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The Daily


Thursday, February 21, 2008

While the economy continued to expand in October and November, there were numerous signs in the leading indicators of an impending slowdown. Auto output fell nearly one-third in December; together with the spin-off effects on other industries, this will shave 0.2 percentage points off of gross domestic product (GDP), according to simulations using Input/Output tables. Severe winter weather curtailed business activity, notably housing starts and total hours worked. Fourth-quarter economic growth was anemic in the US, reflecting a deepening slump in housing and a drop in inventories. Finally, stock markets around the world tumbled early in 2008.

Several factors make the assessment of current economic conditions the most complex in years. The multiplying signs of a cyclical slowdown in North America are occurring without many of the imbalances typical of a cyclical peak, notably as inflation and inventories remain under control. The bursting of the bubble in the US housing market has already sent starts to near their lowest level since 1970, and triggered much of the turmoil in global financial markets since mid-August that has raised some interest rates even as central banks lowered their rates. As well, the surge of the Canadian dollar to parity with the US dollar has depressed the prices and earnings of many exporters, although output volume has remained steady.

However, many of the indicators of cyclical slowdowns in the past may be less reliable in the current environment. GDP growth in recent years has been less volatile because of better inventory management. In the US, housing and autos contracted over the last two years without precipitating a cyclical slowdown in real GDP—a development without precedent in recent decades. By comparison, Canada's housing market and auto sales remained strong. Finally, the stock market fell precipitously in 1987, 1998 and 2001, without a subsequent recession in Canada.

Other cyclical indicators remained robust. Commodity prices stayed high, even rising in January despite weaker growth in the US. Real incomes of households have been bolstered by steady job growth and rising real wages into January. As well, governments and corporations have large financial surpluses to absorb unexpected shortfalls in incomes. And, of course, the Federal Reserve Board has moved rapidly to lower interest rates, culminating in a two-step drop of 125 basis points in January that helped stabilize financial markets.

Definitions, data sources and methods: survey numbers, including related surveys, 1301, 1901, 2152, 2306, 2406 and 3701.

The print version of the February 2008 issue of Canadian Economic Observer, Vol. 21, no. 2 (11-010-XPB, $25/$243), is now available. This issue summarizes the major economic events that occurred in January and presents an article entitled "Tracking value-added trade: Examining global inputs to exports."

For more information, or to enquire about the concepts, methods or data quality of this release, contact Philip Cross (613-951-9162; ceo@statcan.gc.ca), Current Economic Analysis Group.