EclectEcon

More likely than not, the U.S. will experience a recession. The housing recession and credit crisis are ongoing and their consequences are likely to be felt for quite some time – both in the U.S. and world wide. The U.S. housing sector does not look to be approaching a bottom quite yet. On the supply side, housing starts are down 57% from their peak, but on the demand side sales of new homes are down a whopping 62%. This certainly does not bode well for inventory absorption and keeps putting downward pressure on home prices – the S&P Case-Shiller indices that came out yesterday speak for themselves. And together with home prices, the wealth of the U.S. consumer – the engine of a U.S. economy that relies on consumption (72% pf GDP) like no other economy in the world – is estimated to have fallen by almost $2 trillion in Q1 2008 and is bound to fall further. If tax refunds and rebates are trying to hold up the mood of the U.S. consumer – whose confidence is dropping – energy and food prices are pushing the other way. And employment figures are contributing further to the dismal of the U.S. consumer. The big shock in the latest employment report was a spike in the unemployment rate to 5.5% from 5.0%, one of the biggest monthly rises on record, and the next employment report could mark the seventh consecutive monthly decline for payrolls and the sixth for overall jobs.

Canada’s GDP actually contracted by 0.3% y/y in Q1 on plunging inventory and residential investment, disappointing those that hoped it would decouple from its Southern neighbor which absorbs 75% of its exports. U.S. weakness, elevated credit costs, and a strong Canadian dollar are offsetting strong commodity exports and buoyant domestic demand. Yet, some economists suggest that real GDP strips out the very income gains that have increased Canadians wealth from its sustained terms of trade rise. With the Canadian dollar’s disinflationary power fading, the Bank of Canada may have ended its aggressive easing and there is little room for more fiscal stimulus. Lackluster growth looks likely for the rest of the year. See “Canada Recoupling With a Vengeance?” and Rachel Ziemba’s “Why Is Canada Growing Slower Than the U.S.?”