The equity market may have surged off its March lows, but the actual fundamentals paint a pretty bleak picture
Economy
David Rosenberg: The U.S. economy is much closer to a bust than a boom — and markets are mispriced – The Kingston Whig-Standard
By David Rosenberg and Andrew Hencic
To help alleviate all the confusion over whether the United States economy is actually out of recession and into a full-fledged and reliable recovery, we have constructed a new Boom-Bust index that measures exactly where the economy is operating relative to some semblance of normality.
The index is based on a set of seven economic and financial indicators and is designed to judge whether economic performance is more similar to an average economic boom or an average recession. What it currently shows (with all due deference to the increased risk appetite through the spring and summer courtesy of unprecedented fiscal stimulus and massive market-price distortions by the U.S. Federal Reserve) is that the economy, sad to say, is really not out of its recessionary state; at a minimum, it shows that we have a long way to go to get back to anything that can be remotely called a pre-COVID-19 norm. This, in turn, tells us that if you are prone to being long the pro-cyclical reflation trade that is so contingent on a vaccine, it’s best to wait for this to become a trend rather than a trade… or, more than likely, a value trap.
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We based our index on something called the “Mahalanobis distance,” which was introduced for economic purposes by recent research out of the Massachusetts Institute of Technology (A New Index of the Business Cycle by William Kinlaw, Mark Kritzman and David Turkington). We then deployed seven different macroeconomic and market-price indicators at a monthly frequency: the original four used in the paper (industrial production, the U.S. 10-Year T-Note/Fed funds rate spread, nonfarm employment and the S&P 500) supplemented with initial unemployment claims, single-family housing construction permits and the Conference Board’s consumer expectations index.
From a technical perspective, our definitions of “booms” and “busts” are the same as those from the MIT report: a bust is a technical recession as defined by the National Bureau of Economic Research, and a boom is a period where the year-over-year growth rate in industrial production is in the 75th percentile of the past 10 years.
The index is centered around 50, which corresponds to an economy that is neither running “hot” nor “cooling off.” A value of less than 50 means that the indicators are showing more features of a recession than a boom period (a value of zero is when the indicators are fully pointing to recession). Values above 50 mean the economy has more in common with solid growth, while a value of 100 would be a consensus that a boom is ongoing.
The index is responsive to the start of recoveries, as it jumps quickly back to values close to 50 at the conclusion of recessions (with the tech wreck and Great Financial Crisis taking slightly longer). However, the six-month trend performs quite well in anticipating recessions (values below 50 have preceded every recession since 1980 with the notable exception of 2015-2016) and with turning points off the lows that signal the resumption of growth.
The current value and six-month trend both sit at zero, firmly planting conditions as of September’s data in the Bust category. Going back to the late 1970s, the only other time the six-month average has hit these lows was in the later stages of the Great Financial Crisis. Though, with initial jobless claims still more than 750,000 per week, and nonfarm employment at -6.4% year over year (still worse than any period since the demobilization after the Second World War), this really shouldn’t be much of a surprise — the bulls, for some reason, see making up lost ground with unprecedented stimulus as the primary reason for being positioned with a pro-cyclical bias. Meanwhile, the debt overhang that caused the 2009-2019 economic expansion to have been the weakest in the past seven decades has only become worse and represents a massive tax liability and constraint on aggregate demand for the foreseeable future.
The equity market may have surged off its March lows, and credit spreads sharply tightened on both real and pledged Fed intervention, but the actual fundamentals paint a pretty bleak picture. Activity is still severely depressed and with COVID-19 cases reaching another daily record last week, it may be some time before things turn around.
In the face of this uncertainty, a portfolio positioned defensively — including Treasuries, gold and equities that trade with “utility-like” characteristics and have reliable dividend growth characteristics — is a prudent strategy that mitigates downside risks, but has the ability to capture upside potential, as economic growth prospects are very sluggish and inflation risks are still low alongside a massive resource gap in the broad economy.
David Rosenberg is founder of independent research firm Rosenberg Research & Associates Inc. and Andrew Hencic is a senior economist there.You can sign up for a free, one-month trial onhis website.
Economy
Canada’s unemployment rate holds steady at 6.5% in October, economy adds 15,000 jobs
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Press. All rights reserved.
Economy
Health-care spending expected to outpace economy and reach $372 billion in 2024: CIHI
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
The Canadian Press. All rights reserved.
Economy
Trump’s victory sparks concerns over ripple effect on Canadian economy
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
The Canadian Press. All rights reserved.
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