Economies on the rebound

The North American economy is roaring back to life, easing fears of a perilous slide back into recession.

The big question now is whether the recovery – so clearly apparent in both Canada and the U.S. at the end of 2009 – is solid enough to convince companies to start rehiring millions of laid-off workers and to withstand eventual higher interest rates.

"It's far too early to break out the Champagne and declare 'recovery accomplished,' " warned economist Josh Bivens of the Washington-based Economic Policy Institute.

The U.S. economy grew at a surprisingly strong annual rate of 5.7 per cent in the fourth quarter of last year, according to a preliminary estimate. That's the fastest pace in more than six years and compares with a 2.2-per-cent rate recorded in the third quarter.

In Canada, the economy expanded for a third consecutive month, advancing 0.4 per cent in November, pulling further out of recession and putting the country on a track to meet or exceed the Bank of Canada's forecast of a 3.3-per-cent growth rate in the final three months of 2009.

"We never thought it would be at this level so early," said Millan Mulraine, an economics strategist at TD Securities in Toronto. "It's certainly an indication that the economy picked up a lot of steam."

The challenge now is to repair damage caused by the recession. Mr. Bivens pointed out that even three years of sustained 5.7-per-cent growth wouldn't replenish the 7.2-million U.S. jobs that have vanished since the recession began in December, 2007.

And economists cautioned that the main driver of growth in the final three months of 2009 won't sustain the same pace of growth this year.

The main reason for the U.S. fourth-quarter surge is that businesses have begun the process of restocking badly depleted inventories after the longest and deepest recession since the Second World War. Gains in consumer spending, exports, spending on homes and business investment also helped push growth higher.

If you strip out the impact of restocking inventories, which accounted for more than half of the quarter's gains, the U.S. economy was growing at a much more sluggish 2.2-per-cent rate.

Indeed, most economists are expecting tamer U.S. GDP growth of roughly 3 per cent in the first three months of this year.

And most disturbing, according to Wells Fargo Securities chief economist John Silvia, businesses aren't yet feeling confident enough about the future to resume hiring.

Taking advantage of record low interest rates, companies are choosing to invest in productivity enhancing tools, rather than people, he said. Mr. Silvia pointed to an impressive 13.3-per-cent increase in spending on equipment and software in the third quarter.

"Capital appears to be substituted for labour as many firms strive for productivity and cost control," he explained.

Mr. Silvia also suggested that companies may be delaying hiring until the uncertainty over health care reform is resolved, worried the cost of providing benefits to new hires may soon soar.

There was also some suspicion among economists that the 5.7-per-cent headline number, which will be revised at least twice in coming months as more precise data becomes available, may turn out to be lower.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said he suspects further revisions will show that growth was not as strong. For example, he cast some doubt on the surge in equipment and software investment, which he said came out of nowhere.

"A downward revision is likely but for now it is the number," Mr. Shepherdson said.

Several factors continue to weigh on the economy. And it's not just the weak job market.

The housing market remains in a deep slump, with prices still sagging in key markets. That's causing a continuing rise in foreclosures, while sapping homeowners' wealth.

And the banking sector continues to be a drag on growth. Banks are still withdrawing credit from the economy, according to the Federal Reserve, making loans harder to get for businesses and individuals, in spite of rock-bottom interest rates.

Economists fear that an inevitable return to higher interest rates could further destabilize banks, and the housing market.

The U.S. economy's fourth-quarter GDP gain may only do so much to improve the climate for Canadian manufacturing exports because it's heavily weighted toward inventory adjustments, as opposed to spending by America's shell-shocked consumers.

(prepared by Barrie McKenna and Jeremy Torobin/Globe and Mail - Jan 30, 2010)




Economies gather momentum

U.S.

GDP grew 5.7 per cent in fourth quarter (first of three estimates)

What it showed

Growth in the world's biggest economy blew past expectations, coming in at the fastest annual pace in more than six years, according to the Commerce Department's preliminary estimate. Notably, consumer spending – 70 per cent of the U.S. economy – rose more than anticipated.

The high points

Equipment and software purchases rose at a 13-per-cent pace, the fastest clip since 2006, helping business investment climb 2.9 per cent. Consumer spending rose 2 per cent from October through December.

The low points

Commercial construction plunged 15 per cent as that battered part of the real estate sector continued to lag far behind.

What it signals

The gain may only do so much to improve the climate for Canadian factories that ship goods to the U.S., because 3.4 percentage points came from companies replenishing depleted inventories, a condition that could be short-lived. Also, a weak U.S. dollar and higher demand in Asia is helping the U.S. become a net exporter.

Canada

GDP up 0.4 per cent in November.

What it showed

The economy grew for a third straight month and Statscan revised its September and October readings higher. Economists surmised the annual growth rate easily met and probably surpassed the Bank of Canada's 3.3-per-cent estimate for the fourth quarter.

The high points

Mining, oil-and-gas and wholesale trade accounted for about 60 per cent of the month's growth. Construction and the real estate sector gained as rock-bottom borrowing costs continued to fuel a buying spree in the home resale market.

The low points

Manufacturing stalled as the strong dollar crimped exports, and retail shrank after a series of monthly gains. Utilities contracted because unseasonably warm weather in November reduced demand for heating.

What it signals

The data bolster an IMF forecast this week that raised its 2010 projection for the Canadian economy. Nevertheless, the Bank of Canada says the economy remains largely dependent on government stimulus.

(prepared by Jeremy Torobin/Globe and Mail - Jan 30, 2010)