March 16, 2010
Economy at a Glance
Stock markets in U.S. and Canada move in sync with positive GDP growth
ALEX CARRICK
Chief Economist, CanaData
The major North American stock market indices had a jog down in January 2010, but they bounced back in February. At February’s month-end, they were 2.5% to 4.0% higher than at January’s month-end.
The 52-week low points for the indices were all recorded in February of last year. Therefore, on a year-over-year basis, the stock markets are looking quite positive. All four indices have made back between 45% and 60% of their most recent peak to trough declines.
Fourth-quarter 2009 gross domestic product (GDP) numbers for both the U.S. (+5.9% quarter to quarter annualized) and Canada (+5.0%) were very strong. Corporate profits have also been perking up over the last several quarters and world economic recovery is helping with export sales. But there are some significant differences between the U.S. and Canadian economies.
As a result of Washington’s debt, there is the potential for further weakness in the U.S. dollar. While this helps export sales, it has negative implications for interest rates longer term. However, there has been even more selling pressure on the Euro than the greenback due to speculation that Greece may default on some of its debt repayments.
The strong U.S. economic growth in the latest quarter came from export sales and an improvement in the inventory cycle. While the decline in inventories is coming to a close, that is not enough. What is needed is for sales improvements to warrant rebuilding stock. Consumers have been spending more than might have been expected, especially on new motor vehicles.
But what is needed is a more broad-based consumer spending recovery and that is dependent on an improvement in the jobs market and better residential real estate markets. Eight million Americans remain unemployed or underemployed and a pickup in the overall number of jobs has not started yet. Beyond employment, many people derive their confidence from the equity in their homes. Year-over-year house prices in the U.S. are no longer as negative as they were, but they have not healed yet either. Way too many homeowners have outstanding mortgage amounts that are in excess of what their homes would sell for.
In Canada, jobs have been more readily available than in the U.S. and home prices have been remarkably strong in most regions of the country, with the exceptions of some major cities in B.C. and Alberta. The resale market has taken off thanks to fewer excesses of speculation (except in the aforementioned B.C. and Alberta) in the earlier boom times and current record-low mortgage rates. Consumer confidence has not been a restrictive factor to the same degree.
Canadian government finances will be strapped over the next several years, the same as in many other countries, but the magnitude of the problem will be less. Also, Canada’s financial community has emerged relatively unscathed from the credit crisis that ensnared most others.
Canada is surfing the wave of the U.S recovery. But it is also poised for the pickup in commodity prices that will come with the China and Southeast Asia growth surges. Finally, Canada has not yet had its inventory cycle turnaround. Q4 09 inventories in Canada declined more than in Q3 09. Once this situation reverses, the impact on GDP growth will be dramatic.
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 lifestyle blog is at www.alexcarrick.com
Data sources: New York Stock Exchange (NYSE), Standard and Poor’s (S & P), National Association of Securities Dealers Automated Quotations (NASDAQ), Toronto Stock Exchange (TSE) and Reuters/Table: Reed Construction Data – CanaData.
