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Avery Shenfeld
Chief Economist
Concerns about the US all come down to one big worry—jobs. If hiring had picked up, as it did within months after the end of recessions prior to the 90s, we would have had the income growth needed to raise the savings rate, cover tax hikes and have something left over for spending. But it really hasn’t. Instead, we seem to be following the pattern evident after US recessions of the past two decades, in which it took two to three years for hiring to gain serious momentum. Why, then, have these recent cycles been so different?
In part, it reflects a change in the nature of job losses. Temporary layoffs now account for a much smaller share of recessionary employment declines than they did prior to 1990. The globalized nature of today’s economy has meant that recessionary earnings pressures often see businesses accelerate shifts in production locations, including those involving overseas plants, leading to more permanent shutdowns during the downturns.
Furloughs have also not been as customary in the service sector, which has gained in its share of total US employment over the past few decades. Furloughed workers are ready to be quickly recalled when demand picks up, without needing to go through the adjustment process of relocating or changing skills. Those frictions lead to a slower process in re-employing workers when their job loss was from a permanent shutdown, as is more often the case these days.
But that’s not the whole story, because it’s not as if there has been a groundswell of unfilled job vacancies. Perhaps the technology investments in recent decades have businesses under-appreciating how lean they can run. It’s only under the profit pressures of a recession that they uncover all of the labour saving opportunities, so that rehiring doesn’t have to coincide as directly with an output recovery.
Finally, in this cycle, we have the particular role played by the unprecedented slump in home building, and the inability of the traditional weapon, low interest rates, to reignite activity in the face of the huge inventory of foreclosed properties, an indebted household sector, and weakened financial intermediation. In Canada, where those factors have weighed less if at all, construction employment is nearly back to its pre-recession peak.
In the US, there are nearly three times as many employees in residential construction and related trades as there would typically be with this level of housing starts. So building could pick up without much hiring as the existing workforce simply extends its weekly hours. One more reason why it could be a long, long road back to full employment.
By Sunny Freeman,
The Canadian Press
TORONTO – Recession-battered Canadians are growing more conservative with their money and turning away from high risk investments to the safety of savings accounts — a trend that banks are cashing in on, industry insiders say.
Canadians this year have opened about 20 per cent more chequing and savings accounts than last — a giant leap from the average three to five per cent annual increase, said financial services consultant David McVay.
“Canadians are more conservative than they were in 2007,” McVay said, adding that more consumers are paying off debt, opening RRSPs and tax-free savings accounts than they were a year ago.
“We’re seeing a shift from stock investing into keeping more money in savings accounts because of the financial crisis,” he said.
The shift to safer investments is being driven by a nervous baby boom generation who “have lost their mojo” after the plunging stock market wreaked havoc on their retirement investments, McVay said.
They no longer want to take on the risk of a crash that could force them to work another five or 10 years.
“The banks are marketing to the uncertainty that Canadians have about their savings and retirement plans caused by the financial crisis,” McVay said.
Banks are looking to capitalize on the conservative shift in consumer sentiment because they can make more money from savings accounts than they can when stocks and bonds are in vogue, he added.
The 20 per cent increase in retail accounts amounts to about $100 billion in business — and Canadian banks are fighting aggressively for customers with cash-back and points incentives, McVay said.
TD Bank economist Grant Bishop agrees that the trend away from risky equity markets has increased competition for deposits.
“You did see banks increasing the attractiveness in order to get the largest bulk of that cash flowing in,” Bishop said.
But the rush into precautionary savings during the initial phases of the recession, has since dropped off, he added.
As the early stages of recovery took hold, consumers began to take advantage of historically low interest rates and favourable borrowing conditions.
“We did see households, spurred by ultra-low interest rates, accumulating debt, largely for the purpose of home ownership,” he said.
“But going forward that does need to slow and households do need to save more in order to rebalance their finances and bring down the potential vulnerabilities that households would face as interest rates rise.”
As interest rates on loans begin a cycle of gradual hikes, borrowing will become more expensive. As the same time, that should eventually translate into higher interest on savings accounts.
Scotiabank released results of a survey of Canadians’ savings habits Tuesday that found nearly one-third of Canadians do not have a savings plan in place even though almost everybody —94 per cent— said they feel better when they have a safety net of savings.
That means there is still a large untapped market of Canadians who are looking for help with their savings.
“We did have a tough period in the last few years and I think now is a great time to really focus on this and get people thinking about how they can save,” said Gillian Riley, Scotiabank senior vice-president of retail deposits, payment and lending.
“Over the last year we certainly have seen some movement towards savings as a flight to safety,” Riley added.
About 55 per cent of the 1,000 Canadians surveyed by Harris/Decima for Scotiabank in March told pollsters they save on a regular basis. Still, nearly one-in-five Canadians said they don’t have any rainy day savings at all.
Household consumption had been growing at a faster rate than income growth, indicating that Canadians were taking on more debt to fuel domestic spending, Bishop said, adding that TD predicts that the pace of credit growth will slow in the near future.
The personal debt to income ratio has climbed dramatically in the past year, Bishop said. It sits at around 147 per cent, meaning for every dollar of income households earn, they hold about $1.47 in debt.
“That reflects that households still do need to save a larger portion than they were during the pre-recession period … in order to pay down debt.”
A Turn for the Worse, or for the Worst?
By Avery Shenfeld
research.cibcwm.com
Economics gets interesting for markets at inflection points, and that’s exactly where the global economy sits as spring turns to summer. But are we seeing a turn for the worse — a period of slower, or slow growth — or a turn for the worst, towards renewed recession?
After their recent pull-back, equities might be able to muddle through the former, but would have a lot of additional downside if it’s the latter. Two-year Treasuries are back at the lowest levels since the depths of the recession, reflecting the consensus view that whatever fate awaits the US economy, the Fed is a long way away from a tightening. But equities are, of course, still miles from their March 2009 lows, and are counting on earnings gains, not a recessionary dive in profitability.
Trouble is, a turn to a slowdown looks much like a turn towards outright recession in its early stages. That’s particularly the case when the prior period saw very robust growth. China put in 12% growth in the year to Q1 2010. In Canada, we are coming off two quarters averaging 5½% growth. The US wasn’t quite so heated, but averaged better than a 4% pace in the two quarters ending in March.
Our own long-held view is that the global economy will see much slower growth ahead, with a trough at only 1½% growth in both Canada and the US by Q4. If so, we shouldn’t be shocked, shocked, to see purchasing managers indexes for both the US and China move lower, as they did this month, but to levels still consistent with growth.
Today’s anemic US private sector hiring wasn’t the deeply negative figure associated with recession onsets, but was in line with the deceleration to below trend GDP growth we expect in the quarters ahead. Housing data were boosted by tax incentives, so again, a big drop in the month after their expiry is not a surprise. Our two favourite aggregate US measures, the comprehensive Chicago Fed National Activity Index, and the leaner but more contemporaneous ADS index from the Philadelphia Fed, are still both saying green for growth, if a bit less vociferously in the latter.
Closer to home, Canada’s flat GDP for April, was consistent with a deceleration in growth, rather than a turn to recession, given that it came off of a bloated 0.6% March advance. May GDP looks to be much better, as we already know it was a decent month for hiring. But don’t be surprised to see the week ahead’s Canadian jobs data for June show a deceleration. That’s the stuff that slowdowns are made of.
The U.S. housing market will experience a second recession, forcing banks to post additional loan-loss reserves, said analyst Meredith Whitney, founder of New York-based Meredith Whitney Advisory Group, in an interview on CNBC Squawk Box, where she also talked about deflation in the economy, hinting that the housing crisis is far from over, due to strategic defaults, long term high unemployment, and increasing foreclosures.
“Most investors are not baking in a double-dip in housing,” Ms. Whitney said, “You’re going to see banks post additional reserves associated with this double-dip in housing, and that means weak performance going forward.”
U.S. home prices fell more than 30% from their peak in 2006 through the first quarter of 2009, prompting banks to take writedowns on mortgage loans. Housing starts have increased 24% since the low in April 2009 as mortgage rates remained near record lows and the U.S. government offered tax credits to home buyers.
Ms. Whitney said she didn’t foresee the trend of some homeowners paying off credit cards and other debt instead of making mortgage payments, as they await better terms on mortgage modification programs.
“Banks are actually accelerating their foreclosure programs, accelerating their short-sale programs. People who have been paying their mortgage now have to start paying rent. You’ll see a real leg down in supply displacement when you foreclose and you have to sell.”
Job cuts by state and local governments will also contribute to a “rough second half” for the U.S. economy, she said.
Financial reform will slow the velocity of money and cause “de-banking” as more Americans lose access to some banking services, making it “more expensive to be poor in this country,” Ms. Whitney said.
Meredith Whitney is a frequent contributor to CNBC, Fox Business, and Bloomberg News programs. Her extremely bearish view on banks landed her on the cover of the August 18, 2008 issue of Fortune Magazine. Even before the problems in September that befell Merrill Lynch and Lehman Brothers, she is quoted as saying, “It feels like I’m at the epicenter of the biggest financial crisis in history, however even a broken clock is right twice a day”.
In 2007, Whitney was listed as the second best stock picker in the capital markets industry on Forbes.com’s list of “The Best Analysts: Stock Pickers”, as well as being named “one of NY Post’s 50 Most Powerful Women in NYC.
Whitney, who was ranked as one of Fortune 500’s “50 Most Powerful Women in Business” in 2008, has also won CNBC’s “Power Player of the Year” over Jamie Dimon, Ben Bernanke, and Hank Paulson.