May 22, 2012

May 6, 2011

North American stock markets have been flying high

Alex Carrick

Chief Economist, CanaData

Three of North America’s major stock market indices ended April on another high versus their February 2009 trough levels. In a little more than two years, the NASDAQ index has more than doubled (+109%), while the DJI (81%) and S&P 500 (+86%) have also performed spectacularly.

NASDAQ has climbed back above its previous peak in October 2007. The DJI and S&P 500 have made back 84% and 77% of their October 2007 to February 2009 declines respectively.

Only the Toronto Stock Exchange recorded a drop in April versus March. Still the TSX is +77% versus its low point, also in February 2009, and it didn’t decline quite as much as the other three indices in the first place.

The TSX has been driven largely by commodity prices. In the latest month, there was considerable speculation and concern that Canada would end up with a third straight minority government as a result of the federal election scheduled for May 2nd.

The fact the Conservatives took 167 of the 308 seats in the House of Commons – a healthy majority – is an important boost for the business sector.

The performance of the TSX should also be looked at in an international context and that means taking into account currency shifts. Since February 2009, the Canadian dollar has advanced 33% in value versus the U.S. greenback.

Factoring in the exchange rate, the TSX has outperformed the three major U.S. indices.

Nevertheless, some pausing in the latest numbers on the economy shouldn’t be ignored. Canada’s February GDP declined 0.2% month to month and U.S. output slowed from +3.1% in Q4 2010 to +1.8% in Q1 2011.

There have been two culprits: (1) high gasoline prices that are causing consumers to alter their spending patterns and delay discretionary purchases; and (2) a North American auto sector in which sales may still be okay, but production levels are down due to parts shortages in Japan.

The latter, of course, has been caused by the earthquake and tsunami damage northeast of Tokyo.

Auto plant shutdowns have also been blamed for the rise in U.S. initial jobless claims, as reported by the U.S. Department of Labor, for the week ending May 5th, to 474,000 from 431,000 the period before.

In nine of the previous 12 weeks, first-time unemployment applications dropped to 400,000 or less, a very good sign for the economy.

The latest uptick will most likely prove to be temporary, but it is still detrimental for confidence.

A great deal of fuss is being made about how slowly the U.S. labour market is improving. On the positive side, well-educated young people, with groundings in knowledge-based occupations, are among the first being hired in the recovery.

This accounts for both the improvement in rental housing markets ahead of other segments and the strong gains in corporate profits based on productivity advances. The latter have often been achieved through IT investments as opposed to hiring back regular staff.

However, young adult males without a lot of formal education are being left out of the improving jobs mix. One plausible explanation lies in the symbiotic relationship between employment and housing starts.

Poor job prospects lead to lower housing demand and falling prices. In turn, lower home prices reduce labor mobility. The factor that’s often left out of the overview, however, is the actual reduction in employment caused by the disappearance of residential on-site work.

When U.S. housing starts were notably stronger in 2005 through 2007, employment in residential construction (by general and specialty trade contractors) was close to three million. Now the figure has dropped to two million. That’s nearly a million jobs lost right there.

And it’s only the beginning of the story. An equal number of jobs has probably been lost in professions with close ties to the industry - lawyers, design professionals and realtors – and in plants manufacturing building products such as windows, doors, roofing materials, HVAC systems and so on.

Until the housing sector shakes off its lethargy, U.S. employment and the economy overall are destined to fire on less than all cylinders.

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

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