Over the past several weeks, much has changed in the tone of the financial press, the economic indicators and the markets. Virtually all of the changes have been positive. The tone has changed from utter doom and gloom to something much more cheerful and, I might add, more balanced. Many economic indicators have become more positive, in the sense that while many continue to indicate shrinking economic activity, activity is not shrinking as rapidly as before. And the markets have advanced significantly from their lows earlier in the year.
All of this is positive, especially given the huge amount of uncertainty that has gripped economies and financial markets around the world during the past 22 months. Falling into a black financial and economic hole, which many thought likely only a few months ago, no longer seems even a remote possibility. Although we are getting there, we’re not there yet. (I define “there” as meaning the sort of normal and better times that include sustained economic growth and healthy markets.)
Words and phrases such as “unprecedented” and “the worst since …” have all but disappeared. Many articles correctly point out that risks and uncertainties still exist. And the interpretation of economic data and the general discussion of current economic policies — what the central banks and governments are doing — has proven quite astute, which is in contrast to what we were seeing a few months ago.
There are two additional points to consider. First, we have not heard the last of the bad economic news. We can reasonably expect the good news to increasingly outweigh the bad news over the coming months, but there is still some bad news yet to come. Examples may include overall economic activity, where it will be late in the summer when we get the reports on the Canadian and U.S. Gross Domestic Product (GDP) for the second quarter. Both are likely to show that the respective economies shrank. Second, continue to advise your clients to use some judgment when reading the financial press. Clients should not take everything that is said as gospel truth, and ideally they’ll look at more than one news source and spend some time with you discussing the relevant economic news.
Many economic indicators have also shown signs of improvement. But most are indicating only that the economic deterioration has slowed down. In other words, many national economies are still shrinking. When an economy shrinks, many analysts describe it as “negative growth.” I find it a confusing phrase that is employed far too often. An economy either grows or shrinks, while occasionally doing neither. I am a stickler about how trends in economic and financial market trends are described, because most of our clients get their sense of how an economy is doing by way of words, not numbers.
Where the U.S. economy stands can be found in recent data from the Institute of Supply Management. The Institute performs monthly surveys to determine whether manufacturing (which accounts for about 12% of the U.S. economy) and the rest of the economy are expanding or contracting. Just a few months ago, the data showed both parts of the economy had gone deep into contraction territory. More recently, both have risen much closer to the break-even point between contraction and expansion, though they remain in contraction. Obviously, these indicators need to travel through the “shrinking less rapidly” territory before getting back to expansion. The point is that while they have not hit expansion yet, they are improving.
An economic indicator turning, and actually hearing about it, don’t happen at the same time. For most indicators in Canada and the United States, it takes at least a month before the statisticians are able to gather, analyze and report the data. The timing of the data on how the whole economy is performing — GDP — is different in the United States and Canada. The U.S. Bureau of Economic Accounts does a preliminary accounting each quarter, based on the first two months of the quarter, and releases it a month after the quarter’s end. For Statistics Canada, the delay is usually two months, but the data includes estimates for the entire quarter.
By way of illustration, the Q1 Canadian GDP data, which indicated that the Canadian economy shrank at an annualized rate of 5.4%, was only released on June 1. While it is helpful to get the preliminary look at the U.S. data, the fact that the data is preliminary means that it is revised more frequently and typically by larger amounts than the Canadian data. A return to growth in GDP will be one of the more significant indications that we are actually out of the economic woods.
The only Q2 data we have so far is the April labour market data, which indicated an unexpected increase in employment and an unchanged unemployment rate. Nevertheless, we can make some pretty good guesses that the major indicators, such as the GDP, are continuing to shrink but at a much-reduced rate. By the third quarter, or the fourth at the latest, we are likely to see a return to economic growth.
So what will things look like when we are “there”? Much of the current analysis suggests that the return to growth, when it comes, will be modest. There will, of course, be exceptions — Asia, which hasn’t stopped growing, will be poised to grow more quickly than virtually any other area of the global economy. That could make an important contribution to Canadian economic growth, because rapid Asian economic growth means a rapidly rising demand for commodities produced in Canada.
In the United States, much has been made of the fact that consumers are unlikely to contribute as significantly to the coming recovery as they have in the past. Nevertheless, other sources of economic growth will partially compensate, including government spending, business investment and exports.
Every market and economic downturn is marked by at least one analyst declaring that “it is all different this time.” Of course, we know it is never all different, though each downturn has its own unique characteristics. So do recoveries, and the coming recovery isn’t likely to deviate.
Peter Drake is vice-president, retirement & economic research, for Fidelity Investments Canada. With over 35 years of experience as an economist, he leads Fidelity’s research efforts in examining retirement in Canada today.
(06/04/09)