Sunday, November 9, 2008

The Weekly Bottom Line


  • U.S. recession hitting all sectors of the economy.
  • U.S. sheds 240,000 jobs in October. Unemployment rate at 6.5%.
  • Canada creates 9,500 jobs, unemployment edges up to 6.2%

Economic news took second stage this week to an historic occasion in U.S. political history. 2008 has already been a memorable year but the election of Senator Barack Obama as the 44th U.S. president will certainly earn it a prominent page in the history books. Unfortunately, as much as we'd like to ignore it, the economic data were a grim reminder of the dire state of the economy that President-elect Obama will face in his first year in office. From dour reports on the state of the manufacturing sector to a dismal payrolls report led by service sector job losses, the economic data out this week painted one bleak picture after another. While Tuesday's election provided enough of a distraction for equity markets to provide for a one day rally, it was short lived and markets quickly gave up the gains (and more) as the week closed out.

U.S. manufacturing in a slump... services too...

Proof that the U.S. recession has hit every sector of the economy was on display throughout the week, no more so than in the October results of the ISM manufacturing and non-manufacturing Purchasing Managers Indexes (PMI). With anything below 50 indicating contraction, the manufacturing headline index showed a stunning drop to 38.9, the lowest level the index has reached since 1982. Indicators of current conditions in the manufacturing sector showed deep contraction. What is more, the forward looking indicators also fell to new lows, with new-export orders showing their worst performance since inclusion in the report.

Just as worrying as the decline in the manufacturing PMI, was the performance of the larger non-manufacturing index, which reached a new all-time low in October. The details of the report foreshadowed the results of Friday's payroll report, showing a steep drop in output and employment in the U.S. service sector. Perhaps the only good news out of the report was the drop in prices, reflecting the fall in energy prices in the last few months. With prices falling and output contracting, the Federal Reserve will have an easier time adding further monetary stimulus. But with interest rates at 1.0%, their main constraint is no longer inflation but the 0.0% nominal interest rate bound.

Brother can you spare a job?

If there is one statistic that President-elect Obama will certainly have in mind as he prepares his transition team, it is the state of U.S. employment. He can't be happy with what he's seeing. The U.S. economy has shed jobs every month this year and the numbers have only worsened as the year has gone on. Not only were there 240,000 jobs lost in the month of October but revisions to the previous two months added another 179,000 job losses to the ledger, moving total losses so far this year to 1.2 million. Year-to-date there are only 139,000 fewer losses so far this year than in the same period in 2001 and the worst is yet to come. Job losses, which started out in manufacturing and construction at the start of the year, have now moved to the service sector. While service sector job growth was positive over the first seven months of this year (offsetting some the substantial weakness in manufacturing and construction), they slipped into negative territory in August. Since then, job losses in services have outpaced the goods producing sector and have contributed over 56% of total job losses in the past three months.

A greater pace of job losses paired with unprecedented declines in household wealth and restricted credit conditions (illustrated once again this week by the Fed's Senior Loan Officer Survey) sets the stage for the worst contraction in consumer spending since 1980. The downward spiral of falling spending leading to greater job losses, lower production and a further deterioration in credit quality, underscores the need for government intervention. Federal Reserve Chairman Bernanke has recognized this and called once again for a second wave of fiscal stimulus. This will likely become one of the first actions of the new administration upon taking office in January. A substantial package totaling over $150 billion and including spending on infrastructure, financial aid to state and local governments, an extension in unemployment benefits, and personal income tax breaks looks increasingly likely and necessary in order to get the economy moving once again.

Brother can you spare an election?

This week, Quebec's Liberal government also got election fever and will send Quebecers to the polls on December 8th. In an election focused on the economy, Premier Jean Charest can point to Friday's Labour Force Survey for the positive (albeit temporary) stimulus provided by an election call. The Canadian election held in October was a boon to job growth in the month, helping add 40,000 public administration sector jobs. Unfortunately, outside of the public sector job growth was more disappointing with 11 of 15 sectors posting losses and the unemployment rate edging up to 6.2%. Going forward, outside of the likely positive contribution of the election to job growth in Quebec, employment looks to be heading lower in Canada. Real GDP likely fell in October and is expected to decline by 2.6% (annualized) in the fourth quarter of the year. With many of the previous sources of job-market strength in Canada losing steam, losses are likely just around the corner and will see the unemployment rate move up above 7% next year.

Bank of England takes a hatchet to interest rates, ECB prefers a scalpel

While all eyes were on the U.S. this week, European central bankers made every effort to make their presence felt. On Thursday both the Bank of England and the European Central Bank cut interest rates – the BoE by a whopping 1.5 percentage points and the ECB by a more measured 0.5 percentage points. The English and European economies have taken a dramatic turn for the worse and, as in the United States, inflation is no longer the boogie-man it once was. These actions are not likely the last and as growth continues to be moribund through the remainder of this year and with more room to cut than their counterparts in North America, further and likely substantial rate cuts should be expected.


Canadian Housing Starts - October

Release Date: November 10/08 September Result: 219K TD Forecast: 200K Consensus: 205K

The Canadian housing market boom is over, and our forecast is for leaner times ahead. Indeed, with a sluggish domestic economy and tighter lending conditions, Canadian housing activity should continue to cool, though the moderation in activity is expected to be both measured and orderly. For October, we expect Canadian residential housing starts to fall to 200K, from 219K in September. Most of the declines are expected to come from the volatile multiunit component, though single-unit starts are also likely to be lower. In the coming months, as builders slow down on the pace of new building activity, we expect residential housing construction to remain subdued, with starts sitting roughly within the 190K to 210K range.

Canadian International Trade - September

Release Date: November 13/08 August Result: $5.8B TD Forecast: $5.1B Consensus: $5.0B

Slumping commodity prices and diminishing export opportunities will likely weigh heavily on Canadian exports in the coming months. And in September we expect the trade surplus to decline to $5.1B, on account of weakening exports. Declining commodity prices, which have fallen by 6.9% M/M in September, and waning export demand for auto products should be the main catalyst for the weakness in exports, which we expect to drop by 2.5% M/M. Imports are also likely to be weak, though they should fall by a more modest 1.0% M/M. In the coming months, we are likely to see further deterioration in the Canadian trade surplus, though the soft Canadian dollar will likely provide some partial offset.

Canadian Manufacturing Shipments - September

Release Date: November 14/08 August Result: -3.7% M/M TD Forecast: -2.5% M/M Consensus: -2.0% M/M

After the surprisingly strong performance in the early part of the year, the Canadian manufacturing sector appears to have hit a soft patch, and may be in for some harder times ahead. For September, our call is for a further 2.5% M/M drop in manufacturing shipments, following the rather dramatic 3.7% M/M decline in August. Most of the weakness should come from the energy sector, while weakness in the auto-related sector is also likely to play a crucial role. In real terms, however, the decline is expected to be less profound, as most of the fall in the headline number is likely to be due to price effects. Over time, Canadian manufacturing sector activity should decline even further as the weakness in Canadian and the U.S. consumer spending dampens demand for Canadian manufacturing products.

U.S. Retail Sales - October

Release Date: November 14/08 September Result: total -1.2% M/M; ex-autos -0.6% M/M TD Forecast: total -2.0% M/M; ex-autos -1.0% M/M Consensus: total -1.5% M/M; ex-autos -1.0% M/M

U.S. households have been hit hard by the weakening domestic economy, worsening labour market conditions, and continuing financial crisis. And with the plunging stock market hitting consumers particularly hard in October, we expect U.S. retail sales to fall by a sizeable 2.0% M/M in October. However, given that much of the weakness in the headline number will be due to the 15.5% M/M plunge in car purchases, sales excluding autos should post a more modest 1.0% M/M drop. In the months ahead, we expect the downward trend in retail sales to continue as U.S. consumers constrain spending further as the growing economic and financial crises take hold.

TD Bank Financial Group

The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.