June 23, 2008
Economy at a Glance - June 24, 2008
U.S. and Canadian growth rates present a conundrum
Economic slowdowns are underway in both the U.S. and Canada. Real (i.e., inflation-adjusted) first-quarter 2008 Gross Domestic Product (GDP) figures indicate a more serious situation in Canada (-0.3% quarter to quarter annualized) than in the United States (+0.9%). This is a bit of a conundrum that needs some explaining, given that Canada is doing much better than the U.S., according to most major economic indicators.
U.S. quarterly economic growth continues to be mildly positive, defying anyone’s attempts to label the current period as a recession. That positive growth, however, is made up of some fortuitous circumstances. The big swing in inventories, between accumulation and drawdown, occurred in the final quarter of last year. Therefore, most of the inventory impact was out of the way before the first-quarter of this year. Furthermore, in Q1 08, foreign trade came to the rescue with goods exports outperforming goods imports.
Similarly, the long-term decline in value of the U.S. dollar has helped with foreign trade in services. Visitors from outside the country have flocked to the U.S., while trips by Americans abroad (especially to Canada) have fallen off dramatically. Omitting foreign trade and inventories leaves the major national account items of consumer spending, business investment and government spending. These three added together amount to final domestic demand, for which the real (inflation-adjusted) change in the U.S. has been 0.0% in each of the past two quarters.
Canada’s problems in the first quarter of this year stem from a large inventory adjustment (i.e. a quarter later than in the U.S.) and poor foreign trade figures. Much of the shift down in inventories was due to weak U.S. demand for autos in general, many of which are assembled in Canada. However, while residential construction in Canada is starting to grow weary, there has been no sign of the kind of collapse in housing starts that has occurred in the U.S. Furthermore, jobs have been plentiful in Canada, retail sales growth has been stronger and the liquidity crisis has not been nearly as severe as in the U.S. Final domestic demand in Canada in Q1 08 was +2.3%, a quite respectable figure.
U.S. consumers, much more so than consumers in Canada, are under assault from high gasoline prices, falling home prices and shaky job markets. The U.S. unemployment rate has risen to 5.5% in the latest month and, for one of the few times in memory, is now nearly as high as Canada’s level, which sits at 6.1%. Year-over-year total job growth in Canada (+2.0%) continues to be much stronger than in the U.S. (+0.2%) and the disparity is truly astonishing when it comes to construction jobs (+8.9% for Canada versus -5.1% for the U.S.)
In its latest meeting (June 10) to set interest rate policy, the Bank of Canada decided to stand pat, despite a level of inflation (+1.7%) that would have allowed more stimulus. The problem is that inflation world-wide is becoming more of a problem, due to high demand for food and energy and the nuisance factor of speculators driving up prices. In the U.S., the increase in the general price level is now +3.9%, while the core rate (minus food and energy) is +2.3%. The Federal Reserve Board is also likely to leave interest rates unchanged at its next policy-setting meeting on June 25.
For more articles by Alex Carrick on the Canadian and U.S. economies, visit his blog and Market Insights.
Key U.S. and Canadian Policy-setting Interest Rates
Data sources: Bank of Canada and U.S. Federal Reserve Board.
Reed Construction Data - CanaData.
