Sunday, 15 January 2017

Going south

Away soon for our annual trip south -- this year, to the land of rum and reggae.  Posting should resume just before month end.

Tuesday, 10 January 2017

Optimism reigns at the Bank of Canada

For decades, Canadian federal governments have been trying to reduce the economy's dependence on the United States as a trading partner -- to absolutely no avail.  The behemoth to our south still accounts for upwards of 70 percent of Canada's goods exports, just as it did when Justin Trudeau's daddy was Prime Minister.

So you'd think that the election of a mindlessly protectionist President would trigger a wave of pessimism among Canadian businesses, right?  Well actually, not right, according to the Bank of Canada's Business Outlook Survey, published on Monday. The Bank finds that after two years of "overall modest activity" (that's one way of putting it), business prospects have improved, reflecting "building domestic demand, a supportive export outlook and an expected recovery in energy-related activity".

These three factors are, in fact, closely related.  The improvement in domestic demand reflects the waning impact of the oil price shock, and the supportive export outlook is largely attributable to the exchange rate weakness which that shock triggered.  Businesses are uncertain about the implications of the election of Donald Trump, but fears of protectionism appear, at least for the moment, to be outweighed by optimism about the potential benefits of the new administration's planned infrastructure spending.  It is all but certain that any infrastructure initiatives launched by Trump will have stringent "Buy America" provisions, so this optimism may well prove unjustified.

The Survey highlights several developments that could, in the fullness of time, push the Bank toward some degree of policy tightening. Capacity pressures are absent for the moment, but there are signs that they could begin to emerge.  There are rising indications of labour shortages in certain regions. Input and output prices are set to rise as the impact of the weakened exchange rate continues to be felt and as firms begin to feel emboldened to rebuild profit margins.  Inflation expectations are edging higher, though they remain at the lower end of the Bank's target range.

None of these developments suggests that the Bank will be raising rates at any time this year, even as the Federal Reserve continues to tighten.  However, the deliberately upbeat tone of this survey, after many quarters of unalloyed gloom, suggests that the Bank is starting to prepare the ground for less accommodative policy, perhaps in the first half of next year -- though of course, all bets will be off if the incoming administration unleashes the chaos that seems to be Donald Trump's stock-in-trade.

Friday, 6 January 2017

Canadian jobs data: good? Yes. Believable? Maybe

Canadian jobs data for December are remarkable. The economy reportedly added 54,000 jobs in the month, compared to an economists' consensus that effectively called for no change. This made 2016 the best year for job creation since 2012.

I've posted here innumerable times about the unreliability of the Canadian Labour Force Survey, and certainly a result like this one deserves plenty of caveats.  Did the economy really add 81,000 full-time jobs in a single month, after several years in which full time employment has been relentlessly replaced by part-time work?  Precedent suggests that the January data will see a sharp reversal in the full-time jobs data, which will leave us as much in the dark as ever about what is really going on.

Rather than listening to me blithering on even longer about this, I encourage you to amuse yourself by scrolling through the comments section of the linked article.  The sourpuss reactions to the numbers began immediately:  "McJobs"; "all December retail jobs that have already disappeared"; "how many of those jobs required post-secondary education".  One commenter then went to the trouble of posting the actual breakdown, which strongly suggested that the jobs were in fact concentrated in skilled, white-collar sectors of the economy.  Think that stopped the nay-sayers?   Think again!

Free trade follies

Still more than two weeks until Donald Trump becomes POTUS 45, but we can already see how he intends to use the Oval Office: as a bully pulpit, a term coined by his predecessor Teddy Roosevelt.  His tweeted threats to Boeing (over the cost of a new Air Force One) and to Carrier, Ford. GM and, just today, Toyota, over jobs moving to Mexico from the United States, seem to portend a major change in the historic relationship between a Republican White House and big business.

There has been a wide variety of reactions to the Trump Trade Twitter-storm, but one surprising thing is the relative absence of voices prepared to come to the defense of free trade as such.  Trump may be leading the charge here in his inimitable way, but he's by no means out of touch with the zeitgeist, even among academics.  Herewith a short sampling of reactions over the past few days.

First, a surprising reaction from Paul Krugman. Writing just after Christmas in the New York Times, Krugman warned that the trade war threatened by Trump during the campaign was already under way.  However, he believes that this will "probably not" push the world economy into recession.  Why is this surprising?  Well, it's long been believed that it was US protectionism, in the form of the Smoot-Hawley Tariff Act, which turned the Wall Street Crash of 1929 (a problem) into the Great Depression (a calamity).

Krugman, a diehard Keynesian, doesn't see it that way:  "protectionism didn't cause the Great Depression", he asserts.  Instead, it was the inappropriate austerity measures taken in the US and elsewhere that did that, right up until FDR's New Deal.  That's arguable -- both factors probably played a role -- but the interesting thing here is that Krugman is in effect validating what seems likely to be Trump's economic policy.  The crackdown on free trade is already visible, but the other key element is sure to be an expansionary fiscal policy that will make FDR look like a piker.  And here we have a left-leaning Nobel Prize winner telling us that this may well be a successful formulation!

Moving on, we find my old friend Dennis DesRosiers, who has been running an automotive consulting firm in Toronto since the days of the Edsel. (Sorry, Dennis!).  Dennis is the closest thing to a free trader that we find during this little tour d'horizon.  He told the local media that forcing producers to build cars in the high-wage USA won't promote economic growth: "tariffs sound good on paper, but they increase prices for consumers", which prevents them from buying.

DesRosiers is not wrong here, but that's not the whole story.  The people who used to earn $40 an hour plus benefits at the huge GM plants in my neighbouring city of St Catharines, Ontario are now on minimum wage in call centres, always assuming they have work at all.  They can't afford to buy GM cars any more, either, even if those cars are now being made in Mexico by workers making a fraction of the wage.

Here, in fact, we get a bit of a clue to why the bloom is off the free trade rose.  The benefits of well-paid, skilled work haven't been transferred lock, stock and barrel from unionized workers north of the border to grateful Mexicans.  The work has gone south all right, but much of the benefit has gone into the pockets of the automakers and their shareholders.  There can be no real doubt that globalization and free trade have been major factors behind the massive rise in wealth inequality in the past three decades.

Lastly let's meet Jerry Dias, head honcho of Unifor, the current name for the old Canadian Auto Workers Union.  Dias sees Trump's assault on outsourcing as an entirely positive thing for his members and for the Canadian auto industry.  After all, he notes, Trump's attacks have all been on Mexico, with Canada not getting so much as a mention.

Well, so far, at any rate.  It's tempting to remind Dias of the old lament that dates back, I think, to the rise of the Nazis -- you know, the one that begins, "First they came for the Communists, but I'm not a Communist, so I just sat back and did nothing to help", and ends "And then they came for me, and by then there was nobody left to help me".  If Trump sees his bullying is working -- and maybe even more if he fears it isn't -- it's astoundingly naive to think that he will stop with Mexico.

The whole world is likely to be in the firing line, and if that is the case, then it's not just Jerry Dias that's naive: so too, I'd argue, is Paul Krugman.  The world is much more trade dependent now than it was in the 1930s, and so the kind of trade disruption that Trump seems so blithely willing to trigger stands to be much more destructive.  Can a domestic infrastructure program offset that?  I'm not sure that's a good bet.

Thursday, 29 December 2016


Sure, the holidays are a time for family, but they're also a fine time for binge-watching TV.  This year we've been watching a couple of spooky series that show just how much TV programming has changed over the decades.

We keep being told that we live in a golden age of television, blessed by offerings like Deadwood, Mad Men, The West Wing, Breaking Bad, and on and on.  In the last year or two a lot of well-received material has been originated by Netflix.  Just before Christmas, it dropped (with little fanfare) a sci-fi/fantasy series called The OA, co-written by and starring Brit Marling.  Without spoiling it for anyone who hasn't seen it yet, I can safely reveal that the principal focus is near-death experiences and the people who survive them.

Like the other series I've listed, The OA unspools at a measured pace, with eight episodes of varying lengths.  There's lots of flashing back and forward in time, a large cast of characters and plenty of unexpected twists and turns.  And, like so many other such series, it doesn't actually reach a conclusion: the ending is ambiguous to say the least, and sure enough, a quick Google search reveals that Ms Marling and her co-auteur, the marvellously named Zal Batmanglij, are hoping to secure funding for another series, or two, or even three!

What ever happened to telling a story economically?  The creators of Breaking Bad will freely admit that the story took on a life of its own: for example, the character of Jesse Pinkman was supposed to be written out at the end of the first series, but ended up as a mainstay of the entire six-year run. Marling and Batman say they have a complete story arc for The OA that can unfold over several seasons, but it's very likely that the tale will evolve in the writing.

You couldn't find a sharper contrast for this style of story-telling than The Twilight Zone, which is now available in a 25-disc complete set, and which found its way under our Christmas tree this year.  Each episode runs for less than 30 minutes, yet manages to create from scratch a coherent scenario in which the action takes place.  The stories don't always reach a clear conclusion -- indeed, that's often the point -- but each episode is entirely self-contained.  The show's creator, Rod Serling, gave himself absolutely no wiggle room -- at the conclusion of each week's show, he would briefly appears on screen to offer a teaser about the following week's entirely different episode.

I'm not suggesting that even Rod Serling, genius that he was, could have told a complex story like that of The OA in less than half-an-hour.  However, there are times, watching The OA or even much superior shows like Breaking Bad, when you wish the writers could have reined in their self-indulgence a bit and just got on with the story.  

Friday, 23 December 2016

Holiday potpourri (with added cauliflower)

Just a few brief thoughts before the Christmas break....

* Canada's headline CPI for November was reported yesterday.  The year-over-year rise of 1.2 percent was slightly lower than expected, something which StatsCan attributed to lower food prices.  Ah yes! At this time last year we were enduring the great cauliflower ripoff, with heads of the cruciferous staple selling for as much as ten bucks.  It was all the result of the drought in California, plus the enfeebled state of the Canadian dollar.  This year prices for cauliflower (and other imported produce) have come back down from the stratosphere, resulting in the lower-than-expected headline CPI.

* But of course, the Bank of Canada told us a few months ago that it was no longer going to focus on either headline or core CPI in assessing its inflation target, instead unveiling three oddly-named new indicators.  This month, for the first time, StatsCan has reported the values of those measures.  Two of them -- CPI-common and CPI-trim --are slightly higher than the headline figure.  The third -- CPI-median -- has been at or above the Bank's 2 percent inflation target for the past four months.  Two thoughts here: if the Bank is taking these measures seriously, then the comfortingly low headline CPI measure may not be the best guide to future policy; and, if these measures continue to diverge widely, it will become harder for markets and analysts to assess what the Bank might be about to do next.

* Canada's real GDP unexpectedly fell 0.3 percent in October, abruptly ending the rebound from the impact of the Fort McMurray wildfires.  The weakness was broad-based, but what will concern policymakers most is the sharp decline in the manufacturing sector, with exports of manufactures remaining particularly weak.  If Justin Trudeau is serious about going along with Donald Trump's demand for changes to the NAFTA agreement, Canada will not be negotiating from a position of strength.

* Last but not least, the housing market.  Prices for detached homes in Toronto have risen 27 percent in the last year, prompting the media to declare that the local market is now the "least affordable" in Canada.  That can't really be true, can it?  I mean, if homes were unaffordable, prices would be going down, not rocketing higher.  Evidently there are still plenty of buyers at these prices -- another news story earlier in the week talked of a two-day open house north of the city that attracted 400 viewings and 50 offers.  I understand what the reporters are trying to get at, but I don't think "unaffordable" is the right word.  "Preposterous" or "cruisin' for a bruisin'" might be better.

Best wishes for Christmas and the holiday season to everyone who's been kind enough to read this blog in 2016.  I can't imagine what I'll find to write about in 2017....

Wednesday, 21 December 2016

My economist can beat up your economist

Watching the UK economy from afar, it's striking how much people's take on what's going on is driven by how they voted in the referendum back in June.  The Remainers (or Bremoaners as the tabloid press has christened them) see economic disaster looming at every turn, while the Leavers are gloating that the most dire pre-referendum predictions have failed to materialize.

Some of the discussion has been truly bizarre.  The "Project Fear" campaign on the Remain side was clearly overdone, though not nearly as mendacious as the Leave side's promises, which have long since been reneged upon.  However, the willingness of Leave campaigners to declare, within days of the vote, that since the sky hadn't actually fallen, everything would be all right, was clearly premature.  It was always going to take some time for the impact of the vote to be felt; so, six months on, where do things stand?

The Guardian has been compiling a monthly report of key indicators, and the latest update can be found here.  As a strong voice on the Remain side, The Guardian chooses to interpret the data in a mildly negative way: the UK economy is "at a tipping point".  Maybe it is, but you'd be equally entitled to see the figures in a much more positive light. Wages and employment are rising, as are house prices and the FTSE.  The biggest negative that The Guardian can point to is the rise in inflation that has been triggered by the post-referendum fall in Sterling.  That could well crimp household spending power in 2017, arresting the expansion of the economy.

Official forecasts from the Office for Budgetary Responsibility concur that growth will slow last year, but no longer think that the economy will be forced into outright recession.  So what do we make of the opinion of Bank of England Governor Mark Carney, that the British economy is in the  midst of its first lost decade since the 1860s, or the Institute for Fiscal Studies' assertions that UK workers face their toughest squeeze on wages since WWII?  The truth is that both of these observations can largely be traced to developments in place well before the referendum, specifically the fiscal squeeze imposed by former PM David Cameron.  Cameron had already put the country through the wringer well before his disastrous and craven decision to hold the Brexit referendum.  History will not be kind.

In economics you can never test counterfactuals, so it will never be possible to know exactly what the impact of the Brexit vote was.  However, it seems reasonable to assert that the longer it takes to come up with some sort of trade deal with the EU, the worse things will be for the UK economy, and the longer the pain will last.  Markets hate uncertainty more than anything, and the Brexit vote, together with the chaotic follow-up by a totally unprepared UK government, has delivered that by the cartload. That lost decade could easily last a whole lot longer.