The $1.2 trillion loss in U.S. equity values this past Monday, September 29th will have serious repercussions for the overall economy. Many individuals are feeling a whole lot worse off now than they did a week ago. This is on top of the heavy burden that has already been placed on homeowners due to the threat of mortgage foreclosures.

The drop in home prices has meant that many U.S. families are already making monthly payments on mortgages that exceed the current value of their homes. This is not an enviable situation to be in. Loss in value of mutual funds held as savings and in 401K retirement packages is an extra twist of the knife.

Business leaders have to be cautious in their outlooks. Investors are likely to be shy about making new share purchases for some time. This will make raising money on the stock markets harder to achieve and must necessarily cause some investment intentions to be postponed, if not cancelled outright.

The flight from equities has meant a corresponding retreat into security in the form of bank savings accounts and Guaranteed Investment Securities. The build-up of such “safer” and more liquid accounts is helping to keep short-term interest rates low. But these are the rates that are being paid to depositors. Borrowing rates, both short-term and long-term, have been jacked up considerably. Firms looking for operating funds are going begging and this is threatening jobs.

Furthermore, low depositor interest rates are in no way stimulative for consumer spending. In fact, they cut into consumption activity because, in many cases, they are the source of income for retirees. This applies in Canada as well as in the United States. Hence, the financial picture south of the border has a direct effect on pensioners in this country as well.

Moreover, few analysts think that consumers should be counted on to bail out the economy. The first priority for most consumers is going to be reducing debt rather than taking on new expenditure commitments. This will have another direct impact on Canada through the mechanism of cross-border trade and the sale of manufactured goods.

A final indignity for Canada will come in the form of weaker demand for raw materials. The U.S. slowdown, rapidly turning into recession, is sucking the vitality out of other economies on a global scale. The resulting drawback in business activity will mean a lowered level of demand for commodities generally and the specific resource products of Canada that have made this country so dynamic over the past six years.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.

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