Economic analysis


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

EconowatchIt would be nice if the markets and trade and employment worked like mathematical equations. After all, economic reports are full of numbers and percentages. You’d think it’s primarily about math. But it isn’t really. Predicting an economy’s direction is not unlike forecasting the weather—it is subject to certain scientific fundamentals (i.e., the weather gets warmer when our hemisphere is tilted toward the sun, and the closer you get to the equator) and a whole lot of scientifically based guesswork (i.e., that low-pressure system should be gone by tomorrow afternoon).

Economics is even more inexact because it tries to foretell the behaviour of human beings—billions of them. And while our tendencies are roughly predictable over the long run, the short term can be incredibly messy, especially when fear gets involved. That’s why you can get synchronized global stock market plunges, like the one we saw early this week, and be at a loss for a credible explanation.

It started with a few rumblings last Friday over the surprise decline in U.S. retail sales in July. By Monday it was a full-blown commotion, fuelled by stories out of China suggesting the government was set to clamp down on borrowing to nip fears of a developing stock market bubble. In Shanghai, stocks tumbled by six per cent and every other market soon followed the downward trajectory.

That in itself wasn’t terribly surprising. Markets have been surging ahead for almost six months now, and there are plenty of reasons to think that investors have gotten too giddy too soon. By many measures, stocks are looking rather expensive given that the weather forecast is calling for a fair bit of cloud ahead as this nascent recovery moves forward. Prices for many consumer goods are still drifting lower; jobs are still being lost by the stadium-full; U.S. bankruptcy filings are up a staggering 37 per cent from a year ago.

But the real problem isn’t really rooted in any of those numbers; it’s in the very mixed messages that all of those figures send. Economists and politicians are increasingly upbeat. But all around, people can see the wreckage of the past 12 months, and they’re constantly warned that things won’t soon go back to the way they were. Does any of that make you feel like treating yourself to a new car?

Recoveries are based on faith not math. And faith is both fragile and fickle. This is what the meteorologists call “unsettled weather.” Translation: better bring an umbrella.

GRAPH OF THE WEEK: The rich are earning more than ever

A paper from University of California’s Emmanuel Saez shows an unprecedented disparity in U.S. incomes. As of 2007, the top decile of earners took home 49.7 per cent of total wages—a level higher than in any other year since 1917.

The rich are earning more than ever


In June, Canadian manufacturers clocked a 1.9 per cent increase in sales, shipping $39.7 billion worth of aerospace parts and oil products to customers. The news was cautiously welcomed by economists, who’d predicted only a o.2 per cent gain. At the same time, exports also rose 2.3 per cent to $29.3 billion, after sliding for four months. Most of the increase came from surging oil prices and not an increase in volumes.

Vive le recovery
Both France and Germany grew their economies in the second quarter, taking the first steps to lead Europe out of recession. The increase in GDP was meagre (just 0.3 per cent) but it was enough for German Chancellor Angela Merkel to declare that country’s recession “over.”

Beat it
U.S. companies are making less money than they were last year, but more than analysts thought they would. As earning season draws to a close in America, 72 per cent of companies that have reported results have beat analysts’ expectations. Take Wal-Mart. Even though sales fell 1.4 per cent to US$100.8 billion, it earned 85 cents a share, three cents more than expected.


A vote of no confidence
Are American consumers on their way back to the deep, dark days of last fall? Amid a worsening job market, the University of Michigan consumer sentiment index plunged nearly three points in August to 63.2, its lowest level since March, and not far from the three-decade low of 55.3 reached last November. The decline helped touch off a collapse in global stock markets.

Clunky sales
Despite the US$3-billion Cash for Clunkers program, U.S. retail sales still fell in July, down 0.1 per cent from the month before. Strip out the auto sector, and sales actually fell 0.6 per cent. Economists had been looking for an increase of 0.8 per cent.

Busted up
As Canadians struggle under a mountain of personal debt, a growing number are finding the weight too much to bear. The number of consumers filing for bankruptcy in June was 11,338, a stunning 52 per cent increase over June 2008. The average debt load of those going bust was $36,000.

Piling it on
Good news is often bad news wrapped in a bow. So it is with the surge in demand by foreign investors for U.S. Treasuries. Government debt sales rebounded to $90.7 billion in June. Economists hailed the “market stabilization,” but this just means Washington can pile on more debt, and is a sign of renewed anxiety over the health of the global economy.



  • If you’re a retailer during a recession, there’s no such thing as too early when it comes to Christmas. Normally, stores wait until at least after Halloween before breaking out the Christmas decorations. Not this year. In the U.S., Sears and Kmart stores have already launched Christmas campaigns, while Toys “R” Us has started selling discounted Christmas toys. At least they haven’t started playing carols.
  • If you’re visiting Vermont, you might want to keep an eye out for the Recession Ride Taxi. In this cab, driver Eric Hagen offers a “pay what you want” fare as well as a frequent rider card (pay for seven rides, get one free). This counterintuitive marketing strategy has been a surprising success so far. Hagen says he hasn’t been shorted by his fares and he’s even thinking of expanding his business.
  • Reader’s Digest, one of the world’s most popular magazines, said it plans to file for bankruptcy in the U.S. The move is part of an effort to restructure its US$1.6 billion in debt, much of which it accumulated when it was taken private in 2007. The magazine has been losing money for several years, but the recession, which has hit the media industry hard, wiped out any hope of a turnaround.
  • The downturn has put a lid on Canada’s thirst for coffee. The Canadian java chain Second Cup said it will close more stores than expected this year (as many as 30 compared to earlier estimates of 20), in an effort to improve earnings. Sales were off nearly five per cent as consumers cut back on discretionary purchases due to the recession, the company said in its latest quarterly results.


Exactly how does one go about withdrawing US$1.5 trillion in stimulus money from the economy? We may be about to find out. Last week the U.S. Federal Reserve vowed to wind down its US$300-billion program to purchase Treasuries. The move signalled the delicate first steps of the bank’s stimulus exit strategy, and economists seem nervous.

“Leaving a financial crisis is like leaving an awkward social gathering: a good exit is essential.”—Norman Bobins, professor, University of Chicago Booth School of Business and former Fed governor

Millan Mulraine“It appears that the [Fed] is slowly moving the U.S. economy from the intensive care unit to the recovery suite, where it will nurse the economy back to health.”—Millan Mulraine, economics strategist, TD Securities

“In a way, it’s more of a thumbs-up than if they had said they were continuing the Treasury-buying.”—Edward McKelvey, economist, Goldman Sachs

“We are confident they know how to exit, but a bit less confident that they will do so in a way that prevents inflation from rising in the medium term.”—Dean Maki, economist, Barclays Capital

Nouriel Roubini“Policymakers are damned if they do and damned if they don’t.”—Nouriel Roubini, economist, New York University

“To start the program in the first place was a clear policy error.”—Harm Bandholz, economist, Unicredit Markets

“The Fed can afford to pull in a few life rafts.”—Richard Yamarone, economist, Argus Research Corp.


Friday, August 21: U.S. existing home sales for July will be reported. Sales have been creeping upward in the past few months.

Monday, August 24: Statistics Canada will release retail trade figures for June. Following a surprise jump in May, analysts expect continued growth despite a weak job market and high debt levels.

Tuesday, August 25: The Conference Board in the U.S. will issue its consumer confidence survey for August. Sentiment remains low.