Economic analysis


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

EconowatchBen Bernanke, the chairman of the U.S. Federal Reserve, and the man charged with resuscitating the world’s largest economy, thinks we all need to be smarter about our finances. “As the global economy continues to experience extraordinary turbulence . . . the need has never been greater for initiatives that help consumers learn to manage their money wisely,” he told a conference on financial literacy this week. Big Ben should be careful what he wishes for.

In recent weeks, world stock markets have been buoyed by a rebound in confidence, and that confidence appears to be based on . . . well . . . not much, really. Earnings among America’s big banks have been better than expected, but jobs are still being vaporized at an alarming pace, housing prices continue to drift lower and blue-collar industries remain dead zones of fear and misery.

Even the earnings success on Wall Street ought to be taken with a grain of salt. Goldman Sachs wowed analysts with a US$1.8-billion profit in the first quarter—pretty impressive for a brokerage thought to be in need of rescue a few months ago. But on closer examination, that profit was largely due to an accounting quirk. Goldman changed its fiscal year and its “profit” didn’t include results for the month of December. In that orphan month, the firm lost US$1.3 billion before taxes. Are investors concerned? Nope. Goldman’s stock has almost doubled this year.

That’s the thing about irrationality: it can cut both ways. NPD Group issued its latest consumer sentiment survey last week and found that most Americans remain convinced the economy is in the toilet, but their spending plans are edging back up. As NPD said, consumers appear to have “reached their cost-cutting limit.” In other words, we’re getting frugality fatigue—and thank goodness.

We might’ve saved ourselves a lot of pain if we were all more financially literate a few years ago, but now isn’t such a hot time to be fixing that problem. Sometimes the economy relies upon temporary suspension of financial prudence. It requires leaps of faith. If all consumers wait for definitive signs of recovery before venturing out to make major purchases, then the economy will never recover. Fear becomes self-fulfilling, and prudence self-defeating. So here’s to better financial literacy and an end to reckless spending. Just please save it until the recovery is underway.

GRAPH OF THE WEEK: The four big bears

The four biggest bear markets of the past hundred years proceeded along very different trajectories in terms of length and depth. Below, a chart of the four bears in months from their market peak to trough. The big question on the minds of economists: is this bear market going to be more like the 1973 oil crisis, or more like the 1929 crash that led into the Great Depression?

The four big bears


One man’s junk . . .

Last week marked the sixth-straight week of gains on North American stock markets, but the most hopeful signs were happening behind those headline gains. After a year-long drought in initial public offerings, the U.S. market saw two successful new stock sales last week. Even more significant: the market for high-yield junk bonds seems to be coming back to life, at last. Hospital chain HCA and wireless tech firm Crown Castle International sold a combined US$2.7 billion in junk bonds. The fact that investors are finally willing to buy high-yield debt again is an important sign that the panic is over and an appetite for risk is returning, for now at least.


Consumer prices fell in the U.S. last month for the first time since 1955. Here in Canada inflation was a mere 1.2 per cent, and in fact aside from food prices (which rose 7.9 per cent) just about everything else was cheaper. There are some who worry about a deflationary spiral in prices, and others fear runaway inflation due to the run of stimulus spending. But so far, consumer prices remain the least of our worries.

Jobs. Yes, jobs.

It’s been awhile since the job market produced any joy, but new jobless claims in the U.S. fell to 610,000—far less than expected, and the lowest since January.


Zeroing in on 0%

The Bank of Canada cut its benchmark interest rate to 0.25 per cent—an all-time low, to deal with a recession that will be “deeper than anticipated.” The bank also took the unprecedented step of committing to leave rates at this level until the middle of next year. It might be the right move, but it’s a desperate measure for desperate times.

Housin’s hurtin’

The real estate market hasn’t hit bottom. In March, new housing starts in the U.S. plunged to the second-slowest pace on record—48 per cent below their pace of a year ago. Meanwhile, foreclosures surged in the first quarter to 803,000, despite massive White House efforts to keep people from losing their homes. Commercial construction in Canada slipped in the first quarter of this year—the first decline in almost five years. There are many economists who believe that this crisis will not be over until real estate prices and construction stabilize. If they’re right, then this isn’t good.

Factory free fall

The latest report on factory output (for February) showed slight improvement, but there are more clouds on the horizon. A new survey of 63 large manufacturers showed activity plunged again last month. What’s more, 90 per cent expect to cut staff, hours, capital spending and/or travel this year. As for the massive stimulus spending, 32 per cent don’t think it will do much to help their industry.



  • It is planned as a monument to America’s courage and indomitable spirit. But the economy may be delivering a bigger blow to the new World Trade Center project than terrorists ever could. A new analysis of the project for the Port Authority of New York says that the final phase of the three-tower development may need to be delayed until 2030 because of the state of the real estate market.
  • Southwest Airlines has long been a resilient and efficient survivor in an industry littered with basket cases. So when Southwest is suffering, you can bet every airline in the world is feeling the pain. Southwest posted its first quarterly loss since 1991 to begin this year, bleeding US$91 million. “We face the toughest revenue environment in our history,” said chief executive Gary C. Kelly.
  • The Amish reject all manner of modern conveniences, from cars to home electricity. But in Indiana, church elders are quietly allowing members to collect unemployment benefits, even though it would normally be forbidden. Eli Miller, an Amish bishop, explained to the Los Angeles Times that since Amish workers paid into the program, and they have families to feed, the church won’t object.
  • The U.S. government’s Troubled Asset Relief Program (better known as TARP, even better known as “the bank bailout”) was supposed to bolster consumer lending. But new figures show banks that collected TARP bailout money are lending less than they did last October. Just as the critics feared, recipients of TARP money are hoarding it to bolster their finances rather than lending.


All clear? Stock market investors will tell you that the Dow Jones Industrial Average is a leading indicator of economic growth. In other words, the market will rally strongly about six to eight months before the economy turns around. So, the recent surge in stocks (combined with some moderate improvement in other economic data) should herald significantly better days ahead right? Well . . . um . . . maybe.

“This is the very early stage of a new bull market, rather than a lot of other people who are thinking it’s a bear market rally. Economic data is starting to get less bad.”—Anthony Bolton

“In a little over a month, much has changed. As the story moves from the balance sheet to the earnings potential for [banks], the bull market will also extend from its narrow base to encompass other industries where capacity has been sufficiently reduced as to allow pricing power to come through.”—Crispin Odey

“This is the start of a great bull run.” —Dennis Gartman

Paul Krugman“History shows that one of the great policy dangers, in the face of a severe economic slump, is premature optimism. So here’s my advice, to the public and policy makers alike: don’t count your recoveries before they’re hatched.”—Paul Krugman

“It’s not getting better, it’s only getting worse more slowly. And the same damn fools who missed the oncoming freight train in the first place are now busy declaring it’s all clear. They were wrong before and they are wrong now.”—Barry Ritholtz

Nouriel Roubini“Investors are talking of ‘green shoots’ of recovery . . . As a result, stock markets have started to rally . . . This consensus optimism is, I believe, not supported by the facts. Moreover, growth next year will be so weak . . . and unemployment so high . . . that it will still feel like a recession.”—Nouriel Roubini


Thursday, April 23: StatsCan will release Canadian retail sales for the month of February, with a modest gain expected. • The Bank of Canada will present its monetary policy report, which should shed light on the surprise decision to leave rates untouched until 2010. • U.S. will report existing home sales for March.

Friday, April 24: U.S. durable goods orders for March will be released. February produced a surprising gain, but that looks like an aberration given the state of manufacturing industries.

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