Thursday, August 31, 2006

Recession in 2007?

My wife has been predicting a recession every year since the last one ended. I'm beginning to think, however, that this time she's got it right. The first bit of evidence comes from today's GDP report:

OTTAWA (Reuters) - Canada's economy lost momentum in the second quarter, posting 2.0 percent growth, down sharply from 3.6 percent in the previous quarter, as weaker exports took their toll along with a slower pace of consumer and business spending.

Statistics Canada also reported on Thursday that gross domestic product did not grow at all in June from May, after inching up just 0.1 percent in May. Statscan revised lower the first-quarter growth figure from 3.8 percent previously.

The strong Canadian dollar is hurting shipments to the U.S., no doubt.

However, a more disturbing indication of a looming downturn comes from the U.S. itself, where housing markets have been riding the surface of a bubble since about 2000. Nation-wide, average prices have been rising at about 13 percent year over year, with many states (like California) seeing increases nearly double that rate. This is simply not sustainable, and it appears that the bubble is finally starting to burst.

Now, the state of the Canadian housing market is not nearly so tenuous. For example, in Toronto the average price of a home has increased about six to seven percent annually since the market bottomed in 1996. Even in Calgary, where prices have gone up about twelve or thirteen percent since last year, the longer term increases have been in single digits. This is not not bubble territory.

No, the problem will be with spill-over effects from any slowdown in the U.S. caused by deflating home prices. For example (as R. McClelland notes here) a crash in the U.S. residential construction industry will effect lumber sales and prices in Canada, and may even trigger tariffs written into Harper's softwood lumber deal.

Oddly enough, the dude at Dymaxion World chose today to write on this very same topic. He's got some scary looking graphs showing price increases in the U.S. housing market. Compare them with, for instance, the numbers from Calgary and you can see how different the situation is in the two countries.

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