Economic stabilization is in the air

It's paradoxical, but encouraging, nevertheless. Even as the U.S. economy suffers what is probably the most painful part of this severe downturn, signs of life are popping up.

That's partly because the two are connected, explains a leading forecaster, Nigel Gault, chief economist at IHS Global Insight. When consumer demand south of the border fell off a cliff late last year, retailers and manufacturers couldn't possibly cut inventories fast enough to keep them from piling up.

Recently, we've paid the price, with factory activity all over North America collapsing. The good news: Production has been slashed even more deeply than Gault had expected.

Good news? Yes. This means the economy is now in freefall, as the first-quarter numbers will show later, but that inventory purge actually speeds the arrival of a rebound, since it opens the way for renewed production.

That's great news for Canada, because we're closely tied to the fortunes of the U.S. For example, our car sales are holding up well, but auto production is collapsing since most customers live south of the border.

We've already seen what could be early signs of stabilization in the U.S. Retail sales interrupted their slide, and banking has shown signs of healing.

More recently, the U.S. housing market, epicentre of all this distress, has just surprised analysts with a number of indications that it could be bottoming.

The latest is that new-home sales, which had been expected to take another dive in February, actually rebounded by 4.6 per cent to the fastest pace in 10 months, eating away at the big inventory of unsold homes that's been depressing prices.

Alone, this doesn't mean much. New-home sales bounce up and down from month to month, so this could easily be nothing but "a bump in the longer-term downtrend," warns economist Sal Guatieri at BMO Capital Markets.

But it's not alone. It's the fourth positive surprise in recent days, with resales of existing homes and construction of homes also surprising analysts by moving higher instead of lower, as did orders of durable goods.

Along with many of his colleagues in the dismal science, Guatieri says he'll remain a skeptic about any housing rebound until he sees another couple of months' positive data. At the same time, he agrees that all this is encouraging, and "tentatively -- very tentatively -- suggests stabilization" in the U.S. housing market.

With durable goods -- statistician-speak for items that last more than three years, like cars, aircraft, machinery and the like -- orders surged a substantial 3.4 per cent instead of falling as most forecasters expected.

As with housing, this is just a single good month after many bad ones, but the series of upside surprises in recent weeks has now involved consumer spending, investment goods and housing. That's enough for an increasing number of analysts to believe that the U.S. is, if not recovering yet, at least heading toward a landing.

Canada is likely to follow much the same pattern, says Brian Bethune, the IHS Global Insight economist who keeps an eye on this end of the North American economy.

The firm's latest forecast for Canada shows a much shallower consumer pullback than in the U.S. and a milder downturn, although Bethune warns this could prove too optimistic if the collapse of auto sales and oil prices drags employment down much more.

Canada's economy is forecast to shrink by 2.5 per cent this year, much less than the severe 3.7 per-cent drop foreseen for the U.S. In 2010, the Canadian upturn is estimated at 2.2 per cent, fairly healthy compared with a feeble U.S. upturn of 1.4 per cent.

But, as always in today's fragile environment, there's plenty of room for error. The one thing to hang your hat on is that the bad news is finally mixed with a little good.

(prepared by Jay Bryan/Vancouver Sun)