The U.S. and Canadian Economies Continue to Improve Slowly
In an earlier blog entitled “What is Canada’s Role in the U.S. and Michigan Economies?,” I talked about the link between the economies of the United States and Canada and what role Canada might play in Michigan’s economic recovery. These topics were discussed in more detail at the Canada–United States Business Association’s (CUSBA) Economic Outlook for 2013. I was fortunate enough to be asked to speak at this event, along with Martin Schwerdtfeger, senior economist for Toronto-Dominion Bank. Here are some of the main points that were presented during the discussion.
I opened the discussion with a brief summary of the U.S. economy. The most recent data through December suggest that growth in U.S. economic activity has paused in recent months, in large part because of weather-related disruptions and other transitory factors. Employment has continued to expand at a moderate pace, but the unemployment rate remains elevated. On a positive note, the recently revised employment numbers indicate that total nonfarm payroll employment had increased by as much as 647,000 more than originally thought. Based on advanced estimates from the Bureau of Economic Analysis comparing the fourth quarter of 2011 with the same period in 2012, we see that total GDP grew by 2.2 percent, personal consumption expenditures increased by 1.9 percent, and gross private domestic investment advanced by 9.6 percent. Headwinds to this growth were net exports of goods and services (–0.7 percent) and government consumption expenditures and gross investment (–1.7 percent).
I then went on to discuss the U.S. consumer. When talking about the consumer, it is important to distinguish between the consumer’s ability and willingness to consume. On the ability side, the consumer has seen some recent improvements in real disposable income and an improved debt position evidenced by lower debt service ratios, low inflation rates, and low interest rates. However, on the willingness side, the consumer remains skeptical because of slow job creation, which has led to stubbornly high unemployment rates; and although the consumer’s household net worth has improved, home prices remain well below their previous peak. In addition, slower global growth expectations, higher payroll taxes, and potential fiscal spending cuts continue to add to uncertainty. Combined, these factors have kept consumer attitudes, as indicated by the University of Michigan’s Consumer Sentiment Index, at near recessionary lows since 2008.
One positive for Michigan and the Midwest economy has been the consumer’s increasing propensity to purchase automobiles. Light vehicles sales in the U.S. increased to 14.4 million units in 2012, which was an increase of 4.0 million units from the industry trough reached in 2010. According to analysts’ forecasts, auto sales are expected to continue to increase in 2013, reaching 15.0 million units, due to pent-up demand, an aging vehicle fleet, and the consumer’s desire to take advantage of the better fuel economy featured in some of the newer products on the market.
Transitioning to a discussion on the Canadian economy, Schwerdtfeger pointed out that Canada’s economy has long been closely tied to the economic health of the United States. According to Schwerdtfeger, Canada’s economy had outperformed the economies of other developed countries since 2007, led by growing consumer spending and a vibrant housing market. However, the housing markets in Canada appear to have peaked, and consumers are becoming more cautious about adding to their debt. Schwerdtfeger went on to say that, over the next few years, growing exports to the U.S. will likely help to sustain at least modest economic growth for Canada. But once the final figures are in for 2012, Canada’s almost seven-year run of outperforming the United States will likely come to an end.
On the international front, Schwerdtfeger warned that concerns over the U.S. fiscal outlook and a continued drag from the European recession will most likely negatively impact Canada’s economic performance in 2013. Fiscal consolidation in the U.S. alone could shave as much as 0.7 percentage points off Canadian economic growth through declining exports and knock-on-effects to other areas of the Canadian economy. Beyond mid-year, Schwerdtfeger suggested that U.S. economic growth could improve enough, based on stronger real estate activity, to support a modest increase in Canadian exports. Still, an overvalued Canadian dollar, elevated household debt, and government restraint will likely keep Canada’s overall pace of economic expansion in check. Schwerdtfeger saideconomic growth for Canada in 2013 and 2014 is forecasted at 1.7 percent and 2.5 percent, respectively. Faced with this continued sub-par performance of the economy in the near term, the Bank of Canada will be in no rush to raise interest rates earlier than 2014, unless growth at the end of this year exceeds current expectations.