The Weekly Bottom Line

HIGHLIGHTS

• U.S. payrolls down 524,000 in December.
• Canada posts its second month of job losses, unemployment rate surges to 6.6%.
• Fiscal stimulus all the rage on both sides of the border.

After a week of relative optimism, equity markets returned to earth this week as economic data continued to point to a grim picture of the global economy at the outset of 2009. Job losses were the story of the week in both Canada and the United States with December's data closing out 2008 on a sour note for both countries. For the U.S. the first year of the recession marked the worst year for job losses since 1945. Canada performed better; managing to create jobs in the year, but enters 2009 on a much weaker footing. With interest rates already at historic lows and economic performance continuing to deteriorate, calls for fiscal stimulus grow ever louder.

More carnage on the job front

Friday's payrolls report confirmed the dire expectations for job losses in the U.S. The U.S. shed 524,000 jobs in December. With downward revisions, this brought total job losses in 2008 to 2.6 million. In absolute terms, this is the worst year for job losses since 1945. In percentage change terms, it amounts to the largest decline since 1982 - not exactly a benchmark to be proud of. Not only was 2008 the worst year for U.S. jobs in decades, the pace of deterioration worsened as the year went on as weakness spread from the goods producing sector to services. The unemployment rate moved up at an astonishing pace through the year, finishing 2008 at 7.2%, 2.3 percentage points higher than it began and the highest level in 15 years. Perhaps equally troubling is the rise in underemployment. The number of persons at work part-time for economic reasons rose to over 5% of the labour force, its highest level since the peak of the early 1990s recession. Unfortunately, we're still a long way from the light at the end of the tunnel and job losses in 2009 will very likely top those in 2008.

In Canada, job losses were worse than expectations, dropping by 34,000 in December and following on the heels of a 70,600 decline in November. The losses pushed the unemployment rate up 0.3 percentage points to 6.6%, its highest level since January 2006. Over the course of the year the unemployment rate has risen 0.8 percentage points from its low in January of 5.8%.

2008 was a rollercoaster ride for the Canadian labour market. The year started out with stunning job growth - the first quarter saw employment increase by more than 2.0% (annualized), while the economy as a whole contracted. Job growth cooled mid-year before jumping by a massive 107,000 jobs in September and just as quickly falling back in the final months. As the year went on it became more and more obvious that behind the headlines were some pretty weak details. Nearly all of the jobs created in the first eight months were in the construction industry, an unsustainable source of job growth, particularly as the housing market continued to cool. The job market has a way of reversing itself quickly and construction jobs dropped a stunning 44,300 in December. Nonetheless, whereas the U.S. is already a year into job losses, Canada faired much better in 2008, creating 98,000 jobs for the year as a whole. 2009 is unlikely to show a repeat. With the Canadian economy believed to have slipped into recession in the fourth quarter of 2008 job losses in 2009 will get worse before they get better. We believe about a quarter-million jobs will be lost before the year is out.

Canada's sinking domestic economy

Evidence that the global economic recession is taking a toll on Canada's domestic economy increased this week as both the consumer picture and the housing market weakened dramatically in the final months of the year. New vehicle sales, which had held up fairly well through most of the year, plunged in December, down 21% from the previous year. Similarly, after several years of strong growth, residential construction finished the year on a sour note with housing starts falling dramatically, to their lowest level since 2001. The slowdown in residential construction echoes the trends in the employment data and highlight that the recession will not escape any region of the country. In many ways the reversal in fortunes of western economies, particularly that of Alberta, is the most astonishing. Alberta's economy, which has led the country for much of the last five years, is turning quickly as commodity prices fall, confirmed in both the employment data and housing starts data out this week. Employment growth, which after rising by 4.4% in 2007, slowed to 1.3% in 2008. Similarly, housing starts fell from 48,000 in 2007 to 30,000 in 2008. At its peak in 2006, Alberta was building over 50,000 new homes (at an annual rate); it finished 2008 with housing starts 60% lower at just above 21,000.

Fiscal stimulus just around the corner...

Talk of fiscal stimulus rose to a feverish pitch on both sides of the border this week. In Canada, Finance Minister Flaherty on a cross country tour for pre-budget consultations gave hints that the government's January 27th budget would include both tax-cuts and increased infrastructure spending. But it won't come free. As the Finance Minister recognized, the Canadian budget deficit will be substantial. TD Economics estimates that even without the fiscal stimulus, the budget deficit in 2009 would be over $10 billion. With increased spending it will more than likely surpass $20 billion.

In the U.S., President-Elect Obama stressed the need for substantial fiscal stimulus, suggesting that without it, the unemployment rate would sore to double digit levels and the economy would miss its potential by over one-trillion dollars. The trillion dollar figure was popping up all over the place this week. Earlier in the week the Congressional Budget Office (CBO) released its estimates of the potential budget shortfall for the U.S. Federal Government - putting the deficit at $1.2 trillion in 2009. Obama's plan, the “American Recovery and Reinvestment Plan,” takes-over where 2008's “Economic Stimulus Act,” left off and will likely approach over $700 billion in total spending. This, on top of the already projected deficit, will make a trillion dollar deficit look like the good old days.

UPCOMING KEY ECONOMIC RELEASES

Canadian International Trade - November

Release Date: January 13/09
October Result: $3.8B
TD Forecast: $2.8B
Consensus: $3.3B

With the U.S. remaining the key destination for Canadian exports, a prolonged U.S. economic recession resulting in waning demand for foreign products will continue to depress the value of Canadian exports. Add to this the continued slump in energy prices, which have declined by a massive 15.7% M/M in November, and we expect to see total exports fall by a rather dramatic 4.0% M/M (following the 2.5% M/M gain in October). Imports are also expected to be weak, falling by a more measured 2.0% M/ M. Taken together, our call is for the Canadian trade surplus to drop to $2.8B in November, from $3.8B in October. In the coming months, we are likely to see further moderation in the Canadian trade surplus as the continued weakness in the U.S. and global economies, and declining commodity prices reduce exports despite the partial offset coming from the weak Canadian dollar.

U.S. Retail Sales - December

Release Date: January 14/09
November Result: total -1.8% M/M; ex-autos -1.6% M/M
TD Forecast: total -1.2% M/M; ex-autos -1.3% M/M
Consensus: total -1.2% M/M; ex-autos -1.4% M/M

There appears to be no end in sight for the distresses U.S. consumers are facing, as mounting job losses, plunging financial and housing wealth and tighter lending conditions conspire to squeeze the bottom-line of the average U.S. household. These continuing headwinds are expected to result in further retrenchment in consumer spending, and for December we expect U.S. retail sales to fall for the sixth consecutive month, with a further 1.2% M/M drop. This despite the aggressive discounting by retailers during the month to lure consumers back into their stores. Indeed, in addition to the overall economic weakness, plunging gasoline prices (which have fallen by 21% M/M in December alone) are also expected to be a source of drag for the headline number. Excluding autos, sales are expected to also be weak, falling by 1.3% M/M. Looking ahead, we expect retail sales to remain quite soft for some time as the prolonged economic recession continues to constrain consumer spending.

U.S. Consumer Price Index - December

Release Date: January 16/09
November Result: core 0.0% M/M, 2.0% Y/Y; all-items -1.7% M/M, 1.1% Y/Y
TD Forecast: core 0.1% M/M, 1.9% Y/Y; all-items - 0.9% M/M, -0.1% Y/Y
Consensus: core 0.1% M/M, 1.9% Y/Y; all-items -0.9% M/M, -0.1% Y/Y

Weak consumer price inflation is likely to become a feature of the U.S. economic landscape as plunging commodity prices and growing economic slack continue to place downward pressure on prices. For December, with energy prices falling by double digits across the board and the economic recession appearing to have intensified, our call is for consumer prices to fall a further 0.7% M/M, bringing the annual rate of headline inflation into slight negative territory to -0.1% Y/Y (from 1.1% Y/Y in November). This will be the first negative print on headline consumer price inflation since the mid-1950s. Core consumer prices are also expected to be soft, rising by only 0.1% M/ M, with the annual rate of core consumer price inflation falling to 1.9% Y/Y. In the coming months, we expect consumer prices to moderate even further as U.S. economic activity weakens and companies slash prices to resuscitate sales.

TD Bank Financial Group

The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.