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The canaries in the coal mine
Michael Hlinka
I'm not shocking anyone by pointing out that the Canadian and American economies are closely integrated. As someone who tries to figure out what's going on here, I have to pay special attention to what's happening there. I'm seeing a few indications that everything isn't quite as hunky-dory as some prognosticators would have you believe. US home builder sentiment hit a ten year low in June. Then in July, it declined further to levels not seen since 1991!
Simultaneously, a very different industry—high tech—seemed to be taking it on the chin, with Dell Computer shares dropping to levels not seen since October 2001...and by the way, that was the last time the US economy was officially in recession.
These two industries, housing and tech, are two very different "canaries in the coal mine" if I may use that metaphor. Housing, or more accurately housing starts, is a classic leading indicator. That is, it doesn't tell us how things are today, but it reveals information on how things will be nine months to two years from now. On the other hand, the tech space—particularly represented by a company like Dell Computer, tends to be a coincident indicator. That means it provides pretty good information about the current strength of the economy.
Putting this information together tells us the US economy is weakening now…and will get worse in the future! But this begs the question: How slow the slowdown? Let me try to make the argument why it will be different this time.
Difficult conditions
In the past, when the US economy decelerated, it tended to take the rest of the developed world with it. That meant, for example, commodity prices like oil would go down.
And, of course, this would then have a stimulating effect and the economic cycle would move from recession and trough to recovery and expansion. However, because of booming markets like China and India, even as the US slows, commodity prices should remain robust...and they may actually increase.
All of this bodes well for the overall Canadian economy. But if I'm correct, some of our domestic industries will face particularly challenging markets. Those manufacturers who source locally and export into the American market should find conditions difficult in the near future. The auto sector comes to mind. Overlaying this is the currency situation: The loonie will soon renew its climb against the greenback on its way to par before the end of this decade.
The housing and tech canaries are chirping loud and clear…you’ll know it will be really bad when we no longer hear their song.
Michael Hlinka, based in Toronto, provides daily business commentary to CBC Radio One and a bi-weekly column syndicated across the CBC network. He also conducts financial planning courses.
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