Sunday, May 17, 2009

The Weekly Bottom Line


  • U.S.: April retail sales -0.4% m/m; CPI -0.7% y/y
  • Canada: March manufacturing shipments -2.7% m/m
  • March trade: Canada surplus rises to $1.1bn; U.S. deficit widens to $28bn

A funny thing happened on the way to the recovery. It turns out the global economic mending process is more of a meandering creek than a beeline back to the top. This does not mean recovery is not happening, but the data certainly shows why it will take time. U.S. consumers are moderating the pace at which they moderate their spending, but they are still spending less. U.S. industrial production fell less than expected in April, but businesses continue to produce less. Canadian new auto sales were unexpectedly strong in March, but manufacturing shipments fell and were broadly weak.

Race to the bottom

Estimates for first-quarter GDP continue to roll in around the world, and they are none too pretty. The Russian economy shrank by 9.5% in the first three months of 2009, nearly twice as bad as its worst quarter during the 1998 crisis (all numbers reported are unannualized). The Hong Kong economy shrank by 4.4% in the first quarter and nearly 8% over the last year. The Eurozone reported a 2.5% Q1 contraction, with Germany feeling the brunt with a 3.8% decline. All of this makes the U.S. reported 1.6% contraction look good by comparison. All told, the US, French, UK, and Canadian economies (given our expectations for Canadian data to be released June 1st) have now returned to their mid-2006 size. The German economy is now as big as it was in late 2005, while Italy and Japan (whose data will be released next week) have lost five years of economic growth. Across the G-7, it’s as if the last several years didn’t happen. If only that were the case, but, if Star Trek can reboot and start anew, why not the global economy?

Under the hood

A reboot is very different from a rewind. A rewind insinuates you are going to do things the same way all over again. A reboot is a fresh start, and while the cast may stay the same, the path taken will almost certainly diverge. Markets were hoping the U.S. consumer might be able to eke out a flat reading for April, but U.S. consumers once again pulled back on spending on a fairly broad basis. As the chart on the first page shows, the collapse in U.S. retail sales at the end of last year was fairly anomalous.

However, the current pace of consumer retrenchment is about on par with the pace at which income is falling. While job losses are likely to continue into 2010, they should moderate. And real purchasing power will at that point start to improve and drive renewed spending, with headline inflation in the U.S. already running at -0.7% y/y and likely to ease further. In this reboot, however, consumers seem to be turning their attention to paying down debts and rebuilding their savings. Neither can be criticized, but imply less momentum in spending.

Trading blows

Not only is the pace of U.S. consumer spending likely be weaker than the past, but it is likely to be less importdependent, as well. This is crucial for the global rebalancing underway. Rewinding several years, the public debate centered on the massive U.S. current account deficit that sat at 6.5% of GDP at the end of 2005. With U.S. consumers pulling back, the U.S. trade deficit has been cut in half in only six months. As a result - and in spite of the contraction in the overall economy - the U.S. current account deficit was likely just 2.4% in the first quarter of 2009. In comparison, the current account deficit of the Euro region was 1.5% in the fourth quarter of 2008, while Canada swung to a deficit of 1.9%. This global reboot is therefore starting with an implosion of global imbalances. It’s somewhat ironic that many feared it would take a massive depreciation of the U.S. dollar for this to take place. Instead, in came in spite of a strengthening dollar, but at the expense of consumers.

But few around the world have been spared the rebalancing pain. Canadian exports generally stabilized - or at least stopped their free fall - in February or March, but remain 19% lower than last year. Eurozone, Hong Kong, Singapore, and Chinese exports are also down by 20-25%. And so far, this rebalancing has also been reflected in overall economic performance - those economies which had leveraged the most from global imbalances in the recent past are seeing some of the most rebalancing. Russian exports fell 48% in the first quarter over last year, and they saw one of the worst GDP prints, as well. German manufacturers had become export machines, driven by machinery and equipment investment especially in Asia, and the German economy is now one of the worst performing in the Eurozone.

Perhaps the one oddity is China. The economy there has continued to grow despite being at the center of the global imbalance debate. However, looking at the details of the U.S.-China trade data, U.S. nonpetroleum imports from China have recovered sooner and sharper than U.S. nonpetroleum imports from the rest of the world. While much has been made of the success of the Chinese stimulus plan, perhaps it is the old driver of Chinese growth - U.S. imports of Chinese goods - which has played an important role in the Chinese economic exceptionalism seen so far this year.

The undiscovered country

So, looking backwards, the data were atrocious. This is no surprise. Looking ahead, however, we have seen the stress in some of the most impaired corners of the credit and financial markets show significant progress. The cost of credit is still very high in many corners, though, and this will continue to limit the speed at which corporations and households can reboot. We have seen inventories in many industries worked off, but spare capacity is large and growing, so rebooting production will take time. But, with the help of hindsight, our reboot should eventually prove a step forward.


U.S. Housing Starts - April

  • Release Date: May 19/09
  • March Result: 510K
  • TD Forecast: 530K
  • Consensus: 520K

U.S. housing starts have fallen at a double-digit pace in 5 of the last 6 months, and after plunging a staggering 78% from its peak of early 2006, there is a sense that new residential construction may be stabilising. Indeed, with the NAHB housing market index appearing to have gotten some upward momentum, and the level of permits approved almost equivalent to the actual level of starts, it appears that the correction in the new homes market may be abating. As such, our call is for new residential construction to rise by a modest 20K units to 530K in April. The increase is likely to be on account of a bounce-back in the volatile multi-units component, which declined by 29.0% M/M the month before, while single-family construction should remain relatively unchanged.

Canadian CPI - April

  • Release Date: May 20/09
  • March Result: core 0.3% M/M, 2.0% Y/Y; all-items 0.2% M/M, 1.2% Y/Y
  • TD Forecast: core 0.0% M/M, 1.7% Y/Y; all-items 0.3% M/M, 0.7% Y/Y
  • Consensus: core 0.1% M/M, 1.8% Y/Y; all-items 0.2% M/M, 0.6% Y/Y

Despite the ongoing economic recession, Canadian consumer price inflation has remained stubbornly high, as rising food prices have keep the headline inflation number above the 1.0% Y/Y level. Core consumer inflation has also been high, hovering around the 2.0% Y/Y for a number of months. The resistance, however, should come to an end in April. During the month we expect Canadian headline CPI to rise by a further 0.3% M/M (but down 0.1% M/M on a seasonally-adjusted basis) on account of higher gas and food prices. However, due to base effects, the annual pace of consumer price inflation should ease to 0.7% Y/Y, from 1.2% Y/Y the month before. The Bank of Canada’s core consumer price index, however, is expected to be flat on the month (though up 0.1% M/M on a seasonally-adjusted basis), with the annual core inflation rate falling to 1.7% Y/Y from 2.0% Y/Y. In the coming months, with the domestic economy likely to remain very weak, we expect consumer price inflation to soften even further.

Canadian Wholesale Sales - March

  • Release Date: May 21/09
  • February Result: -0.6% M/M
  • TD Forecast: -1.0% M/M
  • Consensus: -0.8% M/M

The poor domestic economic fundamentals and weak global appetite for Canadian export products have resulted in 5 consecutive monthly drops in wholesales sale, and with the outlook for both factors remaining well intact, we expect this weakness in wholesales sales to stretch into a sixth straight month. Indeed, with domestic manufacturing shipments falling by a sizeable 2.7% M/M, and exports declining by an equally disappointing 1.8% M/M, we expect wholesale sales to drop by a sizeable 1.0% M/ M. The weakness is expected to be broadly-based, with slower sales of motor vehicles and machinery and equipment expected to be the main contributor to the soft headline number. Real wholesale activity should also decline on the month. In the coming months we expect wholesale sales to remain soft as the weak Canadian economy and ongoing global economic recession push sales lower.

Canadian Retail Sales - March

  • Release Date: May 22/09
  • February Result: total 0.2% M/M; ex-autos 0.6% M/M
  • TD Forecast: total 1.0% M/M; ex-autos 0.3% M/M
  • Consensus: total 0.5% M/M; ex-autos -0.1% M/M

After falling in 4 of the last 6 months of 2008, Canadian retail sales moved back into positive territory this year as shoppers took advantage of the aggressive discounts offered by retailers after the dismal Christmas shopping season. And despite the dismal economy and poor labour market conditions, there are indications that the positive tone in Canadian consumer spending may continue into March. In fact, with existing home sales rising by a brisk 7.7% M/M and new motor vehicle sales advancing by 6.3% M/M during the month, we expect retail sales to rise by a respectable 1.0% M/M in March. Higher gasoline prices should also contribute favourably to the headline numbers. Excluding autos, sales are expected to rise by a more modest 0.3% M/M, while real retail sales should also be up. Looking ahead, we expect retail sales to remain subdued, as Canadian consumers economise on their spending in the face of the very difficult economic environment.

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.