HIGHLIGHTS
- January's job losses kick off 2009 with a hiss
- Canadian budget and bigger U.S. stimulus built into TD Economics' forecasts
- Political wrangling over U.S. stimulus package: Buy American vs. Buy! Americans!
Some pieces of data you just can not ignore. The U.S. and Canadian job numbers out this week were two such examples. In Canada the drop in employment close to tripled consensus expectations, while in the U.S. a third straight month of job losses exceeding 500,000 have brought total losses to 3.6 million, making this recession the worst for jobs since 1982. The numbers put into sharp context the scope of this downturn and the difficulties North American economies will face pulling themselves out. All this as the U.S. congress wrangles over how best to stimulate the economy and concerns rise amongst America's trading partners that a Buy America provision would cut into world trade and further worsen the global economic situation.
January, the month of empty pockets...
For some time we have been tracking the relative performance of the Canadian job market compared to the overall economy and cautioned that after several months of job growth exceeding the growth in the number of goods and services produced, the risk of a turnaround was high. That fear was realized with the release of the January Labour Force Survey. Total employment in Canada fell by 129,000 jobs in the month, a whopping decline of 0.8%. No matter which metric you use to compare the data, the number is simply horrible. In percentage terms it is the worst single month of job losses seen in Canada since January 1975. For manufacturing, where the bulk of the losses took place, the fall exceeded 5% of total employment in the sector. Losses were primarily in full-time work and amongst core-aged adults, 25-54 years of age and came almost entirely in Canada's three largest provinces - Ontario, Quebec and British Columbia.
The extent of the losses is all the confirmation needed that the Canadian economy slipped into recession in the final months of last year. Since October, the Canadian economy has shed over 212,000 jobs, a decline of 1.2%. B.C. and Ontario have been particularly hard hit, falling by 1.9% and 1.8% since October, respectively. The unemployment rate in Ontario now sits at 8.0%, exceeding the national average by 0.8 percentage points - the biggest gap on record. B.C. too has taken its share of the lumps - the unemployment rate has risen a full 2.0 percentage points since January of last year, the steepest rise among the 10 provinces. Unfortunately, as bad as January was, it will not be the last of job losses to hit the Canadian economy. While the pullback in manufacturing is nothing short of dreadful, it reflects the extraordinary plunge in U.S. demand that has taken shape over the last year. What we haven't seen yet (but expect is around the corner) are increased job losses in the construction and services sector. All told, even if Q1 represents the worst of the expected quarterly declines, Canadian job losses are likely to exceed 320,000 before a trough is reached, pushing the unemployment rate to a peak of 8.8% nationally. The dramatic deterioration in the Canadian job market is further validation of our expectation that the Bank of Canada will cut interest rates by another 50 basis points when they meet next in early March.
While comparatively January's job losses in Canada were worse than those in the U.S., the extent of U.S. job losses can not be understated. For thirteen straight months the U.S. has been shedding jobs, but even worse than that, the pace of job losses has been worsening. For the first seven months of the recession, employment was dropping at a pace of close to 150,000 jobs per month, in percentage terms a decline of around 0.1%. But in the past three months monthly job losses have increased to over 500,000 (a decline of 0.4%). Already, cumulative job losses are worse than both the 2001 and 1990s recessions and with the peak-to-current sitting at -2.6%, we are edging ever closer to the 1982 peak-to-trough of -3.1%. In all likelihood that benchmark will be met later this year, making this recession the worst one for the U.S. labour market in over fifty years.
Economic Stimulus & TD Economics Forecasts
While signs of the increased depth of the North American recession have risen since our last Quarterly Economic Forecast, so too has the policy response. The passing of the Canadian Federal Budget and its $40 billion in spending over the next two years (equivalent to 2.5% of GDP) has led us to revise our forecasts for Canadian economic growth. We estimate that increased spending by Federal and Provincial governments will raise Canadian real economic growth by close to 0.5% in 2009 and a further 0.6% in 2010. These estimates are lower than those proposed by the Federal Government but we feel are also more realistic given the structure of the Canadian economy and its exposure to forces largely out of its control (i.e. growth prospects south of the border).
Unfortunately, the Federal Budget was not the only new piece of information to come into play since our December forecast. Data on Canadian economic performance in the final months of 2008 led us to revise down our forecast for growth in the fourth quarter of that year. The Canadian economy likely contracted by 2.8% compared to our December forecast of 1.4%. Moreover, signs of worsened conditions at the outset of 2009 have also lowered the near-term outlook. On net, the downside adjustments to near-term growth offset the upside from higher government spending. All told, the Canadian economy is likely to contract by 1.4% in 2009 before improving to positive growth of 2.8% in 2010.
In the U.S, the size of its fiscal stimulus package has also expanded. In our December Quarterly Economic Forecast we had built in an assumption of $600 billion. Since then the size of the stimulus plan has risen by over $250 billion. Recent talk is that the total stimulus could reach over $900 billion. Now, it must be noted that this total package encompasses spending over the next 10 years and much of it falls outside of our forecast horizon. Nonetheless, according to the CBO, over 64% of the stimulus should hit the economy within the next two years. With much of the government infrastructure spending (which is likely to have a bigger bang per fiscal buck than the front-loaded tax-cuts) tilted towards 2010, the fiscal package is expected to add 1.9 percentage points to 2010 growth and 0.7 percentage points in 2009.
UPCOMING KEY ECONOMIC RELEASES
Canadian Housing Starts - January
Release Date: February 9/09 December Result: 172K TD Forecast: 160K Consensus: 169K
The worsening domestic economic fundamentals and weak labour market conditions have not been kind to the Canadian housing market. Add to this the tighter lending conditions constraining access to credit and the growing consumer anxiety, and it becomes apparent why the weakness in the Canadian housing market is expected to continue for time. For January, our call is for residential construction activity to fall a further 7% M/M to 160K, as Canadian builders moderate their construction activity in the face of waning housing demand. The unusually cold and wintery conditions in January are also likely to be an important factor adversely affecting building activity. Both single-family and multi-family units should post declines. And given that we expect the labour market and domestic economic conditions to remain soft, further moderation in building activity should not be surprising.
Canadian International Trade - December
Release Date: February 11/09 November Result: $1.3B TD Forecast: $0.9B Consensus: $0.8B
Since the middle of last year, the Canadian merchandise trade surplus has been battered by the stunning 75% plunge in commodity prices, and further bruised by the onslaught of the intensifying global economic recession which has translated into shrinking U.S. and global demand for Canadian manufacturing products. Indeed, since reaching $5.6B in June, the Canadian trade surplus has steadily dwindled on account of these factors, and we expect this disturbing trend to continue. For December, our call is for the trade surplus to fall to $854M (its lowest level in almost 15 years) as the weakening U.S. economy and 20% drop in energy prices during the month more than offset whatever benefits may have otherwise accrued from the weaker Canadian dollar. During the month, exports should fall a further 3.5% M/M, which will be the fifth consecutive monthly drop in this indicator, while imports are expected to also decline, though by a slightly more modest 2.5% M/M. In the short term, we expect the trade surplus to drop even further with a growing risk that the Canadian economy may run its first merchandise trade deficit since the 1970s.
U.S. International Trade - December
Release Date: February 11/09 November Result: -$40.4B TD Forecast: -$36.7B Consensus: -$36.4B
Plunging energy prices have become a welcome boon for the U.S. international trade balance (and the economy as a whole), as it has single-handedly chopped one-third from the U.S. trade deficit between July and November last year. This despite the spectacular 17% surge in the trade weighted U.S. dollar during the same period. In fact, excluding trade in petroleum, the U.S. trade deficit has been virtually unchanged since July, and with crude oil prices plunging a further 22% M/M in December, we expect the U.S trade deficit to narrow further, falling to $36.8B and bringing of trade imbalance to its lowest level since 2002. During the month, we expect imports to fall a further 4.5% M/M, following the 12.0% M/M in November, while exports should fall a more modest 3.2% M/M. In the months ahead, with the worsening U.S. economic conditions continuing to dampen import demand, and crude oil prices likely to remain weak, we expect the U.S. trade balance to narrow further.
U.S. Retail Sales - January
Release Date: February 12/09 December Result: total -2.7% M/M; ex-autos -3.1% M/M TD Forecast: total -0.8% M/M; ex-autos -0.4% M/M Consensus: total -0.4% M/M; ex-autos -0.4% M/M
The distresses facing U.S. consumers are well documented, and there is precious little evidence that they are likely subside any time soon. In fact, with the number of job losses mounting, plunging equity and housing prices eating away at household wealth, and tighter lending conditions limiting access to credit, an argument can be made that things are only going to get worse for U.S. consumers before they get any better. With this in mind, we expect U.S. retail sales to decline for an unprecedented seventh consecutive month in January, with a further 0.8% M/M drop. However, with the headline number likely to be weighed down by the continued weakness in auto purchases, sales excluding autos should post a more modest 0.4% M/M drop. In the months ahead, we expect retail sales to remain quite soft as fallout from the prolonged economic recession continues to constrain U.S. consumer spending.
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.
