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An economy spinning its wheels, looking for firmer traction

09/30/2011 by Alex Carrick, RCD Canadian Chief Economist

Canada’s industry-based gross domestic product (GDP) in July rose 0.3% from June, according to Statistics Canada.

The increase in the latest month was good to see after second quarter “real” (i.e., inflation-adjusted) GDP change came in at -0.3%.

Maybe there won’t be two consecutive quarters of GDP decline after all – the technical definition of a recession.

The numbers are likely to be weak for some time nevertheless. Just look south of the border.

The Bureau of Economic Analysis says U.S. personal incomes in current dollars declined 0.1% month to month in August.

Personal disposable income – which is what’s left over after taxes – was flat in current dollars and down 0.3% in constant (i.e., after deflation by a price index) dollars.

Personal consumption expenditures in constant-dollar terms were also unchanged.

It’s fair to say that in both countries the economy is spinning its wheels.

In fact, the vista can be expanded beyond that. During much of this year, the world economy has been in shock.

Thoughts of recovery have been sidetracked by the slide towards default in Greece, revolution in Libya, a spiking of gasoline prices nearly everywhere and the U.S. debt downgrade.

One could easily be forgiven for wondering what else could go wrong. How about tempests? That came in the form of massive tsunami damage in Japan.

Everyone could use a respite from bad news.

Some consistency in reporting on better business conditions would go a long way towards restoring confidence and promoting better economic health.

Tidbits of information of late have been more encouraging.

The figure on U.S. initial jobless claims in the latest week was 397,000, down 37,000 from the week before.

The level may have dropped so low due to some timing issues that made the seasonal adjustment factor harder to calculate. Just the same, it was the lowest since early April.

A figure below 400,000 on an ongoing basis is needed to make a dent in the unemployment rate, which so far has stubbornly stayed above 9.0%.

U.S. GDP growth in the second quarter of this year was recently revised upwards to 1.3% from 1.0% in an earlier estimate.

The economy has continued to benefit from strong export sales of capital goods to emerging nations by firms with a strong presence in foreign markets.

U.S. corporate profits surged ahead in the latest quarter. The business sector has accumulated immense stockpiles of cash as a bulwark against possible onslaughts ahead.

American consumers have spent the past couple of years straightening out their finances. Debt has been paid down. Credit cards have been snipped and discarded.

Another phenomenon has gone largely overlooked. Bankruptcy proceedings have been another means to eliminate personal debt.

The same holds true with respect to mortgage foreclosures, painful as they may be.  

Record-low mortgage rates have provided an opportunity for many homeowners – at least those who’ve had the sagacity, income or good fortune to hold onto their properties – to refinance and lower their monthly cash outlays.

Overseas, Germany’s parliament has just passed legislation approving another round of bailout money for Greece. This may still not be enough and further credit may need to be arranged.

Meanwhile, Italy, Spain, Portugal and Ireland are taking action to prevent the chance they might be the next dominos to fall. Exposed banks are attempting to bulk up on capital.   

It’s worth saying again that if the euro-zone emerges from its current difficulties (largely) intact, it will be a more fiscally responsible place than before, with a highly competitive workforce.  

Finally, many commodity prices have come off the boil. The global price of oil has dropped near $80 U.S. per barrel.

Gasoline prices are stickier on the downside than the upside, but eventually there will be moderation.

Lower base metal prices will help with construction costs. The bottom line is there will be costing relief throughout the whole supply chain.

With a modicum of good luck, the current uncertainty and angst may prove to be relatively short-lived.

At the very least, though, there’s likely to be some uncomfortable squirming as we wait things out.

Canada's industry-based gross domestic product (GDP) - July 2011
(based on seasonally adjusted constant dollars)
Canada's industry-based gross domestic product (GDP) - July 2011
Three-month moving averages of month-to-month per cent changes, placed in latest period.
Data Sources: Statisics Canada /Chart: Reed Construction Data, CanaData.


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