finally fallen out of favour. A survey of U.S. architects found fewer and fewer Americans are interested in more square footage and builders report more small homes under construction. With the recession, and given concerns about rising energy costs and an aging population with no children at home, smaller is better.


Many economists had expected American job losses in June to moderate at around 350,000, offering a further sign of recovery. Instead, last month another 467,000 jobs were lost, scorching any talk of a rebound. Some diehards still sought good news in the numbers. But as the U.S. moves perilously closer to national double-digit unemployment, the end of the recession seems as far off as it ever has.

“This was a very ugly labour market report, and there is no amount of lipstick that can improve its image. With conditions in the U.S. economy continuing to be very weak, there is little to suggest that a turnaround in U.S. labour market conditions is on the horizon.” —Millan Mulraine, TD Securities

“At no time in the 1990 or 2001 recessions did we ever come close to seeing such a detonating jobs figure, not even at the depths of those downturns, and yet we have a whole industry of ‘green shoot’ advocates today telling us that the recovery has already arrived. As always, the devil was in the details.”—David Rosenberg, chief economist and strategist, Gluskin Sheff & Associates

Dean Baker“People can’t spend when they don’t have the money.” —Dean Baker, director, Center for Economic and Policy Research

“We were on the road of things getting less bad in the jobs market, and that has been temporarily waylaid. But this doesn’t change my view that the recession will end later this year. We’re probably two months away.”—Ken Mayland, president, ClearView Economics

Peter Schiff“The only areas that showed any growth . . . were the already bloated sectors of education and health care. Our current economic problems will not be solved by hiring more teachers and medical technicians.”—Peter Schiff, Euro Pacific Capital


Friday, July 10: The U.S. trade deficit will be reported by the Census Bureau. Imports to the U.S. have been declining for the past nine months, a pattern analysts expect to continue.

Monday, July 13: The U.S. Department of Treasury will release its June budget, which will highlight an ever-growing federal deficit.

Wednesday, July 15: Statistics Canada will report manufacturing sales for May. Sales are down in recent months, but improving.