Economic analysis


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

EconowatchThings are getting a tad frosty in the world of high-level economics. U.S. Treasury Secretary Tim Geithner said this week that he sees “encouraging signs” in the global economy. But vague assurances aren’t enough for the growing backlash against America’s financial leadership, which has been characterized by half-measures and missteps since last September. The problem, as the critics see it, is that Geithner’s cautious optimism is focused on the symptoms of this crisis. Despite hundreds of billions in stimulus spending and bailouts, there has been little progress in treating the disease itself—which is rooted deeply in the U.S. housing market.

That disease is still getting worse, not better. The S&P/Case Shiller housing index fell another 2.2 per cent between January and February, prices in 20 major cities are down 18.6 per cent from a year ago, existing home sales fell three per cent in March and distressed home sales (including foreclosures and so-called “underwater” properties in which the mortgage is bigger than the value of the house) represented almost half of all transactions last month.

Not everyone is suffering, of course. The plunge in prices is opening up the market for young homebuyers who wouldn’t have been able to afford a house a few years ago. The National Realtors Association estimates half of all home sales last month involved first-time buyers. But for all the young families taking advantage of falling prices to realize their dreams, even more are facing the final act of a financial nightmare—being forced out of a home they can’t afford. New census figures show that home ownership among people under 35 has slipped to its lowest point in almost a decade.

That offers a glimpse of the complexity of the problem. Normally, falling prices boost demand and slow the supply of new homes, until the market reaches balance and prices start to rise. But the unprecedented flood of foreclosures has thrown that equation into chaos. Rather than cutting supply, falling prices keep driving more mortgages into default and dumping more homes onto the market. During the 1991 real estate recession, just 94,000 mortgages slipped underwater, 1.1 million lost their jobs and recovery was relatively quick. So far, at least six million U.S. mortgages are underwater and job losses are over five million and counting.

Forget swine flu. Real estate is the only disease that matters. Everything else is just a symptom. And we haven’t found a cure yet.

GRAPH OF THE WEEK: A total writeoff

By now, you’ve heard that Canada’s banking sector is the envy of the world. But our relative success is far more about what Canadian banks didn’t do, rather than anything they did. Below is a breakdown of total assets writedowns related to toxic investments since the crisis began. As international giants loaded up on mortgage-related junk, most Canadian banks stayed on the sidelines.

A total writeoff

Frugality fatigue

Confidence is a tricky thing, and it just keeps getting trickier. Most economists figure that a discouraged consumer will not spend, but recent polls suggest it’s not that simple. The latest TNS Canadian Facts poll found that while perceptions of the current economy are still weak, spending plans increased by nine per cent month over month. Similarly, the NPD group found economic perceptions among U.S. consumers declined slightly last month but the retail response indicator (which tracks whether people consider this a good time to buy) actually edged up modestly. Translation: the economy is lousy, but these bargains are too good to pass up!

Retail resilience

Canadian retail sales moved 0.2 per cent higher in February—a second consecutive monthly rise in the wake of a dismal holiday shopping season.

Clean up, aisle 4

For those keeping score at home, the top U.S. banking regulator believes “we are past the crisis stage” and into “the cleanup stage.” That’s not to say all the pain is over, though. FDIC chair Sheila Bair said the first phase of delinquencies was driven by bad mortgages, and the next will be driven by surging unemployment. And the scope of the “cleanup” is already huge: the FDIC has shut down 26 failed banks so far in 2009—more than in all of 2008.


Totally gross

The official announcement won’t be made for more than a month, but the Bank of Canada isn’t waiting around to break the news about the state of the domestic economy. Governor Mark Carney this week warned that the GDP likely contracted at an annual pace of 7.3 per cent in the first quarter. That would be by far the worst reading in decades. Preliminary numbers suggest the first three months of 2009 saw 273,000 jobs disappear on this side of the border.

Mass misery

Another measure of weakness in the U.S. job market came to light with the Labor Department’s report of 2,933 “mass layoffs” in March—the highest reading on record. Firings of 50 or more people at once are considered especially devastating because they have a large psychological impact on the communities in which they happen. Almost 300,000 lost their jobs in mass firings last month alone. And with GM announcing plans to cut another 21,000 factory jobs and to close more than 40 per cent of its North American dealerships, there are more mass firings on the way.

Not so durable

Remember that rise in durable goods orders in February? It didn’t last. March orders slipped 0.8 per cent last month and are down 23.6 per cent from 2008. With orders down and inventories high, production will stay depressed.



  • The European Central Bank is missing about 40 billion euros in cash, and it’s pretty sure it knows where it is: mattresses. The ECB noted this week that during the fourth quarter of 2008, just when the global economy was really starting to come off the rails, there was a surge in demand for European banknotes. Demand for 100-euro and 500-euro notes was especially high and those bills are “to a large extent used for hoarding,” the ECB said.
  • The Japanese government has come up with a novel, not to mention highly inflammatory, plan to ease the burden of unemployment. It is paying jobless immigrants to go back home. Japan is offering $3,000 for each foreigner of Japanese descent, and $2,000 for each family member, to return to their country of origin. Takers must sign an agreement not to return until the economy recovers.
  • One of the bright spots in Canada’s February retail sales report was a dramatic rise in sales at liquor and wine stores—a jump of 2.3 per cent from January to February. But economists say it’s not that Canadians are drowning their financial worries in booze—they’re likely passing up on trips out to restaurants and bars, and opting to drink at home instead, because it’s a lot less expensive.
  • This week’s sign of the apocalypse for the media industry: Condé Nast has shut down its glossy monthly business magazine Portfolio after just 21 issues. It’s been a great time for business news, but a lousy time for high-end advertising. And so, the company is walking away from its estimated US$100-million investment.


Next week the U.S. government will reveal results of the so-called “stress tests” aimed at gauging whether 19 major American banks have enough capital to weather a worsening economy. But many critics are already slamming the tests, noting that the banks’ own models for capital adequacy failed in the midst of this crisis, so why should anyone believe that the government can get it right this time?

“The vast majority of banks have more capital than they need to be considered well-capitalized by their regulators.” —Tim Geithner, U.S. treasury secretary

“Transparency is critical. While banks have pushed to keep the kimono closed, the stress tests have forced it open.” —Bill Brown, former managing director at Morgan Stanley

Josh Rosner“It took 10 years to come up with Basel II, and the models failed. Is it credible that the Treasury and New York Fed could come up with an alternative stress test in two weeks?” —Josh Rosner, managing director at Graham Fisher & Co. Mike Holland“The stress test are, at best, a waster of time. At worst, they’re misleading and testing the wrong things. The idea of using some level of unemployment to say whether Citigroup is not as strong as J. P. Morgan to me is laughable. And therefore I will be glad when this process is over.” —Mike Holland, chairman, Holland & Co.

“The reason for assisting banks is so that they can lend, not so that they can hunker down and hope the economy recovers. We need to hold the banks to a much higher standard and insist that they add enough capital to start lending even if the economy continues to deteriorate.” —Anil Kashyap, University of Chicago


Thursday, April 30: StatsCan will release Canadian gross domestic product for February. Since the Bank of Canada is already warning that the first quarter was a writeoff, little joy is expected. • The U.S. Commerce Department will report personal income and spending for March—small declines are expected in both.

Friday, May 1: The Institute for Supply Management will report U.S. manufacturing activity for March.

Tuesday, May 5: The ISM will report March service sector activity.

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