Economic analysis


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

EconowatchSo how about that recovery? You missed it? Too bad, because the last few months might be as good as it gets for a while.

According to our Graph of the Week (see right), compared to other nasty recessions of the past, the S&P 500 has already enjoyed one of the best rebounds ever. The bad news is, that may be all the rebounding you’re going to see for some time. Because if this recession is anything like the previous ones, we’re either just on the cusp of a plunge into the next Great Depression, or (more likely) we’re in for a few years of going sideways, as we did after the oil crisis of 1973 and the tech crunch of 2001-02.

It’s certainly possible that we could embark on a new bull market and pick up where we left off in 2007, but the smart money seems to be on a recovery of the excruciatingly slow variety. Why? As Warren Buffett wrote in the New York Times last week, mainly because “enormous dosages of monetary medicine continue to be administered” by the government, and “before long, we will need to deal with their side effects.” In short, the U.S. has taken on its largest non-wartime deficit since 1920 to get us this far, and it’s still racking up debt at a frightening rate. Eventually that money will need to be paid back, and even the U.S. will be strained by the effort.

As Buffett writes, if the Chinese and other recipients of America’s current account deficit invest every penny in U.S. debt, and Americans themselves save more money than they have in years and invest all of that in U.S. debt too, the U.S. Treasury will still be US$900 billion short. This will put enormous pressure on the President to cut spending and hike taxes, or even worse, crank up those money presses and usher in years of nasty inflation.

Buffett’s analysis, by the way, was the most optimistic of three dissertations on What Comes Next to emerge over the past little while. In the second, Bill Gross, the legendary co-founder of PIMCO, wrote that he thinks the days of five per cent annual increases in American GDP are over, and we may have to get used to three per cent growth instead. This would lead to a “vicious cycle of recession or low-growth stagnation” and a portion of the labour market “will have to be permanently laid off.” The third outlook, by Nouriel Roubini, professional bear and professor of economics at New York University, was so depressing I don’t even want to go into it.

Enjoy the sunshine. It could be a long, cold winter.

GRAPH OF THE WEEK: Is that it?
The black line is the inflation-adjusted rebound in the S&P 500 since March, compared to recoveries from the 1929 depression low, the 1974 oil crisis low and the 2002 tech crash low. So far, so good—but if this is anything like past recoveries, now we go sideways.
Is that it?


A little retail relief
Canadians are opening up their wallets in a way they haven’t for months. Retail sales jumped one per cent in June from May. Rising prices at the pumps accounted for part of the increase, but even after stripping that out, we’re spending 0.4 per cent more on everything from food to sporting goods. This is the fifth increase in the last six months, a hopeful sign that Canadian consumers are on the mend.

Better homes
America’s housing market is showing more encouraging signs of life. In the three months ending in June the S&P Case-Shiller home price index rose 1.4 per cent from the three months ending in May, the second straight monthly gain. House prices also rose on a quarterly basis for the first time in three years. Even so, U.S. house prices are still falling on a year-over-year basis—they’re just not falling as fast as they were.

Not so glum
U.S. consumers perked up a bit in August. The Conference Board’s consumer confidence index rose to 54.1 from 47.4, beating expectations. Americans felt better about the current economic situation, their future prospects, and the job market. Still, the index is far below 90, which is where it should be in a healthy economy.


Where are the tourists?
In June the number of Americans crossing into Canada on same-day trips plummeted by 26 per cent from May, to the lowest level since 1972. Tougher passport rules are partly to blame, but so is the strong loonie, which is making Canada expensive. Roughly two-thirds of Canada’s $75-billion tourism sector relies on American travellers.

A slick recovery
Soaring oil prices helped tip the world into a recession, so the dramatic rise in crude over the last week has many worried about a repeat. Oil hit US$75 a barrel, a high for 2009, on confidence that the U.S. economy is improving. The price of oil has jumped by 134 per cent since December.

Feds in the red
Canada posted a $5-billion deficit in June, as bailouts for the auto industry and Employment Insurance payments took their toll on the country’s finances. In the U.S., the Obama administration suddenly raised its deficit forecast for the next 10 years from US$7 trillion to US$9 trillion. On the positive side, the U.S. also shaved US$262 billion from its estimated 2009 federal budget deficit.

The EI rolls keep rising
More Canadians are turning to Employment Insurance in the wake of huge job losses. In June there were 816,600 people collecting EI, up 5.1 per cent from May, according to Statistics Canada. The largest percentage increases were in B.C. and Alberta.



  • The rich have been getting richer for 30 years now, but their gold-plated ride may be over. New figures show that for the first time in decades, the share of total income earned by wealthy Americans may be in decline. According to CapGemini and Merrill Lynch Wealth Management, the number of Americans with a net worth of at least US$30 million crashed by 24 per cent last year. No word yet on whether that means there’s more money left over for the rest of us.
  • When gas prices soared and the recession hit, Hummer sales took a dive, but Jim Lynch Hummer in Chesterfield, Ill., didn’t take the blow lying down. Lynch has decided to start stocking tactical rifles, handguns and shotguns, along with the tank-like vehicles at his dealership. So far, he says, his guns-and-Hummers mix has been a big hit.
  • There’s been a lot of talk about “overcapacity” in the global economy as assembly lines go idle and warehouses sit empty. But the shipping industry has found a solution. It is literally destroying market overcapacity—by sending record numbers of container ships to the scrapyards. It’s projected that the number of ships sent to breakers this year will be double that of last year, setting a new high.
  • Who wants to be a bureaucrat? The U.S. Bureau of Economic Analysis just released new figures showing that the pay advantage enjoyed by U.S. federal civilian workers over private sector workers is soaring. The average federal worker now receives compensation worth US$119,982 per year (including wages and benefits)—more than double the US$59,909 average for private sector workers.


When Washington launched its “cash for clunkers” program in July, offering up to US$4,500 to those willing to trade in gas guzzlers for new fuel-efficient vehicles, it hoped to inject new life into the troubled auto industry. US$2.6 billion and 700,000 cars later, the program wrapped up this week. But experts remain divided over its impact.

Ray LaHood“You’ve got dealers, you’ve got mechanics, you’ve got the banks doing the loans—this isn’t just about the auto industry. We’re talking about tons of common ordinary people working today because of this program.” —U.S. Transportation Secretary Ray LaHood

“A billion dollars for cash for clunkers looks dramatically more efficient, dollar for dollar, than anything else the Congress has passed yet.”—Neal Soss, chief economist at Credit Suisse

Cody Lusk“We needed a shot in the arm and this is it.” —Cody Lusk, president of the American International Automobile Dealers Association

“This was a sweet little spurt of sales, but it’s hard to imagine it will have any lasting impact.”—Rebecca Lindland, analyst at IHS Global Insight

“Any time we get one of these big surges in demand, it’s usually followed by a period when sales are not so strong.”—George Pipas, chief market analyst at the Ford Motor Company

“We’re going to have a hangover.”—Harm Bandholz, economist at Unicredit Markets

“Because this was hot and heavy for such a short period of time, we are going to have a payback.”—Jeff Schuster, analyst at J.D. Power and Associates


Friday, August 28: The U.S. Department of Commerce reports on personal income and spending for July. Income is expected to rise by 0.1 per cent over June, with spending up 0.2 per cent.

Monday, August 31: StatsCan releases balance of international payments for Q2. A $12.1-billion current account deficit is expected.

Wednesday, September 2: The U.S. Census Bureau issues Manufacturers’ Shipments, Inventories and Orders for July.

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