President Biden’s proposed stimulus/relief bill won’t help the economy, though it may help some at the expense of others. Neither cold logic nor the numbers support the idea that an additional $1.9 trillion of federal spending will provide any impact to the overall economy.
For the logical experiment, begin with the sectors that are sub-par now: leisure and hospitality, which includes restaurants, bars, hotels, theaters, professional sports, museums and so forth. How much federal money would induce my neighbors and me to go out to dinner? Unless our governor is bribed to allow restaurants to re-open, no amount of money will do the trick. That pretty much holds true for all other weak parts of the economy.
In addition to leisure and hospitality, school employment is down, both for public and private education. Many teachers are working remotely thanks to Zoom and other platforms, but the unused buildings don’t need janitors and the cafeterias don’t need cooks and servers. New federal money won’t will get the schools to reopen.
Some weakness occurs in other industries, but mostly that’s attributable to leisure and hospitality and education. Wholesale trade is down, for example, but that sector includes the people who sell paper products to restaurants and schools. Stimulus won’t get those sectors to expand.
That’s the logical story. The numbers reach the same conclusion through a different path, described recently by Larry Summers. Let’s assume that stimulus would get those activities going, or some substitutes. That is, with enough federal stimulus the unemployed waiters, hotel clerks and school janitors would find work elsewhere. How much stimulus would that take? Even that question assumes that everyone were willing to shift quickly, for a temporary new opportunity. But let’s make the assumption.
At the end of 2020, the economy was running about $0.7 trillion per year short of its potential. Potential GDP is a clear concept, though roughly estimated. The concept is how much our country would produce at full employment of people who wanted to work, and full utilization of factories and offices. Full employment does not mean zero unemployment; rather it means that the time it takes someone to find a job is normal. Similarly, it does not assume that every factory is running three shifts, but that they are running at normal pace, accounting for occasional shutdowns for maintenance and upgrades. The actual estimate is soft but unlikely to be grossly wrong.
So we ended 2020 with a $0.7 trillion shortfall from GDP potential. Then at the end of December, Congress passed and President Trump signed $0.9 trillion of stimulus. That happened too late to affect our final GDP report, so it’s all going into 2021. Consider this: a gap of $0.7 trillion was countered with $0.9 trillion of stimulus in December, and now we are considering another $1.9 trillion.
How will that money be spent? Most discussions focused on $1400 checks, Additional payments to unemployed people, state and local governments and for child care round out the large categories. Most people will use the payments to pay down debt and increase their bank balances—which are already very high. In fact, people in poorer zip codes are now spending much more than they spent a year ago, at the economic peak before Covid-related layoffs and lockdowns. There are some individuals in need of relief, but many laid-off workers received extra unemployment insurance payments that boosted their take-home pay above working wages.
If most people tried to spend their stimulus money, we’d all be fighting to purchase the same things. We’re pretty much producing at full capacity for the open part of the economy, such as grocery stores and online gear. Computer chip shortages plague electronics and automobile producers, illustrating the limits of our productive capability.
Eventually, pushing too much money into people’s hands—when productive capacity cannot match the spending—will prove inflationary. Early signs in inflation may show in 2021 and be clearly evident by the end of 2022 and certainly by 2023. At some point government debts come due, so if people have not paid for the stimulus through inflation reducing the value of their assets, then higher tax rates and higher interest rates will take a toll on the public.
The bottom line for the economy with the stimulus bill is no noticeable change in total spending, production and employment until Covid dies out, and then too many dollars chasing too few goods and services.
Canadian regulator lifts banks’ capital buffer to record, priming for post-pandemic world
Canada‘s financial regulator raised the amount of capital the country’s biggest lenders must hold to guard against risks to a record 2.5% of risk-weighted assets, from 1% currently, in a surprise move that could pave the way for them to resume dividend increases and share buybacks.
The new measures, which take effect on Oct. 31, is a sign that the economic and market disruptions stemming from the coronavirus pandemic have abated and banks’ capital levels have been resilient, the Office of the Superintendent of Financial Institutions (OSFI) said in a statement.
But the regulator acknowledged that key vulnerabilities, including household and corporate debt levels, as well as asset imbalances caused by steep increase in home prices over the past year, remain.
In a sign of concern about the housing market, OSFI and the Canadian government raised the benchmark to determine the minimum qualifying rate for mortgages, starting June 1.
The increase in the Domestic Stability Buffer (DSB) to the highest possible level raises the Common Equity Tier 1 (CET1) capital – the core bank capital measure – to 10.5% of risk-weighted assets; a 4.5% base level, a “capital conservation buffer” of 2.5%, and a 1% surcharge for systemically important banks, plus the DSB.
The change “gives OSFI more leeway to loosen a restriction down the road, namely the freeze on buybacks and dividend increases,” National Bank Financial Analyst Gabriel Dechaine said.
OSFI felt it was “useful for the banks to understand what our minimal capital expectations are and to give them time to adjust to that… ahead of any lifting of the temporary capital distribution restrictions,” Assistant Superintendent Jamey Hubbs said on a media call.
Even with the higher requirement, Canada‘s six biggest banks would have excess capital of about C$51 billion, dropping from C$82 billion as of April 30, according to Reuters calculations.
That was driven in part by a moratorium on dividend increases and share buybacks imposed by OSFI in March 2020, although a pandemic-driven surge in loan losses has so far failed to materialize.
The Canadian banks index slipped 0.25% in morning trading in Toronto, while the Toronto stock benchmark fell 0.1%.
The increase is the first since the last one announced in December 2019, which did not come into effect as planned in April 2020, as OSFI made an out-of-schedule change https://www.reuters.com/article/canada-mortgages-regulation-idUSL1N2B636J that dropped the rate to 1% in March. It has maintained that level at its twice yearly reviews.
Prior to that, OSFI had raised the required level by 25 basis points at every twice yearly review since it was introduced at 1.5% in June 2018.
($1 = 1.2326 Canadian dollars)
(Reporting By Nichola Saminather; Editing by Marguerita Choy and Jonathan Oatis)
Canada Economic Indicators
The economic indicators used to gauge the performance of an economy and its outlook are the same across most nations. What differs is the relative importance of certain indicators to a specific economy at various points in time (for instance, housing indicators are closely watched when the housing market is booming or slumping), and the bodies or organizations compiling and disseminating these indicators in each nation.
Here are the 12 key economic indicators for Canada, the world’s 10th-largest economy:1
Statistics Canada, a national agency, publishes growth statistics on the Canadian economy on monthly and quarterly bases. The report shows the real gross domestic product (GDP) for the overall economy and broken down by industry. It is an accurate monthly/quarterly status report on the Canadian economy and each industry within it.2
Employment Change and Unemployment
Key data on the Canadian employment market, such as the net change in employment, the unemployment rate, and participation rate, is contained in the monthly Labour Force Survey, released by Statistics Canada. The report contains a wealth of information about the Canadian job market, categorized by the demographic, class of worker (private sector employee, public sector employee, self-employed), industry, and province.3
Consumer Price Index
Statistics Canada releases a monthly report on the consumer price index (CPI) that measures inflation at the consumer level. The index is constructed by comparing changes over time in a fixed basket of goods and services purchased by consumers. The report shows the change in CPI monthly and over the past 12 months, on an overall and core (excluding food and energy prices) basis.4
International Merchandise Trade
This monthly report from Statistics Canada shows the nation’s imports and exports, as well as the net merchandise trade surplus or deficit. The report also compares the most current data with that for the preceding month. Exports and imports are shown by product category, and also for Canada’s top ten trading partners.5
Teranet – National Bank House Price Index
This composite index of house prices across Canada was developed by Teranet and the National Bank of Canada and represents average home prices in Canada’s six largest metropolitan areas. A monthly report shows the change in the index monthly and over the past 12 months, as well as monthly and 12-month changes in Canada’s six and 11 largest metropolitan areas.6
RBC Manufacturing Purchasing Managers’ Index – PMI
Released on the first business day of each month, this indicator of trends in the Canadian manufacturing sector was launched in June 2011 by Royal Bank of Canada, in association with Markit and the Purchasing Management Association of Canada. RBC PMI readings above 50 signal expansion as compared to the previous month, while readings below 50 signal contraction. The monthly survey also tracks other information pertinent to the manufacturing sector, such as changes in output, new orders, employment, inventories, prices, and supplier delivery times.7
The Conference Board’s Consumer Confidence Index
The Conference Board of Canada’s Index of Consumer Confidence measures consumers’ levels of optimism in the state of the economy. It is a crucial indicator of near-term sales for consumer product companies in Canada, as well as an indicator of the outlook for the broad economy since consumer demand comprises such a significant part of it. The index is constructed on the basis of responses to four questions by a random sampling of Canadian households. Survey participants are asked how they view their households’ current and expected financial positions, their short-term employment outlook, and whether now is a good time to make a major purchase.8
Ivey Purchasing Managers Index – PMI
An index prepared by the Ivey Business School at Western University, the Ivey PMI measures the monthly variation in economic activity, as indicated by a panel of purchasing managers across Canada. It is based on responses by these purchasing managers to a single question: “Were your purchases last month in dollars higher, the same, or lower than in the previous month?” An index reading below 50 shows a decrease; a reading above 50 shows an increase. Panel members indicate changes in their organization’s activity over five broad categories: purchases, employment, inventories, supplier deliveries, and prices.9
Canada Mortgage and Housing Corporation (CMHC) issues a monthly report on the sixth working day of every month, showing the previous month’s new residential construction activity. The data is presented by region, province, census metropolitan area, and dwelling type (single-detached or multiple-unit). The indicator is an important gauge of the state of the Canadian housing market.10
This key indicator of housing activity is compiled by the Canadian Real Estate Association (CREA) and is based on the number of home sales processed through the MLS (Multiple Listing Service) Systems of real estate boards and associations in Canada. The monthly report from the CREA shows the change in home sales across Canada, as well as for major markets, from month to month. The report also includes other important housing-related information, such as the change (as a percentage) in newly listed homes, the national sales-to-new listings ratio, months of housing inventory, the change in the MLS Home Price Index, and the national average price for homes sold within the month.11
Statistics Canada releases a monthly report on retail sales activity across Canada, with changes shown on month-over-month and year-over-year bases. The headline number shows the percentage change in national retail sales on a dollar basis; the percentage change in volume terms is also shown. The retail sales figures are shown by industry and for each province or territory, and provide insights into Canadian consumer spending.12
The building permits survey conducted monthly by Statistics Canada collects data on the value of permits issued by Canadian municipalities for residential and non-residential buildings, as well as the number of residential dwellings authorized. Since building permit issuance is one of the very first steps in the process of construction, the aggregate building permits data are very useful as a leading indicator for assessing the state of the construction industry.13
The Bottom Line
The 12 economic indicators briefly described above show the health of key aspects of Canada’s economy: consumer spending, housing, manufacturing, employment, inflation, external trade, and economic growth. Taken together, they provide a comprehensive picture of the state of the Canadian economy.
Canada adds jobs for fourth straight month in May
Canada added 101,600 jobs in May, the fourth consecutive month of gains, led by hiring in the education and health services sector as well as in professional and business services, a report from payroll services provider ADP showed on Thursday.
The April data was revised to show 101,300 jobs were gained, rather than an increase of 351,300. The report, which is derived from ADP’s payrolls data, measures the change in total nonfarm payroll employment each month on a seasonally-adjusted basis.
(Reporting by Fergal Smith; Editing by Alex Richardson)