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Weekly Economic Letter

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United States: sustained recovery

Tue, Jun 16 2009, 06:15 GMT
by Economic and Strategy Team

National Bank of Canada


Summary

  • Presently, the ratio of residential investment to GDP is already scraping bottom and the ratio of business investment in machinery and equipment to GDP is at a 45-year low. Consequently, forecasters advancing the scenario of a double-dip recession must necessarily expect a further decline in consumption ahead.

  • Even though the economy is currently deep in excess capacity territory, if long rates rise too much, the surge could paralyze activity, as these would have an impact on mortgage rates in particular.

  • Inflation expectations, and not the output gap, will determine the shift in monetary policy. Paradoxically, an increase in short rates could contain the increase in long rates in these utterly atypical times when the central bank is pumping massive amounts of new money into the system.

  • Many observers will no doubt deem our forecast of a rate hike in the United States premature. However, the present context must be dissected in minute detail in order to read the situation correctly.

  • The truth is that businesses have pared back employment in the service sector without production in the sector declining in the current recession. This means that service productivity has exploded, thus propelling corporate earnings upward in the first quarter.

  • At a time when the ratio of investment to GDP seems too low, this component of GDP should pick up again and rekindle the employment market by yearend. We should therefore see a change in the composition of U.S. growth over the course of the recovery to come.

  • The fact that employment has fallen much more sharply than activity in the service sector probably means that the unemployment rate is about to peak and, unlike what it did in the past two recessions, should not continue to climb much once the situation turns around. Consequently, the recovery should be sustained, unless the Fed bungles its exit strategy and makes a mess of managing inflation expectations.

Published on  Tue, Jun 16 2009, 06:21 GMT


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Legal disclaimer and risk disclosure

This presentation may contain certain forward-looking statements about the 2009 Economic and Financial Outlook. Such statements are subject to risk and uncertainties. Actual results may differ materially due to a variety of factors, including legislative or regulatory developments, competition, technological change and economic conditions in Canada, North America or internationally. These and other factors should be considered carefully and readers should not rely unduly on National Bank of Canada’s forward-looking statements. This presentation may not be reproduced in whole or in part, or further distributed or published or referred to in any manner whatsoever, nor may the information, opinions or conclusions contained in it be referred to without in each case the prior express consent of National Bank.


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