Economic analysis


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

EconowatchI’ve always believed that Canada is a nation of optimists. Now I know it for sure. For all the talk of the dangers of an “adverse feedback loop,” where consumers collectively get depressed about the wilting economy and make things worse by spending less, the numbers show that Canadians may already be spending our way out of this mess.

Earlier this week, Statistics Canada released a report showing that Canada’s real GDP increased by 0.1 per cent in June, the first monthly increase since July of last year. It was tentative cause for celebration, and it was interesting to see what was fuelling that uptick. It wasn’t manufacturing, construction, mining or anything so fundamental. Apart from the rising price of oil, Canada’s baby steps toward a recovery seem largely due to—surprise!—a bit of a consumer spending spree.

And we’re not talking about consumers switching back to brand-name margarine here, we’re talking about spending on big-ticket items like houses and cars. In June the Teranet-National Bank House Price Index recorded a surge in unit home sales. Meanwhile, auto purchases have been rocketing up, with a stunning 19 per cent increase in the second quarter over the first.

In that same quarter, however, Canada’s export sector chalked up its worst performance on record. It was so bad, it likely means that Canada’s economy is undergoing a permanent shift away from manufacturing. As TD Economics noted in a recent special report, “The global recession likely hastened some structural economic changes that were already under way—such as the shrinking of manufacturing in developed economies.” If TD’s right, that means many of those manufacturing jobs aren’t coming back, ever.

Given that grim news, why are Canadians spending again? Because our country is less and less dependent on making stuff. Manufacturing, as a share of our total GDP, has declined from almost 25 per cent in the 1960s, to less than 15 per cent today.

If you work in a factory, that’s terrible news. But for the country as a whole, it’s probably good. As TD’s economists write, “The manufacturing shift under way is positive for global potential output in the long run, even though the frictions created in the short term could be detrimental.” So the recession is helping by nudging us along in the direction we need to go anyway. See? The recession has a silver lining after all. Maybe you should celebrate with a new car.

GRAPH OF THE WEEK: House prices are rising again
On a month-over-month basis, the U.S. has seen house prices declining since 2006, while Canada’s have been falling for only a year. Both countries saw a big spike lately, though. Will it last? It likely depends on whether interest rates rise.

House prices are rising again


Homes sweet homes
Another week, another round of positive signs from America’s housing sector. New home sales beat expectations and rose 9.6 per cent in July from a month earlier. That works out to 433,000 new homes sold on an annual basis, though that’s far below the 50-year average. The resurgence in sales will be tested in December, when the US$8,000 new homebuyer federal tax credit expires.

(Slightly) bigger paycheques
Canada is still suffering from ongoing job losses, but those who are still working are bringing home larger paycheques. The average weekly earnings of payroll employees rose to $823.23 in June, up 1.8 per cent from a year earlier. The gains weren’t spread evenly, though. Wages in P.E.I. and Newfoundland rose the most, while Ontario saw the smallest gain.

A big story during this recession has been the collapse of America’s manufacturing sector. Finally, there’s some hope: the ISM manufac­turing index climbed four points to 52.9 in August. It’s the first time the index has climbed higher than 50 (which implies expansion) since January 2008. The question now is whether the sector can keep it up, without stimulus from the “cash for clunkers” program.


Room for improvement
Despite signs of recovery in the new home market, U.S. construction spending continues to fall. It was down 0.2 per cent in July from the month before, and down 10.5 per cent, year over year. Residential construction was up slightly in July compared to June, but it was still down a whopping 27 per cent from a year earlier.

More bad banks
Between March and June the number of problem banks in the U.S. jumped 36 per cent to 416, straining the Federal Deposit Insurance Corporation (FDIC) to the point where some are asking if the agency needs a bailout of its own. With the collapse of 81 banks so far this year, the FDIC now has less in its coffers that it has had in 16 years.

Wish you were here
Fewer tourists are coming to Canada and the ones that do are spending less while they’re here. Statistics Canada says spending on travel into Canada fell 1.6 per cent in the second quarter, to $3.8 billion. One reason: the number of Americans crossing the border for overnight trips fell 2.5 per cent to a 16-year low.

Glee to glum
Consumer confidence in America continues to see-saw. Last week the Conference Board registered an uptick in the national mood, but the University of Michigan consumer sentiment index just fell to its lowest level since April. The index was driven down by consumers who believe the economy’s present condition is deteriorating.



  • Even drug dealers are feeling the sting of the downturn. Some high-end cocaine dealers who once specialized in delivering to preferred clients are resorting to cold-calling former users to try and drum up business, reports New York magazine. But they’re finding few can afford the pricey drug. Even college kids aren’t interested, says one dealer.
  • I’m a PC, and sales are looking up. Computer maker Dell surprised analysts with strong earnings in its latest quarter, and it reported that it expects commercial PC sales to take off next year. Meanwhile, Intel boosted its sales forecast, citing strong demand for its computer chips. After a year of hard times and abysmal sales, it appears that things are finally getting better for the lowly desktop computer.
  • Call it the “cash for car seat clunkers” program. In the U.S., Toys “R” Us is offering shoppers a chance to turn in used baby products like car seats, cribs and strollers in exchange for a 20 per cent discount on new items. Toys “R” Us hopes to reverse a slide in sales of nearly 10 per cent this year as frugal parents have looked to hand-me-down items rather than buying new.
  • Men’s underwear sales are improving, and that can only mean one thing: the recession is almost over. Economists say that when the economy sinks, men tend to put off buying boxers. Because of that, sales are expected to fall by two per cent this year. But now the underwear index is on the rise, and thanks to the resurgence, retailers report that sales are expected to be off by just 0.5 per cent next year.


The Canadian economy grew for the first time in 11 months in June, eking out a 0.1 per cent gain, even as growth in the second quarter continued to fall 3.4 per cent on an annualized basis. The news brought more predictions that the recession is over. But with unemployment still rising, not everyone thinks it’s time to celebrate.

“Mark it on your calendar—the Canadian recession ended in June.”—Avery Shenfeld, chief economist, CIBC

“The monthly GDP numbers and the quarterly GDP numbers set us up for a very nice pop.”—Sheryl King, economist, Merrill Lynch Canada

William Downe“Fiscal and monetary stimulus in North America and abroad is kicking in, signalling that an economic recovery has begun.”—William Downe, president and CEO, Bank of Montreal

“If you’re out of a job in Canada, it doesn’t make any difference at all, does it?”—Finance Minister Jim Flaherty

“More and more, we’re looking at an incremental recovery, rather than a sharp V-shaped recovery.”—Stewart Hall, strategist, HSBC Securities

“This could be a very halting recovery.” —Douglas Porter, deputy chief economist, BMO Capital Markets

Don Drummond“Relative to what we all thought a year ago amid some of the biggest financial institutions falling apart, everybody’s got off a little bit lighter than we would have thought.”—Don Drummond, chief economist, TD Bank


Friday, September 4: Statistics Canada will report the unemployment rate for August. More job losses are expected.

Tuesday, September 8: The value of new building permits for July will be released by StatsCan. While still well below last year’s levels, a one per cent increase in June surprised analysts.

Wednesday, September 9: The number of July job openings in the U.S. will be reported. Hiring levels remain very weak.