| || ||Michael Burt |
Canadian Industrial Outlook
Lost in the midst of the steady drumbeat of bad news coming out of Europe in recent months, there have been some encouraging economic trends in the U.S. Manufacturing activity is making steady gains, corporate profitability is greatly improved and consumer spending has finally surpassed its pre-recession peak. Even the beleaguered housing industry is showing some signs of life, as multi-family building activity started to pick up in the closing months of 2011. However, most encouraging of all has been job creation hitting a “magic number”; job creation has been averaging gains of more than 200,000 jobs per month over the past three months.
Why is this number important? This is a pace that will allow the U.S. economy to absorb the new workers entering the workforce and draw down the supply of labour that is under- or unemployed as a result of the recession. The result, a falling unemployment rate or more people fully employed. Healthy job creation has been the missing ingredient in the U.S. economic recovery, and if it is now in place, consumer confidence and spending, the engine of the U.S. economy, can be expected to improve considerably.
It is possible that we are seeing another false dawn. Monthly job creation in the U.S. briefly achieved the 200K milestone in the spring of 2011, only for the pace of the recovery to slow in the summer months. Indeed, there are still considerable risks to the world economy at present, including the debt crisis in the Euro zone and concerns over inflationary pressures and the sustainability of growth in major emerging markets. The U.S. still has domestic risks as well. Most prominent is the gaping budget deficit, with the U.S. federal government essentially spending three dollars for every two it brings in right now. As well, despite some signs that the U.S. housing market has finally found a bottom, market activity remains near multi-decade lows.
However, despite these risks there may be room for optimism. Job creation is being driven by the healthy corporate profitability and continued modest economic growth. U.S. businesses have been slow to rehire over the past few years, but their ability to increase production without hiring has limits, and employment is now on the rise. Further, this improvement is already occurring in an environment of significant government cost-cutting. Government employment in the U.S. has fallen by 276,000 positions in the past year alone.
As well, the European debt crisis may have smaller implications for the U.S. than many believe. The U.S. economy is domestically oriented, with exports equivalent to only 13.3 per cent of GDP last year; in comparison, that figure stood at 34.2 per cent for Canada. What is more, the Euro zone accounts for less than a fifth of those exports. The U.S. banks also have some exposure to Europe through their holdings of sovereign debt and other euro denominated assets and transactions, but their public disclosures to date have suggested that this exposure is fairly small.
To be clear, employment in the U.S. still has a long way to go until it fully recovers from the effects of the very deep recession that occurred in 2008-09. At the current pace of job creation, it will still take nearly three years for employment to reach its pre-recession peak, and at least two more years beyond that before the unemployment rate falls below 6 per cent. Nonetheless, after years of disappointing economic news from our neighbours and largest trading partner, there is the possibility that the U.S. may surprise on the upside this year. One good thing about being at the bottom is that you have nowhere to go but up.