Keep the Corks in the Champagne

Here we go with another media frenzy celebrating the official “end of the recession.”  Truly, this time.  We really mean it.

Harken back to July 23 of this year, when Mark Carney made it official the first time, declaring in his monetary policy update that the economy was back in the black.  His bold declaration made headlines, but it sure hasn’t felt like a “recovery” since then: unemployment growing, incomes stagnant, and even real GDP growth non-existent.

Now Statistics Canada’s GDP report for the third quarter adds to the consensus that the recession is over.  Led by public sector stimulus, a surge in auto production (tied to the U.S. “cash-for-clunkers” program, now finished), and a steady expansion of the financial industry, real GDP eked out an increase of just under 0.1% (rounded up) for the quarter.  “Annualized” (that is, raised to the 4th power), that means growth at an annual pace of 0.4% (again, rounded up).

Qualitatively, this is within the statistical error of margin of zero growth.  So again, while it is more evidence that the free-fall in economic activity which occurred from last autumn through this spring has been (thankfully) arrested, this report does not remotely indicate that anything approximating a “recovery” is underway.  So don’t pop the champagne just yet.

Here are a few cationary nuggets buried within the StatsCan report:

  • Without public sector stimulus, GDP would still be contracting.  Private sector GDP shrank marginally during the third quarter.
  • Of course, the finance industry is the brightest light in the private sector — partying like the good old days since the markets turned around in March.  GDP in the FIRE sector grew a full percentage point in the third quarter.  By contrast, private non-financial GDP (what I call the private “real economy”) was shrinking at an annualized rate of 1.4 percent.
  • A $1 billion boost in auto sector output (as Chrysler’s Canadian assembly plants came back on stream, and all auto exports were boosted by the U.S. incentives) accounts for 150% of the total expansion in Canada’s national GDP in the third quarter.  So much for the Fraser Instutute’s claim that the rescue of GM and Chrysler was a gigantic waste of money.  Never mind that it may not actually cost taxpayers a cent; without the auto turnaround, Canada’s GDP would have kept declining.  I doubt that performance will be repeated in the months ahead.

Of course, whether the GDP is growing or not is hardly the ultimate arbiter of whether the economy is healthy, for all the reasons we know so well.  But it is important.  Yet even by this narrowest of criteria, we cannot say that the recovery has arrived.  Without public sectior stimulus (both here and in America), and without the current rebound in financial exuberance (that is quite likely simply the onset of the next pointless boom-and-bust cycle), real GDP would still be falling.

I am not a brainless pessimist.  There are a few sunbeams of light in this report.  Nominal GDP (and hence nominal incomes for all stakeholders) has stopped falling.  Business investment in machinery and equipment grew slightly in the third quarter, as did exports.  Those are the major engines of private sector expansion in Canada.  If those trends continue, then perhaps a genuine, self-sustaining dynamic can be re-established.

I tend to think that won’t happen for another year or two, however, in which case we will continue to rely on increases in public spending to foot the whole bill.  Yet, perversely, we are now hearing loud calls for fiscal restraint from all levels of government.  If they start cutting public spending (rather than increasing it), then the engine of growth at present could be thrown into reverse in the coming months as well.

My base case forecast: real continues to “bounce along bottom” (around zero growth) for the next year.  Downside risks: more financial distress in the private sector, and/or a shift to fiscal restraint in the public sector.  Upside risks: none visible.


  • Also worth noting is the fact that there was precisely zero growth in wages and salaries in the third quarter and a modest drop in the savings rate, suggesting that the growth in consumer spending rests on rather shaky ground.

  • Why is it that we need two consecutive quarters of GDP decline to call it a recession, but as soon as we’ve got a quarter with the slightest positive growth we’re ready to announce a recovery?

    Given the magnitude of recent quarterly growth revisions (all downwards), I wouldn’t be surprised if early in 2010 we are told that GDP didn’t actually grow in the third quarter.

    As for the shaky grounds of consumer spending, how about those employment losses from October? Which, let’s not forget, came on the heels of two months of apparent employment growth in August and September (both of which fall in the third quarter).

  • Jim, great minds apparently think alike, particularly on the welcome but transitory effect of “cash for clunkers.”

  • Iglika,

    Don’t even get me going on the stats and the inclined plane of bias they are placed on.

    I am no zombie pessimist either, but watch carefully as the financial system falls apart again. There is nothing in place to prevent it all happening again. Who knows how many hidden regional bubbles we have going across the global financial system.

    Have you ever studied the forces behind an el-nino.

    It actually means bad fishing off the coast of Ecuador- due to a somehwhat patterned- but chaotic effect between ocean currents and air currents- all based upon down-welling and upwelling.

    When the upwelling in the pacific ocean occurs along the S. American coast it brings up nutrients with it from the ocean floor- fishing is good, and every 5-7 years and sometimes with even a bit more variance, the two cycles between the air pressure and wind and ocean current comes out of sync and the upwelling stops. Fishing is bad and the economy suffers. But within a year, the cycles start in sync again.

    I wish I could believe such dynamics involved within the el-nino were similar in periodicity to that of the world markets that are now driving our economy. I am sure for thousands and thousands of years the fisher people off Ecuador deeply culturalized these soci-economic factors.

    But where we have went within the global capitalism, is anything but periodicity based, and anything but predictable, let alone measurable. Especially with the jagged edged rulers we are using to measure the economy with. However, if culturally it all makes us feel optimistic like and ready to open our wallets or further charge those credit cards, then so be it. But it simply is not an economy that any kind of sustainability can be built upon.

    Business cycles are dead, and so to should all the media discourse and fantasies associated with them be dead as well.

    Bubble based economies and the fictiscious notions of wealth will indeed become inflationary- as within that economic world it makes more sense to scrap productive assets and invest the capital in some notion of finance.

    So I am now becoming an inflation hawk-with no productive assets to expand the economy upon- but plenty of fictitious wealth generating mechanisms it won’t be long before we are all trying to eat a derivative.

    THis is a very serious problem- all the wealth hiding somewhere safe until the sun starts shining again. Potentially that is precisely the role of these fictions of recessions being over are hoping to bring about.

    I am anxious to see the employment numbers coming up this week.


  • I am not quite sure why convention has settled, as pointed out above in the comments, on two quarters of decline defining a recession, and one quarter of possible (but unlikely) growth can be enough to be labelled recovery. Actually the BofC was willing to settle for one month in June to pop the cork.

    Given that this definition is asymetrical, without justification, and does not capture whether the economy’s growth is self sustaining, whether employment levels are healthy, or the living standards imrpoving across a wide variety of indicators, the debate should probably be reframed.

    Even though, for example, there might have been growth, the economy continues to be far below capacity, and the economy continues to lose potential production from unemployed labour that is impossible to recover. A recession, to my mind, is really about being below potential and we are in a “recession” so long as this remains true. I fthis were acceptable, we might be still in a recession, but moving back towards potential – yet realise that times are still tough.

  • Here is the rather sensible NBER definition of recession. To my knowledge neither the US nor Canada have an “official” definition.

    “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades. The postwar average, excluding the 2001 recession, is eleven months.

    In choosing the dates of business-cycle turning points, the committee follows standard procedures to assure continuity in the chronology. Because a recession influences the economy broadly and is not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee views real GDP as the single best measure of aggregate economic activity. In determining whether a recession has occurred and in identifying the approximate dates of the peak and the trough, the committee therefore places considerable weight on the estimates of real GDP issued by the Bureau of Economic Analysis of the U.S. Department of Commerce. The traditional role of the committee is to maintain a monthly chronology, however, and the BEA’s real GDP estimates are only available quarterly. For this reason, the committee refers to a variety of monthly indicators to determine the months of peaks and troughs.

    The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, the committee refers to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes. The committee also looks at monthly estimates of real GDP such as those prepared by Macroeconomic Advisers (see Although these indicators are the most important measures considered by the NBER in developing its business cycle chronology, there is no fixed rule about which other measures contribute information to the process. “

  • At Paul T, & author.

    Real GDP, The FED, HR1207 in the US will affect Canada. Would you support HR1207 type bill for our central bank???

    The author taps on one of my points or yours from the recent article on Japan. Real GDP is not improving as we would theoretically like as we blame this on how the funds are used, then ask the question will the funds ever be used correctly with HR1207 looming? then inflation becomes a bigger concern, when I would traditionally be a deflationist.

    Real GDP is worse in the united states given how they calculate a lot of contributions from workers overseas in their statistics, and what the official number doesn’t do. Give any hope for a winding down of stimulus measures, a reduced central bank balance sheet with traditional CB assets you would expect to find, and meaningful rise rates that would happen in the third quarter of 2010, nor do I expect 2011. If the US was still a creditor and had surpluses, or savings, or production to build on from, I would be a deflation hawk.

    I do not think their recovery is sustainable, I don’t even think ours is, and if that’s the case. The real economy in America is hurting like never before. Even jobs losses are not what they appear to be, because the 10% unemployment figure the highest since 1983 included part time workers who were looking for full time and those seasonally adjusted workers who are no longer looking, which is still counted by the united states but is referred to by labor statistics as U6, to compare apples to apples then comparing apples to oranges. Lets be fair you would use the 1983 unemployment and compare it to the U6. That measure – which includes the part-timers — is at 17.5 percent. So if you throw the unemployed into the statistics, as the U6 does, that nation’s job problems are worse than the 10.2 percent U3 rate suggests.

    Then we Dubai, for the markets to treat this as a blip, when it was more serious then people think, makes me wonder. Then but of course with so much global liquidity and low rates globally, the markets can only go up without capital or price controls, there are no capped limits to liquidity, if we mess up now we issue more new dollars later, this cycle doesn’t need to necessarily stop, and unlike Japan, America must fund this debt globally or monetize because unlike Japan doesn’t have the surpluses or the savings or production to fund and service their debt domestically.

    The Federal Reserve signaling it would rather risk leaving rates too low than choke off any emerging recovery, will leave rate 0% effectively for most of 2010 if not all. This is causing its international role into question, and I can easily see a new reserve currency in my lifetime, with the fiscal risk the FED has took on. Our Central bank has none of the fiscal risks that the FED does. The US central bank has responded by monetary and fiscal relief.

    In Canada I’m unclear how this will all effect us. as we have never had the states not come back robustly. When a major problem to my research is the US, I don’t see the necessary changes their and year from now or two or more when the FOMC release their minutes on interest rates, the only thing I can see that would reign in long term and short term borrowing cots is a revolt in the treasury market, something like the Suez canal crisis developed or even less trivial and US creditors put the foot down. Or wide of US debt default.

    The FED may still surprise me, if they unlock Paul Vockler Monetary tightening, which was who it took last time the USD reserve status was last called into the light with a president Ronald Reagen who protected the central bank independence.

    Now we have democratic president and congress, who’s about to legislate HR1207 which hampers the feds monetary Independence and rises the scope for public intervention and how many voters would scream bloody murder if rates even inch up not to mention politicians by different colors.

    Already the FED publicity is unusually high for me to be comfortable. I think it politically impossible for the FED to stop injecting money, the only difference will be how the money is used? That doesn’t satisfy international creditors. There is public rage all right but none of that rage yells for a reduction in money. That rage want its own bailout blanc cheque. Why give Wall street everything, and Main street nothing, as long as that perception remains intact with HR1207, I dont see good times.

    Also the trend that globally sales, I mentioned previously will outperform the Us is coming to fruition and need months of more data to clearly establish this trend but I throwing my cards down.

    “The surge in [recent] imports reflects Canadian domestic demand that is stronger than in the U.S.,” said Yanick Desnoyers, assistant chief economist at Montreal-based National Bank Financial and went on to say “The Bank of Canada will focus on domestic demand, not the GDP number.” Given his firm was amongst the earliest to predict Canada’s economy would resume growing in the third quarter.

    The strong Canadian dollar isnt all bad. On the flip-side the most innovative technology to equipment is cheaper and is indicated by recent imports. 25-per-cent rise in automobile and parts, reflecting the emergence of General Motors and Chrysler from bankruptcy protection, a 10% gain in purchases of machinery and equipment, and a 5% increase in industrial goods. I expect this is not just taking place in Canada but all around the world in various degrees.

    This Christmas the global shift in consumption patterns will be more evident, but that is really just clear hope. Hope that’s is however seemingly becoming reality.

    p.s. Too anyone making any investment or decisions based off the states, Just read HR1207 (it is a extremely important document which has garnished Americans distrust over the bailouts and acting as a vent for that rage and regulates the FED not the Banks) then think about everything, the unprecedented actions, etc the FED has done. I would worry or at least change 5% of my net worth to include the possibility of a currency crises. The US FED is becoming to politicized, and the politicians loves this because then they dont have to fund wars or welfare through savings, production, or surpluses, or taxation.

    They just run up the record breaking debt. Why not when your debt is the most liquid and safe in the world. If I see tightening from the FED, my normals senses should return too me and I will say I over reacted but its better then not being prepared.

    However that small window that opened up in 2008 will return in greater force because of the current solutions (cough). Good or bad that’s up to your point of view.

  • Federal Reserve Transparency Act of 2009 – Repeals the authority of the Comptroller General to carry out an onsite examination of an open insured bank or bank holding company only if the appropriate federal regulatory agency has consented in writing. (Retains the authority of the Comptroller General to audit a federal agency.) Directs the Comptroller General to complete, before the end of 2010, an audit of the Board of Governors of the Federal Reserve System and of the federal reserve banks, followed by a detailed report to Congress.

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