HIGHLIGHTS
- Canadian labour continues to hemorrhage jobs, unemployment rate up to 8.0% in March.
- Housing starts in Canada rebound in March.
- After a horrible January, Canada and U.S. both see trade balance improvement in February.
Slowly but surely data is pouring in enough to paint a fairly clear picture of the state of North American economies in the first quarter of 2009. Unfortunately, the image is not a pretty sight. Nothing speaks of the reality of the recession more than the state of the job market and for both Canada and the U.S. the losses in the first quarter of this year were near historic. In Canada, employment fell at a 5.5% annualized pace, the third worse quarterly contraction in the history of the Labour Force Survey back to 1966. Since then, the only period to see larger percentage declines in jobs in Canada was in the depths of the 1982 recession. In the U.S. you have to go back to the first quarter of 1975 to get job losses worse than the 5.9% annualized drop in Q1 of 2009.
Canadian job market continues steep descent
The carnage in the U.S. employment report of last week was echoed this week in Canada, where 61,300 (79,500 full-time) jobs were shed in March and the unemployment rate rose 0.3 percentage points to 8.0%. For the quarter as a whole, Canada lost over 239,000 jobs, a decline of 1.4% (or 5.5% annualized). The key source of weakness in the Canadian labour market remains the goods producing sector, led by manufacturing and construction. Manufacturing shed over 100,000 jobs in the first quarter of the year, outstripping either of the past two recessions, making this by far the worst quarter for manufacturing losses on record (even in percentage point terms the losses are roughly onethird worse than any single quarter in either the 1980s or 1990s recessions). The other big contributor to the fall-off in Canadian jobs was the construction sector, which shed 63,000 jobs in the first quarter. The two sectors combined represented 68% of the total jobs lost in the quarter. While the services sector held up better, it too shed jobs in the quarter, with most industries sharing in the losses. If the pattern in the U.S. is anything to go by, services employment could continue to show weakness in Canada. In contrast to Canada, job losses in the U.S. in recent months have been about equally split between the goods and services sectors of the economy.
The distribution of job losses showed once again that this is very much a national recession. While B.C., Alberta and Ontario led the way in terms of job losses, even the new stalwart of growth - Saskatchewan shed 0.5% of its job force in March. The two former powerhouse economies of B.C. and Alberta are now seeing the worst job losses their provinces have experienced since the recession of the early 1980s. While we often think of the 1990s as the last Canadian recession, this downturn was much less significant for the western provinces, who still managed to eke out positive economic growth and actually created jobs through the period that Canada was in recession (though they shed some of these as the rest of the country recovered). Not so with this recession. Since October, B.C. has shed 3.0% of its job force, while Alberta has lost 2.4%. Undoubtedly, the current environment reflects conditions that were unknown to many in western Canada. All told, while the first quarter likely represents the worst in terms of the magnitude of job losses and a slower pace should be expected going forward, the jobless ranks will nonetheless continue to swell across the country, pulling the unemployment rate up to 10% by early 2010.
Canadian housing starts blip up but more pain down the road
In addition to the stunning decline in Canadian employment over the last several months, the other sector to reveal just how quickly the economy can go from cruising speed to reverse is residential construction. Housing starts have fallen by over 26% since October of last year to 154,700 in March. While starts improved in March from 136,000 in February, this is likely a short-lived blip. The increase came mainly in the more volatile multiple segment, while single-family construction was roughly unchanged from February. Even with the increase, 154,700 is a far cry from the pace of construction just months earlier. As we outline in a report on our website this week, (http://www.td.com/economics/special/gb0409_housing.pdf) evidence of the overbuilding of homes through the last seven years, implies several more years of underperformance. A lagged recovery in the Canadian housing market and the important feedback from construction to job growth and from home prices to consumer spending, are two reasons to be cautious about the pace of the Canadian economic recovery even as world economic growth begins to improve. While starts will likely bottom at 115,000 at the end of this year, we believe it will be several more years before Canada sees start levels above 200,000.
International trade one step away from the abyss
While job losses and housing construction are two of the most watched economic indicators, equally important in the current environment is the performance of international trade. Perhaps more than any other indicator, the global synchronicity of the current downturn is evident in the unprecedented declines in global trade flows in the final months of 2008 and continuing into the first quarter of 2009. Data for February for both Canada and the U.S. showed a rebound in goods exports combined with a decline or smaller increase in imports, resulting in an improvement in the trade balance of both countries. However, this is small comfort when considering that falling imports reflect the weakness in domestic demand and even with the upward movement in exports, a steep quarterly decline is all but certain. Examining the monthly pattern, Canada is on track for a decline in real goods exports of close to 30% annualized and an even larger 35% decline in imports in the first quarter. In the U.S. the story is similar if slightly worse with both exports and imports looking set to decline by close to 35% in the quarter. These numbers will likely come in very close if not worse than anything that either country has seen before. Unfortunately, these are not the kind of records anyone wants to set.
UPCOMING KEY ECONOMIC RELEASES
U.S. Retail Sales - March
Release Date: April 14/09 February Result: total -0.1% M/M; ex-autos 0.7% M/M TD Forecast: total 0.5% M/M; ex-autos 0.2% M/M Consensus: total 0.3% M/M; ex-autos 0.1% M/M
Despite the ongoing job losses and wealth destruction caused by the plunge in equity markets since the onset of the global financial and economic crises, U.S. consumer spending appears to be regaining its footing in recent months. This has been made clear by the recent flow of personal spending reports, which have mostly surprised to the upside. This pattern is likely to continue in March. Indeed, with the 7% M/M surge in motor vehicle sales, higher gasoline prices, and somewhat encouraging same store sales reports, we expect total retail sales to rise by 0.5% M/M in March. Excluding auto sales, it should rise a more modest 0.2% M/M. However, despite the recent buoyancy in consumer spending, our bias is for retail sales to moderate in the coming months and to perhaps return to negative territory briefly, before the boost from the stimulus package kicks in.
U.S. Consumer Price Index - March
Release Date: April 15/09 February Result: core 0.2% M/M, 1.8% Y/Y; all-items 0.4% M/M, 0.2% Y/Y TD Forecast: core 0.1% M/M, 1.7% Y/Y; all-items - 0.1% M/M, -0.4% Y/Y Consensus: core 0.2% M/M, 1.7% Y/Y; all-items 0.2% M/M, 0.0% Y/Y
After teetering on the brink for some time, U.S. consumer price inflation is expected to finally take the plunge into negative territory for the first time since the mid-1950s. The drop in the headline index is expected to come on the back of the growing domestic economic slack and soft commodity prices. For March, we expect the headline index to fall by 0.1% M/M, with the annual pace of consumer price inflation dropping to -0.4% Y/Y. Core consumer prices are also expected to be soft, rising by only 0.1% M/M, with the annual pace of core consumer price inflation remaining unchanged at 1.7% Y/Y. In the coming months, as the U.S. economy continues to weaken we expect consumer prices to soften even further, with the headline rate of consumer price inflation remaining in deflationary territory. The threat of money growth is overrated given the plummeting velocity of money.
U.S. Housing Starts - March
Release Date: April 16/09 February Result: 583K TD Forecast: 520K Consensus: 550K
The U.S. housing market correction is well into its second year, and given that most key domestic economic fundamentals are weakening, we maintain our bias towards thinking that the adjustments will continue for some time. This, despite the recent flow of housing sector reports that appear to be pointing to some stabilisation in the sector. Indeed, with labour market conditions deteriorating at a very brisk pace, growing economic anxiety should continue to weigh heavily on U.S. housing demand. With this is mind, we expect the surprising gains in February to unwind, with the level of new residential construction falling to 520K. Most of the weakness is expected to come from the volatile multi-units component, which posted a staggering 82% M/M gain in February. In the months ahead, we expect new residential construction to remain very soft as the drag from the worsening domestic economy, tighter lending conditions, and the massive inventory of unsold homes continue to weigh heavily on new residential building activity.
Canadian Manufacturing Shipments - February
Release Date: April 16/09 January Result: -5.4% M/M TD Forecast: 4.0% M/M Consensus: 2.0% M/M
The Canadian manufacturing sector has been in bad shape for some time, and the ongoing global economic recession has only served to make a bad situation worse. The decline in activity in the past three months has been particularly sharp, and manufacturing sector sales have fallen by almost a quarter since July last year. The key factor pushing manufacturing sector activity lower has been soft U.S. demand, and the slump in demand for autos – which accounts for over 10% of overall Canadian manufacturing sector sales – has been the key source of weakness. However, with the staggering 18.9% M/M rebound in auto exports in February, we expect Canadian manufacturing sales to post a reasonable rebound. In February, we expect manufacturing shipments to post a respectable 4.0% gain, ending a record six consecutive monthly declines. In real terms, sales are also expected to be positive. However, the bounce-back in shipments are unlikely to last, and we expect Canadian manufacturing sector activity to moderate in the coming months as the worsening global economic recession erodes demand for Canadian manufacturing products.
Canadian CPI - March
Release Date: April 17/09 February Result: core 0.5% M/M, 1.9% Y/Y; all-items 0.7% M/M, 1.4% Y/Y TD Forecast: core 0.4% M/M, 2.1% Y/Y; all-items 0.6% M/M, 1.7% Y/Y Consensus: core 0.3% M/M, 2.0% Y/Y; all-items 0.3% M/M, 1.4% Y/Y
Despite the weakening domestic economy and soft energy prices, Canadian consumer prices gained considerable strength in the past month as higher food prices and shelter costs have pushed the headline index higher. The stickiness in consumer prices is expected to continue in March, with the headline index expected to rise by a further 0.6% M/M (up 0.3% M/M on a seasonally adjusted basis) on account of higher gasoline prices. On an annual basis, the rate of total consumer price inflation should climb to 1.7% Y/Y, from 1.4% Y/Y the month before. The Bank of Canada’s core consumer price index is also expected to edge higher, rising by 0.4% M/M (up 0.1% M/M on a seasonally-adjusted basis). The BoC annual core inflation measure is also expected rise on the month, increasing to 2.1% Y/Y, from 1.9% Y/Y the month before. Despite the uptick in March, with the Canadian economy likely to weaken further in the coming months, and commodity prices remaining weak for some time, Canadian consumer inflation should soften.
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.
