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A Faint Pulse in the U.S. Economy

Kip Beckman, Principal Research Associate, Forecasting and Analysis
May 1, 2009

Tentative signs that the economy in the United States may be slowly turning around have provided welcome relief from the recent onslaught of bad news and dire predictions. The Conference Board’s U.S. Outlook: Spring 2009 calls for real gross domestic product (GDP) to decline by 2.5 per cent in 2009, and the job losses remain alarming. Nevertheless, there are two indications of a faint pulse in the U.S. economy, which offer some solace to a world economy that is also expected to shrink this year.

Consumer Spending Grows

The first reason for hope is signs of life in the American consumer. Spending has actually increased in two of the past three months. The gains are likely a result of the dramatic drop in gasoline prices in recent months, which has provided households with some extra cash. Americans aren’t buying cars and homes, but they have increased their purchases of non-durable goods and services. The Obama tax cuts haven’t kicked in yet; when they do, consumer spending will receive an added short-term boost. While major growth is unlikely, given the tough state of U.S. labour markets, spending in the first quarter (after accounting for price changes) could be positive.

There are two indications of a faint pulse in the U.S. economy.

Deals Bring Life to Housing Markets

U.S. housing markets, the launch pad for the economic crisis, represent the second reason for hope. Both new and existing home sales increased above expectations in February. There are also signs that the rate of home price declines is beginning to ease in a few markets. Home prices have tumbled so much—especially in California and Florida—that families are starting to re-enter the market to take advantage of once-in-a-lifetime deals. Mortgage applications have increased sharply in recent weeks. As families refinance to take advantage of lower mortgage rates, they will increase their discretionary income over the next few months, generating additional economic activity.

A sustained recovery won’t occur until confidence, which is linked closely to the state of labour markets, recovers from record-low levels. Nevertheless, the positive news in some key U.S. markets indicates that, at the very least, a bottom is beginning to form.

Implications for the Global Economy

The faint pulse in some sectors of the U.S. economy offers some encouragement for countries—like Canada—that depend heavily on U.S. import demand. Nevertheless, the global economy is forecast to contract by 1.6 per cent this year, before the stimulus plans implemented in every major economy will help to produce growth of 2.1 per cent in 2010.

Recession in Eastern Europe

A sharp (and possibly prolonged) recession in Eastern Europe is inevitable, which will also hamper economies in Western Europe. Not only is Eastern Europe the destination for 30 per cent of eurozone exports, but Western European banks are also heavily exposed to risk because of loans they made in Eastern Europe. Furthermore, the European stimulus plans are not well coordinated at the EU level and among member states.  

The positive news in some key U.S. markets indicates that, at the very least, a bottom is beginning to form.

Slump in the Asia-Pacific Region

Emerging Asia is being hit hard by a sharp decline in world trade as the global downturn intensifies and export demand collapses. China’s exports are expected to decline this year for the first time in decades. Both China and India grew by 9 per cent last year; real GDP growth is forecast to slip to 7 per cent in China and 6.6 per cent in India. Australia may manage to avoid slipping into a recession this year, but the same cannot be said for Japan, where real GDP is set to tumble by close to 6 per cent. With the financial markets taking their toll, Hong Kong and Singapore will remain trapped in recession for most of this year.  

Kip Beckman
Kip Beckman
Principal Research Associate
Forecasting and Analysis
613-526-3090 ext. 319
U.S. Outlook: Spring 2009
World Outlook: Spring 2009

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2009 Spring Technical Forecasting Seminar