Weaker Than You Think

I had been girding my loins yesterday, with the release of StatsCan’s July GDP numbers, for another orgy of triumphalist headlines: “The Recovery Is Nigh! All is Good! Stop Worrying!  Nothing to See Here, Folks!  Just Go About Your Business!”

After all, Chrysler’s two humongous Canadian assembly plants went back to work in July (after a 6-week shutdown as Chrysler went through U.S. bankruptcy court).  That alone should have given a noticeable bump to real GDP.  Let alone the other fruits of the so-called recovery that the financial pages have been trumpeting for several months now.

So I was readying my arguments to cast a bit of sober second thought on any strong GDP number that may have come down the StatsCan pipeline.  Turns out I didn’t need to: the official StatsCan number was surprisingly weak.  And the deeper you dig, the weaker it looks.

The headlines trumpeted no growth in real GDP.  In fact it was a slight month-to-month decline (of over $400 million in chained $2002 — not enough to amount to a tenth of a percentage point in StatsCan’s one-decimal-point approach to economic growth).

Take away the $2 billion boost in auto assembly, parts, and other direct inputs that resulted from the re-start of the Chrysler plants, and national GDP would have declined by over 0.2 percent.

The weakness was pretty broad: primary, utilities, construction, non-auto manufacturing (which, bucking Chrysler’s good news, is still declining), retail trade, transportation, information, administration, arts, and public services.  Of the 18 2-digit sectors reported in StatsCan’s summary table, 12 of them saw declining real GDP.  The financial scetor grew nicely, of course, but I already knew that — ever since Canada’s big banks announced they were setting aside another $7 billion for performance-based compensation.

I was surprised to see that even the public sector (which has been the source of pretty well all the good GDP and employment news in recent months) saw a month-to-month decline in seasonally-adjusted GDP.  Some of that was the Toronto civic strike, but not all: education sector GDP also declined.

Here’s an interesting tidbit resulting from the numbers for those who like to play with numbers.  After this release, real GDP will have to grow by at least 0.2% in each of August and September (or by close to 3% at an annualized rate), for third-quarter GDP to be higher than the second-quarter average.  That’s because the July numbers (while about equal to June) are lower than the second-quarter average — and there are now only 2 months left in the quarter to pull up the third-quarter average.  This means it’s by no means a slam-dunk that the thrid-quarter will indeed mark the end of the “official” recession (defined by consecutive quarterly declinesin real GDP).

The countervailing headline yesterday (addressed in Andrew Jackson’s post) was the report on payroll employment for July (from the enterprise-based SEPH survey, not to be confused with the more well-known household-based LFS survey).  It suggested, counter-intuitively, that payroll employment rose by 74,000 jobs in July.  Two-thirds of those positions were in the public sector.

How do you reconcile that with stagnant GDP for the month?  I guess those 74,000 new employees produced precisely nothing.

At any rate, the 74,000 number is itself hugely suspect.  The LFS report for July indicated that paid employment (exluding self-employed) declined by 79,000 — almost exactly the opposite of the SEPH report!  Wierd.  In the LFS number, even public sector paid employment fell slightly (by 4,000 jobs), but almost all the carnage was in the private sector.

The July GDP results did seem to temper, ever so slightly, the relentless cheer-leading for recovery emanating from government, finance, and certain sectors of the media.  But the rose-coloured set can still find a half-full glass of water anywhere they look.  Erin Weir has already pointed out the ridiculous mis-interpretation of Monday’s reported decline in EI beneficiaries for July, by those hunugry for good news.  They heralded this finding as a sure sign of imminent recovery, forgetting that we already knew that actual employment fell badly in July.  Therefore, the only thing accomplished by a decline in beneficiaires, is an increase in the number of unemployed Canadians who are excluded from benefits!  Business may indeed celebrate the fact that most unemployed Canadians fall through the gaping cracks in our social safety net.  But no-one can interpret that as a sign of economic recovery!

StatsCan’s Philip Cross certainly had his cheerleading hat on again in today’s Globe and Mail coverage of the July GDP numbers.  He emphasized that “the reasons for this disappointing report appear to be temporary.”  Then, to make sure we put down the paper with a comforted smile, he added: “Certainly the worst has past and the economy was starting to grow slowly in the summer.”  No evidence of that in the numbers.

Don Drummond’s optimism was even funnier.  I heard him on Toronto’s 680 News radio tonight discussing what he admitted were shockingly weak GDP numbers the day before.  But don’t worry about one month of lousy numbers: “The trend is up, and you can’t expect it to go up every single month.”

The trend is up?  Look at a graph of real monthly GDP (for example, here: http://www.statcan.gc.ca/daily-quotidien/090930/dq090930a-eng.htm).  It fell for 10 straight months, by a cumulative total of 4.5%.  Then there’s a tiny uptick at the far right of the graph, up by 0.1%.  So now, according to Don, “the trend is up.”

I don’t have any vested interest in the recession lasting longer than it needs to.  Millions of Canadians need recovery and work sooner, rather than later.  I accept that there is evidence that the rapid decline in output and labour markets that occurred beginning last fall has leveled off.  (Whether “leveling off” equates to “bottoming out” depends on what happens next.)

However, this is in a context of unprecedented injections of temporary fiscal support from government.  And there is no sign of anything remotely resembling broad-based momentum gathering anywhere in the private sector — other than, of course, Bay Street, where they are partying like Lehman Brothers still exists.