A shaky start for 2009

By James Marple, Economist, TD Bank Financial Group

Construction workers at a building site.

A large contributor to the fall-off in Canadian jobs in 2009 was the construction sector, which shed 63,000 jobs in the first quarter.

Data results collected for the first quarter of 2009 paint a clear picture of the state of the North American economy. Unfortunately, the image is not a pretty one. Nothing speaks of the reality of the recession more than the state of the job market and, for both Canada and the U.S., the losses in the first quarter of this year were near historic.

In Canada, employment fell at a 5.5% annualized pace, the third worst quarterly contraction in the history of the Labour Force Survey back to 1966. Since then, the only period to see larger percentage declines in jobs in Canada was in the depths of the 1982 recession. In the U.S., you have to go back to the first quarter of 1975 to get job losses worse than the 5.9% annualized drop in the first quarter of 2009.

Canadian job market continues steep descent

The carnage in the U.S. employment report of last week was echoed this week in Canada, where 61,300 jobs were shed in March and the unemployment rate rose 0.3 percentage points to 8.0%. For the quarter as a whole, Canada lost over 239,000 jobs, a decline of 1.4% (or 5.5% annualized).

The key source of weakness in the Canadian labour market remains the goods-producing sector, led by manufacturing and construction. Manufacturing shed over 100,000 jobs in the first quarter of the year, outstripping each of the past two recessions, making this by far the worst quarter for manufacturing losses on record (even in percentage-point terms, the losses are roughly one-third worse than any single quarter in either the 1980s or 1990s recessions).

The other big contributor to the fall-off in Canadian jobs was the construction sector, which shed 63,000 jobs in the first quarter. The two sectors combined represented 68% of the total jobs lost in the quarter.

While the Canadian services sector held up better than the goods-producing sector, it too shed jobs in the quarter, with most industries sharing in the losses. If the pattern in the U.S. is anything to go by, services employment could continue to show weakness in Canada.

Job losses in the U.S., however, have been about equally split between the goods and services sectors of the economy in recent months.

The distribution of job losses showed once again that this is very much a national recession. While B.C., Alberta and Ontario led the way in terms of job losses, even Saskatchewan, the new stalwart of growth, shed 0.5% of its job force in March. The two former powerhouse economies of B.C. and Alberta are now seeing the worst job losses their provinces have experienced since the recession of the early 1980s.

While we often think of the 1990s as the last Canadian recession, that downturn was much less significant for the western provinces, which still managed to eke out positive economic growth and actually created jobs through the period that Canada was in recession (though they shed some of these as the rest of the country recovered). Not so, however, with this recession.

Since October, B.C. has shed 3.0% of its job force, while Alberta has lost 2.4%. Undoubtedly, the current environment reflects conditions that were unknown to many in Western Canada. All told, while the first quarter is likely to represent the worst in terms of the magnitude of job losses and a slower pace should be expected going forward, the jobless ranks will nonetheless continue to swell across the country, pulling the unemployment rate up to 10% by early 2010.

Short-lived boost for Canadian housing starts

In addition to the stunning decline in Canadian employment over the last several months, the other sector to reveal just how quickly the economy can go from cruising speed to reverse is residential construction. Housing starts have fallen by more than 26% since October of last year, to 154,700 in March.

While starts improved in March from 136,000 in February, this is likely a short-lived blip. The increase came mainly in the more volatile multiple segment, while single-family construction was roughly unchanged from February. Even with the increase, 154,700 is a far cry from the pace of construction just months earlier.

As we outline in a report on our website, “Overpriced and overbuilt: Canadian housing market returns to fundamentals” (http://www.td.com/economics/special/gb0409_housing.pdf), evidence of the overbuilding of homes through the last seven years implies several more years of underperformance.

A lagged recovery in the Canadian housing market and the important feedback from construction to job growth and from home prices to consumer spending are two reasons to be cautious about the pace of the Canadian economic recovery, even as world economic growth begins to improve. While starts are likely to bottom at 115,000 at the end of this year, we believe it will be several more years before Canada sees start levels above 200,000.

International trade on steep decline

While job losses and housing construction are two of the most watched economic indicators, equally important in the current environment is the performance of international trade. Perhaps more than any other indicator, the global synchronicity of the current downturn is evident in the unprecedented declines in global trade flows in the final months of 2008 and continuing into the first quarter of 2009.

Data for February for both Canada and the U.S. showed a rebound in goods exports combined with a decline or smaller increase in imports, resulting in an improvement in the trade balance of both countries. However, this is small comfort when considering that falling imports reflect the weakness in domestic demand. Even with the upward movement in exports, a steep quarterly decline is all but certain.

Examining the monthly pattern, Canada is on track for a decline in real goods exports of close to 30% annualized and an even larger 35% decline in imports in the first quarter. In the U.S., the story is similar, if slightly worse, with both exports and imports looking set to decline by close to 35% in the quarter.

The long view indicates that these first-quarter numbers are likely to be the worst either country has ever seen, or close to it. Unfortunately, this is not the kind of history anyone wants to make.