It’s that time of the year again: there’s still lots of snow on the ground in Canada, but in much of the rest of the northern hemisphere flowers are blooming and birds chirping away—and the U.S., as customary for the past four years, looks headed for an economic slowdown.
According to this morning’s advanced GDP estimate, the U.S. economy expanded by a respectable 2.5% in the first quarter, below expectations of a 3% gain but so much healthier than the anemic 0.4% of the last three months of 2012. Things are likely to get worse going forward, though. Already in March most indicators have disappointed: the U.S. economy added a dismal 88,000 jobs last month, less than half as many as analysts expected; retail sales dropped 0.4%, the largest decline since June of 2012; and this week durable goods orders, out last Wednesday, plunged 5.7%, nearly twice the tumble expected and likely a sign that U.S. factories have entered a slump.
The GDP release also delivered an unwelcome surprise on government spending: budget trimming by federal agencies, especially the defence department, shaved an estimated eight percentage points off growth. Sequestration wasn’t supposed to take effect until late March or early April, but it looks like some federal officials cut preemptively. And the fiscal drag from spending reductions won’t lift for at least another quarter.
It’s never fun for Canada when the U.S. gets into a funk, but this time it’s particularly important that Uncle Sam snap out of it. Consider our situation. Our housing market is on a marked cooling trend. Consumers are reducing debt loads. Business investment is inhibited by the low prices for Canadian crude and weak domestic demand. With all this, the accelerating U.S. recovery was the brightest spot in Canada’s short-term economic outlook.
So how bad could this U.S. spring slowdown be? The consensus expectation is that the country will go through a soft patch in the second quarter, as the economy absorbs the impact of the fiscal cliff tax hikes and spending cuts, and rebound in the second half of the year. The Bank of Canada sees the U.S. growing 1.8% slower than it would have without the fiscal drag, but that still works out to a decent 2% expansion.
Also, notwithstanding a silly fiscal policy and the ongoing political impasse, the U.S. economy has some very good things going for it now, as even king of doom, Nouriel Roubini, couldn’t help but note: the Fed is going to stick to its asset-buying regime for the foreseeable future, providing a monetary protein shake the recovery still very much needs; the housing rebound is well on its way, which is helping Americans rebuild their wealth and is boosting employment in many states with high jobless rates; and the shale oil and gas revolution continues to power investment, job creation and revenue growth.
On the other hand, there seem to be four spoilers that could limit the extent to which Canada gets a lift from the U.S. this year:
1. In the past two years, the U.S.’s spring swoons could be attributed to new outbreaks in the eurozone debt crisis; this year, it’s home-grown factors that are expected to weigh on growth. But what if foreign crisis flared up abroad? Could the combination of domestic and foreign headwinds cause more severe trouble? It’s not such an unlikely scenario: Europe is far from being on safe ground, and China seems to have hit a snag.
2. The extent to which a U.S. slowdown affects Canada will depend on how much of it comes from the private sector. We can cope with the sequester, which will mostly depress U.S. government demand, much better than with a decline in U.S. private demand. The tax-hike part of the fiscal cliff was always the bigger threat. For the first two months of the year, Americans didn’t seem to mind their reduced take-home pay but lower retail sales and consumer confidence in March suggest that they might have simply had a delayed reaction. Today’s GDP release showed that lower disposable incomes translated into personal saving rates falling to 2.6% from 4.5% in the fourth quarter. Expect Americans trying to bring family balance sheets back on track to cut back on shopping.
3. The second-quarter slump might have been expected for economists, but it could surprise the stock market, which some analysts believe has been rallying well past levels warranted by fundamentals. Investors’ disarray could trigger a correction, Roubini has been warning.
4. Finally, the issue of raising the federal debt ceiling might come up again in August and another standoff in Washington could compromise the expected economic bounce-back in the third quarter. Now, the political blowback over fiscal policy theatrics has been serious enough for both Republicans and Democrats that they might have both decided to drop that strategy. But then, again, one never knows…