Canadian housing starts strength is timely U.S. focus shifts to "how deep, how long?"
Canadian economic data did not disappoint this week, far from it. For starters, total building permits shot back above 230,000 units in February after trending mostly down since the middle of last year.
Then, housing starts for March closed out the
quarter on a strong note, barely budging from
February's astonishingly high level of around
255,000 units. The level of first quarter housing
starts (246,000 units) ranks close to the highest
ever on record, which dates back to 1977. Even after
adjusting for population growth and trends in
household formation, we judge the current pace of
home construction to be unsustainably high. In
particular, the volatile multiple-unit segment is
vulnerable to a second quarter payback, after
shooting through the roof in the first quarter.
Nonetheless, current momentum has lead us to
increase our 2008 forecast to 221,000 starts, a 3%
decline from 2007. [More in "Canada's Red Hot Real
Estate Markets to Cool", available on our website.]
Fortunately, in the current cycle where the Canadian
economy does its best to weather the U.S. downturn,
strength in construction activity could not have
come at a better time. The construction sector has
certainly done its part in recent months. It has
been a significant direct and indirect contributor
to Canadian economic growth and employment, and
shows, as of yet, little sign of relinquishing that
role.
Even trade lent a hand
Another positive surprise this week was that even
the weakest spot for the Canadian economy in the
current cycle, namely exports, fared much better
than expected in February. On a month-over-month
basis, the volume of exports shot up 3.6% while
import volumes were down 1.9%, which combined imply
that net exports will have lent a significant hand
to growth accounting for February. As a consequence
of unexpected strength in construction and exports,
overall first quarter growth is not looking nearly
as weak as we forecast in March, and will surely be
positive. However, for a multitude of reasons which
still hold – in particular a strong Canadian dollar,
emerging market competition, and mostly, weak U.S.
demand – we still hold firm the view that exports
will remain the weak spot for the Canadian economy
going forward. They will likely continue to exert a
significant drag on Canadian growth in upcoming
months, with February written off as a blip when all
is said and done.
Sombre Frenchmen
On the other side of the Atlantic, the French seem
to be in no mood to kid these days, despite the
usual comic antics to come out of Sarkozy's press
conferences. Between virulent protests - what else
is new? - in Paris over the Olympic torch relay and
the decidedly somber mood from top men at the IMF
(Dominique Strauss-Kahn) and the ECB (Claude
Trichet), "joie de vivre" seems to be in short
supply these days. They are not alone in feeling
bearish of course. The little data for the U.S.
economy that was released this week did little to
change our or central bankers' views on the U.S.
outlook, so allow us to editorialize a bit more than
usual this week.
Concerns over the U.S. economy have shifted in
recent weeks. The focus up to recently seemed to
have been an understandable, but misguided, fixation
on whether or not the U.S. is technically in a
recession. The jury on this, which is the cycle
dating committee of the National Bureau of Economic
Research, doesn't offer its verdict until much later
after events have unfolded. Much confusion arises in
the meantime as the only thing anyone can provide
until then is a forecast, be it theirs or someone
else's. Anyone claiming the U.S. economy is
currently in a recession is providing you with their
forecast, not a statement of fact. By the same
token, anyone claiming the U.S. is not in recession
is offering, you guessed it, their forecast. As time
passes and more data comes in, uncertainty
surrounding the forecast dissipates and the
likelihood of it being correct improves – nothing
more, nothing less. Think of the NBER as the Pope
(insert alternative authoritative religious figure
here as needed) of recessions, but given the huge
lag, we don't advise waiting around for the 'final'
word.
TD Economics' forecast is that the U.S. economy is
indeed currently in the midst of a recession, which
will record two non-consecutive quarters of real GDP
contraction. By itself, the fact the quarterly
contractions are not expected to be consecutive
would make this an atypical recession. But there are
other more substantive issues which would also make
the current recession unlike those past. Overall,
our U.S. forecast stands on the slightly pessimistic
side of consensus, but is not currently quite as
bearish as that of the IMF. The accompanying table
compares the IMF forecast from April to ours from
March.
Loud and clear
After slashing their U.S. forecast by a full
percentage point for 2008 and 1.2 percentage points
for 2009, the organization has now come out clearly
on the gloomy side of things. Interestingly, it
would seem hard to remain poised if one lines up
this week's simultaneous alarm bells rung off by the
IMF. First, their latest Economic Outlook has world
growth slowing considerably this year – agreed.
Second, the IMF thinks there's a 1 in 4 chance of a
worldwide recession (less than 3% growth) – again,
we'd agree that the current uncertainty means a
wider range of potential outcomes with
higher-than-usual probability, so we would not
quibble with that figure. According to another IMF
report, we are currently facing the worst financial
crisis since the great depression, with financial
losses forecast at $945 billion. Maybe, but
comparisons to the great depression are off the mark
in both scope and depth. Specific estimates as to
aggregate financial losses vary greatly and depend
on market outcomes. Any such calculation is fraught
with uncertainty, and the IMF's estimate is
certainly as good as any, if not better than most.
Third, food price inflation is causing riots in some
developing countries and threatens to seriously
compromise efforts to fight poverty in many regions
of the developing world. Every one of these concerns
is valid, even if slightly over-hyped by the media
at times.
But without dismissing any of the aforementioned
concerns, dare we remain cautious pessimists while
at the same time putting things in perspective and
say that the world is not coming to an end? Dare we
say that the same financial players in the U.S.
which originated much of the currently toxic
asset-backed securities (ABS) are also the fastest,
certainly with a lot of help from the Federal
Reserve, to adjust their books and clear out the
mess? Dare we remind observers how many times the
American economy has been written off, bound for the
heap of history, only to lead the world economy into
another decade of growth? None of this means the
U.S. economy will fare well in the near term, far
from it. It will at best move sideways until
mid-2009, at worse face a deeper recession. And we
are nowhere near done with alleviating financial
markets stresses worldwide, as credit spreads can
attest. But it might serve as a friendly reminder
that gloom is in part self-fulfilling, and that the
remarkably flexible U.S. economy has consistently
shown an ability to land on its feet. Just something
to keep in mind if your time
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Mark
A. Mark Argentino
P. Eng. Broker
Specializing in Residential & Investment Real Estate
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