Economic analysis


A weekly scorecard on the state of the economy in North America and beyond

EconowatchDavid Rosenberg ranks up there with the very best economic minds currently practising the dismal science, and last week he returned home to Toronto, to a new job as chief economist with Toronto firm Gluskin Sheff, after a seven-year stint as lead economist with Merrill Lynch in New York.

While he was south of the border, Rosenberg became known as one of a precious few economists willing to warn of serious trouble ahead. While most of Wall Street constructed complicated justifications for the gravity-defying surge in housing and stock prices, Rosenberg warned again and again that it would end in tears. As we all know by now, it did. And, in all honesty, it’s been a fair bit worse than even Rosenberg predicted. It spread pain around the world and, ironically, destroyed Rosenberg’s own firm. Even the men who paid his salary weren’t paying close enough attention to his sobering analysis of a market gone mad.

One of Rosenberg’s most memorable contributions at Merrill was his list of 13 rules for fledgling economists. They’re all worth memorizing, but one stands out: get the U.S. consumer right and everything else will take care of itself.

That seems especially relevant right now because, for the past month or so, there’s been a lot of talk about “green shoots” in the economy. On the back of a smattering of fairly encouraging data, we’ve seen a rousing surge on the stock markets. Many economists are convinced that the worst of this crisis has passed and sunny days are just around the corner. But the end of the crisis phase and the beginning of a true recovery are two different things, and to understand why, you need only to remember Rosenberg’s advice: keep your eye on the consumer.

We know from past experience that it is possible for the economy to recover without creating any new jobs. It’s possible for GDP to grow while huge industries and vast regions are in turmoil. But can the world economy recover while U.S. consumers are in shock? Can the U.S. and its trading partners thrive while hundreds of thousands of Americans are still losing their jobs every month? While millions are seeing their home values sink, and thousands are being foreclosed upon each week? April’s flaccid retail sales numbers provide an unpleasant hint at the answer. We’ve seen many amazing things in this recession, but a global rebound taking hold while ordinary Americans are still too terrified to spend? That would top them all.

GRAPH OF THE WEEK: Eyes on the warehouse

For a clue as to when manufacturers will increase production and hire workers again, watch the relationship between sales and inventories. Typically, manufacturers maintain inventories at about 1.25-times sales. But as sales plunged faster than production in the past year, inventories have ballooned to around 1.5, and must be sold down before factories can start accelerating again.

Eyes on the warehouse


Where the heart is

Canadian home sales improved dramatically in April—the third consecutive month of improvement since January’s all-time low. Sales were up 11.2 per cent on the month, according to the Canadian Real Estate Association. Owners are still reluctant to put their house on the market during a recession (new listings are down 21 per cent from a year ago) but that limited supply has driven prices up by one per cent from March, and they are now just about five per cent below the peak in December 2007.

Revving up car sales

Homes aren’t the only thing selling better. New vehicle sales shot up by 6.3 per cent in March. Sales of trucks and vans were especially strong, rising 11 per cent on the month. The gain has to be kept in perspective: car sales are still 23 per cent below where they were a year ago.

Fear of ’flation

Producer prices in the U.S. climbed by 0.3 per cent last month while consumer prices remained flat. This comes as a huge relief to economists who find themselves worrying about both inflation and deflation at the same time. Inflation would obviously crush consumer spending power and further exacerbate the strain on struggling families, while falling prices could create a deflationary spiral. Thankfully, for now, both threats seem benign.


Behind the 8 ball

The number of U.S. households facing foreclosure increased again in April—to 342,000. That number is a whopping 32 per cent above where it was a year ago (when foreclosures were already considered to be at crisis levels). It seems the slowdown in foreclosures earlier this year was just a brief reprieve.

Sales facts

The much-hoped-for revival of U.S. consumers isn’t quite what it was cracked up to be. April retail sales fell 0.4 per cent from March, and were down 10.1 per cent from a year ago. Electronics and appliance stores were especially weak. March sales were also revised lower, meaning post-holiday bargain hunting has screeched to a stop.

Manufacturing misery

Like U.S. retail sales, the February uptick in Canadian manufacturing collapsed in March, with shipments down 2.7 per cent from the previous month and 23 per cent below the peak hit last summer. A 3.6 per cent decline in new orders is a warning of more gloom ahead.

Jobless claims

Weekly claims for jobless benefits in the U.S. rose to 637,000 last week, nearly wiping out two weeks of improvement. More worrying is the surge in continuing unemployment claims, which rose by 202,000 in a week—the worst jump in unemployment claims in six months—proving that the job market remains extremely depressed, and may still be getting worse.



  • Many economists will tell you that container traffic on the high seas is the single best barometer of the state of world trade. If so, the scene unfolding off the coast of Singapore is sobering to say the least. Approximately 735 ocean freighters have moored there because they have no shipments to carry and nowhere to go. It’s cheaper to drop anchor and wait than to head for shore. For now, they are a floating testament to the sad shape of the global economy.
  • Politicians and economists have fretted publicly about the lack of available credit for consumers to refuel the American economy. But far from a lack of credit, it seems the real problem might be a lack of demand for credit. The U.S. Federal Reserve reports 60 per cent of banks reported a decline in loan applications in the first quarter. After a binge on credit for a decade, household credit suddenly stopped growing at the end of last year.
  • U.S. auto dealerships—businesses that represented the heart of local commerce in so many communities—are facing their sharpest decline ever. Chrysler has said it will close 789 dealerships, or a quarter of its dealer network in the next month. GM already announced plans to shut down 2,600 dealers worldwide.
  • The recession is hitting just as hard across the Atlantic as it is here. Home repossessions in Britain surged by almost 50 per cent from a year ago in the first quarter; France’s GDP fell by 3.2 per cent in the first three months of the year—the worst decline in the post-war era; and Italy’s is plunging at a 5.9 per cent annual rate.


In the midst of a punishing recession, it doesn’t take much to crush nascent optimism. This week, fresh evidence of weak retail sales, more layoffs and another surge in mortgage foreclosures in the United States overwhelmed all the talk of “green shoots” on the devastated economic landscape. Now, observers are more focused on the difficult road ahead, and are asking whether those green shoots are strong enough to survive this harsh climate. It’s getting harder to believe this bull market will last.

“What we saw last week was only a necessary pause, not the beginning of a retracement. The worst of the economy is behind us and it’s hard to see earnings getting any worse from here.” — Hank Smith, chief investment officer of Haverford Trust Co.

“There is no momentum in spending; the free fall is over but . . . declining incomes mean a broadly flat trend is about the best we can expect. Green shoots are withering.” — Ian Shepherdson, High Frequency Economics

Paul Krugman“It looks to me now as if the markets are pricing in a rapid recovery . . . which I consider to be extremely unlikely. The market seems to be looking as if this is going to be an average recession, but it’s not.” — Paul Krugman

“Although the worst is now over, there’s still no evidence of an actual recovery.”— Paul Dales, Capital Economics

Paul Kasriel“This is a very deep and defining recession that is going to lead to a transformed U.S. economy, and these transformations don’t take place overnight.” — Paul Kasriel, The Northern Trust Corp.


Thursday, May 21: The Conference Board will report its index of leading indicators for April. After 11 months of decline, the index is expected to rise, thanks to higher stock and commodity prices.

Friday, May 22: Statistics Canada will report retail sales for the month of March, and economists are hoping for at least a continuation of February’s modest 0.2 per cent rise.

Tuesday, May 26: The Conference Board will report U.S. consumer confidence, which jumped significantly higher last month.

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