26 March 2008

Buy, buy, buy

Canadians go on spending bender as Americans sober up

It's official: When it comes to shopping, Canadians are the new Americans. And that might just help our stock market avoid the growing gloom south of the border, or at least blunt the impact of a US slowdown that's looking increasingly nasty. Yesterday brought dramatic evidence of how US consumers are succumbing to the triple whammy of plunging home prices, soaring energy costs and a weakening labour market. The Conference Board's consumer confidence index sank to 64.5 in March from 76.4 in February – a staggering drop that was about 10 points bigger than economists expected. Worse, the expectations component – which measures consumers' attitudes about the future – slumped to its lowest since December, 1973. If confidence doesn't rebound, consumer spending could soon contract at a year-over-year pace of 2%, making a “severe recession” almost unavoidable, said Ian Shepherdson, chief US economist with High Frequency Economics. “In short, this is one of the most alarming economic reports we have seen in this cycle so far,” he said in a note.

But in contrast to their American cousins, Canadian consumers went on a bender in January. Spurred by a strong job market and rising wages, retail sales leaped 1.5% after a revised 0.8% advance the previous month, reflecting higher spending on cars, clothing and furniture. That compares with a 0.6% drop in US retail sales in February. “Domestic demand remains strong in Canada, and there's no sign yet of any serious cracks – certainly no sign in this report,” said Douglas Porter, deputy chief economist at BMO Nesbitt Burns. The resilience of Canadian consumers helps explain why, even as US stocks spent much of the day under water, Canada's benchmark index soared 302.5 points or 2.3% to 13,322.22. Higher commodity prices certainly helped, but the advance was broadly based, as all but one of the 10 sector indexes gained ground. Momentum seems to be on Canada's side: Over the past three sessions, the S&P/TSX has surged more than 600 points. But on Wall Street, the precipitous drop in consumer confidence proved too much for investors, as the Dow Jones industrial average finished down 16 points, even as the S&P 500 and Nasdaq made small gains. Meanwhile, the Conference Board survey wasn't the only piece of grim news rattling investors. In a sign the US housing recession is deepening, home prices in 20 of the largest US cities plunged by 10.7% in January from a year earlier, according to the S&P/Case-Shiller home-price index. It was the biggest drop on record.
(Globe and Mail 080326)

Too bad no one heeded the calls ten years ago to wean Canada's economic dependency off of exports to the U.S. We should've been negotiating trade deals with China and India a decade ago. Even if it's not as much the case as a few decades ago, we are still entrenched in the U.S. system -- what happens to them happens to us. This time around might be a bit different since we're playing the role of whore to the U.S.'s john for services and products highly valued around the world as demand soars for everything essential. Maybe we'll make it through this not that much worse for wear? From the view of the equities markets, probably not. Might as well spend ourselves into as deep a hole as the Americans are in now; it only makes sense!

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