The Weekly Bottom Line

HIGHLIGHTS OF THE WEEK

ISM indexes continue to rise in January. Manufacturing index reaches highest level since 2004 at 58.4, while non-manufacturing inches above 50 (indicating expansion) to 50.5.
U.S. non-farm payroll employment falls by 20,000 in January. Revisions push total job losses over recession to 8.4 million.
U.S. unemployment rate falls 0.3 percentage points to 9.7%.
Canadian financial markets are hit by external global economic developments. Rising fiscal deficits in Western Europe stoke fears of sovereign debt defaults.
Commodities, Canadian dollar continue slide. Oil sits below $70, Canadian dollar falls more than 4 cents in 4 weeks.
Canadian labour market posts 43,000 net job gains. Concentrated in services-producing sectors: FIRE, business, building, and support services lead gains.
Canadian unemployment rate declines to 8.3%

UNITED STATES - JOBS: COME OUT, COME OUT WHEREVER YOU ARE.

This week could be summed up in one word - jobs. Jobs and how to create them were a focus of President Obama's budget released on Monday and stayed in the limelight through Friday with the release of the January jobs report. While there have been a number of hopeful signs that job growth is just around the corner (for more see our report, U.S. Won't Have a Jobless Recovery), we didn't quite make it there in January, and U.S. payrolls fell by 20,000 in the month. Nonetheless, despite the (marginally) negative number, the details of the jobs report were actually very positive. First, it is important to note that given the total size of the U.S. jobs market (127 million), a loss of 20,000 represents a change in percentage point terms of -0.015%. Moreover, this is well within the standard statistical error of the survey and could well be revised away in future estimates. Indeed, somewhat puzzlingly, while the payrolls report showed job losses, the unemployment rate still fell by 0.3 percentage points to 9.7%. While this can occur when employment is falling as long as the labor force is also shrinking, this was not the case in January. Instead, the difference was due to an unusually large discrepancy in employment reported in the household survey (used to calculate the unemployment rate) and the establishment survey. While we could spend the rest of this Bottom Line talking about differences in survey methodology, in an effort to keep my readership numbers up, let's instead focus on some of the other more tantalizing details of the reports.

First on the menu: temporary employment. It may not sound sexy, but changes in temporary employment have a good track record of predicting future job growth.

Typically companies in the initial stages of recovery, facing a need to kick up production will start by hiring temporary help as a prelude to more permanent job creation. So the fact that the number of temporary workers rose by 52 thousand in January and is up a whopping 11% on a three month moving-average basis is a good sign. Moreover, firms are getting more out of all the workers they have - aggregate weekly hours worked rose by 0.3% (3.7% annualized) in the month. On the unemployment side of things, in addition to the largest single month decline in the unemployment rate since 1998, there were also improvements in the median duration of unemployment, which fell to 19.9 weeks from 20.5. The underemployment rate (which adds in discouraged workers and those who are working part time but would like to be working full-time) fell significantly to 16.5% from 17.3% in December. For all these factors, we continue to expect the U.S. economy to add 2.3 million jobs over the course of this year.

Of course, we must recognize that while on the whole the labor market appears to be improving, there remains a very large hole to fill. Since the start of the recession the U.S. has lost a stunning 8.4 million jobs (6.1% of the total workforce). As a consequence, the level of employment today is lower than it was 10 years ago. It is fair to say that at this point, the prospects for a sustainable economic recovery hinge on what happens in the job market. Let's get hiring!

CANADA - EXTERNAL SHOCKS CONTINUE TO HIT CANADIAN FINANCIAL MARKETS

This week, on the global recovery: Canada's domestic economy continues to climb its way out of recession, while fears of sovereign debt defaults in the European Union, a slower than anticipated recovery in the U.S. labour market, and a new crackdown on corporate equity issuance in China generate ripples in Canadian financial markets. Sound familiar? Economic developments around the world highlight the fact that the bulk of the risks facing Canada remain from external sources.

Sovereign debt fears originating from Greece have now spread to Portugal and Spain. Fear that rapidly rising deficits and inadequate financing capability sparked widespread concern of the possible need for an EU bailout that sent corresponding default spreads soaring and global risk appetite plummeting. In addition, a renewed crackdown on the amount of liquidity in China was put forth this week by the government. Not limiting themselves to simply restricting bank lending activity, they have also put the squeeze on corporate secondary equity issuance. Many industries, which may be suffering from overcapacity, were apparently using the additional capital to pay off existing bank loans, only to leverage further by applying for new loans. Worries that such a move could choke off Chinese growth and put the entire global economic recovery at risk mounted additional pressure on already thin risk appetite and pushed markets lower. A flight-to-safety mentality combined with uncertainty over commodity demand from both of these developments caused Canadian financial markets to maintain their downward trek that has copme to characterize 2010, so far. All major equity indexes are down between 6%-9% from their recent peaks in early January and this has had the expected rippling effect on the TSX Composite, which is down almost 7% over the same period. Similarly, crude oil prices have fallen by 12% and the Canadian dollar has lost more than four cents since then. The flight-to-safety has meant that the spread between Canadian and U.S. bonds has risen; in fact, the 2-year spread rose by about 15 basis points just in the last week.

Fortunately, the mortar of Canada's domestic economy continues to solidify in the face of such global distress. This was a light week for economic indicators in that the only big story to come out was today's employment report: the labour market added 43,000 net jobs and pushed the unemployment rate lower by 0.1 percentage points to 8.3%. The employment data have been extremely choppy ever since the trough in the job market was hit in the middle of last year. The jobs data have fluctuated between gains and losses almost every month since then; hence, although today's report is certainly positive news, the recent trend in job growth suggests that we remain in the early stages of the recovery in the labour market. In addition, an elevated duration of unemployment that has shown no sign of turning course, in tandem with the need for a significant restructuring of certain sectors, suggests that the Canadian labour market still has some kinks to work out. To echo the Bank of Canada's governor, Mark Carney, in a recent speech, “Canada is entering this period of adjustment with many strengths, but the efforts required of us will be historic.”

U.S.: UPCOMING KEY ECONOMIC RELEASES

U.S. International Trade - December

Release Date: February 10/10 November Result: -$36.4B TD Forecast: -$35.5B Consensus: -$35.0B

Despite a weak domestic currency and relatively soft economy, the U.S. trade deficit widened dramatically in November as the combination of higher energy prices and soft export demand pushed the deficit to its highest level since the middle of 2009. In December, we expect the trade deficit to narrow modestly, falling to $35.5B from $36.4B in November. Much of the improvement should be on account of lower crude oil prices and the pick up in export demand. Slower import growth should also add favourably to the bottom line. In the coming months, we expect the performance of the U.S. trade deficit to be somewhat mixed, as the weak U.S. dollar and increased global demand for U.S. products is offset by the higher import bill.

U.S. Retail Sales - January

Release Date: February 11/10
December Result: total -0.3% M/M; ex-autos -0.2% M/M
TD Forecast: total 0.5% M/M; ex-autos 0.5% M/M
Consensus: total 0.3% M/M; ex-autos 0.4% M/M

After a disappointing dip in December, consumer spending should spring back to life in January, with headline retail sales rising for the 3rd time in 4 months. Indeed, with the U.S. economic recovery appearing to be gathering considerable steam and labour market conditions improving by the month, there are growing indications that the recovery in U.S. consumer spending is continuing. In January, we expect headline retail sales to rise by 0.5% M/M, with sales excluding autos rising at the same pace. Evidence of the pick-up in retailing activity has been seen in the strong same store sales report for the month, along with the 42K increase in retail employment, which is the biggest monthly employment gain in this sector since the beginning of the recession. Looking ahead, with U.S. households continuing to navigate against the stiff headwinds coming from a weak (though improving) labour market and tight credit conditions, we expect retail sales activity to remain relatively subdued, though the recovery in consumer spending should remain on track.

CANADA: UPCOMING KEY ECONOMIC RELEASES

Canadian Housing Starts - January

Release Date: February 8/10
December Result: 177.8K
TD Forecast: 180.0K
Consensus: 177.5K

After a long period of inertia, Canadian new residential construction took a mini-leap forward in December, as construction activity rose to its highest level since October 2008 when 177.8K residential units were constructed. This upward momentum in residential construction activity is expected to continue in January, when 180.0K residential units are expected to be constructed. Unseasonably warmer weather and the strong recovery in demand for housing are expected to be the main factors pushing construction higher. The recent positive momentum in building permit approvals is also an indication that building intentions have also received a jolt. Most of the gains in construction in January are likely to be in single-family unit construction, while the more volatile multi-family segment is also expected to advance. And with the Canadian economic recovery expected to slowly gain traction in the coming months, and low mortgage rates remaining supportive to housing demand, the recovery in Canadian residential construction should persist.

Canadian International Trade - December

Release Date: February 10/10
November Result: -$0.3B
TD Forecast: $0.3B
Consensus: -$0.2B

The recent see-sawing in Canadian net merchandise trade looks set to continue in December, with the trade balance expected to swing back to a modest surplus position following a mild $0.3B deficit the month before. During the month, we expect the combination of higher commodity prices and the recent resurgence in U.S. economic activity to bolster Canadian exports, pushing the trade balance back to a modest $0.3B surplus. Exports of automotive products and commodities are expected to rise modestly, while exports of machinery and equipment and other manufactured products should also post gains. Imports are expected to also be higher, though they will be more than offset by higher exports during the month. In the months ahead, we expect the trade balance to continue its pendulum swings in and out of surplus as the combination of the strong Canadian dollar and import demand offset the benefits of higher commodity prices and the recovery in U.S. demand.

PDF Format

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.