Saturday, April 4, 2009

The Weekly Bottom Line


  • U.S. sheds 663,000 jobs in March while the unemployment rate climbs to 8.5%
  • Canada's real GDP shrank by 0.7% in January
  • G20 summit yields concrete commitments

The U.S. economy lost another 663,000 net jobs in March, generalized across nearly all sectors of employment. Revisions to prior months only altered the January figure, bringing the job loss tally up by 86,000 for a total of 741,000. By U.S. standards, such a revision is not large. The average monthly job loss in the first quarter was a whopping 685,000. Meanwhile, the household survey revealed that the unemployment rate climbed from 8.1% to 8.5%. These combined data are not good news by any stretch of the imagination. Another chilling milestone was reached with this latest employment report: a net 5.1 million jobs have been lost since of the start of the U.S. recession. However, the bad news for March was anticipated as the figures were on par with consensus forecasts. And, of late, lack of surprise to the downside or of any significant deterioration from previous months' data have been enough to send equity markets rallying. This would be consistent with their typical behavior which tends to lead the actual economic cycle by a few quarters.

Other indicators for the U.S. economy have been showing mixed signs of late. Not that economic activity would be expanding, but rather that contractions might be stabilizing or, better yet, diminishing. Manufacturing activity is a case in point. The ISM index hit a three decade low of 32.9 last December, and stood at a slightly higher 36.3 in March. Recall that it needs to be above the 50.0 mark to signal an actual expansion in overall manufacturing activity. However, this measure is typically only back up in the mid-40 range by the time a recession is over. Trends in retail sales and personal consumer expenditures are other important examples, where most of the year-over-year declines were steepest late last year and have shown modest improvements in the first two months of 2009. Looking ahead to the second quarter which just started (Q2.09), the expected decline in U.S. real GDP will likely be significantly less than those of Q4.08 (-6.3%) and Q1.09 (estimated to be -5.8%). Our March forecast pegged the Q2.09 contraction at 2.1%. Early indications do point to some upside risk, but it would be premature to change our call in an environment were signals remain mixed at best.

Canadian output continued its slide

Canadian real GDP started off this year with nearly as weak a tone as it ended last year. Following a 1.0% decline in December, real GDP slid a further 0.7% in January, a sixth consecutive monthly decline. To get a sense of how pronounced the drop-off has been since August 2008, simply note that this brings the level of real economic output roughly back to that of December 2006. While broadly based across sectors of activity, the slide continues to be more acute in the goods sector, particularly in manufacturing and residential construction. As of January, real construction output had reverted back to mid-2006 levels, while real manufacturing output was back to 1998 levels. The difference lies mainly in the fact that, entering into this recession, real manufacturing output had been stagnant in Canada since 2002, while construction activity was booming. The one bright spot within manufacturing has been the increasingly important food sector, the output of which has been climbing steadily since 2004 and has, so far, held up to its 'recession-proof' label. As a result, its share of overall real GDP has climbed from 1.50% to 1.62%. This might not seem much, but contrary to widespread belief, it is significantly larger than that of, say, autos & parts combined (0.90%). The same holds true if one were to look at employment for these respective sectors.

Meanwhile, the larger, services-producing side of the economy is not left unscathed. Certainly, many services sectors have held up, but the more cyclical ones have been sideswiped. Hardest hit has been wholesale trade activity, down 12.3% from its peak, followed by transportation & warehousing, down 4.1%, and retail trade at 3.4% lower. These figures are indicative of just how large a negative U.S. and international trade shock the Canadian economy has been under, as much of wholesale, transportation, and warehousing activity is tied to cross-border trade flows, and how it is reverberating through the domestic side of the economy, i.e. retail spending. This shock wave and its consequent employment fallout, have not run their course, and will ripple through until at least the end of the second quarter. A significant manufacturing inventory buildup since September (+2.5% in volume as of January) attests to just that.


Political summits often conclude with statements that feed cynicism, containing a mixture of lofty goals, generalities, and platitudes. Not so at the latest G20 summit held in London this week, which actually yielded some clear and far-ranging commitments. Each member country seemed pleased with the outcome, not that this is always a sign of effectiveness. In this forum, emerging economies steadily increase their footprint on economic policy, in line with the actual repartition of economic weight, and specific measures are clear expressions of this evolving dynamic on the world stage. Furthermore, as other countries have increasingly taken note that Canadian financial institutions have held up well throughout the financial crisis, Canada has been able to play a prominent role, particularly in its co-chairing, with India, of an important G20 sub-committee on regulation. Markets were justifiably emboldened by the proposed regulatory changes and financial commitments. In the near-term, a pledge to expand the IMF's lending capacity by $500 billion and that of other multilateral development banks (MDBs) by $100 billion (e.g. Inter- American Development Bank (IADB) and European Bank for Reconstruction and Development (EBRD)) seemed to us the most important outcome, alongside another $250 billion in trade finance to be provided through these MDBs and domestic export credit agencies. While no silver bullet, these funds directly help to alleviate some of the systemic financial risks present in some Eastern European and other economies that we had explicitly flagged in our March Quarterly Economic Forecast ( http:// ). It is still early days, but when looking back at our list of five necessary pre-conditions to a sustainable economic recovery, notably a stabilization of U.S. housing and a diminishing aforementioned systemic financial risk, most of them still seem within reach. It remains a long and daunting 'to do' list, and the ensuing economic recovery is bound to be choppy rather than linear. While equity markets might have gotten ahead of themselves in March, their direction is not wrong in signaling that, one step at a time, we will get across this valley. During this crossing to a sustainable recovery, economic winds will be blowing in many directions at once. Keep your protective goggles handy.


Canadian Housing Starts - March

Release Date: April 8/09 February Result: 134.7K TD Forecast: 125.0K Consensus: 131.0K

The direction of the winds has clearly shifted in the Canadian housing market as a weakening domestic economy, mounting job losses and tighter lending conditions continue to temper housing demand. And it is now clear that Canadian homebuilders are adjusting their building activity accordingly, cutting new residential construction by double-digits in three of the last four months and in so doing took the actual number of new homes built to its lowest level in 9 years. Moreover, with these three key factors continuing to be at play in the Canadian housing market, we expect the correction in new residential construction to stretch into March, with starts reduced further to 125.0K. Both single-family and multi-family unit construction should post declines. In the coming months, starts are likely to edge even lower, and remain in these depressed territories as the weakening domestic economy and soft labour market conditions continue to place downward pressure on residential building activity.

Canadian Employment - March

Release Date: April 9/09 February Result: -82.6K; unemployment rate 7.7% TD Forecast: -50.0K; unemployment rate 8.0% Consensus: -50.0K; unemployment rate 7.9%

With a worsening domestic economic environment, the Canadian labour market appears to have gone into a downward spiral with close to 300K jobs being lost since November. By the look of things, conditions are only likely to worsen in the near term. In fact, with the constant flow of layoff announcements we expect the pace of job losses in Canada to remain very brisk. For March, our call is for an additional 50K positions to be eliminated from the Canadian payrolls, as businesses continue to reduce their workforce in the face of the worsening economic recession. The bulk of the job losses should come from the goodsproducing sector, with losses in the construction and manufacturing sectors being particularly acute. The servicesproducing sector should also post significant losses. Moreover, with job destruction continuing to outpace job creation, the unemployment rate should inch higher in March, rising to 8.0%. In the months ahead, given the weak economic fundamentals we expect the negative dynamics in the Canadian labour market to continue.

Canadian International Trade - February

Release Date: April 9/09 January Result: -$1.0B TD Forecast: -$1.6B Consensus: -$1.4B

The slump in the global economy has dealt a severe blow to the performance of the export-oriented Canadian economy, and unfortunately the pain is likely to continue for some time. In fact, with the global economic recession expected to gather steam in the early part of this year, global demand for Canadian exports is likely to weaken even further. For February, the story for the Canadian merchandise trade balance is expected to be the same - weakening export demand and soft commodity prices weighing heavily on exports. During the month, we expect the Canadian trade deficit to widen to $1.6B. Much of the deterioration is expected to come from declining automobile exports, which has suffered tremendously from slumping US demand. Weak commodity prices are also expected to be a drag on exports, which should fall a further 4.0% M/M. Imports are also likely to be weak, declining by 2.0% M/M, as softening domestic economic fundamentals continue to depress Canadian demand for imported goods. In the months ahead, we expect the trade deficit to widen even further as the global recession gathers traction.

U.S. International Trade - February

Release Date: April 9/09 January Result: -$36.0B TD Forecast: -$34.0B Consensus: -$36.5B

The dramatic retreat in crude oil prices over the past few months, along with weakening import demand has been a tonic for the U.S. international trade balance, as the trade deficit has plunged from a staggering $62.5B in July last year to $36.0B in January. This downward trajectory in the U.S. trade deficit is likely to continue into February as the two key contributing themes to this improvement have remained well entrenched. As such, for February, we expect the U.S trade deficit to fall to $34.0B, despite the double-digit jump in crude oil prices during the month. Indeed, with the U.S. trade deficit with China plunging a dramatic $5.5B during the month, the risks to this call are to the downside. In the final analysis, we expect both imports and exports to edge lower, with the decline in imports continuing to outpace the drop in total exports. Looking ahead, with the worsening U.S. economic conditions continuing to dampen import demand, we expect the U.S. trade deficit to perhaps improve even further.

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.