TRI signals sub 2.3% GDP for rest of 2013
Aug 31 2013 delayed FreeVenue public release of
May 31st MemberVenue guidance ~
Today's update of the
TRENDLines Recession Indicator
suggests a second consecutive sub 1% quarter in 3Q13 before the
economy finally possesses the critical mass to sustain positive
growth w/o the assistance of federal fiscal policy stimulus.
That said, the Canada Economic Plan remains in place and historic
growth rates will prevail over the next three years despite several
defined headwinds, primarily the medium-term correction of the 28%
($80k) Canadian Realty Bubble. It presented a -0.3% headwind
this month. Faced with either combating Inflation or priming
for upcoming waning economic activity, the model predicts Bank of
Canada will mistakenly raise its key rate in 4Q14.
The headwind caused by residual
rising oil prices (Oct/2010
- Apr/2011) finally expired in March 2013 and in an ironic twist, declining
petroleum costs actually
provided a 0.2% tailwind to GDP growth in May.
A monthly reminder of
the malaise within the current business cycle is the Unemployment Rate. At 7.2% in
is not yet even half-way back to its 2007 low of 5.3%
after rocketing to an 8.7% peak in Aug/2009.
The long-term outlook continues to warn of a potential Severe
Recession should the USA undergo a self-induced Austerity Crisis in
2024 and the Federal Gov't fails to mitigate the damage with massive
($68 billion) fiscal stimulus.
TRENDLines Recession Indicator
monitors two activity measures: (a) TRI - a gauge of
Real GDP filtered of reporting period noise; & (b) TRIX
- a measure of the health of the underlying economy by filtering out
the influence of Parliament's fiscal policy deficits/surpluses.
StatCan released data today inferring
March's (Q1) Real GDP grew at a 2.5% rate, compared to the TRI
inference of a 1.2% pace. TRI gauges
May GDP was 0.8%, down
from 0.9% in April. TRI's measure of animal-spirits-plus projects
a 0.8% Q2, 0.8% Q3 & 2.2% Q4.
Model filtering enhancements indicate much of the cause of the pause
to economic activity two years ago is traceable to rising residual
oil prices which at their peak in April 2011 formed a 1.6% headwind.
This factor dissipated with declining petroleum costs to the point
where fossil fuel energy provided a 0.2% tailwind to May's GDP
Despite this ironic good news, the combination of the other definitive headwinds are
increasing their grasp to the extent where the annual economic growth rate
appears to be entering a multi-decadal era
sub 2.6% performance.
If this trajectory persists, it conflicts with my original Sept/2009 analysis of North American
economic activity over the past four decades and its conclusion of
the existence of an 8.5-yr business cycle with probable troughs in
2017, 2026 & 2034.
It appears the
magnitude of the Great Recession and its significance as a
once-in-a-lifetime "balance sheet recession" event has temporarily
blown out the harmonics of natural rhythms. The associated
deleveraging is ongoing, but it must be said that aside from the
headwinds, the generally subdued
post-Recession economy indeed continues a secular decadal downtrend of GDP
growth rates. This decline trend is typical of maturing
economies as well as activism among G-20 central
bankers aimed at damping the amplitudes of the business cycles.
The timing of an
eventual hard or soft landing will change as inflation and inventory
factors come into play. Layered over those natural cycles will be
the mitigation efforts: Monetary Policy actions by the Bank of
Canada & the Minister of Finance's Fiscal Policy recommendations to
A developing situation
south of the border could result in a massive bodycheck to the
Canadian economy. In Feb/2013 enhancements to the
models discovered the US Gov't will pass thru a critical
tipping point in 2024 which empirically should induce a critical
surge in sovereign bond yields, harsh austerity measures and
a multi-year Severe Recession.
Canada does not come out of a
downturn of its major trading partner unscathed. The
TRENDLines Recession Indicator
projects The Canada economy will face a 7-Qtr Severe Recession
unless its Federal Gov't promptly completes key free trade agreement
negotiations, commences proposed coastal petroleum pipelines and/or
provides $68 billion in Deficit spending.
preceding discussion is typical of conventional Real GDP narrative
where one identifies the symptoms of an economy ... not its
underlying problems if any.
The genuine health of the Canadian economy is best
observed when viewed thru a prism which
filters out the influence of Federal Gov't Deficits & Surpluses.
Calculated via fiscal multipliers, the
resulting metric (Structural GDP) is depicted in the chart
as TRIX (red line).
Upon an initial viewing
of long-term TRIX, one is immediately stunned by two striking
observations: (a) whereas the USA has been mired in a
Structural Greater Depression since Nov/2006, the recent event has
been rather insignificant in
Canada and in fact only made its presence felt due to failure of the
Harper Gov't to pare back the 2008 federal surplus in timely
fashion; & (b) the sheer magnitude of the 1977-97
The 1970 event is
defined as a Structural Technical Recession (-0.4% avg Structural
GDP over 4 Quarters). The deeper 1974-75 event is also defined
as a Structural Technical Recession (-1.7% avg SGDP over 8
Qtrs). On its heals is the massive 1977-97 event, a Structural Greater Depression (-3.6% avg SGDP over 21 years).
The recent 2008-2010 downturn was a mere Structural Technical
Recession (-1.3% avg SGDP over 7 Qtrs).
It also becomes obvious
the 2001 slowdown was self-inflicted. It was of course partly due to the downturn of our American
neighbour, but TRIX analysis suggests this was not entirely a normal business cycle trough. Rather,
it suggests much of the softness was primarily a result of an over-exuberant
Federal Gov't which withdrew far too much
liquidity from the economy via
taxation of its citizenry: a fiscal Surplus amounting
to a record 1.8% of GDP.
The potential for a similar situation
exists after 2015. TRIX will increasingly exceed TRI
as the Federal Govt's Fiscal Deficits become
Surpluses, rising incrementally to 1.5% of GDP by 2022 in an effort to
retire Canada's $608 billion Federal Debt by 2043. Upon
attaining this admirable objective, the Gov't-of-the-day will be in
the remarkable position of being able to reallocate expenditures
and/or reduce the annual tax burden by an incredible $39 billion!
Recession Alert: The Canadian economy
shall finally attain the critical mass to sustain
positive economic growth without the assistance of fiscal policy stimulus in
September. That said, the economy will require some degree
of accommodative monetary policy throughout the
Trendlines Recession Indicator's
2030 visible horizon. The soft GDP outlook
for this decade remains in place primarily due to the ongoing correction (Aug/2011
to 2019) of Canada's 28%
($80k) realty bubble. Then comes a potential 2024 USA austerity crisis
which w/o Federal Gov't mitigation would spawn a 7-Qtr
Headwinds Factors contributing to short, medium
& long-term weakness in the TRI
outlook to 2030 continue to be: (a) correction of the
CMHC realty bubble; (b) an Exports killing "par-plus"
Loonie; (c) federal debt retirement; (d)
the USA's potential 2024 austerity crisis; & (e) by contrast and in an ironic twist,
the $16/barrel decline in USA Refiner Acquisition Crude and related
petroleum costs since the Libya crisis are in turn providing the
economy with a quantifiable tailwind!
(a) $80,ooo (28%)
CMHC Realty Bubble
Realty Bubbles Monitor,
Canada's realty bubble finally burst in Aug/2011 after the avg
Canadian home price had risen to a level 32% ($89k) above the
long-term trend of the price/family-income ratio. Albeit the Canadian bubble has since
declined to 28% ($80k), the avg house price is still double its
American counterpart. Extraordinarily
high mortgage and rent payments continue to be a heavy burden on Disposable
Income, preventing families from indulging in desired durable goods,
holidays, landscaping, renovations,
clothing, vehicles, etc. As well, subsequent falling homeowner equity is a direct
assault on the
wealth effect phenomenon. Both are are recessionary
Canada was the last
G-20 nation to fall into Recession in 2008 and the first one out ...
not by clever fiscal/monetary policy but rather because Canadians
were able to use rising home equity as a convenient ATM
to fund consumer purchases in a declining economic
environment. Whereas housing prices were properly correcting
in the USA (2006), UK & Australia (2008), CMHC enabled further inflating of
the domestic realty bubble (2006 to 2011) by continuing to condone 5% minimum downpayments for
its high-ratio mortgage insurance coverage.
The avg priced home of $365k
currently faces an
correction. As this
realization becomes more widespread, consumer/business confidence
will suffer and add to the fray. To make matters
TRENDLines forecasts 5-yr mortgage rates will rise 2% by late
as a normalization of the business cycle unfolds. This will serve to
prevent upward price pressure and gives confidence to the model's conclusion
record highs won't be set 'til 2022.
This suggests a probable mimic of the 1989-1999 sideways housing
price correction rather than the
recent abrupt USA event (-25%). In the 90's episode, home prices dropped
only 6% from the '89 high, then flat-lined 'til incomes caught up
with the overpriced housing stock.
I continue to find it despicable CMHC has not yet heeded TRENDLines
long-time recommendation to temporarily raise required minimum
downpayments to 10% (from 5%) of purchase price for insured high
ratio residential mortgages. Despite the realty bubble rising
to 15% (above norms) in 2005, CMHC has refused to mitigate its wrong-headed policy thru
2006, 2007, 2008, 2009, 2010, 2011, 2012. The policy remains in
place in 2013 and as such the economy enters an eleventh successive Quarter of
After the first plea (March 24
2010) targeted at CMHC, avg home prices unnecessarily increased
$32,000. Knowing Canadian taxpayers are ultimately at risk for
the crown corporation's losses associated with claim
appears to bear no conscience and is comfortable moral hazard will
allow it to pay the financial institutions in full for all claims
'cuz it trusts it can socialize its negligence via the Federal Gov't
Loonie vs Exports
by the Conservative Gov't will reinstate Surplus budgets in 2016.
USA Refiner Acquisition Crude price made incursions into triple-digit territory in
the Spring of both 2011 & 2012 and again this Summer. These two issues are the
foundation for recent surges of the Canadian Dollar - USDollar exchange rate
to lofty heights. The consequence of a par-plus Loonie
has been an unrelenting assault on Export oriented manufacturing (especially the
auto sector) and tourism.
With the unfolding of
the 2008 US financial crisis and exposure of deep structural issues
in Europe's periphery, Canada has once again regained status as a
safe haven for foreign investment. This will not abate anytime
soon. In fact, with the $608 billion Federal Debt poised to be
paid off by 2043, Canada will one day be the G-8's shining star and an
incrementally rising currency is sure to accompany said progress.
forecasts USA RAC ($97 USD today) will decline to $68 by early 2018, then resume
it secular uptrend.
This will give some reprieve to the high exchange rate on the
medium-term, but a reversal is poised with triple-digit prices set
in 2021 and a 2040 target of $327. Good Gov't policy would
ensure proposed coastal
pipeline expansions are in place to take advantage of world
pricing regimens rather than the present discount to WTI environment. The export and manufacturing sectors will have to strive
for innovation and productivity to survive not just a dollar parity environment, but
likely one with an increasing premium.
(c) Federal Debt
is one of those good news bad news deals! Taxpayers currently
spend $25 billion per year on federal debt interest but that
figure will commence to decline after
2015 as federal gov't fiscal policy returns to Surplus status.
projects the annual Surplus will rise incrementally to 1.5% of GDP
(2022) in a strategic effort to
retire Canada's $608 billion Federal Debt by 2043.
Albeit an altruistic
endeavour, the measure has recessionary effects on the economy as
evidenced by TRIX exceeding TRI thru most of the post-2016 era.
When the mission is accomplished, the dividend for Canada's
taxpayers will be $39 billion in annual general tax relief. It
will be welcomed as an offset to ever-rising Provincial taxation.
USA's potential 2024 Austerity Crisis
For over a
decade I have been warning that America's Congress is on an unsustainable fiscal
path. Along with traditional American macro forecasts, the
TRENDLines Debt Wall
typically since 2009 depicted US Gov't annual Structural Deficits
rising to $10 trillion (19% of GDP) & its federal Debt
rising to $125 trillion (235% of GDP) by 2040 if Congress
pursued its path to preserve long-term entitlements.
was always a caveat this journey was unsustainable and thus
someday there would either be an epiphany moment in DC or an involuntary
intervention. Credit must go the Tea Party movement
for bringing discussion of this fiscal irresponsibility to the
guidance since early 2012 has suggested that unless there is a
sea change of political leadership in addressing its long-term
entitlements, the US Gov't will approach Greece-scale metrics within
their own Deficit & Debt to GDP ratios in ten years - a situation
which will be underscored by incremental sovereign debt downgrades
and ever-rising yields on its long-term Treasuries.
In Feb/2013 enhancements to the
& TRI-USA models enabled the quantifying of a tipping point
with the first run identifying 2024 as the timing for this austerity
commences to unfold in 2015 when the FOMC starts a normalization
key rates and worsens later that year as Structural Deficits begin to surge due to varied
entitlements promised long ago finally coming to fruition.
Federal Debt service increasingly crowds out discretionary program spending.
This leads to increasing agitation among the international
investment community and by 2024 bond yields in excess of 7%
will be a reality. Unable to
borrow at sustainable terms, Congress will have no option but to slash its
$1.4 trillion Deficit over the ensuing four years.
Such harsh austerity measures
will induce a multi-year Severe Recession which would no doubt impact
Canada. As the US is by far our largest trading partner, TRI
projects Real GDP would initially plunge (-4.4% 4Q24) as the Canadian economy
7-Qtr Severe Recession (2023-2025) unless the Federal Gov't steps in
with $68 billion of Deficit spending.
Congress is in a
Catch-22 dilemma. Finding itself presently in the midst of a Structural
Greater Depression, present policy requires Congressmen to maintain an
infinite number of
trillion dollar Deficits to avoid Real GDP contractions.
w/o a mitigation strategy, continuing this Keynesian measure only hastens the
inevitable austerity crisis. As
the impact on some Canadian sectors could be horrific, it is hoped
Americans find the elusive political leadership necessary to address
this issue. Failing that, it is incumbent on Canada's
policymakers and legislators to
diversify our export markets (via bilateral & multilateral free trade agreements) and complete
proposed coastal petroleum pipelines.
(e) Wow, Oil Prices become a
years of declining residual crude oil prices have ironically turned
this former economic headwind into a tailwind.
TRI calculates cumulative quarters of high oil, diesel & gasoline prices
during the Libya crisis had shaved
a record amount (-1.60%) off the April 2011 RGDP growth pace, nudging out this
former June 2008 high (-1.55%).
En route to
USA Refiner Acquisition Crude price plunging from $113/barrel to
$98, the baked-in headwind exhausted in Feb/2013. On
reversal, the factor provided instead a (0.2%)
tailwind this month. The
trend to a reduction of the Stress Premium price component ($24 to $10/barrel) as global geopolitical issues
dissipated. The tailwind record (1.38%) was set in July
2010, reflecting the 71% RAC price collapse across the previous two
I have concluded the Canadian & American economies are much too
diversified and per capita disposable incomes too large for high
petroleum costs to induce a Recession by itself. As seen in
2008, just shy of the level
where oil price would do significant harm, the more vulnerable G-20
nations are already entering Recessions and thus paring back their Demand.
In that regard, the definitive Oil/GDP ratio where some G-20 Recessions would again be
induced is currently
represented by $130/barrel RAC ($124 WTI).
That said, high petroleum prices can certainly damage susceptible sectors
of the North American economy.
models were the first to discover (Nov/2009) predictable oil & gasoline price thresholds which if surpassed
will harm auto sector growth. Breach of these definitive
petroleum/GDP ratios signaled setbacks for USA Light Vehicle Sales in 1980, 1990, 2008, 2011,
2012 as well as earlier this year, reflecting buyer resistance to excessive gasoline & diesel costs.
Although RACrude price has retreated below the LVS Barrier
($117/barrel), gasoline has been stubborn.
This current pump LVS Barrier is $3.58/gal, still a tad under today's
gasoline price and the reason new car sales have been stagnant at the 15
million unit/yr pace since Sept/2012. The
forecast for imminently lower prices should
result in a surge of auto manufacturing and sales this Summer.
The environment for
tailwinds and a rejuvenated auto sector should be lengthy. The
models currently forecast $68/barrel USA RAC & a $2.70 pump price by
1Q18. The consequences of LVS Barrier incursions are dire.
During the Great Recession, volume declined 44% (16 million unit
annual rate to 9 mu/yr). The rate dropped by 1.2 mu/yr in the
2011 episode, 0.7 mu/yr in 2012 and 0.6 mu/yr again this year.
black swan event make its presence,
Gas Pump &
Barrel Meter models
both conclude any extraordinary price spike
would be constrained by the same Price Spike Ceiling which
firmly arrested the 2008 price run @ $129/barrel USA RACrude
($4.11/gal pump). That definitive petroleum/GDP ratio predicts
an upper limit today of
currently forecasts such a scenario is likely
to befall the US auto sector upon US gasoline surpassing the LVS
Barrier ($4.11/gal) permanently in late 2024. Being already in
Recession, the sale of gasoline/diesel fueled Light Vehicles may
fall more than 20%, adversely affecting the manufacturing sector in
The PSC represents a threshold where certain demand destruction feedbacks attain critical mass. As
happened in the Summer of 2008, Demand and Price are reversed as alternative
energies, substitution and conservation measures are pursued. The negative effects of rising energy
costs on the disposable income of consumers and the profits and viability of
commerce and institutions inevitably takes a toll on the Canadian & American economies.
Ironically, triple-digit crude prices have been for the most part
the USA's own making. In the realm of unintended consequences,
a plethora of avoidable events has thoroughly disappointed the
international investment community over the years.
The USDollar has been debased as much as 40% since January 2002. The
journey was truncated by safe haven
activity in 2009, but the latest relapse is responsible for a $19/barrel component of today's $97 RAC
price. To give context
to the volatility, this
same factor was a record $30 in July 2008 and a mere $1/barrel on the day of
Barack Hussein Obama's first inauguration.
Aside from its lousy handling of the CMHC realty bubble, Canada's Federal Gov't must be praised for
its measured post-Recession austerity
measures and strategic revisions to Provincial transfer payments & cost-sharing agreement
ceiling to cement fiscal responsibility
with respect to the nation's long-term future.
Canada's 11-yr string of balanced budgets
was interrupted by the
Great Recession but will resume in 2016.
Canada's $608 billion national debt should be extinguished by 2043.
No other G-20 country has a brighter fiscal future...
the Great Recession retrospect
Held aloft by a CMHC facilitated realty bubble, Canada's economy
contracted for only ten months - one of the shortest of the G-20
(Aug/2008 to May/2009). Following a -9.6% Real GDP
trough in Feb/2009, Canada's Economic Action Plan served up a robust
economic Recovery manifested in a 4.9% crest in Jan/2010. The
GDP growth rate avg'd -5.6% over the three quarters of contraction. The
Canadian economy finally surpassed the July 2008 Real GDP high water
mark in Oct/2010 completing the Recovery phase.
The Expansion of
the new business cycle has been particularly soft, reflecting
both the ongoing deleveraging associated with a balance sheet
recession event and persistent economic weakness in the USA.
America is mired in a Structural Greater Depression. Canada's
troubles stem from being in only the second year of a projected
eight-year correction of the CMHC realty bubble.
The Progressives and their President continue to wage
class warfare seemingly in an attempt to stretch the
rhetoric into the 2014 & 2016 campaigns. Upon
becoming Liberal leader, Justin Trudeau jumped on this
same band wagon. The
introduction of "middle class" as their
battle cry is odd. Throughout the British empire
and beyond, it is common knowledge the real middle class
is doing just fine! That's 'cuz most Americans are
understandably unaware of the relevant definitions.
The upper class is a culture's wealthiest 1%, whilst
middle class refers to a nation's highest 10% of
earners. Down the line comes the working class and
lower class populations. (link)