February 16, 2010
Economy at a Glance
A fuller Canadian understanding of the personal versus business mood disparity in the U.S.
The disparities between the personal and business sides of the U.S. economy are glaring. The mood of the former has been particularly hammered by weak housing markets. In Canada, we saw some declines in home prices.
These were especially acute in regions of the country where there was an earlier speculative fever tied to the commodity price boom just after mid-decade.
The mood of homeowners
But consider what has happened in the U.S. The S&P Case Shiller 10- and 20-city home price indices peaked in the middle of 2006. They fell by more than 30% until reaching trough levels in April 2009. Current existing home price levels in the U.S. correspond with the fall of 2003.
Some U.S. city home price declines are jaw-dropping. The two worst-performing cities have been Las Vegas (-55.5%) and Phoenix (-50.8%). The next tier of really bad declines came in Miami (-46.4%), Tampa (-41.3%) and Detroit (-41.1%). A third block of staggering losses fell on California: Los Angeles (-38.0%), San Diego (-37.3%) and San Francisco (-37.2%).
Other cities displaying particular weakness have been Washington (-28.3%) and Minneapolis (-27.5%). Charlotte, Dallas and Denver are the major cities with lowest declines.
While more recent prices have stabilized or advanced slightly, there remain four factors that will continue to distress U.S. new and existing home sales:
- The high unemployment rate that is expected to linger around 10.0% well into the fall;
- The financial incentive to simply walk away from homes where the market value is well below the outstanding mortgage amount;
- The expiration of the $8,000 new homebuyer tax credit at the end of June 2010; and
- The scheduled March 2010 end to the Federal Reserve’s $1-trillion commitment to buy mortgage-backed bonds.
The mood of the business sector
To appreciate contrasting sentiments, consider what U.S. firms are doing. Business investment in equipment and software has come back strongly over the last several quarters. The fourth-quarter versus third-quarter 2009 change was +13.3% (annualized in inflation-adjusted dollars).
There are four major reasons for strength in this category of business investment:
- Worker layoffs have necessitated productivity improvements in order to achieve production targets.
- Earlier cuts to physical capacity (i.e. plant closings) are now requiring production line investments in order to maintain competitiveness.
- Companies are upgrading their assets to re-position themselves for future growth. And
- Many non-financial firms maintained decent enough profit levels and cash flows through the recession to make such purchases possible.
The investment in means of production and services improvement is well out in front of additions to industrial plant and commercial space. Canada’s similar investments usually track the U.S. quite closely. What is most interesting for Canada is the “currency effect.”
The fact that the Canadian dollar has increased in value versus the U.S. dollar, combined with the fact that many Canadian machinery and equipment purchases are made south of the border, point to an even stronger recovery in this sector north of the 49th parallel.
This has already shown up in the third-quarter over second-quarter gain in machinery and equipment investment of +25.6%. Canada’s fourth-quarter 2009 results are not scheduled for release until March 1, 2010.
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog. His personal blog is at www.alexcarrick.com
Data sources: Bureau of Economic Analysis (U.S. Department of Commerce) | Statistics Canada | Chart: Reed Construction Data - CanaData
