May 1509

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TD Economics The Weekly Bottom Line May 15, 2009 HIGHLIGHTS REAL INCOME AND SPENDING CONVERGING*

• U.S.: April retail sales -0.4% m/m; CPI -0.7% y/y • Canada: March manufacturing shipments -2.7% m/m • March trade: Canada surplus rises to $1.1bn; U.S. deficit widens to $28bn

2-qtr annualized % change 15 12 9 6 3

A funny thing happened on the way to the recovery. It turns out the global economic mending process is more of a meandering creek than a beeline back to the top. This does not mean recovery is not happening, but the data certainly shows why it will take time. U.S. consumers are moderating the pace at which they moderate their spending, but they are still spending less. U.S. industrial production fell less than expected in April, but businesses continue to produce less. Canadian new auto sales were unexpectedly strong in March, but manufacturing shipments fell and were broadly weak.

0 -3 -6

-12 -15 1979

1983

1988

1992

1997

2001

2006

*Q2 figure assumes flat growth for spending and income in May and June; Source: Haver Analytics

returned to their mid-2006 size. The German economy is now as big as it was in late 2005, while Italy and Japan (whose data will be released next week) have lost five years of economic growth. Across the G-7, it’s as if the last several years didn’t happen. If only that were the case, but, if Star Trek can reboot and start anew, why not the global economy?

Race to the bottom

Estimates for first-quarter GDP continue to roll in around the world, and they are none too pretty. The Russian economy shrank by 9.5% in the first three months of 2009, nearly twice as bad as its worst quarter during the 1998 crisis (all numbers reported are unannualized). The Hong Kong economy shrank by 4.4% in the first quarter and nearly 8% over the last year. The Eurozone reported a 2.5% Q1 contraction, with Germany feeling the brunt with a 3.8% decline. All of this makes the U.S. reported 1.6% contraction look good by comparison. All told, the US, French, UK, and Canadian economies (given our expectations for Canadian data to be released June 1st) have now

Under the hood

A reboot is very different from a rewind. A rewind insinuates you are going to do things the same way all over again. A reboot is a fresh start, and while the cast may stay the same, the path taken will almost certainly diverge. Markets were hoping the U.S. consumer might be able to eke out a flat reading for April, but U.S. consumers once again pulled back on spending on a fairly broad basis. As the chart on the first page shows, the collapse in U.S. retail sales at the end of last year was fairly anomalous. However, the current pace of consumer retrenchment is about on par with the pace at which income is falling. While job losses are likely to continue into 2010, they should moderate. And real purchasing power will at that point start to improve and drive renewed spending, with headline infla-

Recent TD Economics Research May 15, 2009 - Cdn. Manuf. Shipments Commentary May 14, 2009 - Canadian Resale Housing Commentary May 13, 2009 - U.S Retail Sales Commentary May 12, 2009 - Canadian International Trade Commentary May 11, 2009 - Weekly Commodity Price Report The Weekly Bottom Line

Recession Real income Real spending

-9

1

May 15, 2009

www.td.com/economics tion in the U.S. already running at -0.7% y/y and likely to ease further. In this reboot, however, consumers seem to be turning their attention to paying down debts and rebuilding their savings. Neither can be criticized, but imply less momentum in spending.

AVERAGE U.S. BOND YIELDS 25

20

15

Not only is the pace of U.S. consumer spending likely be weaker than the past, but it is likely to be less importdependent, as well. This is crucial for the global rebalancing underway. Rewinding several years, the public debate centered on the massive U.S. current account deficit that sat at 6.5% of GDP at the end of 2005. With U.S. consumers pulling back, the U.S. trade deficit has been cut in half in only six months. As a result – and in spite of the contraction in the overall economy – the U.S. current account deficit was likely just 2.4% in the first quarter of 2009. In comparison, the current account deficit of the Euro region was 1.5% in the fourth quarter of 2008, while Canada swung to a deficit of 1.9%. This global reboot is therefore starting with an implosion of global imbalances. It’s somewhat ironic that many feared it would take a massive depreciation of the U.S. dollar for this to take place. Instead, in came in spite of a strengthening dollar, but at the expense of consumers. But few around the world have been spared the rebalancing pain. Canadian exports generally stabilized – or at least stopped their free fall – in February or March, but remain 19% lower than last year. Eurozone, Hong Kong, Singapore, and Chinese exports are also down by 20-25%. And so far, this rebalancing has also been reflected in overall economic performance – those econo-

15

10

10

5

5

0

0

-5

-5

-10

-10

Non-China

-20 -25 97.Nov

01.Nov

03.Nov

05.Nov

-20

07.Nov

Source: Census, Haver, and seasonal adjustment of Chinese data by TD Economics

The Weekly Bottom Line

5

5

0 Aug.97 Apr.99 Dec.00 Aug.02 Apr.04 Jan.06 Sep.07 May.09

So, looking backwards, the data were atrocious. This is no surprise. Looking ahead, however, we have seen the stress in some of the most impaired corners of the credit and financial markets show significant progress. The cost of credit is still very high in many corners, though, and this will continue to limit the speed at which corporations and households can reboot. We have seen inventories in many industries worked off, but spare capacity is large and growing, so rebooting production will take time. But, with the help of hindsight, our reboot should eventually prove a step forward. Richard Kelly, Senior Economist

-25 99.Nov

10

The undiscovered country

-15

-15

15

mies which had leveraged the most from global imbalances in the recent past are seeing some of the most rebalancing. Russian exports fell 48% in the first quarter over last year, and they saw one of the worst GDP prints, as well. German manufacturers had become export machines, driven by machinery and equipment investment especially in Asia, and the German economy is now one of the worst performing in the Eurozone. Perhaps the one oddity is China. The economy there has continued to grow despite being at the center of the global imbalance debate. However, looking at the details of the U.S.-China trade data, U.S. nonpetroleum imports from China have recovered sooner and sharper than U.S. nonpetroleum imports from the rest of the world. While much has been made of the success of the Chinese stimulus plan, perhaps it is the old driver of Chinese growth – U.S. imports of Chinese goods – which has played an important role in the Chinese economic exceptionalism seen so far this year.

20

China

15

20

Source: Merrill Lynch and Haver Analytics; Last update: 5/11/09

25

20

High Stress: High-yield corporate, BBB financial, and ABS HELOC Medium Stress: BBB corporate and ABS Auto/Credit Card Low Stress: AAA financial and corporates

10

0

U.S. NONPETROLEUM IMPORTS 3-month % change

25 LIBOR (1 week)

Trading blows

25

Yield

416-982-2559 2

May 15, 2009

www.td.com/economics

UPCOMING KEY ECONOMIC RELEASES U.S. Housing Starts - April

U.S. HOUSING STARTS

Release Date: May 19/09 March Result: 510K TD Forecast: 530K Consensus: 520K

1,200

Thousands of units*

1,100 1,000

U.S. housing starts have fallen at a double-digit pace in 5 of the last 6 months, and after plunging a staggering 78% from its peak of early 2006, there is a sense that new residential construction may be stabilising. Indeed, with the NAHB housing market index appearing to have gotten some upward momentum, and the level of permits approved almost equivalent to the actual level of starts, it appears that the correction in the new homes market may be abating. As such, our call is for new residential construction to rise by a modest 20K units to 530K in April. The increase is likely to be on account of a bounce-back in the volatile multi-units component, which declined by 29.0% M/M the month before, while single-family construction should remain relatively unchanged.

900 800 700 600 500 400 Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

*Seasonally adjusted at annual rates; Source: U.S. Census B

Millan Mulraine 416-308-2911

Canadian CPI - April

CANADIAN CONSUMER PRICE INDEX (CPI)

Release Date: May 20/09 March Result: core 0.3% M/M, 2.0% Y/Y; all-items 0.2% M/M, 1.2% Y/Y TD Forecast: core 0.0% M/M, 1.7% Y/Y; all-items 0.3% M/M, 0.7% Y/Y Consensus: core 0.1% M/M, 1.8% Y/Y; all-items 0.2% M/M, 0.6% Y/Y

4.0

Y/Y % change

3.5

4.0 3.5

CPI: All Items

Despite the ongoing economic recession, Canadian consumer price inflation has remained stubbornly high, as rising food prices have keep the headline inflation number above the 1.0% Y/Y level. Core consumer inflation has also been high, hovering around the 2.0% Y/Y for a number of months. The resistance, however, should come to an end in April. During the month we expect Canadian headline CPI to rise by a further 0.3% M/M (but down 0.1% M/M on a seasonally-adjusted basis) on account of higher gas and food prices. However, due to base effects, the annual pace of consumer price inflation should ease to 0.7% Y/Y, from 1.2% Y/Y the month before. The Bank of Canada’s core consumer price index, however, is expected to be flat on the month (though up 0.1% M/M on a The Weekly Bottom Line

Y/Y % change

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0 Bank of Canada Core CPI ex. 8 most volatile items & indirect taxes

0.5

0.5

0.0

0.0 Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

Source: Statistics Canada/Haver Analytics

seasonally-adjusted basis), with the annual core inflation rate falling to 1.7% Y/Y from 2.0% Y/Y. In the coming months, with the domestic economy likely to remain very weak, we expect consumer price inflation to soften even further. Millan Mulraine 416-308-2911 3

May 15, 2009

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Canadian Wholesale Sales - March

CANADIAN WHOLESALE SALES*

Release Date: May 21/09 February Result: -0.6% M/M TD Forecast: -1.0% M/M Consensus: -0.8% M/M

M/M % change

The poor domestic economic fundamentals and weak global appetite for Canadian export products have resulted in 5 consecutive monthly drops in wholesales sale, and with the outlook for both factors remaining well intact, we expect this weakness in wholesales sales to stretch into a sixth straight month. Indeed, with domestic manufacturing shipments falling by a sizeable 2.7% M/M, and exports declining by an equally disappointing 1.8% M/M, we expect wholesale sales to drop by a sizeable 1.0% M/ M. The weakness is expected to be broadly-based, with slower sales of motor vehicles and machinery and equipment expected to be the main contributor to the soft headline number. Real wholesale activity should also decline on the month. In the coming months we expect wholesale sales to remain soft as the weak Canadian economy and ongoing global economic recession push sales lower.

3

3

2

2

1

1

0

0

-1

-1

-2

-2

Total

-3

-3

Ex. Motor Vehicles

-4

-4

-5

-5 Feb-08

Apr-08

Jun-08

Aug-08

Oct-08

Dec-08

Feb-09

*Seasonally Adjusted data; Source: Statistics Canada/Haver Analytics

Millan Mulraine 416-308-2911

Canadian Retail Sales - March Release Date: May 22/09 February Result: total 0.2% M/M; ex-autos 0.6% M/M TD Forecast: total 1.0% M/M; ex-autos 0.3% M/M Consensus: total 0.5% M/M; ex-autos -0.1% M/M

CANADIAN RETAIL SALES* 3

After falling in 4 of the last 6 months of 2008, Canadian retail sales moved back into positive territory this year as shoppers took advantage of the aggressive discounts offered by retailers after the dismal Christmas shopping season. And despite the dismal economy and poor labour market conditions, there are indications that the positive tone in Canadian consumer spending may continue into March. In fact, with existing home sales rising by a brisk 7.7% M/M and new motor vehicle sales advancing by 6.3% M/M during the month, we expect retail sales to rise by a respectable 1.0% M/M in March. Higher gasoline prices should also contribute favourably to the headline numbers. Excluding autos, sales are expected to rise by a more modest 0.3% M/M, while real retail sales should also be up. Looking ahead, we expect retail sales to re-

The Weekly Bottom Line

M/M % change

3

2

2

1

1

0

0

-1

-1

-2

-2

-3

-3

Total Ex. Motor Vehicles

-4

-4

-5

-5

-6

-6 Feb-08

Apr-08

Jun-08

Aug-08

Oct-08

Dec-08

Feb-09

*Seasonally Adjusted data; Source: Statistics Canada/Haver Analytics

main subdued, as Canadian consumers economise on their spending in the face of the very difficult economic environment. Millan Mulraine 416-308-2911 4

May 15, 2009

www.td.com/economics

RECENT KEY ECONOMIC INDICATORS May 11 - May 15, 2009 Release Date

Economic Indicators

Data for Period

Units

Mar. Mar. Mar. Mar.

M/M % chg. $C, blns M/M % chg. M/M % chg.

-0.5 1.1 6.3 -2.7

-0.7 0.3 -2.4 2.2

Mar. Apr. Apr. Apr. Mar. Apr. Apr. 9-May. Apr. Apr. May Apr. May

US$, blns Y/Y % chg. M/M % chg. M/M % chg. M/M % chg. % change % change Thousands Y/Y % chg. Y/Y % chg. % change % change Index

-27.6 -16.3 -0.4 -0.5 -1.0 0.3 0.1 637 -0.7 1.9 -4.6 -0.5 67.9

-26.1 -15.3 -1.3 -1.2 -1.4 -1.2 0.0 605 -0.4 1.8 -14.7 -1.7 65.1

Current

Prior

Canada May 11 May 12 May 13 May 15

New Housing Price Index International Merchandise Trade New Motor Vehicles Sales Manufacturing Shipments

R R

United States May 12 Trade Balance May 13 Import Price Index May 13 Advance Retail Sales May 13 Retail Sales Less Auto May 13 Business Inventories May 14 Producer Price Index (PPI) May 14 PPI excl. food and energy May 14 Initial Jobless Claims May 15 CPI May 15 CPI ex. Food and Energy May 15 Empire Manufacturing May 15 Industrial Production May 15 U. of Michigan Confidence Source: Bloomberg, TD Economics

R R R R R

R

R

UPCOMING NORTH AMERICAN ECONOMIC CALENDAR May 18-22, 2009 Release Date

Data for Period

Economic Indicators

Units

Consensus Forecast

Prior

Canada May 19

Bank of Canada Deputy Governor Murray speaks on unconventional monetary policy in Philadelphia

May 20

Consumer Price Index

Apr.

Y/Y % chg.

0.6

1.2

May 20

Core Consumer Price Index

Apr.

Y/Y % chg.

1.8

2.0

May 20

Leading Indicators

Apr.

M/M % chg.

May 21

International Securities Transactions

$C, blns

6.107

May 21

Wholesale Sales

Mar. Mar.

---

M/M % chg.

-0.8

-0.6

May 22

Retail Sales

Mar.

M/M % chg.

0.5

0.2

May 22

Retail Sales Less Autos

Mar.

M/M % chg.

-0.1

0.6

May 18

U.S. Treasury Secretary Geithner to speak at Newsweek Magazine Event

-1.3

United States May 18

NAHB Housing Market Index

May

Index

16

14

May 19

Housing Starts

Apr.

Thousands

520

510

May 19

Building Permits

Apr.

Thousands

530

516

May 19

Minneapolis Fed President Stern speaks in Willmar, Minnesota 17-May

Index

-42

-42

May 19

ABC Consumer Confidence

May 20

U.S. Treasury Secretary Geithner speaks at Senate Hearing on TARP

May 20

FOMC April 28-29 Meeting Minutes Released

May 21

Initial Jobless Claims

16-May.

Thousands

May 21

Leading Indicators

Apr.

M/M % chg.

625 0.7

637 -0.3

May 21

Philadelphia Fed Index

May

Index

-19.0

-24.4

May 21

Philadelphia Fed President Plosser speaks on economic outlook in New York

May 22 Federal Reserve Chairman Bernanke speaks at Boston College Source: Bloomberg, TD Economics

The Weekly Bottom Line

5

May 15, 2009

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G-7 ECONOMIC RELEASES AND EVENTS Country

May 18

5:00 11:30 13:00 18:10 21:30 22:30

E.C. U.S. U.S. AU AU AU

4:30 4:30 4:30 5:00 5:00 5:00 8:30 8:30 12:00 13:15 17:00 19:50 19:50

U.K. U.K. U.K. Germany Germany E.C. U.S. U.S. Canada U.S. U.S. Japan Japan

Apr. Consumer Price Index Y/Y % chg. 2.4 Apr. Core Consumer Price Index Y/Y % chg. 1.6 Apr. Y/Y % chg. Retail Price Index -1.1 Index ZEW Survey - Economic Sentiment May 20.0 Index ZEW Survey - Current Situation May -90.0 Index ZEW Survey - Economic Sentiment May -Apr. Thousands Housing Starts 520 Apr. Thousands Building Permits 530 Bank of Canada Deputy Governor Murray speaks on unconventional monetary policy in Philadelphia Minneapolis Fed President Stern speaks in Willmar, Minnesota 17-May ABC Consumer Confidence Index -42 Q/Q % chg. GDP (annualized) Q1-09 -15.9 Q1-09 Y/Y % chg. 1.8 GDP Deflator

3:00 4:30 7:00 7:00 8:30 9:30 14:00 19:50 21:30

Germany U.K. Canada Canada Canada U.S. U.S. Japan AU

Apr. Y/Y % chg. Producer Prices Bank of England Minutes Apr. Y/Y % chg. Consumer Price Index Apr. Y/Y % chg. Core Consumer Price Index Apr. M/M % chg. Leading Indicators U.S. Treasury Secretary Geithner speaks at Senate Hearing on TARP FOMC April 28-29 Meeting Minutes Released Mar. % change Tertiary Industry Index Apr. New Motor Vehicle Sales Y/Y % chg.

0:00 3:00 3:00 3:30 3:30 4:00 4:00 4:00 4:30 4:30 8:30 8:30 8:30 10:00 10:00 19:00

Japan France France Germany Germany E.C. E.C. E.C. U.K. U.K. Canada Canada U.S. U.S. U.S. U.S.

Bank of Japan Monetary Policy Meeting May Index Purchasing Managers Index (Manufacturing) May Index Purchasing Managers Index (Services) May Index Purchasing Managers Index (Manufacturing) May Index Purchasing Managers Index (Services) May Index Purchasing Managers Index (Manufacturing) May Index Purchasing Managers Index (Services) May Index Purchasing Managers Index (Composite) Apr. Retail Sales Y/Y % chg. Apr. M4 Money Supply Y/Y % chg. Mar. $C, blns International Securities Transactions M/M % chg. Wholesale Sales Mar. 16-May. Thousands Initial Jobless Claims Apr. M/M % chg. Leading Indicators May Index Philadelphia Fed Index Philadelphia Fed President Plosser speaks on economic outlook in New York

-4:30 8:30 8:30 14:00

Japan U.K. Canada Canada U.S.

May 20

May 21

May 22

Units

Consensus Last Period Forecast

Time*

May 19

Economic Indicator/Event

Data for Period

Date

Mar. Eur, blns Trade Balance U.S. Treasury Secretary Geithner to speak at Newsweek Magazine Event Index NAHB Housing Market Index May RBA Governer Stevens speaks in Sydney Reserve Bank of Australia publishes May board minutes Australia Treasury Secretary Henry speaks on economy

22-May Bank of Japan Target Rate Q1-09 GDP Mar. Retail Sales Mar. Retail Sales Less Autos Federal Reserve Chairman Bernanke speaks at Boston College

Overnight rate Q/Q % chg. M/M % chg. M/M % chg.

-3.8

-4.0

16

14

2.9 1.7 -0.4 13.0 -91.6 11.8 510 516

-42 -12.1 0.7

-1.3

-0.5

0.6 1.8 --

1.2 2.0 -1.3

-1.5 --

-0.8 -22.6

41.0 46.8 37.0 44.2 38.5 44.4 42.3 2.5 ---0.8 625 0.7 -19.0

40.1 46.5 35.4 43.8 36.7 43.8 41.1 1.5 17.8 6.107 -0.6 637 -0.3 -24.4

0.10 -1.9 0.5 -0.1

0.10 -1.9 0.2 0.6

* Eastern Standard Time; Sources: Bloomberg, TD Economics

This report is provided by TD Economics for customers of TD Bank Financial Group. It is for information purposes only and may not be appropriate for other purposes. The report does not provide material information about the business and affairs of TD Bank Financial Group and the members of TD Economics are not spokespersons for TD Bank Financial Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. The report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise TD Bank Financial Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

The Weekly Bottom Line

6

May 15, 2009