The Weekly Bottom Line

HIGHLIGHTS OF THE WEEK

United States

• U.S. economic indicators for January point to renewed momentum in early 2012. Non-farm payrolls expanded by a vigorous 243K, and the unemployment rate fell to 8.3%.
• Vehicle sales rose 4.6% to 14.1 million (SAAR) in January, reaching the highest level in over three and half years and surpassing the one-time shot in the arm provided by the cash for clunkers stimulus program.
• ISM manufacturing and non-manufacturing indexes posted strong gains and, as leading indicators, give hope that January's performance could be maintained in the month's ahead.
• Despite the positive turn in the data, 2012 will remain a challenging year for economic growth. The housing market and European recession present key downsides risks.

Canada

• Positive economic news out of the U.S. continues to improve sentiment on financial markets, keeping the TSX in positive territory this week, and taking the loonie above parity with the U.S.
• Domestically, however, the picture has been a lot less rosy, with economic growth in Canada looking quite soft at the end of 2011. January's disappointing jobs tally suggests that this anemic trend continued into 2012.
• Fortunately, the stronger U.S. demand of late improves our export outlook, which should help our economy strengthen in the second half of the year.

UNITED STATES - GETTING BETTER ALL THE TIME?

You'd be forgiven if you began this week feeling a bit glum. With the Federal Reserve downgrading their forecasts for economic growth and reinforcing their pessimism with a commitment to leave interest rates at low levels until late 2014, who wouldn't be left feeling a bit melancholy? Even more, who, upon opening the business section of their newspaper, wouldn't have felt just a bit disappointed reading about economic growth in the fourth quarter? Not only did growth come in below expectations, but the details showed a dramatic slowdown in domestic demand.

Well, if last week left you in the doldrums, this week should have turned that frown upside down. Economic data over the last few days have turned decidedly uplifting, delivering three of the strongest reports on the state of the economy in several months.

Consider first the most watched economic indicator of all - the employment report. Non-farm payrolls expanded by a vigorous 243,000 in January, the strongest monthly increase since April of last year. Job gains were widespread across sectors, with both goods and services employment accelerating. Revisions were also positive, adding a net 54,000 to payrolls in the previous two months. Just as encouraging, the unemployment rate fell to 8.3%, extending its downward streak to five months. Since August the unemployment rate has fallen by an impressive 0.8 percentage points.

Second, U.S. auto sales rose 4.6% to 14.1 million (annualized) in January, reaching their highest level in over three and a half years and even surpassing the one-time shot in the arm provided by the cash-for-clunkers stimulus program. The increase in auto sales makes up for a relatively weak pace of spending growth in December and provides a solid foundation for first quarter spending growth.

Third, both the ISM manufacturing and non-manufacturing indexes posted strong gains in January. As in the payrolls report, gains were relatively widespread and, as leading indicators, give hope that January's performance could be maintained in the months ahead.

Taken together, these data point to an economy with more forward momentum than was anticipated just a week ago and that is something to be happy about. However, before we break out the champagne, we must be careful not to lose the forest through the trees. The U.S. economy is still clawing its way out of balance sheet recession. The housing market, while showing signs of life, will struggle over the next year with an increasing flow of distressed sales as process delays are remedied. At a minimum, this will keep downward pressure on home prices and forestall an improvement in household balance sheets.

Similarly, in Europe, liquidity injections by the ECB have mitigated a growing credit freeze, but are unlikely to prevent a euro zone recession. Combined with upward pressure on the U.S. dollar, this will make for a challenging environment for exporters, which have become increasingly important to growth prospects.

All told, when we published our economic forecast in December, risks around the outlook appeared to be skewed to the downside. This week looks a bit less cloudy than the last, but we're not ready to let go of the umbrella just yet.

CANADA - FORECASTS FOR AN EARLY SPRING LOOK PREMATURE

Canada's slate of furry forecasters was mixed this groundhog day on whether we are headed for an early spring or not, and that appraisal is not dissimilar to the readings on Canada's economy lately. Financial markets seem to be in the optimism camp, with the TSX higher on the week, and up just over 5% so far this year. Most commodities have also rallied, taking the Canadian dollar above parity with the US. But we dismal scientists are prone to focusing on the economic shadows looming over the Canadian economy.

The most important economic reading so far in 2012 was this morning's jobs numbers, which showed Canada adding a measly two thousand net new jobs. That is not enough to keep pace with labour force growth, and the unemployment rate ticked up to 7.6%. Over the past six months the Canadian economy has generated only 17 thousand net new jobs. One year ago that total was 140 thousand. Canada's paltry pace of job creation also compares poorly with the over 1 million new jobs south of the border, even when you account for the fact that their population is roughly nine times larger (see chart).

The past week also saw GDP decline 0.1% in November, which is a bit stale at this point, but does confirm the lack of momentum in our economy as the year came to a close. Fourth quarter growth now looks to be around 1.5-2.0%, which gives a poor hand-off to 2012. January's anemic job tally confirms that the tepid momentum at the end of 2011 has carried over into this year, and is very much in line with the expected cooling in consumer spending.

The inauspicious start for Canada's labour market stands in contrast to global manufacturing sentiment indicators which have been indicating brighter prospects in January. These readings have no doubt contributed to the positive mood in equity markets. Canadian small businesses were also a tad more optimistic in January, continuing to dig out of last summer's pessimistic lows, although not regaining the level of optimism seen early last year. This indicates that small businesses are still expecting growth, but not at the pace we had seen last year.

As usual, however, the devil is in the details. And when confidence is broken down by province a very uneven view emerges that is divided along east-west lines (see chart). Astonishingly, nearly three years into an economic recovery small business confidence indicates that every province east of Manitoba is growing below potential. The trend in confidence is no better, with Alberta the only province where businesses are more optimistic than at this time last year. Tellingly, the chart also mirrors the provinces that are the most exposed to the current downturn in Europe (Provincial Economic Update).

In sum, the most encouraging developments for the Canadian economy so far in 2012 are south of the border. The U.S. economy is finally starting to put out some decent job gains, and auto sales were strong in January. Since Canada still sends nearly three quarters of our exports to the U.S.(Canada's Declining Reliance On The U.S. - Where To Grow From Here?), that is encouraging news indeed. While the economic data may not be pointing to an early spring in Canada, stronger U.S. demand improves our export outlook, which should help our economy bloom in the second half of the year.

U.S.: UPCOMING KEY ECONOMIC RELEASES

U.S. International Trade - December

• Release Date: February 10, 2012
• November Result: -$47.8B
• TD Forecast: -$46.0B
• Consensus: -$48.1B

After rising sharply to a 5-month high in November, we expect a reversal in fortune for the US trade balance with the deficit falling to $46.0B in December on account of higher export activity more than compensating gains in imports demand. During the month, we expect exports to boast a respectable 1.5% m/m advance, ending two consecutive monthly declines as global economic activity appears to be regaining its footing. Imports should also rise during the month, though at a more modest 0.5% m/m pace as lower crude oil import should partially offset the gain in import demand for other commodities. In real terms, trade should also improve, suggesting that this sector will add to economic activity during the month. Moreover, with global activity appearing to have stabilized and oil prices continuing to trade at or below the $100/barrel mark, we expect the improvement in the deficit to be sustained.

CANADA: UPCOMING KEY ECONOMIC RELEASES

Canadian Housing Starts - January

• Release Date: February 8, 2012
• December Result: 200.2K
• TD Forecast: 185K
• Consensus: 191.5K

Housing starts are expected to have moderated to 185K annualized units (from 200K). The decline is expected to be driven by poorer weather conditions, along with a moderation in the pace of construction employment. In terms of compositional mix, single starts are expected to remain fairly stable while multiples are forecast to experience the majority of the moderation following the strong gain the month before. Heading forward, we expect housing market activity to gradually cool, especially as the likelihood of tighter mortgage regulations have increased. This forecast is also consistent with our expectation of 188K starts in the first quarter of this year.

Canadian International Trade - December

• Release Date: February 10, 2012
• November Result: $1.07B
• TD Forecast: $0.8B
• Consensus: $0.65B

After a sharp swing into surplus, the Canadian merchandise trade balance is expected to narrow modestly to +$0.8B in December. Following broad based growth in November, export growth is expected to gain by 1.0% (from the 3.2%). Weaker nominal export sales are expected to be driven by the drop in industrial product prices and generally soft commodity prices in December. Softer sales are expected to be registered in the energy sector, where the decline in product prices was particularly acute. Moreover, the firming of the Canadian dollar in December will weigh on exports. That said, an improvement in the US backdrop and increased car production during the month will help provide an offset to the weakness. On the other side of the ledger, imports are expected to modestly outpace export grow and advance by 1.6%, supported a stronger CAD and firming in US manufacturing. Finally, since this is the final print for Q4, net exports are expected to exert a modest drag to growth. Heading forward, net exports are unlikely to be a major contributor to growth as the European debt crisis weighs on confidence, US demand is expected to wane and the Canadian dollar remains firm.