Economy

The US economy and asset markets are underpinned by strong growth drivers – CNBC

Published

5 years ago

February 10, 2020

Jobs, incomes and credit costs drive household consumption, residential investments and business capital outlays — a hefty 87.2% of the U.S. economy in 2019.

Those three variables look good.

With nearly 4 million people added to payrolls in the year to January, the unemployment rate was cut, over that period, to 3.6% from 4.4%. That is a remarkable development, indicating that, at the current level of labor supply, we have a fully-employed economy.

Predictably, the steady growth of labor demand has led to increasing income gains. The rate of increase of the real hourly compensation last year more than doubled from 2018, and the inflation-adjusted after-tax household incomes rose 3.4%.

Personal savings were driven up by those rising jobs and incomes. As a share of disposable income, savings grew 8% last year, providing a significant buffer to maintain the households’ usual spending patterns during transitory income and employment changes.

Low credit costs have also made an important contribution to rising consumption and investment.

Surprisingly mild inflation pressures in an economy growing above its noninflationary potential have allowed the Federal Reserve to keep an exceptionally easy credit stance. Prices for personal consumption expenditures show an annual increase well below 2%, and the unit labor costs in 2019 remained stable at 2% for three consecutive years.

The Fed, therefore, has no compelling price stability concerns to abandon its current level of monetary accommodation, especially since the fiscal policy remains impaired by a high and rising public debt and expanding budget deficits.

The U.S. foreign trade — accounting for nearly one-third of the economy — is improving. As a result of that, net exports are becoming less of a drag on economic growth.

The first GDP estimates for last year indicate that the trade deficit on goods and services declined by 3.4%, while the volume of U.S. sales abroad remained roughly unchanged.

That good trade result is due to a substantial trade adjustment undertaken by China. In the course of last year, China’s surplus on goods trade with the U.S. was cut 17.6%. The long-overdue rebalancing of U.S.-China trade accounts could have been much larger had China made an effort to increase its imports of American goods and services.

Still, that’s a good start. Things are likely to get better because Beijing is pledging to step up its U.S. imports as soon as the coronavirus epidemic is brought under control.

By contrast, the U.S. is not making any progress on its large trade imbalances with the European Union and Japan. Last year, the U.S. trade deficit with those two economies came in at $247 billion. That is a 5% increase from 2018 and an amount accounting for nearly 30% of America’s total deficit on goods trade.

The trade problem with the EU and Japan is large enough to warrant an urgent policy attention. That should be a logical next step following recent trade agreements with China, Canada and Mexico.

And to support a revival of U.S. manufacturing industries, Washington should insist that a rebalancing of its trade accounts with China, EU and Japan should proceed on the basis of rising U.S. exports and supplies to American markets from local production facilities.

Putting all this together, the U.S. near-term growth prospects look good.

Could the U.S. do better?

Yes, of course, but to open up the possibility of a sustainably faster noninflationary economic growth, the U.S. has to increase the stock and quality of human and physical capital that would raise the economy’s current growth potential from 2% to the range of 3% to 3.5% — roughly the numbers we have seen during the 1990s.

That would require active labor market policies (investments in education, health care, vocational training, etc.) to connect some 95 million Americans who are currently not in the labor force with stable employment opportunities. A larger pool of skilled manpower would than need to be outfitted with best practice technologies to raise productivity growth. That would keep costs and prices at reasonable levels and make possible supportive monetary and fiscal policies.

Of all the industrialized economies, the U.S. is arguably the only one to have such a wide scope for faster noninflationary growth.

Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.

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Economy

S&P/TSX composite up more than 100 points, U.S. stocks also higher

Published

6 hours ago

September 26, 2024

Anne Joseph

TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in the base metal sector, while U.S. stock markets were also higher.

The S&P/TSX composite index was 143.00 points at 24,048.88.

In New York, the Dow Jones industrial average was up 174.22 points at 42,088.97. The S&P 500 index was up 10.23 points at 5,732.49, while the Nasdaq composite was up 30.02 points at 18,112.23.

The Canadian dollar traded for 74.23 cents US compared with 74.28 cents US on Wednesday.

The November crude oil contract was down US$1.68 at US$68.01 per barrel and the November natural gas contract was down six cents at US$2.75 per mmBTU.

The December gold contract was up US$4.40 at US$2,689.10 an ounce and the December copper contract was up 13 cents at US$4.62 a pound.

This report by The Canadian Press was first published Sept. 26, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

Economy to grow moderately, rates to fall below three per cent next year: Deloitte

Published

8 hours ago

September 26, 2024

Anne Joseph

Deloitte Canada expects economic growth to pick up next year as it forecasts the Bank of Canada to cut its key interest rate below three per cent by mid-2025.

In the company’s fall economic outlook released Thursday, it forecasts the central bank’s interest rate will fall to 3.75 per cent by the end of this year and a neutral rate of 2.75 per cent by mid next year.

Meanwhile, it expects the economy to grow moderately as softer labour market conditions persist, especially as many homeowners have yet to face higher rates when they refinance their loans.

“We do think that we’re going to be in for a decent year next year,” said Dawn Desjardins, chief economist at Deloitte Canada.

It appears Canada will successfully skirt a recession despite the impact of higher borrowing costs on the economy, said Desjardins.

“It’s hard to argue that the economy is just skating through this period of higher interest rates. But having said that, the overall numbers themselves continue to show the economy is expanding,” she said.

“Yes, the labour market has softened, but I don’t think we’re in any kind of crisis in the labour market at this time.”

The Bank of Canada has cut its benchmark rate three times so far this year as inflation has eased, and signalled more cuts are coming.

Inflation in Canada hit the central bank’s two per cent target in August, falling from 2.5 in July to reach its lowest level since February 2021.

However, higher rates have weighed on economic growth and the labour market.

Deloitte’s predicted 2.75 per cent neutral rate — the rate at which the central bank’s monetary policy is neither stimulating nor holding back the economy — is higher than where interest rates were hovering in the years before the COVID-19 pandemic.

Desjardins said the forecast aligns with the central bank’s own projections. There are a number of factors on the horizon that may pose increased risk to inflation, she said, such as climate change.

“These are costly things that we’re going to have to deal with and will be embedded in prices. So that’s sort of how we get to this 2.75 (per cent).”

The report says the global backdrop continues to be challenging, with no clear ends to the wars in Ukraine and the Middle East, growing trade frictions and an uncertain impact of the U.S. election on policy.

Consumers and businesses alike are still facing a lot of uncertainty, said Desjardins.

The heightened uncertainty, including from the looming U.S. election in November, makes businesses reticent to invest, she said, but added more clarity should come in the new year.

“We’ll see inflation coming down and interest rates coming down. So those are two powerful factors that will support an improvement in confidence both from the consumer side as well as the business side as we go through next year,” she said.

In its report, Deloitte said it’s still optimistic about Canada’s economy next year.

“Lower rates will ease the burden on the highly indebted household sector sufficiently to support a pickup in spending and a housing market recovery,” it said in the report. “After two years of subpar growth, we look for the economy to hit its stride in 2025.”

Deloitte said despite the easing of overall inflation, shelter prices — especially rent — “remain too high for comfort.” However, it also said interest rate cuts are expected to “rejuvenate construction activity,” with home-building activity set to rise throughout 2025.

While rate cuts should help stimulate the housing market, Deloitte said it expects the recovery to be modest amid poor affordability.

Desjardins said without a significant boost to housing supply, the affordability issue is unlikely to subside.

“We know that Canada has a pretty significant supply deficit on the housing side,” she said.

“The housing cannot be created overnight.”

However, she also doesn’t see house prices significantly increasing.

“I think we’re going to see some easing up on demand from new Canadians as we move forward. So that might give a little bit of a relief,” she said.

This report by The Canadian Press was first published Sept. 26, 2024.

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Economy

S&P/TSX composite moves lower Wednesday, U.S. stock markets mixed

Published

1 day ago

September 25, 2024

Anne Joseph

TORONTO – Canada’s main stock index edged lower on Wednesday, weighed down by the energy sector as the price of oil fell, while U.S. stock markets were mixed, with the S&P 500 and Dow slipping from the records set the day before.

The S&P/TSX composite index closed down 46.34 points at 23,905.88.

In New York, the Dow Jones industrial average was down 293.47 points at 41,914.75. The S&P 500 index was down 10.67 points at 5,722.26, while the Nasdaq composite was up 7.68 points at 18,082.20.

It was a quieter day as investors anticipated important economic data to come later in the week, said Jennifer Tozser, senior wealth adviser and portfolio manager with Tozser Wealth Management at National Bank Financial Wealth Management.

The next report on U.S. GDP is scheduled for release Thursday, while Friday will bring the Personal Consumption Expenditures index.

Investors will be looking for hints in the data on what the U.S. Federal Reserve might do next, Tozser said.

“Now everybody’s just sitting there looking to see if tomorrow’s economic data suggests not only how many more cuts are to come, but how fast and what magnitude.”

Last week, the U.S. Federal Reserve cut its key interest rate by half a percentage point, the first cut since its hiking campaign to fight inflation.

Meanwhile, the Bank of Canada has already cut its key rate three times this year, as the Canadian economy and labour market have softened faster than in the U.S.

Central banks in both Canada and the U.S. are set to keep cutting interest rates, but Tozser said the path is less certain south of the border.

Lower rates and the promise of more cuts on the horizon are helping boost the recent sectoral rotation in markets, said Tozser, with a broader group of companies seeing gains as attention on the Magnificent Seven stocks eases.

“We’re seeing strength in the overall economy, not just those few leaders that have been able to swim against the tide,” she said.

Large tech companies like Nvidia have led gains this year on the back of optimism over artificial intelligence.

The Canadian dollar traded for 74.28 cents US compared with 74.25 cents US on Tuesday.

The November crude oil contract was down US$1.87 at US$69.69 per barrel and the November natural gas contract was up three cents at US$2.82 per mmBTU.

The December gold contract was up US$7.70 at US$2,684.70 an ounceand the December copper contract was down less than a penny at $4.49 a pound.

This report by The Canadian Press was first published Sept. 25, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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