Economic analysis


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

As they have so often over the past few months, General Motors and Chrysler—the two most troubled of Detroit’s automakers—were at centre stage of the economy this week. The two companies outlined their plans for survival, which include a request for close to US$56 billion in emergency government aid. Up to $10 billion is to come from Ottawa and the Ontario government. The rest is expected to come from Uncle Sam.

In return for this public largesse, the automakers promise to maintain some manufacturing capacity in Canada, but it’ll be nothing like the glory days. GM has said it will cut its Canadian workforce to 7,000 by the end of next year (down from 20,000 in 2005), and will shut down more than 200 dealerships across the country. Chrysler wasn’t so detailed with its plans, but there is little doubt the cuts will be similarly drastic.

Politicians, union leaders and investors took all this in stride—little outrage, and no panic. After all, this had all been largely anticipated and “no worse than expected” is cause for relief these days.

The question that hangs over the car industry, however, is much the same as that which faces Congress and the entire North American economy: will these Herculean cash infusions make a lasting difference, or is it all just an effort to hold back the inevitable tide? President Barack Obama’s US$787-billion fiscal stimulus package has now passed Congress, but Wall Street has already lost interest—U.S. stocks tumbled to a 10-year low this week. The key concern is that just less than a quarter of the stimulus money will be spent this year. Most will land in 2010, and another US$200 billion or so will dribble in over the following nine years.

For now, according to a new survey for the National Association for Business Economics, most expect the economy to shrink substantially in 2009, and return to decent health in 2010. In other words, most expect this recession to be a bitter memory by the time three-quarters of the stimulus begins to take effect. And what will three-quarters of a trillion U.S. taxpayer dollars have bought? An economy that, with any luck, won’t be any worse than expected.



The latest numbers show little sign of price inflation on either side of the border. In Canada, the broadest “all items” index of consumer prices rose at a rate of 1.1 per cent in December, and in the U.S., prices are essentially at a standstill. That’s the slowest rate of inflation since the mid-50s.

Pay raises

The Conference Board of Canada’s survey of Canadian business found employers are planning to give average raises of 2.9 per cent for non-unionized workers and 2.7 per cent for unionized workers this year. That’s down sharply from the anticipated raises a few months ago. But in this environment the mere fact that workers can expect any raise at all, especially one that’s so far ahead of inflation, is welcome and surprising news.

Car prices

Anybody looking for a place to spend their raise will find great deals on new cars. Über-auto analyst Dennis DesRosiers issued his analysis of new car prices, and found that for a typical Canadian to buy an average passenger car it’ll now cost 18.2 months of before-tax income. That’s down from a peak of 24.1 months of income in 1997, and is the most affordable cars have been in Canada since 1985.


Retail sales

Receipts at Canadian shops were down 5.4 per cent in December, the largest monthly decline in more than 15 years. That was outdone only by manufacturing sales, which plunged eight per cent, the biggest monthly decline since records were first tracked in 1992. By comparison, the 3.4 per cent slip in wholesale sales (the worst since 2003) was small potatoes.


The CMHC released their latest numbers on the outlook for the real estate market and they are, in a word, grim. The CMHC expects a 24 per cent decline in new house construction this year (following a 7.6 per cent decline in 2008), and sales of existing homes are projected to drop by 14.6 per cent. The numbers coming from the U.S. are even worse. Housing starts in January fell to their slowest pace in at least 50 years, according to the Commerce Department.


All signs on both sides of the border indicate that manufacturing is still mired in an epic slump. Canadian factories were operating at 77.4 per cent of full capacity in the third quarter of last year (and are almost certainly running at less than that now). Meanwhile, the so-called Philly Fed Index, which measures factory activity in the critical Philadelphia region, fell for the 14th time in the past 15 months, and now stands at its most depressed level since October 1990. New orders, shipments, and prices were all solidly in negative territory and appear to be getting worse.


Continuing claims for unemployment benefits climbed to 4.99 million people in the U.S. last week, which represents the highest number of people drawing benefit cheques on record, dating back to 1967. New claims for jobless benefits held steady at 627,000—near a 26-year high. The job situation continues to deteriorate around the world.


  • The childhood home of Federal Reserve chairman Ben Bernanke, on East Jefferson Street in Dillon, S.C., was sold at a foreclosure sale last week. The Bernanke family moved from the property more than a decade ago, but new owners fell behind on their mortgage last year. Big Ben declined to discuss the fate of his old stomping grounds.
  • Latvia has become the first country to officially slip into an economic depression. The Baltic nation’s GDP shrank by a staggering 10.5 per cent in the fourth quarter of last year.
  • Rural communities in the U.S. Midwest are complaining that vast fields of parked railcars are an eyesore and potential safety hazard. The five largest railroads in the U.S. have put close to a third of their boxcars into storage, an estimated 206,000 in all. If placed end-to-end, the Wall Street Journal calculates those parked train cars would stretch from New York to Salt Lake City, Utah.
  • How bad do times have to get for people to start drinking less? Now we have the answer. The U.S. Commerce Department reported that sales of beer, wine and spirits dropped by 9.3 per cent in the fourth quarter—the steepest decline in the 50 years that records have been kept, and four times as much as the overall drop in consumer spending. Beer took the hardest hit, plunging 14 per cent from the same period a year earlier.


Investors around the world were obsessed last week with the question of whether the U.S. government will, or should, nationalize some of the country’s major banks, including Citigroup and Bank of America. Proponents of the idea say it’s the cheapest and quickest way to recapitalize them, and point out that Sweden successfully nationalized part of its banking sector in the 1990s. Critics say it won’t work, and could collapse the U.S. financial system.

“What’s happening now is a growing sense that the federal government, in return for rescuing these institutions, will demand the same thing a private-sector white knight would have demanded—namely, ownership.”—Paul Krugman, Nobel laureate economist, and supporter of nationalization

“If you thought Lehman Brothers was a mistake, just stand by and see what nationalizing Citigroup or Bank of America would do.” —Bill Gross, chief investment officer at PIMCO

“The idea that government will fork out trillions of dollars to try to rescue financial institutions, and throw more money after bad dollars, is not appealing because then the fiscal cost is much larger. So rather than being seen as something Bolshevik, nationalization is seen as pragmatic.” —Nouriel Roubini, chairman of RGE Monitor and professor of economics at New York University

“So-called experts frequently cite the success of the Swedish experience with bank nationalization in the last decade. Nothing could be less relevant. Sweden’s population, economy and banking system are roughly the size of Ohio’s. Sweden’s largest bank is roughly 10 per cent the size of each of our three largest banking companies. Moreover, Sweden nationalized only Gota Bank—and that was after it had already collapsed.”—William Isaac, the former head of the Federal Deposit Insurance Corp.


Monday: The Bank of Canada will report gross domestic product for the fourth quarter of last year. Most observers are predicting a three per cent decline in GDP—that will almost certainly mean the final months of 2008 marked the official start of Canada’s recession.

• The U.S. will report personal income and spending.

Tuesday: The Bank of Canada will meet to set interest rates, with analysts expecting a cut of at least a 0.25 per cent, bringing the benchmark lending rate below one per cent for the first time ever. For reasons why, see above.