Monday, December 27, 2010

Why is Canada's Recovery linked to the U.S.? This Maclean's article explains.

In our global economy it is important to know what is happening elsewhere, particularly with our BIGGEST trade partner representing 3/4 of our export market.

Here is a comprehensive and well-written article from Maclean's Magazine outlining how intertwined our Canadian economic recovery is with the U.S. and their level of recovery.

Recovery? You bet.
By: Jason Kirby

Over the Thanksgiving weekend in the United States, retailers experienced their best sales gains in four years, surprising many analysts.

With the flood of facts and figures that rush by every day, it’s easy to lose sight of the bigger picture when it comes to the American economic machine. For every batch of positive news confirming a recovery, it takes just one bad jobs report or trigger-happy dictator in North Korea to plunge us back into doom and gloom. But Lakshman Achuthan, managing director of the Economic Cycle Research Institute, and someone who studied recessions and recoveries for two decades, has a message for anyone with an interest in seeing the U.S. economy get back on its feet. “The revival is right in front of us,” he says. “Overall economic growth is about to accelerate.”

Signs of America’s resurgence abound. Shoppers surprised analysts during the Thanksgiving weekend—they helped drive retailers to their best sales gains in four years. They’ve also begun to indulge again, driving strong revenues at companies like Starbucks and cosmetics giant Estée Lauder. At the same time, manufacturers have enjoyed a resurgence of late. Sales and exports are both up. It’s all helped boost America’s top line. In November, third-quarter GDP was revised up to 2.5 per cent from two per cent—the fastest growth rate the U.S. has seen since the end of 2006.



All of this is vital for the Canadian economy. Last week, the Bank of Canada held steady on interest rates, leaving the overnight rate at one per cent. While the U.S. economy is revving up again, Canada has lagged. In the third quarter, GDP growth fell to one per cent, half the rate seen in the second quarter. Despite seeing an increase in exports to China, the U.S. is still the destination for nearly 75 per cent of Canada’s exports, so a strong rebound in that economy will help us immensely. At the same time, fears over the U.S. economy helped drive down the value of the greenback, hurting manufacturers here whose goods, priced in soaring Canadian dollars, have become more expensive. As things improve south of the border, that should take some of the air out of the loonie and lift trade.

Canada also stands to benefit from the recent compromise between President Barack Obama and Republican legislators to extend Bush-era tax cuts and unemployment benefits. As a result, economists at the Bank of Montreal now expect Canada’s economy to grow 2.7 per cent, up from 2.4 per cent. “The compromise stimulus deal is a welcome boost for the U.S. economy, household and business confidence, and, by extension, Canadian trade,” Sherry Cooper, BMO’s chief economist, wrote in a report.

Yet the U.S. job market continues to cast a dark shadow. In November, just 39,000 new jobs were created, far below analysts’ estimates, while the unemployment rate rose to 9.8 per cent. But even here there are reasons to believe the job market could turn positive a lot faster than expected. For one thing, companies are hiring again. According to the U.S. Labor Department, the number of job vacancies jumped by 351,000 to 3.36 million in October, the highest level since August 2008. It’s a safe bet that figure has risen even more since then.

On the ground, a shift is under way. In the rust-belt city of Dayton, Ohio, local businesses have an immediate need to hire thousands of new workers. “We are starting to see growth, job opportunities and more consumer confidence than we’ve seen in the past couple of years,” says Chris Kershner, with the Dayton Area Chamber of Commerce. In Richmond, Va., online job site SnagAJob.com has seen the number of listings double from last year. “It’s been awhile since we’ve had employers contact us saying, ‘We just can’t get enough applications,’ ” says SnagAJob’s Amanda Richardson, who notes the company is doubling its own staff to 300. Even in blighted Las Vegas, several hotels have shifted into hiring mode. Ten months after the Ritz-Carlton Lake Las Vegas folded, a new company, Dolce Hotels and Resorts, is reopening the hotel to capitalize on a nascent rebound in tourism. The hotel is on the hunt to fill 125 immediate vacancies before opening in February. “We are definitely starting to see cautious optimism in tourism and travel pick up,” says Barry Goldstein, an executive at Dolce.

America still has a long way to go to replace all eight million jobs lost during the recession, but the momentum of the recovery is picking up. “We continue to believe that U.S. employment will be stronger than most investors expect next year,” Richard Bernstein, a fund manager who had predicted the recession, wrote in a note to clients last week.

It’s a positive sign that several economists and investors who warned about the dangers of the housing bubble before the recession now believe the U.S. economy is on terra firma. In Bernstein’s case, as former chief investment strategist at Merrill Lynch last decade he alerted investors to the dangers of the housing bubble. Now, as a fund manager, he’s turned bullish on America. “The common theme today is that the U.S. stinks,” he told the Associated Press. “But the economy is already in better shape than people think.” He’s backed that up by focusing his global equity fund on American companies at a time when many in the industry are switching from U.S. stocks to emerging markets.

Likewise Barry Ritholtz, director of equity research at Fusion IQ and author of the popular financial blog The Big Picture, astutely foresaw the crisis, yet has taken an increasingly optimistic tone in recent months. As for the many doomsayers who continue to predict imminent calamity, Ritholtz calls them “zombie bears...They will not admit the economy is getting better, albeit slowly,” he wrote recently. “They insist the recession was a depression; they insist it never ended. These are the bears who cannot be killed. They will stay bearish, regardless of the data that all but insists otherwise.”

There’s a reason for that, says Achuthan at ECRI. “The classic emotional journey everybody takes in the wake of a big recession is, there’s a giant error of pessimism,” he says. To avoid that type of group think, ECRI focuses its analysis solely on leading indicators, which serve as tea leaves for the business cycle. And it’s why ECRI’s optimism now carries so much weight.

By looking at roughly 100 indicators that track things such as sentiment, inventories and new business orders, its various indices have proved reliable at detecting turns in the economy—it accurately predicted the 1990 recession, as well as the 2001 recession and subsequent recovery without ever crying wolf with a false recession call. ECRI didn’t predict the 2008 recession nearly as early as some others. It first warned of the potential for a downturn in December 2007 and didn’t make the official call until March—three months after the recession officially started (though still well in advance of the stock market rout in September). But importantly, in May 2009, as doom and gloom was rampant, ECRI accurately argued the recession was about to end. Similarly, earlier this year it rejected predictions of a double-dip recession, saying growth would merely slow before rebounding, which it has.

Still, skeptics of America’s recovery eagerly point to everything that could go wrong. America’s finances are a mess. The European Union is falling apart. North Korea is on a rampage and China may be slowing. But Achuthan dismisses all that: “To boil it down, those potential shocks, even if they manifest and become real, aren’t going to turn us into a recession any time soon.”

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