Friday, 9 October 2015

Data daze

Business economists like to tell clients that you shouldn't read too much into one monthly data point, but it's advice that they don't always follow themselves. Case in point: last week the US reported that employment rose by only 142,000 in September, significantly lower than expected. Just one reading, right?  No reason to panic. Yet a large majority of economists quoted by the media immediately said that the report was a clear indication that economic problems abroad, notably the slowdown in China, were starting to weigh on US exports. Market participants, many of whom had been expecting a rate hike in September, promptly priced out any likelihood of a Fed rate hike in this calendar year.

So what do we make of today's Canadian employment data, also for the month of September?  Headline number of jobs created: 12,000 -- moderately positive. However, behind that number there was a reported 62,000 loss of full-time jobs, against a 74,000 gain in part-time employment, so it can be argued that the total labour input into the economy actually fell slightly. In addition, the unemployment rate edged up to 7.1 percent -- moderately negative.  However, with the number of jobs increasing, this was attributable entirely to a rise in number of people seeking work, which is generally taken as a sign of worker confidence.

There are plenty of conclusions we can draw from this report. One is that Canada's labour force survey still seems to suffer from wonky methodology.  I've written here before about the wild gyrations that are reported for full-time versus part-time employment, or paid employment versus self -employment, that StatsCan reports almost every month, only to revise away subsequently. A full-time job loss of 62,000 in one month is surely significant if it's true, but even in the oil patch, there have been few news reports that could be taken as evidence of such severe job-shedding.

Turning to the sectoral breakdown, we find truly bizarre numbers from the educational sector: a 51,000 decline in employment in the month when the kids go back to school. Delving a little into the StatsCan report, it turns out that the actual number of people employed in the sector actually rose in the month, and it was seasonal adjustment that produced the reported decline. Might be time to take another look at the adjustment factors.

These quibbles illustrate very clearly why you shouldn't read too much into the monthly headline data: there's too much going on under the surface for you to draw reliable conclusions.  Not that that will stop anybody from doing so, but is there anything in today's report that helps us to get a handle on how the overall economy is performing? StatsCan is very helpful here, pointing out that employment grew more than 60,000 in the first quarter (when GDP was reported to have fallen), by more than 30,000 in Q2 (when a second straight GDP decline led the media to scream "recession") and by a further 20,000 in Q3, for which we don't yet have full GDP data. What's more, the total employment gain of 161,000 in the year to September was entirely accounted for by full-time employment.

True, Canada needs to create more than 161.000 jobs in a year to absorb the growth in the labour force. Still, it's hard to be outright pessimistic about these numbers, given what's going on elsewhere.  And it's all but impossible to believe that the economy was really in a recession in the first half of this year.  

Monday, 5 October 2015

Canada and the TPP

The Trans Pacific Partnership trade agreement that was reached in Atlanta overnight represents the culmination of five years of negotiation among the twelve participating countries.  Strange to say, the final push to get the stalled negotiations completed was provided by the Canadian election. Fears that the October 19 vote might produce a government in Ottawa that was much less favourably disposed to free trade finally broke the many logjams that had arisen.

Not surprisingly, Prime Minister Stephen Harper is lauding the deal, but with exactly two weeks left until polling day, this may be a risky strategy for him and his party. There can be little doubt that Canada's existing trade deal with the United States and Mexico, the so-called NAFTA treaty, has contributed mightily to the rapid erosion of the country's once-dynamic manufacturing sector that has been seen over the past decade and more. The painfully slow recovery in manufacturing that is now taking place in response to the weakness in the Canadian dollar is clear evidence that the sector has experienced an irreversible structural shift, and not just a cyclical slowdown.

Among the major opposition parties, the NDP has already indicated that it will not be bound by the new deal, while the Liberals seem inclined to read the fine print -- of which there will be a great deal -- before coming to a position. The Tories have promised that the new Parliament will have the final say on whether Canada signs the TPP treaty, but it seems inevitable that claims and counterclaims about its likely impact on the economy will be flying in the last two weeks of the campaign.

It's already known that the deal will make things even harder for the beleaguered auto sector, thanks to a slightly scuzzy side deal between the US and Japan over the content of "Japanese" vehicles sold in North America. Japanese manufacturers (and others) will now be able to include more components from cheaper sources in their vehicles while still claiming preferential tariff treatment. The difference -- a fall from a 60 percent local content requirement under NAFTA (i.e. 60 percent of the value of the vehicle from Canada the US and Mexico) to 45 percent under TPP (i.e. 45 percent from all twelve TPP countries) stands to be very significant for what's left of the auto sector in southern Ontario.

Fears that the Harper government would bargain away Canada's so-called supply management system for dairy products -- a scheme that keeps local farmers in business by ensuring that I pay three times as much for milk here as I would five miles away, across the border -- have largely been neutered. Very limited quotas for imported dairy products will be phased in, but it's much more likely that this will mean we start to see New Zealand cheddar in our stores than that the price of liquid milk will drop.

The full agreement will be published, we are told, in the next few days, at which point affected parties will presumably start to squawk.  One major element of the deal that has not been mentioned at all in the early going is the treatment of investment. NAFTA and the TPP are lazily described as trade deals, but it's very often the treatment of multinational investments that proves most significant (and contentious) in the long run. Expect Canadian nationalists to come out strongly against the deal if it affords foreign companies protection from the actions of Canadian governments and courts. (Come to think of it, expect Canadian nationalists to come out strongly against the deal anyway -- that's what they do.)

Canada's Trade Minister, Ed Fast, confidently asserts that the government "certainly doesn't expect" any job losses from the TPP. Pull the other one, Ed: the whole point of deals like this is to compel inefficient sectors of the participating countries to face competition from abroad, which inevitably means there will be job losses. The hope is always that these will be offset by job gains in other sectors.

Economic theory, relying on a concept known as comparative advantage, asserts that free trade deals always make the participating economies as a whole better off. Thus governments can supposedly redistribute the gains made by one sector to offset the losses incurred by another. Great in theory, but does it ever really happen? And in a huge country like Canada, where so much power is held by provincial governments rather than federally, is it ever really possible? It will be interesting to see how Messrs Harper, Mulcair and Trudeau answer those questions in the next two weeks.    

Wednesday, 30 September 2015

Canada's economy is growing again (but let's keep it quiet)

The news that Canada's economy had been in a technical recession back in the first half of the year (well, from January to May) was fodder for some large-font headlines and much hand-wringing in the media.  Today we get news that GDP grew in July for a second consecutive month -- and it's not much of a story at all. In fact, the rabidly anti-Harper Toronto Star can't even find room for it on the home page of its website -- you have to click on the separate "Business" section, well down the page, to find it.

Most private sector analysts are revising their growth forecasts for Q3 and for the rest of 2015 sharply higher, and it seems likely that the Bank of Canada will be doing the same when it updates its published forecast in October. This should mean that there is no prospect of any further monetary easing by the Bank, which should reduce the downside for the exchange rate, even if the US Federal Reserve starts raising rates in the next little while.

This is undoubtedly good news for Stephen Harper's Tories, who look likely to emerge as the largest single party in the October 19 election, even though about two-thirds of the electorate (including your humble scribe) heartily wish them gone.  Harper and his cadaverous Finance Minister, Joe Oliver, have been widely scorned for downplaying the recession, but it looks as if they were right. There's every possibility that revisions to the data -- which can take several years to complete -- will eventually show that it never actually happened.  

Friday, 25 September 2015

Anger is an energy

Last year we spent a couple of weeks in the company of a hundred or more wealthy Americans, cruising the rivers of Europe. It was a great trip and they were mostly great travelling companions, but one thing we couldn't help noticing was how angry they were. Angry about immigration, angry about Obamacare, angry about Obama himself. Most of them proudly identified as Republicans.

That anger is plainly fueling the chaotic race for the GOP Presidential nomination,  particularly the rise of Donald Trump. One of Trump's most popular ideas has been his plan to build, at Mexico's expense, a wall along the entire border between the two countries. Now that idea has been, well, trumped by the suggestion that the US also needs a wall to separate itself off from Canada. This article, originally from Bloomberg News, suggests that the notion has the support of 41 percent of US voters, and has almost 50 percent backing in the southern states.

The Canada-US border is, according to the article, almost 9000 kilometres long -- for the benefit of US readers, that's better than 5000 miles. It goes without saying that a wall of that size would make the Great Wall of China look like your backyard fence. So it's not going to happen. Still, the article, much of which is tongue-in-cheek, contains a few snippets that are worth commenting on, to wit:
  • Thomas Caldwell, a financial executive in Toronto, is quoted as saying "There's not a horde of Canadians rushing to get in to America, let me tell you". Well, yes and no, Tom. This morning as I was driving around the Niagara region, local radio was reporting delays of up to an hour at the border bridges, of which there are four in a twenty-mile stretch. A lot of my neighbours go to the US every week to stock up on groceries, even with the Canadian dollar at such a low level. Canadians may not want to be Americans, but they sure love to shop like them.
  • Another Toronto financial executive -- well, this is Bloomberg -- mocks the 50 percent of southerners who want a wall: "They don't even know where Canada is". Probably some truth in that. A former colleague of mine, a Spaniard, loved to tell the tale of how he went to St Louis to study. One of the questions he was asked most often: how long did it take to drive from Spain to Missouri?  (Yes, I know St Louis isn't in the south, but it's a good story).
  • The Donald says he wouldn't build a wall along the 49th parallel: "I love Canada", he says. Might not be mutual, big guy! One of the tallest new towers in Toronto has Trump's name on it. It's been a source of messy litigation because a lot of the buyers of units in the building, which is a hotel/condo thingy, claim they were misled about the income potential. Trump has remained aloof from the fray, noting that basically his only role was to cash a nice fat check for allowing his name to be used.  
  • A Tory running for re-election in eastern Ontario asks how anyone could build a wall along the border in his neck of the woods, seeing as it's water -- the St Lawrence Seaway, to be precise. Good question, but we were in that area a few weeks ago and saw just how porous the border is down there. One small island has a very short bridge adorned with the flags of both countries, claimed to be the shortest crossing between the two countries. No fearsome looking border security types in evidence either.
This may all be good knockabout fun, but the wave of anger that even tempts otherwise rational people to latch on to such ideas as border walls is dangerous. As the continuing rise of Donald Trump shows, it's not going away -- and just today it's brought down John Boehner, plainly exhausted by the task of trying to keep the crazies in his own party in check.  Maybe it's us here in Canada that should be thinking about putting up a wall.

Sunday, 20 September 2015

Will "shy Tories" decide Canada's election?

Cast your mind back a few months to the UK's general election. On the eve of the vote, opinion polls were pointing to a too-close-to-call outcome between the Tories and Labour. On polling day, however, the Tories trounced both Labour and the Lib Dems, ending up -- against all expectations -- with a solid majority government. Poring over their latest failure, the pollsters settled on the idea that a lot of people who had been polled had been "shy Tories" -- people fully committed to backing David Cameron, but too embarrassed to admit that to a stranger.

Could we see the same thing when Canada votes on October 19? This columnist seems to think it's a possibility, though not an important one.  Opinion polls show the three main parties -- Tories, Liberals and NDP -- each with about 30 percent voter support. Harper's 30 percent , his "base" vote, is certainly very far from being shy. Early in the interminable campaign, a grey-haired gent got international press coverage for screaming abuse at a reporter who had the temerity to ask Prime Minister Harper questions about the ongoing Senate expenses scandal. Among other things he accused her -- and reporters in general -- of being tax evaders.

This kind of anger is a characteristic of Harper's "base", though it's legitimate to ask what they're so angry about. After all, their man has been in office for over a decade, a time in which he has quite deliberately run the country in ways that the remaining 70 percent of the population find abhorrent: strident and blinkered foreign policy, scorn for other levels of government, disregard for the environment, cuts in social programmes. That's what the "base" wanted, and that's what Harper has delivered, so I ask again: what are they so angry about?

Most analysts assume that Harper's real support will never be much more or less than that 30 percent "base". To win the election, or at least to attain a minority government, he needs to shake loose, for one day only, a smattering of wavering souls from the other major parties. Fully 70 percent of Canadian voters are heartily sick of Harper, but at least some of them can be bribed with targeted tax cuts -- a Harper specialty -- or made fretful about terrorist threats.

This ought not to work, but the opposition parties are making it easier for the Tories by shying away from radical proposals. The supposedly socialist NDP has vowed not to run an fiscal deficit, while promising a number of new initiatives that seem sure to be expensive -- a national daycare programme, for example. The Liberals are ready to run deficits to finance infrastructure spending in an effort to jumpstart the economy -- but only small deficits, and only for three years. Ten years of Harperism, echoed at the local level by politicians like former Toronto Mayor Rob Ford, have made the notion of activist government, financed either by a somewhat higher tax burden or through deficits, something almost unmentionable.

Against the odds, then, this election now seem to be taking place on Harper's terms. Given that the other parties aren't promising anything very different, why not stick with good old Stephen and his supposedly firm hand on the tiller, rather than gamble on callow Justin Trudeau or angry Tom Mulcair?  It's not a pitch that's going to win my vote, but there may be enough voters -- "one day" Tories rather than "shy" ones -- to make Harper's party the largest in the House of Commons come October 20.

UPDATE, 24 September: Maybe not so shy after all? This poll shows the Tories pulling ahead of their opponents, with almost enough support to form a majority government. And yet in my own discussions with friends and acquaintances in our riding,  which is currently Tory, I can't find anyone who's enthusiastic about giving Stephen Harper another term, and a whole lot who are horrified at the prospect.    

Thursday, 17 September 2015

Fed up? Not just yet

The market view over whether the US Federal Reserve would raise interest rates this month was slow to gel, but eventually there was a near-unanimous consensus that there would be no move. And so it has proved, with only one dissenting voice on the FOMC.

A quick skim through the press release suggests that the Fed is content with the way the domestic economy is performing: activity is expanding "at a moderate pace", the labour market is strengthening and inflation expectations are stable. The key reasons for keeping rates on hold yet again seem to relate to international factors. Growth in US net exports has been slow, reflecting the emergence of slower growth in a number of key markets. The Fed appears to believe that a faltering expansion in the rest of the world will exert downward pressure on both growth and inflation in the US.

Is this the Greenspan Fed redux?  Regardless of what was happening in the domestic economy -- bubbles in the housing market, overvaluation of financial assets -- the Maestro could always find a reason not to lean too hard on the monetary brakes. Looking at the current US situation objectively, it's impossible to justify keeping rates in a 0-25 basis point range any longer, but that's where we are.

The problem Ms Yellen and her colleagues face, of course, is that they and we have never been here before. Nobody has any idea what will happen when the Fed starts to take away the seven years' worth of free money that the markets have been gorging on. None of the central bankers who devised the emergency response to the financial crisis, back in 2007/8, gave much thought to the question of how their bold experiment might be brought to an end when the time came, but it's a racing certainty that none of them thought the experiment would still be going on seven years later.

It's clear that a lot of analysts and market players are terrified of what may happen when the FOMC pulls the trigger -- check out this piece from the CBC website, published before today's announcement. The one thing that seems safe to say is that continually finding reasons not to hike rates is not going to make things any easier when a move finally comes.

Saturday, 12 September 2015

Harper's economic record

Our old friend David Olive at the Toronto Star has a piece in today's edition examining Canada's economic record under Stephen Harper.  Economic stability was supposed to be one of the key planks in Harper's re-election campaign, but recent data, including a very mild recessionette in the first half of the year, have seriously damaged the story.  In any case, this being the Star, it's no surprise that Olive finds the Tories wanting in most respects.

Piling Peleon on Ossa, Olive compares Harper's record not just with those of other countries over the past decade, but also with what was achieved under previous Canadian Prime Ministers. The first of these strikes me as much more valid than the second. Broadly speaking, everyone was facing the same problems from 2007 on, so it's legitimate to measure one country against another. It's far less reasonable to draw comparisons between what Harper has done and, for example, what Pierre Trudeau did three decades ago.

Anyway, let's assess Olive's assessment.

  • Job creation: Olive admits that Canada's record in this regard is better than the rest of the G7 -- but then tries to knock it down anyway. He argues that you'd expect more jobs to be created in a country that has higher population growth, as Canada does because of its high immigration levels. Why should this be so? If rapid population growth drove employment growth, sub-Saharan Africa would presumably be booming. Olive also notes that Canada's unemployment rate is higher than that in other G7 countries: true, but this is nothing new. Structural unemployment, especially in the Atlantic provinces, has always biased the national jobless rate higher.  
  • Fiscal prudence: Olive correctly states that Harper, despite embracing austerity, has in fact presided over seven straight years of budget deficits. There may be a small surplus this year, but only because of fiscal finagling, as Olive outlines. Interestingly, he offers no comparisons with the rest of the G7 here, presumably because he knows that the fiscal performance of most other G7 countries, including the US and the UK, has been so much worse.  Finally, he contrasts Harper's performance with the decade of surpluses rung up by PMs Chretien and Martin. True enough -- but unlike Harper, that was achieved in an era of rapid global economic expansion, not near stagnation. 
  • Economic growth: Olive has to admit that Canada's GDP has grown more than that of any other G7 country during the Harper years. He argues that growth was faster under PMs Martin, Chretien, Mulroney and Trudeau -- but then, as noted above, everyone else was posting faster growth back then too.
  • Prosperity: Olive notes that growth in real GDP per head in the Harper years has averaged a "barely discernible" 0.4 percent per annum. Once again he offers no comparisons with the rest of the G7, for obvious reasons -- they did even worse -- but instead attempts to blacken Harper by comparing him unfavourably with every PM since the Great Depression!

Olive's sour conclusion is the best that can be said is that Canada under Harper muddled through the post-crisis era better than most other countries. And even for this modest achievement, Olive tries to assign much of the credit elsewhere -- specifically, to former Bank of Canada Governor Mark Carney. Here, Olive may actually be onto something. Unlike much of the rest of the G7, Canada did not have to undertake an emergency bailout of its financial system. Some credit for this indeed goes to Carney, and some to the late Jim Flaherty, who as Harper's Finance Minister took a very hands-on approach to the banks as the crisis unfolded.

Arguably, however, most of the credit for the stability of the financial system should go to Messrs Chretien and Martin. Back in 1998, two pairs of Canada's Big Five banks -- first Royal and BMo, and then TD and CIBC -- announced plans to merge, with the specific aim of becoming bigger players on the world stage. The government of the day disallowed the mergers; one can only speculate how differently things might have turned out post-2007, if those deals have gone ahead. Given Olive's zeal to deprive Harper of any credit for anything at all, I'm surprised he didn't mention that.