WASHINGTON, Aug. 1, 2019 — Photo taken on July 31, 2019 shows U.S. dollar banknotes in Washington … [+] D.C., the United States. U.S. Federal Reserve on Wednesday lowered interest rates for the first time since the 2008 global financial crisis, amid rising concerns over trade tensions, a slowing global economy and muted inflation pressures. The Federal Open Market Committee, the Fed’s rate-setting body, trimmed the target for the federal funds rate by 25 basis points to a range of 2 percent to 2.25 percent after concluding its two-day policy meeting, in line with market expectation.(Photo by Liu Jie/Xinhua via Getty) (Xinhua/Liu Jie via Getty Images)
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Last week, interest rates moved slightly lower, with the 10-year T-Note falling about 7 basis points from 0.71% to 0.64%, a retracement of 37% toward the 0.51% August 4 low. Like its brethren, the 30-year T-Bond fell 10 basis points from 1.45% to 1.35%, a 38% retracement to the 1.19% low (also August 4). Some of the up-move had to do with the “Inflation Scare” discussed in last week’s blog. But most of the up-move was the result of the sheer volume of new debt coming to market. When a Treasury auction doesn’t go so well (Reuters Headline: “U.S. sells $25 bln 20-year bonds to tepid demand”), rates naturally rise. So, why the re-emergence of the downtrend?
Some of it may be related to the growing recognition that we have yet to see the worst of the Recession, and when we do, the Fed will have little choice but to print more money. The chart below, which shows retail sales making a new high (with 28 million people still unemployed) is all you really need to know. The April $1,200 stimulus checks and the extra $600/week of unemployment benefits actually grew personal income (PI) at a $2.2 trillion annual rate (12% annualized growth). And, as I write, we are still awaiting the next installment from Congress.
Retail Sales
U.S. Census Bureau
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At the same time as retail sales and PI were smashing records, the savings rate established some new records of its own, currently standing at 19% of PI. Consumers haven’t taken any vacations lately. Nor have they gone to many restaurants. In fact, most leisure activities have been curtailed. Thus, the rise in the savings rate. What we do see, however, is a significant rise in spending on home improvements (look at HD, and LOW revenues and earnings). And the one sector of the economy that is doing well is new home construction, especially in the suburbs (Housing Starts +22.6% in July!).
There have been discussions in the economics blogosphere about where the Fed’s balance sheet will get to when the real bite of the Recession is felt. As of August 19, the size of that balance sheet is $7.01 trillion. For context, it was $3.76 trillion a year ago on August 21, 2019 (which was still bloated from the ’08-’09 Recession). That’s an 86% ($3.25 trillion) expansion. It appears that the Fed will re-double that effort when the chips are down. Some of the bloggers say that the balance sheet will have to top $10 trillion, i.e., $3 trillion more. Doing the math, for every $1 trillion added to the money supply (Fed’s balance sheet), the annual growth in M2 rises about 7 percentage points. As of August 19, the Y/Y growth in M2 was 22.4%. Adding another $1 trillion puts that growth rate near 29%, and $1 trillion after that puts it at 36%. A third $1 trillion ramps it up to more than 42%! The table below, from my blog of two weeks ago, shows the rate of money growth in the world’s more important economies. None of these economies show money growth even close to the U.S.’s, much less what it may turn out to be when the Fed expands its balance sheet to cope with the real, but belated, Recession impacts.
Rate of money growth in the economies
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Gold price vs Dollar
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Gold is priced in dollars. There is a very strong relationship between its value and the value of the dollar (see chart). Imagine how fast the value of the dollar will fall and the (dollar) value of gold rise if the U.S. money stock grew 42% while the rest of the world continued to expand their money stocks at the rates shown in the table. The scariest issue here is the possibility that the world no longer uses the dollar as the reserve currency!
What’s the Fed Thinking?
In the minutes of the recently held Fed meetings (July), the Fed chiefs indicated that it would continue to expand its balance sheet, as needed. This was no surprise. Discussed at the meeting was a strategy of pegging the Treasury yield curve (i.e., pegging rates for the 1, 2, 5, 10, 20 and 30-year securities). In the minutes, the Fed indicated that it was not going to implement this strategy at this time. When that was revealed last Wednesday, there was a brief back-up in yields.
But, the real kicker was the Fed’s view on the economic outlook. The Fed gave two scenarios, both of which are given an equal probability. In all of my many years of Fed watching, I have never seen them gravitate toward a pessimistic scenario or come off as a worried bunch. But they did in July. In this scenario, the virus has a second wave, more businesses close, GDP falls again, unemployment rises, and deflation prevails.
And their view on the recent upward move in the CPI (i.e., the “Inflation Scare”) is that the negative impact of the pandemic on aggregate demand more than offsets upward price pressures due to supply issues. Well, at least for now. (My comment: The money creation, supply issues and some demand improvement will eventually lead to inflation.)
The Economy
Recent data show some slight improvements in the high frequency data. For example, OpenTable restaurant bookings are slightly higher in mid-August than they were in mid-July (but, still, down more than -50% from their February levels), and TSA passenger counts are up, as are the retail sales and housing starts alluded to earlier. But, as explained, we are still living on the sugar high of free money, and it appears more is on its way. The real economic consequences come when the helicopter money stops.
Employment
As expected, August showed some deterioration in the weekly state Initial Claims (IC) data (week of August 15). IC rose +53k (not seasonally adjusted- NSA) from +839k to +892k, as businesses, now well past any PPP requirements and realizing that the nascent recovery has flattened, continue to lay workers off. These ICs must fall toward their more normal 100k-200k levels for the economy to regain its swagger.
But there was some good news on the employment front, albeit not covered by the business news media! State Continuing Claims (CC) data (week ended August 8) fell -936k (NSA) from 15.201 million to 14.265 million, as some businesses were allowed to re-open. Despite the fall, this number is still mind-bogglingly high! For context, a year ago, this number was 1.619 million (about 11% of the current level).
Unlike the state numbers, the Pandemic Unemployment Assistance (PUA) (the supplemental program created by the CARES Act to aid the self-employed and independent contractors not eligible for the state unemployment programs) new weekly Initial Claims (IC) (week ended August 15) rose +53k from 490k to 543k. The PUA Continuing Claims (CC) data has a 2-week lag, so the latest data there are for the last week of July (week ended August 1). In that week, PUA CC rose +502k, from 10.723 million to 11.225 million. The combined state and PUA data (lagged back to August 1) still shows 28.1 million people unemployed.
The conclusion here is that employment is still a mixed bag. The mid-August state data does show hope. As seen in the chart, the downtrend in the unemployment levels continues.
The unemployment picture
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Bankruptcies (BKs)
Below is an update to the weekly BK chart that I have included in this blog for the past few months. The annual BK rate reached 275 in mid-August (publicly traded companies from the Bloomberg database). As of August 20, the annual rate stood at 273. For context, in 2019 there were 139 BKs of publicly traded companies, and there were 118 in 2018. I expect this rate to accelerate when the helicopter funding ends.
Annual Bankruptcies
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Conclusions
The economy remains on a free-money induced sugar high;
The consequences of the Recession are still “down the road;”
When those consequences do present themselves (rising BKs, stubborn unemployment, foreclosures, loan losses, evictions…), the Fed will have no choice but to print more money;
The result is that the intermediate term prospect is for continued dollar weakness vis-á-vis other currencies;
That means rising gold prices and ultra-low interest rates.
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.
