The link is to a TD economics report analyzing today’s surprisingly low consumer price index (CPI) reading out of the US. The CPI is widely viewed as a benchmark to measure inflation. Of course you’re all too smart now to be fooled by this definition of inflation, as it only reflects consumer price changes, not changes in the underlying monetary base. While I’m not a huge fan of the idea of ‘core CPI’, which strips out the more volatile food and energy prices. Nevertheless, it’s worth noting that core CPI remained essentially unchanged in October, dropping the annual change to just 0.6% (1.17% total reading).
Both measures are exceptionally tame, with the core CPI making 50 year lows.
From the report:
“October’s CPI report falls in line with the inflation outlook for persistently low core inflation and upward deviations in the headline measure been driven mostly by energy prices.”
From CIBC world economics:
“While signs of weakness in inflation and housing is hardly a new story, today’s report underscores…the powerful forces still working to hold inflation in check. It also suggests that any concerns about measurably higher inflation in the next year or two due to
the Fed’s QE program are likely overdone.
We expect core inflation to remain below the 1.0% mark for the next few quarters. Low inflation and a gradual economic recovery suggest that the Fed will refrain from starting to raise its target rate until at least early 2013.”
Not too much to argue with here, except to once again stress that some of the same dynamics working to subdue price inflation in the US are at work or are soon to be at work here in Canada. This is why I don’t mind holding an above-average exposure to bonds (short term like XSB or CLF in my house portfolio; longer term like XLG or XGB in my retirement portfolio).
TD recognizes economic weakness coming to Canada; hopes M&E will bail us out
In a report by TD economics, they acknowledge the coming economic weakness, but make the case for investment by companies in machinery and equipment (M&E) to provide a bit of an economic boost going forward.
“All the stars are lined up for business investment in machinery & equipment (M&E) to be a major contributor to Canadian economic growth in the coming months”
“This new shot in the arm for the Canadian economy could not come at a better time. Households have already begun to moderate their spending and the economy can no longer depend on debt-fuelled consumption, the original poster child for the recovery, in the same fashion that has characterized the recovery so far.”
“Additional headwinds in the form of a weak U.S. demand, the waning impact of fiscal and monetary stimulus, and a housing correction will limit economic growth to a moderate pace in the coming quarters.”
Not bad! Seems TD’s economists are a bit more astute than those over at CREA and CMHC. The overall report is well thought out and logically sound, though they fail to address two issues that may derail M&E spending:
1) TD acknowledges that consumer spending will slow down in the face of a housing correction and massive debt levels. How will this impact sales at many companies? Will companies still be eager to invest in new equipment and machinery if consumer demand erodes substantially and cuts into earnings?
2) Does the report consider the updated optimism readings among Canadian execs, which shows confidence in the broader Canadian economy rapidly tanking? I find it hard to believe that companies will spend at the same clip estimated by the report at a time when their executives see little upside to the economy. We’ll see.
More signs of consumer frugality
One of the ‘big picture’ views of this blog is that the coming few years will see a dramatic movement away from our consumeristic economy and towards a new frugality. Some of the first signs of this shift are starting to appear, though scattered data points certainly don’t show a trend.
Nevertheless, it’s interesting to watch. And with consumers carrying more debt than ever, the mean-reversion is assured. The only question is when.
“A balmy November across much of Canada isn’t helping to lift sales forecasts that were already looking dismal, thanks to high consumer debt, growing unemployment and weak consumer confidence”
“Deloitte’s 2010 holiday outlook survey predicts Canadians will take a more frugal path this year, partly because they are trying to pay down debt and partly because recent economic data points to more uncertainty ahead.”
“Almost half of the survey’s respondents, or 44 per cent, said they plan to spend less this holiday season than they did last year.”
“After racking up record levels of debt during the recession, when interest rates were at bargain-basement levels to inspire borrowing and consumer spending, Canada’s collective retail debt load has reached 146 per cent of income.”
And the kicker…
“In the Deloitte survey, respondents were asked what they would do with a bonus or extra income. Only 10 per cent said they would spend the money; 75 per cent said they would save it or pay down debt.”
BOOM! Savings plus paying off debt = deflationary forces at work! Now we just have to see whether or not consumers can stick to this pledge.
Toronto home prices show surprising strength during first two weeks of November
TREB released their mid-month sales stats earlier in the week. Once again Toronto showed surprising resilience in real estate prices, though sales volume and lack of listings continue to reveal underlying weakness.
Sales came in 16% lower than the same period last year, though prices for the GTA rose 5% over last year, with the city of Toronto rising a ridiculous 12%.
Yet let’s remember that October sales were below not just the manic highs of 2009, but below 2007, 2006, 2005, and about even with 2004. So it’s not just that the sales look bad against 2009’s ridiculous volume.
New inventory continues to remain but a trickle, coming in at the lowest in the past 6 years as sellers have gone on strike, no doubt expecting the same economic ‘Hail Mary’ that they received back in 2009 to revive demand in the Spring. I can’t see that happening.
This data certainly suggests that the Spring market is shaping up to be critical. Can the sellers remain on strike through what is typically the busiest time of the year if sales don’t make a marked turn around on a year-over-year basis?
Should be interesting!