Sunday, November 8, 2009


  • U.S. ISM indexes paint a muddled picture of the U.S. recovery. Manufacturing index jumps to 55.7 from 52.6, while non-manufacturing dropped slightly to 50.6 from 50.9.
  • FOMC statement keeps to the script, leaving interest rates at “exceptionally low levels” and expecting them to remain there “for an extended period.” Statement also adds flavour on the conditions that would lead the Fed to change its mind: resource utilization, inflation trends, and inflation expections. We comment on the prospects for all three.
  • U.S. payrolls shed 190,000 jobs in October and the unemployment rate tops 10.2%, its highest level since 1983. Upward revisions to past data add 91,000 to payrolls.
  • U.S. weekly jobless claims drop by 3.5%. Continuing claims also drop, likely reflecting expiring benefits more than renewed job growth.
  • U.S. nonfarm productivity rises by a better than expected 9.5% Q/Q annualized in the third quarter - its fastest pace since 2003.
  • Canadian labour market sheds 43,000 jobs in October; unemployment rate rises to 8.6%.
  • Value of building permits in Canada rose 1.6% in September.

With an FOMC meeting, ISM reports and - last but not least - the U.S. jobs report out this week, to say it was a busy week in economics, would be putting it lightly. The week began on an uplifting note courtesy of the ISM index of manufacturing activity, which rose to 55.7, its highest level since 2006. Unfortunately, the outturn was not matched by the larger non-manufacturing index, which fell slightly to 50.6 from 50.9. The relative outperformance of the manufacturing index is more reflective of the greater pace of past declines in the goods producing sector than it is of burgeoning demand. The slower pace of recovery in the services sector reveals the soft underbelly of the U.S. recovery. As the Fed outlined in its statement on Wednesday, week job and income growth, continued household deleveraging, and still tight credit conditions will continue to restrain the pace of growth in the broader U.S. economy.

Speaking of the Fed statement, with the federal funds rate firmly at its lower bound, the task of parsing out the FOMC's statement has turned increasingly to tone and nuance. For the most part, this week's statement kept to the playbook and importantly maintained the expectation that the federal funds rate would be kept at “exceptionally low levels…for an extended period.” What was interesting about this statement was the Fed's characterization of the conditions behind the need to keep rates “exceptionally low.” In particular, the Fed specified, “low rates of resource utilization, subdued inflation trends, and stable inflation expectations” as the key factors it is watching. With these three conditions specified, the FOMC threw some meat to Fed watchers looking for indicators to track the future path of monetary policy. So, from one information carnivore to another, a quick assessment: In terms of resource utilization, capacity utilization has seen modest improvements over the last three months but still remains at its lowest levels since the data series began in the 1960s (and for the manufacturing sector since the 1940s). Likewise, with the unemployment rate topping 10.2% (more on this later) we're into pretty unprecedented territory in terms labor market slack. As for inflation, while core CPI inflation has remained fairly steady at 1.5% over the past several months, other indicators of price pressures such as core PPI and unit labor costs show an unambiguous downward trend, weakness that will likely begin to show in the CPI numbers in the months ahead. Finally, in terms of inflation expectations, market based measures such as the spread on nominal and real return bonds show a modest upward movement but for the most part remain relatively well anchored. As real time measures of inflation continue to trend down, it is not unreasonable to expect inflation expectations to move along with them.

Of course the biggest data release to come out this week was the U.S. jobs report. While the median headlines will inevitably focus on the 10.2% unemployment rate (the highest in twenty-six years), several other details of the report are also worth mentioning. On the positive side, the pace of job losses improved slightly from September and revisions to past data added 91,000 to the total number. Even more positive, weekly initial jobless claims continued to point to a slower pace of lay-offs by the end of October. Likewise, strong gains in labor productivity (up a whopping 9.5% in the third quarter), mean that firms are in very good position to begin hiring as the economy continues to improve.

Unfortunately, while there are glimmers of hope in the labor market there are at least as many deep, dark pools of gloom. Foremost on this list, broader based measures of labor market weakness are even bleaker than the headline number. The full scale of job market slack in the U.S., which is measured by adding discouraged workers and people in part time work for economic reasons to the official number, rose to 17.5% and while data only goes back to 1994 the spread between the official rate and this broader measure has shot up dramatically over the course of the recession. Perhaps even more discouraging, both the mean and median duration of unemployment continued to rise in October with average duration reaching an all time high of 26.9 weeks and the median duration rising over a full week from 17.3 to 18.7. So, while we continue to look for improvement on the job front in the months ahead, it is going to take a long time before the U.S. is operating anywhere near its full potential.


Although the Canadian economy has begun to shown signs of improvement, the road to recovery is likely to be long and bumpy. Markets got a dose of this reality this morning with the release of October's Labour Force Survey. The recent strength in the Canadian labour market - which added nearly 60,000 jobs in August and September - has proven to be unsustainable, as it gave up two-thirds of those gains in October. A net 43,200 jobs were lost during the month, pushing the unemployment rate up to 8.6%, from 8.4% in September. The losses in October were concentrated in part-time work, which shed 60,000 jobs for a second consecutive month, while full-time employment experienced a modest increase.

Despite the disappointing headline figure, the report did bear some positive news. The average hourly wage rate of permanent employees jumped from 2.3% Y/Y in September to 2.9% Y/Y in October, partly reflecting the strong performance of the labour market over the past couple of months. Unfortunately, with the economy recovering at only a tepid pace, this large uptick in wage growth is unlikely to be sustained, just as the rapid rate at which the economy was adding jobs proved to be unsustainable. Both wage and employment growth is likely to be volatile on a monthly basis, though the overall trend should be positive.

Overall, October's drop brings the tally of jobs lost in Canada since peaking a year ago to about 400,000. Employment in the private sector has been hit the hardest (down 450,000 jobs or 4%), while public sector employment has held up better (down 55,000 jobs or 1.6%). Self-employment, however, has been moving in the opposite direction, growing by over 100,000 jobs or 3.9%. This trend is not surprising given that self employment typically rises during recessions, as people take a stint at being their own boss when opportunities for payroll jobs are slim.

With the number of self-employed people on the rise in Canada, it came as welcome news when the federal government announced this week that it intends to increase employment insurance benefits for these workers. The new proposal would give self-employed workers the option of buying employment insurance, though coverage would be limited to maternity, parental, sickness and compassionate-leave benefits - hence, they would be excluded from the regular unemployment benefits. The cost would be 1.73% - the standard employee contribution (not the employer contribution) - which accounts for about 40% of the total premium paid for coverage for public and private sector workers.

In other employment insurance news, it was also announced that Human Resources and Skills Development Canada and Statistics Canada will begin tracking exhaustion rates of beneficiaries. While data indicating the number of people currently receiving employment insurance benefits is available, there is no such data for people who have run out of benefits before finding a new job. As such, when looking at the employment insurance statistics - which showed a drop (M/M) in beneficiaries for two consecutive months in July and August - it is unclear as to whether beneficiaries departed for a new job or if they exhausted their benefits and are still unemployed. Tracking exhaustion rates would provide a better indication of the real situation in the market, and could have important implications for social assistance programs.


U.S. International Trade - September

  • Release Date: November 13/09
  • August Result: -$30.7B
  • TD Forecast: -$30.0B
  • Consensus: -$31.8B
U.S. International Trade - September Release Date: November 13/09 August Result: -$30.7B TD Forecast: -$30.0B Consensus: -$31.8B


Canadian Housing Starts - October

  • Release Date: November 9/09
  • September Result: 149.3K
  • TD Forecast: 160.0K
  • Consensus: 154.0K
After plunging by a staggering 57% from its cyclical peak of 273.0K units, new residential construction is yet to catch the bug that is now powering the Canadian real estate activity to its best growth performance in many years. This, we believe, is about to change. Indeed, with residential permit approvals rising at a double-digit pace in both August and September and construction employment rising for the third straight month in October, we expect building activity to rise to 160.0K in October. This will mark the highest level of new residential building activity since December last year. Most of the gains are likely to be in the volatile multi-units component, though single-family construction is also expected to advance. However, with Canadian economic activity likely to remain tentative in the coming months, and the soft labour market conditions likely to keep a lid on housing demand, the recovery in Canadian residential construction should remain somewhat subdued relative to historical norms.

Canadian International Trade - September

  • Release Date: November 13/09
  • August Result: -$2.0B
  • TD Forecast: -$2.2B
  • Consensus: -$2.1B
Canadian trade is unlikely to benefit much from the improving U.S. and global economies, as the strong domestic currency continues to erode the competitiveness of Canadian products on the global market. In September, we expect the Canadian trade deficit to widen to $2.2B, which will be the highest level of trade deficit on record. During the month, exports are expected to rise marginally, though higher imports should offset any gains in export trade. In the months ahead, with the strong Canadian dollar continuing to wreak havoc on the Canadian export-base, we expect net exports to remain relatively unsupportive to overall economic activity

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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.

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