Earlier this week, TD Canada Trust chairman Ed Clark warned Canadians against complacency: we may have dodged the first bullets, but there are more to come. Among the reasons he cited were that, with the drying up of securitization markets, banks would have to keep more loans on their books. Also, as foreign banks mend their balance sheets, less capital will be flowing into Canada.
Stephen Gordon, at Worthwhile Canadian Initiative, an economics professor at Laval University in Quebec City (who recently blogged about the Quebec budget), has this take on Canada’s path to recovery: it wasn’t exports driving Canadian GDP growth in the past decade, it was higher commodity prices, and these insulated Canada for a time against the U.S. recession. So even if the U.S. recovers sooner rather than later, for Canada it is commodity prices that are key — and they will likely inhibit a U.S. recovery.
“A strong US recovery would mean that they’d managed to fix everything that is wrong down there, and that the US economy would stop being a drag on the rest of the world.
“But is a US recovery a necessary condition for higher commodity prices? Here, one’s eyes turn to China. As Jim Hamilton documents, much of the 2007-2008 surge in oil prices can be ascribed to an increase in Chinese consumption. And no doubt a similar story can be applied to the prices of other commodities.
“It could be argued that much of this increase was derived from US demand for Chinese exports, so the US was still the driving force in commodity prices. But to the extent that the Chinese stimulus package succeeds in redirecting aggregate demand from net exports to domestic investment — and there seems to be some reason to be optimistic on this point — then commodity prices may resume their upward trend. This story would be consistent with a Canadian recovery, but a US recovery would be slowed by higher oil prices.
“Although it’s possible to imagine scenarios in which Canada recovers while the US does not, I can’t think of one in which Canada recovers while China remains stuck in recession. Maybe we should be paying more attention to what’s happening in China than to what’s happening in the US.”
Gordon is playing off James Hamilton’s paper, recently delivered at the Brookings Institute , which sees a significant role for oil prices in the current U.S. recession. Hamilton, an economics professor at the University of California at San Diego, co-writes the Econbrowser blog. He writes:
“The implication that almost all of the downturn of 2008 could be attributed to the oil shock is a stronger conclusion than emerged from any of the other models surveyed in my Brookings paper, and is a conclusion that I don’t fully believe myself. Unquestionably there were other very important shocks hitting the economy in 2007-08, first among which would be the problems in the housing sector. But housing had already been subtracting 0.94% from the average annual GDP growth rate (between Q4-2006 and Q4-2007), when the economy did not appear to be in a recession. Housing subtracted only 0.89% over Q4, 2007 and Q3, 2008 when we now say that the economy was in recession. Something in addition to housing began to drag the economy down over the later period, and all the calculations in the paper support the conclusion that oil prices were an important factor in turning that slowdown into a recession.
“It is interesting also that the observed dynamics over Q4 2007 and Q4 2008 are similar to those associated with earlier oil shocks and recessions. The biggest drops in GDP come significantly after the oil price shock itself. We saw in earlier episodes that the drops in spending caused by the oil price increases resulted in lost incomes and jobs in affected sectors, with those losses then magnifying other stresses on the economy and producing a multiplier dynamic that gathered force over subsequent quarters. The mortgage delinquencies and financial turmoil in the current episode are of course not the specific stresses that operated in earlier downturns, but the broad features of that multiplier process are surprisingly similar to the historical pattern.”
There’s also more Canada in the blogs this week. Rebecca Wilder, a financial services industry economist and author of the News N Economics blog , caught the weekend Globe and Mail’s feature on increasing eastward inter-provincial migration, a healthy adjustment that stands in marked contrast to the U.S. situation.
“This recession has, so far, slashed 5.1 million jobs (according to the establishment survey at the BLS) and $3.7 trillion in household (and nonprofit, but this is a really small share) real estate value. And according to the Census Bureau , regional population growth patterns show a sharp slowdown in U.S. migration in the last year through July 2008. “It’s not a stretch to put two and two together: U.S. households are holding leveraged assets (homes) that are falling in value. Households cannot, or will not, sell their homes; and instead of moving where the work is, they stay put. This is not efficient, as normally household migration picks up during an economic downturn.”
Stimulating debate: Although it might seem that we are all Keynesians now, there is strong disagreement in the U.S. economic community. “Freshwater” University of Chicago economists (among them Nobellists Robert Lucas and Gary Becker), think federal spending will simply displace private spending. “Saltwater” economists, including Princeton’s Paul Krugman argue that the private sector isn’t spending. Two veteran economics bloggers, Berkeley’s Brad DeLong and George Mason University’s Tyler Cowan carry on that debate at CBC Money Watch.
According to DeLong: “There are basically two arguments against the stimulus package: That deficit spending will cause interest rates to spike, or that it will crowd out private investment. Neither is correct.”
Cowan responds: “There’s nothing wrong with fiscal stimulus, but the odds that this package will ignite sustained recovery are low. Here’s how the stimulus package could have been much smarter about jolting the economy without such a vast increase in federal debt.”
Getting worse slowly: The last word this week goes to Big Picture’s Barry Ritholtz who says the economy has not bottomed up yet:
“Ever since Ben Bernanke’s 60 Minutes interview where he used the phrase “Green Shoots,” many of the key data releases have been misinterpreted. This has led to a as to whether the worst is behind us.”
“In recent weeks, I have keyed in on 4 data points that the mainstream has spun positively, despite the actual data being horrific. These four factors include ISM data, New Home Sales , Existing Home Sales, and Non Farm Payroll.”
“Coming off historical lows (and in some cases, all time lows) in many data-points feels like things are getting better. In reality, things are getting worse, but more slowly. What is happening in the real world is the change in the rate of fall. The direction is still negative — the economy is still contracting — but it is doing so at a slower pace.
(04/09/09)