The U.S. economy is practically assured of an interest-rate increase. The latest data also reveals cracks in the U.S. success story that renew questions about how long the American economy can function without global problems having an effect.
Another month of strong jobs growth (unemployment at an eight-year low) highlighted the continued good health of the U.S. economy, and likely gave the Federal Reserve the last piece of evidence it needs to raise interest rates.
The U.S. economy activity is in stark contrast to its global counterparts’ actions. Recently, the European Central Bank cut rates and extended its quantitative easing program to counter a struggling euro zone economy and weak inflation. It joins 43 central banks around the world, including Canada, that have reduced interest rates this year.
The U.S. trade deficit widened to $43.9-billion (U.S.) in October, largely as a result of sliding exports. The combination of weak foreign demand and a rising U.S. dollar have led to a decrease in U.S. exports.
Canada’s trade deficit ballooned to $2.8-billion (Canadian) in October due to a slump in exports to the United States.
Experts believe the U.S. economy’s reliance on exports is small enough that its economy can weather weak demand outside its borders fairly well, as long as the job-creation rate remains stable.
The U.S. manufacturing output has actually slipped into decline.
The services side – which represents more than three-quarters of the U.S. economy, and is more closely linked to domestic demand than are goods-producing sectors such as manufacturing – is also in decline.
According to Bank of Canada Governor Stephen Poloz, the Fed rate hike reflects a growing U.S. economy, which translates to stronger demand for Canadian exports. The central bank has long viewed this demand recovery as the key to sustaining Canada’s own elusive economic resurgence especially now that the oil shock has stifled business investment, and the highly indebted consumer sector has exhausted much of its capacity to drive further economic growth.
Unfortunately, Canadian export volumes have now fallen three months in a row, despite persistent weakness in the Canadian dollar that should be making Canadian goods increasingly attractive to U.S. buyers. This is because there’s a portion of Canadian exporters who suffer when the U.S. dollar is strong, mainly those who are part of the supply chain for U.S. manufactured export goods.
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A number of factors are allegedly restraining the trend of growth, including the lingering impact of the 2008 financial crisis, an aging population and even a slowdown in the underlying rate of innovation and technological change. According to Christopher Ragan, Canada’s governments have run out of options to stimulate the economy; others cite the uncertainty created by the unprecedented monetary and fiscal stimulus in response to the financial crisis and recession as a major drag on the recovery itself.
According to a paper released last month by the Fraser Institute, there is reason to believe that pessimism about growth will prove to be an overreaction to the current environment, just as happened in the 1930s and 1970s. These past periods of prolonged slow growth ended when governments adopted better and more predictable policies.
As the price of oil falls and the lingering effect of the financial crisis dissipates, the U.S. economy is slowly improving. The United States seems poised to return to above-trend rates of growth, as shown by a string of strong employment reports. In Canada, both gross domestic product and employment surprised to the upside in the latest month, even as a majority of Canadians say they think the economy is in decline.
The last time a slumping resource sector and robust growth in the United States occurred simultaneously was in 1998, when growth in Canada accelerated. This implies that a stronger U.S. economy can trump lower commodity prices. The importance of our resource sector has increased since then, which will dampen growth somewhat, but the impact will be less for the real economy than for the stock market, which appears to be driving the public’s perception of how much difficulty the economy is in.
An aging labour force is much more of a problem for Europe and Japan than North America, which has a younger population that is not projected to contract in the future due to high immigration. The possibilities for innovative technological change remain encouraging for growth, although this variable is the most difficult to project.
In Canada, growth since the recession has not been unusually weak compared with the previous two decades. Last year’s real GDP growth of 2.5 per cent exceeded its 25-year average, which was reflected in the historically low level of adult unemployment of 5.5 per cent.
Canada is well positioned to take advantage of an upturn in the U.S. economy, since the lingering effect of the recession in the financial sector and labour markets was much less pronounced than in the United States. This will help Canada overcome the slump in commodity prices. A further boost to growth would come from a better policy framework, especially in Central Canada where provincial government debt continues to increase. More policy stimulus, such as the Bank of Canada’s interest rate cut earlier this year, is not needed in North America at this time; growth would be better served by more predictable policies.