When Gross Domestic Product (GDP) growth data for the 3rd quarter of 2020 is released on October 29th, it will almost certainly break records. Many analysts project growth over 30 percent at an annual rate – roughly twice as high as any quarterly growth rate since World War II.
Yet despite this phenomenal-sounding growth, the economy will still be in a considerable hole, is actually slowing down, and presents a strong case for concern. Some basic math and data can help pierce through the mirage.
One reason 30 percent growth doesn’t mean the economy is healed stems from how percentage changes work when going down and then up. If you own a stock priced at $100 and it drops 30 percent, it is now worth $70. If it gains back 30 percent, it is then worth $91 (the gain is just $21 because 30 percent of 70 is 21). In the same manner, the large drop in output in the 2nd quarter followed by similar sized increases in the 3rd quarter will still leave a large hole. Even if GDP growth is 30 percent at an annual rate in the third quarter, output will still be more than 4 percent below its level at the end of 2019, which is more than the farthest the economy ever was from its prior peak in the Great Recession.
In addition, in the United States, we typically report growth numbers at an annualized rate. This way of reporting tells you how much the economy would grow or shrink if it kept up that pace for a full year. When there are huge swings up or down (like now) that can be a bit misleading. It made the drop in the second quarter seem larger than it was, and now makes the rebound seem larger as well.
It is also important to recognize that rapid 3rd quarter growth does not mean the economy has strong momentum now. Third quarter growth measures the average level of output in July through September compared to the average in April through June. The very low level of output in April and May set a low baseline, meaning almost any bounce back at all would generate a huge growth rate for the third quarter.
One way to see how much of 3rd quarter GDP growth comes from earlier in the year is to look at the growth in hours worked. Hours worked are often a good proxy for GDP growth, and grew by 25% at an annual rate between the second and third quarters. When looking at the monthly hours worked compared to the quarterly average (used to generate the quarterly growth rate), it is clear that the second quarter average is held down by the low April level, and in fact much of the growth that lifts the third quarter above the second actually came due to the rapid rebound in May and June. In fact, when calculating the growth rate, well over half of the growth comes from May and June. Had hours worked simply stayed at the June level throughout the third quarter, the 3rd quarter growth rate would still be 15% at an annual rate.
Other evidence also demonstrates that the rebound in the economy has been slowing down over the late summer and into the fall. For each month from June to August, personal consumption growth was slower than in the month before. The same was true of retail sales through the summer, though it rebounded slightly in September. The Chicago Federal Reserve National Economic Activity Index, which pulls together over 80 data series from consumption to employment to production indicated that growth in August was the slowest it has been since the economy began to recover in May.
This slower growth is problematic given the huge hole in employment. Employment in the United States is still more than 10 million jobs below its level in February. Job growth, which broke records in June with almost 4.8 million jobs gained, slowed to 1.8 million jobs gained in July, 1.5 million in August, down to 660,000 jobs gained in September. If job growth continues to slow, it will take years to bring the economy back to its level of employment before the COVID recession. Job growth certainly does not look like a “V” anymore.
In many ways, the slowing job growth is not a surprise. Many of the jobs gained over the early summer stemmed from rehiring workers who had been on temporary layoff. In April, 78 percent of the unemployed considered themselves on temporary layoff; that is down to 37 percent in September. Re-employing a worker from temporary layoff is much easier than matching an unemployed worker to a new firm. The number of individuals who say they are on permanent layoff has also grown considerably, from 1.5 million in March to 3.8 million in September. This rise in permanent layoffs is unusually swift. In the first 6 months of the Great Recession, the number of permanent layoffs grew just half a million. Furthermore, research suggests people overestimate the likelihood of re-employment and each month they are out of work reduces the chances their layoff is in fact temporary. As time passes, improvements in the labor market will become harder.
The number of unemployed actually understates the problem as millions of individuals have left the labor force. Many rejoined over the summer, but the labor force is still more than 4 million workers smaller than it was prior to the crisis, and it contracted in September, a disturbing stall in momentum.
Even as the economy was growing, there was evidence of extreme distress amongst families. Lines at foodbanks have shocked many. Surveys suggest surges in food insecurity. Reductions in employment, secondary incomes, tips, and gig work have left many families on the brink. Over 2.4 million workers have been unemployed for more than 27 weeks, a number that is sharply increasing and demonstrating extreme hardships for many households.
These indicators suggest the economy needs more help. First, it is essential to control the virus. Many sections of the economy simply cannot restart until there is greater safety and better confidence in the safety of workers and consumers. In addition, the economy will continue to need fiscal support. The unemployed need more financial aid. Small firms – especially those in heavily impacted sectors – simply cannot survive without assistance. State and local governments are increasingly laying off workers as their budgets are under extreme stress. Smart fiscal policy can help keep the recession from turning into an even longer and more painful downturn than it already is.
The flashy GDP growth number for the 3rd quarter is more a statistical quirk and reflection of the sharp dive and subsequent bounce in the spring, not an indication of current momentum. We cannot count on the economy to heal itself, it will take direct action.
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 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.
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.
