Sunshine and lolipops! November GDP on FIRE

November GDP on FIRE!

After recording a surprisingly weak 0.1% increase in October, the November GDP reading roared back to life to the tune of a 0.4% increase.  The gains were driven largely by the FIRE group (Finance, insurance, Real Estate) which recorded their strongest showing since the Spring when the housing market was firing on all cylinders.

It may be worth remembering that November resale data was surprisingly strong, but December data told a very different story.  How this will manifest itself in the GDP data in the coming months is worth watching, though I’d suggest the bounce in the FIRE group will likely prove short-lived.

From TD:

“Signs of strength emanated from the service sector (+0.5%), with strong gains in retail trade (+1.4%), and finance insurance, and real estate (0.6%). Both have come roaring back, following a 9-month breather following the robust strength seen in late 2009, and early 2010.”

Though December’s readings should be lower, I’d expect to see this jump and stay high until March once all the 5/35 lemmings have taken the plunge and the demand gap hits.  What happens past that point will be the big Canadian economic story of 2011, but if demand can be miraculously sustained through the rest of the year with a reduction in available credit and a noticeably shallower buyer pool, I will eat my left foot!

This hasn’t entirely been lost on the TD report:

“We anticipate that the strength in the service sector may be short-lived. The service sectors continued to benefit from strong domestic demand, and extremely low-interest rates, led by the Canadian existing housing market. Since, we have seen signs of cooling on that front, and going forward we expect housing activity to be moderate at best. In addition, the most recent changes to mortgage insurance rules should work to dampen demand in the existing home market. A cooling housing market, coupled with high  household debt levels is likely to slow growth in the service sector and construction output through 2011.”

Consumer spending also helped boost GDP readings`with retail activity up 1.4%.  With credit creation still significantly outpacing income gains, one can’t help but wonder how long this can continue.  Indeed if house prices fall as expected by even the bank-employed economists, we should see the main driver of consumer spending, personal lines of credit, face significant head winds.

It wasn’t all good news:

Manufacturing and construction both declined in November.  The manufacturing sector continued its broad decline that started in the summer, while the construction sector posted its second straight monthly decline.  Given the recent weakness in housing starts, I would be surprised to see any increase over the next few months.

“Looking beyond temporary factors, on a year-over-year basis, real GDP growth cooled to 3.0%, from 3.4% in the prior month, continuing a 9-month moderating trend.”

To be fair we were in the midst of a stimulus induced spending spree in the economy.  I’m not shocked that year-over-year comparisons show a deceleration. 

CIBC’s analysis summarized the data succinctly:

“Given the leveraged state of the Canadian household, once the Bank of Canada starts to hike rates in May, we can expect to see a deceleration in not only consumption activity, but the FIRE category as well.”

Perhaps the most telling quote on the state of the economy.  As long as credit can still be extended to those who are already drowning in it, and as long as interest rates never rise, things look great.  In my mind, the only increase in GDP that matters is the one that occurs once consumers and governments actually begin decreasing their debt loads and savings and interest rates normalize.  Until then, any GDP reading can be made to look great if we only pump more debt into the system.

Cheers

Ben

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12 Responses to Sunshine and lolipops! November GDP on FIRE

  1. debunking says:

    Ben,
    get it over, low interest rates are here to stay for a very very long time. That is at least for the next 3 to 5 years.
    It is simply mind boggling that people cant see this.

    • You need to read more of my work. Funny thing is…you and I agree on the direction of rates, but not on the implications. If you think interest rates can stay at these levels without significant deflationary pressure to warrant it, you’re out of your mind. Catch 22 my friend.

  2. debunking says:

    Ben, you have been calling for a RE crash for some time now.
    yet, you seem to agree with me that interest rates are going to stay low for the foreseable future, however you dont seem to make the connection with stagnating RE prices.
    My sceanrio of interest rates severely lagging inflation rates and stagnating RE prices is taking shape everyday that passes.
    What I cant quite figure out, is how to profit from such an enviroment.

    • John in Ottawa says:

      I’ve been so busy fighting a failed septic system this past week I have not been able to keep up with Ben’s writing. Remember the old joke about the various body parts discussing which is the most important? Believe me, when the sewage system freezes up, the answer becomes obvious very quickly.

      Deflation isn’t the complete disaster it is often made out to be, except of course in the face of excessive debt. One industry that has learned to prosper in the face of relentless deflation is the high tech industry.

      The trick to profiting in a deflationary environment is to invest in quality.

    • jesse says:

      Investing in quality in RE is a relative savior only. Innovation in fire is limited, unlike tech.

      • John in Ottawa says:

        Innovation in FIRE is limited? Isn’t “innovation” what got the US in trouble in the first place?

  3. Mango says:

    Ben will always ignore reality

    http://www.theglobeandmail.com/report-on-business/economy/economy-lab/daily-mix/canadians-have-more-equity-in-homes/article1889229/?from=1889230

    LOW LTV’s, no shock from rates, why bother.
    Strong Jobs
    Strong Economy

    What do you expect house prices will do? Stop sitting around and reading this crap, same stuff being said over and over, keep renting and waste money

    The bubble is just starting!!!!!!!!!!!!!!
    http://www.cbc.ca/video/#/News/Money/1239849460/ID=1758092890

    • Nice try Mango. Americans had nearly 60% equity in their homes too prior to their bust. Given the tax advantaged status of mortgage interest payments in the US, our levels are comparable.

      The point is that equity always looks great at the tail end of a bull market in housing, but it has absolutely no predictive value in determining future price movements.

      Back to the drawing board my friend.

      • Mango says:

        What are you talking about 60% equity is with after tax dollars dude??? Wake up. Help me understand that

        60% in Canada with after tax
        60% in US with tax write off

        Where is your data of American pre/post crash from 60%? If Americans has 60% equity in homes, how would you crash ?

        Why is the tail end?

      • rp1 says:

        http://seekingalpha.com/article/205894-a-stunning-trend-in-home-equity

        Home equity of all owners appears to tell you very little. When prices are rising, higher equity of existing owners offsets higher debt taken on by new owners. That’s why you get a flat graph.

        But really, a flat graph should tell you something. If prices have been rising rapidly wouldn’t owners’ percentage equity increase? I mean, it would if everyone is paying off their mortgages. It should increase faster than normal.

        But if percentage equity is flat, it tells you that increased (percentage!) equity is totally offset by increased (percentage!) debt. In that scenario, you’d better hope the housing market NEVER FALLS, because home owners collectively spent whatever equity they received from rising prices.

        Ben?

  4. Tom says:

    Ben: What are the Finance, insurance, Real Estate statistics used to contribute to the GDP? Are Housing Values used as a measurement? Is debt off set? I would of thought it was construction data only. I have a sense that basic indicators have been changed and manipulated over the years.

    • Great question. I’m not too familiar with any changes in the way GDP is calculated.

      @RP1 Thanks for the link! Great point about flat equity. I agree it is a worrisome trend during an unprecedented bull run in real estate.

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