One More Rollercoaster Dive

Tuesday was tough on North American stock markets. One “little” report came out, it became even clearer that the U.S. economy is not likely either to avoid or to avert the recession, and investors again ducked for cover. The “little” report in question was issued by the Institute for Supply Management, stating that its non- manufacturing index shrank in January more than expected. Namely, the index, which includes data about the services, residential and commercial construction, and agriculture and resource industries, dropped from 53.2 points in December to 44.6 points in January.

Sal Guatieri, senior economist with BMO Capital Markets, said for Wednesday’s Toronto Star that, “It’s a huge drop, and it’s probably not a one-month fluke, either. This is a huge decline, very broad- based across industries, across components, employment, new orders. The tone of the comments suggests the mood in the U.S. economy is darkening quite rapidly.”

Why is everyone so concerned about the size of the gap from December to January? With this particular index, the critical mark is 50 points. Anything above 50 points indicates economic expansion. Anything below indicates contraction. And a drop from above 50 points to well below 50 points indicates that this is not a hiccup; rather, the U.S. economy is likely quite ill.

But this is now a two-day-old piece of news. The markets plunged on Tuesday as a result of this report and on Wednesday bargain hunters returned, pushing North American indices up. Investors in Canada still want to know how this is changing the economic outlook here.

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There appears to be a consensus; while the Canadian economy will likely be in plenty of pain due to the economic downturn south of the border, an outright recession in this country is not likely. If anyone is looking for a reference point, I’m sure 2001 right after the tech bubble burst will do just fine. While the U.S. was mauled by a mild recession, Canada limped along, but escaped the worst of it.

Why did I say a mild recession in the U.S. instead of a full-blown recession? Just like in 2001, the Federal Reserve is softening the blows with deep interest-rate cuts and massive economic stimuli packages. We may argue that this is only delaying and perpetuating the problem of indebtedness in the U.S., but at this point, this is what stakeholders in the U.S. economy expect and demand from their central bank.