Running Hot

Whether it makes you glad, mad, sad or just downright perplexed, it’s true. Growth in the US economy is scorching hot, and there seems to be no end to it. And while it seems there’s less willingness to share that growth around, it’s happening anyway: more than a few nations are benefiting from the Yankee boom. So, is Canada one of them, or are we getting left behind?

Doubters were all over America’s weak showing in the first quarter. GDP growth rang in at 2.2 per cent, and was actually weaker in preliminary releases. Realists were vindicated by the near-doubling of growth in the second-quarter, to 4.2 per cent. While nobody really expected this pace to be sustained, the third quarter is pumping out some pretty impressive stats. Rummage through the monthly data, and the singe marks of a hot economy are everywhere.

Take one of my favourites, the ISM Purchasing Managers’ Index. It just hit it’s record level for this expansion in August, a searing 61.3. All the sub-indexes rose in the month, and new orders – a key sign of sustainability – are close to peak levels. Businesses are finding it increasingly hard to keep up. Capacity pressures are high and rising in a large number of industries. Hiring is also getting increasingly difficult. Initial claims for unemployment insurance are at their lowest level since the late 1960s. Job numbers released last Friday show no let-up in hiring, adding 201,000 to the rolls and keeping the unemployment rate in the bowels of the basement, at 3.9 per cent.

Heat is one thing, but are they in danger of overheating? An increasing number of pundits are sliding that way, worried that the mercury’s in for a dip, or worse still, a plunge. They may be right, but current evidence is thin. Post-recession growth in the US was weak for a long time, building up a large store of pent-up demand. Investment has yet to fully recover – both on the business side, and in the housing market. Consumers aren’t racking up debts anywhere close to the pace of a bubble economy. And in spite of still-low interest rates, price pressures in the economy are muted. Things are hot, but not too hot.

Some are saying this is all about stimulus, that tax reductions and spending programs are an artificial boost that will give way to much softer conditions next year. Again, this is plausible, but there are solid counter-arguments. Corporate tax reductions and accelerated depreciation measures aren’t the sort of policies that create flash-in-the-pan growth. Business investment decisions are made on a longer horizon, and are at the near end of their full response to these measures. In fact, this stimulus may be just what US businesses needed to wake them up from their protracted post-recession investment hibernation.

Canada is definitely benefiting from US economic strength. Last week’s merchandise trade data clearly put the US in the driver’s seat. Monthly exports to the US were up 3.3 per cent, and have been up smartly in five of the last six months, lifting year-to-year growth to a blistering 15.8 per cent. Canada’s trade surplus with the US is at a cyclical high of $5.3 billion. While no doubt this will be used by some to illustrate the raw deal the US is getting from the current trade architecture, first, their surplus with us in traded services takes us to balanced trade; and second, one is left to wonder how the US could handle all this growth if it were fully internalized.

So much for today’s story. Will rising protectionism douse the flames of growth? Clearly, it’s not in anyone’s interests to see this happen. Hopefully, growth is not instilling a false sense of invincibility; globalization got the US to this point in the economic cycle, a fact that’s well understood by the business community and many policymakers. Ultimately, today’s trade skirmishes are about getting better deals, not destroying their essence. The uncertainty is at times unbearable, and is currently compromising investment decisions. Mutually beneficial resolution is the remedy, but for the moment, patience is paramount.

The uncertainty in today’s international trade space is not interrupting torrid growth…for the moment. Drag it on, and any delays to trade-related investment plans will begin to constrict the broader economy. For this reason, all sides are hoping for speedy and conclusive resolution to outstanding trade issues.

This was written by Peter Hall, Vice-President and Chief Economist, Export Development Canada.