Sunday, July 5, 2009

The Weekly Bottom Line


  • U.S. economy shed a larger-than-expected 467,000 jobs in June, while the jobless rate climbed to 9.5%.
  • ISM manufacturing index improves while consumer confidence falters in June.
  • Canada's real GDP slips a further 0.1% in April, led by pullbacks in manufacturing, mining/oil/gas extraction, and retail trade.
  • Canadian employment numbers are out next Friday; we are expecting a further 50,000 job losses and a rise in the unemployment rate to 8.7%


In this holiday shortened week where barbeques and fireworks will no doubt light up the American landscape come Saturday, the economic data refused to take any part in festive preparations. This is despite an understandably eager media and public who continue to await signs of real recovery, akin to kids in the back seat of the car on a road trip continually querying if we’ve arrived. As we enter the second half of 2009, a time during which many economists expect a muted recovery to start taking hold, the question has become a focal point of discussions.

Alas, the economic data lags behind real time by a month at best and typically much longer, and the rear view we glanced at this week still showed clear signs of wreckage in the economy. Most notable was the nonfarm employment survey, which revealed that close to 470,000 Americans became unemployed in June alone. This was significantly more than the anticipated loss of 365,000, and marked the first time in five months that the pace of job loss increased. The job loss tally since the onset of the recession totals 6.5 million, or 4.7%. It took only 1.5 years to erase 3.5 years worth of job creation. Jobs lost in June remained evenly split between the goods and services sectors. Some notable sectors taking a turn for the worse included professional and business services (-118,000) as well as construction (-79,000). Additional pressure came from the fact that what could not last did not, and the government sector - which had remained a net job creator in this cycle up until May, but is under increased budget strain across the nation - shed the largest amount of workers (52,000) since July 2007. While much of this is attributable to a drop in temporary federal Census-related employment, we expect to see continued pressure on this sector in the months ahead, particularly emanating from the state and local levels. Meanwhile, private sector job losses, while not as bad as they were earlier this year, worsened somewhat. This will continue to weigh on wages, another key reason why inflation fears are overstated and the Fed can be expected to remain on hold far into next year.

Other noteworthy economic data for June did not sway one way or the other towards renewed optimism or pessimism. The ISM manufacturing index improved but consumer confidence faltered. Neither came as a surprise. The improvement in the ISM manufacturing index was broadly based across current situation sub-components such as production and employment, but absent from the forward- looking new orders index. The overall ISM manufacturing index still points the way out of recession for this sector in the second half of this year while not suggesting that a surge in output is imminent. As hard-hit as U.S. households are, consumer demand is unlikely to lead the way in this recovery. As evidenced by the Conference Board’s consumer confidence index, reasons to be cheerful do not abound. Consumer confidence slipped to 49.3 in June from 54.8 in May, bucking the prior 3-month long improving trend, as household downgraded their views on their current situation and expectations. If, as we expect, a muted recovery takes hold late this year, this will only be confirmed in the first quarter of next year.


While the Canadian economy is definitely faring better than many others around the world, there is no question that it is still in a very weak state. This week we got the first glimpse of real production activity for the second quarter with the release of April GDP figures. The economy contracted 0.1% from March, marking the ninth consecutive month of decline. Compared to year-ago levels, the economy contracted by 3% - the quickest pace observed during the current downturn. While not off to a great start, we suspect that economic activity was even worse in May and June, resulting in an estimated annualized contraction of 2.2% for the quarter as a whole.

Throughout the recession, manufacturing has been one of the hardest hit sectors. April was no different, with output from the sector sliding for the ninth month in a row. And compared to year-earlier levels, manufacturing activity was down by a massive 14%. As a result, manufacturing as a share of GDP has fallen sharply, dropping to only 12.9% in April from 14.5% in July.

We expect the manufacturing sector to continue to be a key source of weakness going forward. Already, we know that the auto sector will leave an imprint in the second quarter figures. Chrysler halted all production for the months of May and June after filing for bankruptcy, while a dire market kept other automakers operating below capacity. As a result, auto production in Canada slid 28% in May, or 51% from year-ago levels, and likely slumped by a similar magnitude in June. All else equal, such a decline in auto production would alone result in a 0.15% monthly contraction in real GDP - slightly more than April’s headline figure. So unless production of other manufactured goods were ramped up considerably during those months - which is not likely - the sector will weigh heavily on overall economic activity in the second quarter.

Some good news for the manufacturing sector is that the loonie has fallen to 86 US cents from 92 US cents since the start of June. This pullback has helped to alleviate some pressure by making Canadian-made goods cheaper in our largest export market. Nonetheless, any uptick in export demand isn’t likely to trigger a rise in output until much later in the year, as a massive accumulation in inventories must be worked down first.

Recent data on manufacturing sales reveal that producers still have a ways to go to bring relative stock ratios down to manageable levels. A rise in shipments in February and April helped bring the inventory-to-sales ratio down to 1.57 in April, from 1.62 in January. But with the average ratio over the past five years sitting around the 1.3 mark, it is clear that manufacturing output is poised for further declines in the coming months.

Overall, the manufacturing sector will remain a weak spot in the Canadian economy, likely detracting from growth for the remainder of this year. On the plus side, it appears that annual rates of decline in other areas - such as construction and most pockets of the service sector - have begun to stabilize. Next week, all attention will turn to the June employment report, which we expect to show 50,000 job losses.


U.S. International Trade - May

  • Release Date: July 10/09
  • April Result: -$29.2B
  • TD Forecast: -$31.0B
  • Consensus: -$30.0B

Slumping exports and imports have become a constant feature of recent U.S. international trade reports, as the ongoing global economic recession has stifled the flow of goods and services in both directions. This pattern is likely to remain largely intact in May, and we expect the trade deficit to widen for the third consecutive month to $31.0B. The key cause for the widening should be higher energy prices, with the double-digit gain in crude oil prices during the month likely to push the petroleum deficit wider. Exports are also expected to be soft on the month, though the weakening dollar during the month and greater export demand from China for heavy machinery (in light of the massive infrastructure spending in recent months) should limit the magnitude of the decline. In the months ahead, we expect the U.S. trade deficit to widen even further as rising crude oil prices offset the benefits that will invariably accrue from the weaker U.S. dollar.


Canadian Housing Starts - June

  • Release Date: July 9/08
  • May Result: 128.4K
  • TD Forecast: 135.0K
  • Consensus: 130.0K

The Canadian housing market has been dealt a heavy blow by the ongoing domestic economic recession and credit crunch. The new homes market has been hit particularly hard, with the number of new homes built falling in 9 of the last 12 months as building activity has plunged a whopping 53% from their recent peak of 273K units in September 2007. That said, there is evidence that the beleaguered Canadian housing market may be regaining its footing, and we expect new residential construction to rise to 135K units in June. The uptick in construction activity is likely to be spread across both multi-units and single-family components. Notwithstanding the improvement in June, with the Canadian economy weakening dramatically, worsening labour market conditions damping housing demand, and tight financial market conditions continuing to stifle access to credit for both home builders and buyers, we expect Canadian homebuilding activity to remain within the 120K-140K range.

Canadian Employment - June

  • Release Date: June 10/09
  • May Result: -41.8K; unemployment rate 8.4%
  • TD Forecast: -50.0K; unemployment rate 8.7%
  • Consensus: -40.0K; unemployment rate 8.7%

The Canadian economy continues to reel from its most intense economic recession since the Great Depression, and with the U.S. economy (its most important trading partner) faring no better, there is hardly any indication that conditions are about to improve any time soon. The impact of the deteriorating economic conditions on the labour market has been quite profound, with over 363K jobs being lost since last November, as Canadian employers reduce their payrolls in the face of slumping demand for their products. The ongoing restructuring in the automotive sector has also added further downside pressures to labour market conditions. In June, we expect a further 50K jobs to be lost in Canada, with both the goods-producing and services-producing sectors shedding jobs. Moreover, with the weak economy continuing to limit the ability of displaced workers to find new jobs, the unemployment rate is expected to rise to 8.7%. In the months ahead, given the very weak backdrop for the Canadian economy, we expect the negative labour market dynamics to continue and the pace of job losses to remain fairly brisk.

Canadian International Trade - May

  • Release Date: June 10/09
  • April Result: -$0.2B
  • TD Forecast: $0.1B
  • Consensus: -$0.6B

The ongoing slump in the global economy has dealt a severe blow to the performance of the Canadian export sector as the once mighty trade surplus has virtually disappeared in the space of six short months. Moreover, with global export demand likely to remain soft and the strong Canadian dollar expected to weaken demand for Canadian exports even further, the outlook for the trade balance remains fairly grim. Even so, the 25% M/M surge in crude oil prices in May is expected to provide some much needed boosts to exports, though the 9% M/M appreciation in the Canadian dollar during the month should partially offset these gains. In the end, our call is for the Canadian trade balance to eke out a meagre $0.1B surplus in May. During the month, we expect Canadian exports to fall a further 1.0% M/M, while soft domestic consumer spending will continue to weaken Canadian appetite for foreign goods, thereby pushing imports down by a more profound 2.0% M/M.

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.