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TD Economics The Weekly Bottom Line May 1, 2009 HIGHLIGHTS • U.S. economy contracts 6.1% in Q1 • Canadian GDP slides 0.1% in February • Chrysler files for bankruptcy

U.S. REAL GROSS DOMESTIC PRODUCT Annualized Q/Q % change 7

Despite some of these so-called “green shoots” beginning to appear south of the border, the U.S. economy remains deep in the doldrums. Indeed, the first reading of U.S. real GDP for the first quarter indicated that economic activity contracted by a whopping 6.1% Q/Q annualized, which followed the 6.3% Q/Q plunge seen during the fourth quarter of 2008. Based on this estimate, the drop in U.S. real GDP from its peak is now 3.3%, which is the largest drop since 1958. While the weakness during the first quarter stemmed largely from private domestic investments and a draw-down in inventories, consumer spending provided some offset. In fact, consumption expanded for the first time since the second quarter of 2008. But even with some signs of strength, it is difficult to put a positive spin on the outlook for growth in the U.S.

3 1 -1 -3 -5 -7 Q1-06

Q3-06

Q1-07

Q3-07

Q1-08

Q3-08

Q1-09

Source: Bureau of Economic Analysis/Haver Analytics

tended holiday discounting – before resuming the downtrend again in March. This provides a weak handoff for the second quarter, which will be likely exacerbated by a further deterioration in the labour market. Following the retail sales report released earlier this month, the personal income and spending report out this week provided further evidence of the drop in spending. Personal income was down 0.3% M/M in March, and up by only 0.3% compared to year-ago levels. Personal spending slid 0.2% on the month, as consumers limited themselves to essential services. What’s more, the savings rate increased from 4.0% to 4.2% in March, suggesting that consumers are watching their spending habits closely. With respect to trade, the positive contribution from net exports was not a good news story and highlights the weakness persisting in the domestic economy – with the contraction in imports (-34%) outpacing the slide in exports (30%). Given that the global economy is expected to deteriorate further, exports will likely continue to deteriorate and weigh on economic growth in the near term.

Strength in consumption to be short-lived

Although consumer spending was positive in the first quarter, this is not a trend that we expect to see continue in the near term. The increase in consumption occurred during the first two months of the year – likely due to exRecent TD Economics Research May 1, 2009 - U.S. ISM Manufacturing Index May 1, 2009 - The Outlook for Consumer Insolvency in Canada April 30, 2009 - Canadian Real GDP April 30, 2009 - Is Canada’s EI Program Adequate? April 30, 2009 - U.S. Personal Income and Spending April 29, 2009 - U.S. FOMC Interest Rate Decision April 29, 2009 - U.S. Real GDP April 28, 2009 - Priming the Fiscal Pump April 27, 2009 - Canadian Bank Lending in March The Weekly Bottom Line

Potential Growth 2.5%

5

Economic weakness to persist

As such, U.S. economic activity in Q2 will likely re1

May 1, 2009

www.td.com/economics main quite sluggish. The ISM manufacturing data out this morning provided us with our first glimpse of Q2 data, and while extending a three-month uptrend in April, remains extremely depressed. At 40.1, it is still well below the 50 threshold, implying that manufacturing activity is still contracting. Given March’s weak handoff, the U.S. economy is on track to shrink further in the second quarter, albeit at a much slower pace than the last two quarters. With first quarter GDP coming in much weaker than expected, all eyes and ears turned to the Federal Reserve’s interest rate announcement. While it was expected that the Fed would leave rates unchanged – which it did – the market was more interested in what the Fed had to say. And on that front, there wasn’t a whole lot of new information contained in the accompanying communiqué. Making no changes to the existing quantitative easing framework, the Fed stated that it will “continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook”. The Fed also noted that the economic outlook has improved modestly since the last meeting – with signs that the housing market may be stabilizing – however, further job losses, reduced housing wealth and credit constraints will keep economic activity under pressure for some time still.

CANADA'S REAL GDP AT BASIC PRICES* 0.8

M/M % change

0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 -1.2 Feb-08

Apr-08

Jun-08

Aug-08

Oct-08

Dec-08

Feb-09

*Real GDP at basic prices in 2002 chained dollars Source: Statistics Canada/Haver Analytics

some large creditors, and securing a partnership with Italian automaker Fiat, the inability to come to an agreement with a group of lenders left Chrysler with only one option: Chapter 11 bankruptcy. On the bright side, the successful negotiations with the unions and Fiat helped the automaker sidestep a liquidation bankruptcy filing, thus allowing the company to maintain its operations. And while Chapter 11 bankruptcy was not the preferred option, under court protection, Chrysler should be able to rid itself of certain obligations and emerge as a smaller and more cost competitive automaker – which in turn should bring it back to profitability. The Obama Administration has agreed to provide up to US$8 billion in loans to finance the restructuring for an 8% stake in the new entity, while the Canadian and Ontario governments agreed to provide US$2.4 billion (C$3.8 billion) in exchange for a 2% stake in the company and a commitment to keep 20% of total production in Canada. At the present time, there are no plans for Chrysler Canada to file for bankruptcy protection in Canada. Although Chrysler was able to obtain government support – thereby avoiding liquidation – the automaker is not out of the woods just yet. With the U.S. economy expected to contract for at least another 2 quarters, unemployment likely to rise and credit conditions expected to improve only modestly, it is highly unlikely that we will see any uptick in sales this year. Moreover, the B-word may scare consumers off, despite warranty guarantees from both the American and Canadian governments. Nonetheless, bankruptcy protection gives Chrysler the chance to improve its financial position, and return to viability.

Canadian economy slides further in February

Switching to Canada, the picture is not much brighter. The Canadian economy contracted by 0.1% M/M in February, with output sitting at its lowest level in over two years. And combined with January’s 0.7% contraction, it appears as though the drop in economic activity in Canada during the first quarter was much sharper than originally anticipated. In fact, assuming a flat performance in March, first quarter GDP is on track to slide by a massive 6.4% Q/ Q annualized – which would be the steepest quarterly drop on record. Moreover, with signs that domestic demand is falling quite rapidly and export demand is still extremely weak, economic activity in Canada will likely remain subdued for some time. History in the making

Given the current economic environment and the various headwinds facing North American consumers, businesses have been hit quite hard. And while several companies have been unable to weather the storm, history was made this week in the auto sector, as Chrysler was the first major U.S. automaker to file for bankruptcy. After obtaining substantial concessions from labour unions and

Dina Cover, Economist 416-982-2555 The Weekly Bottom Line

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UPCOMING KEY ECONOMIC RELEASES U.S. Nonfarm Payrolls - April

U.S. LABOUR MARKET

Release Date: May 8/09 March Result: -663K; unemployment rate 8.5% TD Forecast: -530K; unemployment rate 8.8% Consensus: -610K; unemployment rate 8.9%

Thousands of jobs

9.0

0 8.0 -200

The ongoing correction in the U.S. labour market has been particular sharp, as businesses have slashed jobs left, right and center in response to weakening economic conditions and slumping demand for their products. Notwithstanding the weak economic backdrop, the pace of job losses is likely to ease modestly in April as the 2010 Census hiring moves into gear, with well over 100K census workers likely to be added to payrolls during the month. As such, our call is for nonfarm payrolls to fall by a betterthan-expected 530K, bringing the number of net job losses since the turn in labour market conditions to well over 5.5 million. As has been the case in the past, the losses are likely to be evenly spread among the goods-producing and services-producing sectors, with the size of the government payrolls likely to balloon on account of the census hiring. Moreover, with the pace of job destruction continu-

7.0 Net Job Change* (lhs)

-400

-600

6.0

5.0

Unemployment Rate (rhs)

-800

4.0 Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

Seasonally-adjusted data; * Change in non-farm payrolls Source: U.S. Deptartment of Labor/Haver Analytics

ing to outpace job creation, the unemployment rate should rise even further, climbing to 8.8% in April. Looking ahead, we expect the pace of contraction in U.S payrolls to remain relatively brisk, though further census hiring should partially offset some of the underlying weakness in the labour market. Millan Mulraine 416-308-2911

Canadian Employment - April

CANADA'S LABOUR MARKET

Release Date: May 8/09 March Result: -61.3K; unemployment rate 8.0% TD Forecast: -60.0K; unemployment rate 8.3% Consensus: -50.0K; unemployment rate 8.3%

8.5

%

8.0

Thousands of jobs

140 100

Net Job Change (right scale)

7.5

The Canadian labour market went in a free-fall in November last year as the Canadian economy slipped into its first economic recession since the early 1990s. So far some 350K positions have been eliminated from Canadian payrolls, and there is every indication that the elevated pace of job losses will continue for some time. Indeed, given the ongoing restructuring in the manufacturing sector and the steady flow of layoff announcements from other badly hit industries, we expect a further -60K jobs to be lost in April. This is very close to the recent trend. The bulk of the job losses should come from the goods-producing sector, with the number of job losses in the construction and manufacturing sectors expected to remain high. The services-producing sector should also post significant losses. Moreover, with the weak economy continuing to limit the ability of displaced workers to find new jobs, the unemployment The Weekly Bottom Line

%

60

7.0

20

6.5

-20

6.0

-60

5.5

-100

Unemployment Rate (left scale)

5.0

-140 Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

Seasonally-adjusted data; Source: Statistics Canada/Haver Analytics

rate is expected to rise to 8.3%. In the months ahead, given the weak economic fundamentals, we expect the negative dynamics in the Canadian labour market to continue and the pace of job losses to remain brisk. Millan Mulraine 416-308-2911 3

May 1, 2009

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Canadian Housing Starts - April

CANADIAN HOUSING STARTS

Release Date: May 8/08 March Result: 146.5K TD Forecast: 135.0K Consensus: 140.0K

250

Thousands

Thousands

135

225 Urban Multiples (right scale)

After plunging for six straight months, Canadian housing starts rebounded sharply in March, on account of the 28% M/M gain in the volatile multi-units component. This up-tick, however, is likely to be a one-month wonder as the backdrop for Canadian households and homebuilders continue to sour. Indeed, with the economy remaining weak, worsening labour market conditions damping demand, and tight financial market conditions continuing to stifle access to credit, we expect Canadian homebuilding activity to moderate further. This much has been clear in the continued fall in permit approvals, which have declined every single month since last September. As such, our call is for starts to fall to 135K. Both single-family and multi-family unit construction should post declines. In the months ahead, we expect starts to edge even lower, and remain in these depressed territories for some time.

150

120

200 105 175 90 150

75

Total Starts (left scale)

125

60 Apr-08

Jun-08

Aug-08

Oct-08

Dec-08

Feb-09

Source: CMHC/Haver Analytics

Millan Mulraine 416-308-2911

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RECENT KEY ECONOMIC INDICATORS April 27 - May 1, 2009 Release Date

Economic Indicators

Data for Period

Units

Mar. Feb. Mar.

M/M % chg. M/M % chg. M/M % chg.

0.3 -0.1 12.1

0.5 -0.7 1.6

R

Feb. Apr. Apr. 26 Apr. Q1 Q1 Q1 Q1 Apr. 29 Mar. Mar. Mar. Mar. Q1 25 Apr. 18 Apr. Apr. Apr. Apr. Apr. Mar. Apr.

Index Index Index Index Q/Q % chg. Q/Q % chg. Q/Q % chg. Q/Q % chg. Percent M/M % chg. M/M % chg. Y/Y % chg. Y/Y % chg. Q/Q % chg. Thousands Thousands Index Index Index Index M/M % chg. Index

143.1 39.2 -9 -45 -6.1 2.2 2.9 1.5 0.00-0.25 -0.3 -0.2 0.6 1.8 0.3 631 6271 40.1 39.0 65.1 40.1 -0.9 32.0

146.3 26.9 -20 -47 -6.3 -4.3 0.5 0.9 0.00-0.25 -0.2 0.4 0.9 1.8 0.6 645 6138 31.4 30.0 61.9 36.3 0.7 31.0

R R

Current

Prior

Canada Apr. 30 Apr. 30 Apr. 30

Industrial Product Price GDP Raw Materials Price Index

R

United States Apr. 28 Case-Shiller Home Price Apr. 28 Consumer Confidence Apr. 28 Richmond Fed Manufacturing Apr. 28 ABC Consumer Confidence Apr. 29 GDP Apr. 29 Personal Consumption Apr. 29 GDP Price Index Apr. 29 Core Personal Consumption Expenditure Apr. 29 FOMC Interest Rate Decision Apr. 30 Personal Income Apr. 30 Personal Spending Apr. 30 Personal Consumption Expenditure Deflator Apr. 30 Core Personal Consumption Expenditure Apr. 30 Employment Cost Index Apr. 30 Initial Jobless Claims Apr. 30 Continuing Claims Apr. 30 Chicago Purchasing Managers Apr. 30 NAPM Milwaukee May 1 U. of Michigan Confidence May 1 ISM Manufacturing May 1 Factory Orders May 1 ISM Prices Paid Source: Bloomberg, TD Economics

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R R R R R

R

May 1, 2009

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UPCOMING NORTH AMERICAN ECONOMIC CALENDAR May 4-8, 2009 Release Date

Data for Period

Units

Consensus Forecast

Prior

Mar.

M/M % chg.

2.5

-15.9 43.2

May 6

Mar. Index 40.5 Bank of Canada Governor Carney and Senior Deputy Governor Jenkins appear before the Senate Committee

May 8

Unemployment Rate

Apr.

Percent

8.3

8.0

May 8

Net Change in Employment

Apr.

Thousands

-50.0

-61.3

May 8

Housing Starts

Apr.

Thousands

140.0

146.5

Economic Indicators Canada

May 6

Building Permits

May 6

Ivey Purchasing Managers Index

on Banking, Trade and Commerce in Ottawa, ON

United States May 4

Pending Home Sales

Mar.

M/M % chg.

0.0

2.1

May 4

Construction Spending

Mar.

M/M % chg.

-1.5

-0.9

May 4

Kansas City Fed President Hoenig speaks on Financial Crisis in New York 3-May

Index

--

-45

-645

-742

-0.4

May 4

Richmond Fed President Lacker speaks on the economy in Charlottesville

May 5

ABC Consumer Confidence

May 5

Boston Fed President Rosengren speaks in Hong Kong

May 5

Fed Chairman Bernanke testifies before joint economic committee on the economic outlook

May 5

Minneapolis Fed President Stern speaks in Minneapolis

May 6

ADP Employment Change

May 6

Apr Thousands Minneapolis Fed President Stern and FDIC Chairman Bair speak on financial regulation and moral hazard before U.S. senate committee on banking, housing, and urban affairs

May 6

San Francisco Fed President Yellen speaks to Australian economists via satellite

May 7

Non-farm productivity

Q1-09

Q/Q % chg.

0.9

May 7

Unit Labour Costs

Q1-09

% change

2.8

5.7

May 7

Initial Jobless Claims

Thousands

635.0

631.0

Thousands

6345.0

6271.0

-3.8

-7.5 -663.0

May 7

Continuing Claims

2-May 39928

May 7

Consumer Credit

Mar.

May 7

US$, blns Fed Chairman Bernanke speaks at annual Chicago Fed's annual banking conference via satellite

May 8

Change in Non-farm Payroll

Mar.

Thousands

-610.0

May 8

Unemployment Rate

Mar.

Percent

8.9

8.5

May 8

Change in Manufacturing Payrolls

Mar.

Thousands

-159.0

-161.0

May 8

Average Hourly Earnings

Mar.

Y/Y % chg.

3.3

3.4

May 8

Wholesale Inventories

Mar. M/M % chg. May 8 Richmond Fed President Lacker speaks on the economic outlook at the DC Chamber of Commerce Source: Bloomberg, TD Economics

-1.0

-1.5

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G-7 ECONOMIC RELEASES AND EVENTS Country

May 4

2:00 10:00 10:00 12:30 14:00

Germany U.S. U.S. U.S. U.S.

May 5

0:30 4:30 5:00 6:45 10:00 13:15 17:00 21:30 21:30

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

5-May Cash Rate 3.00 RBA Cash Target Apr Purchasing Managers Index Construction Index 31.9 Mar. Y/Y % chg. Producer Prices Index -2.9 Boston Fed President Rosengren speaks in Hong Kong Fed Chairman Bernanke testifies before joint economic committee on the economic outlook Minneapolis Fed President Stern speaks in Minneapolis 3-May -ABC Consumer Confidence Index Mar. AUD, mlns 1,700.0 Trade Balance Mar. M/M % chg. 0.5 Retail Sales

5:00 6:30

E.C. U.S.

8:15 8:30 10:00 16:00

U.S. Canada Canada Canada

17:30 18:45 19:50 21:30

U.S. NZ Japan AU

Mar. Y/Y % chg. Retail Sales 0.1 -0.6 Minneapolis Fed President Stern and FDIC Chairman Bair speak on financial regulation and moral hazard before U.S. senate committee on banking, housing, and urban affairs Apr Thousands ADP Employment Change -645 -742 Mar. M/M % chg. Building Permits 2.5 -15.9 Mar. Index Ivey Purchasing Managers Index 40.5 43.2 Bank of Canada Governor Carney and Senior Deputy Governor Jenkins appear before the Senate Committee on Banking, Trade and Commerce in Ottawa, ON San Francisco Fed President Yellen speaks to Australian economists via satellite Q1-09 % 5.3 Unemployment Rate 4.7 -Monetary Base Apr. Y/Y % chg. 6.9 Apr. % 5.9 Unemployment Rate 5.7

2:45 6:00 7:00 7:45 8:30 8:30 8:30 8:30 9:30 15:00 19:50 21:30

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

Trade Balance Mar. Eur, blns -3.8 Mar. Y/Y % chg. Factory Orders -35.8 -Percent Bank of England Annouces Rate Decision 0.50 -Percent European Central Bank Annouces Rate Decision 1.00 Q1-09 Q/Q % chg. 0.9 Non-farm productivity Q1-09 % change Unit Labour Costs 2.8 2-May. Thousands 635 Initial Jobless Claims 25-Apr. Thousands Continuing Claims 6345 Fed Chairman Bernanke speaks at annual Chicago Fed's annual banking conference via satellite US$, blns Consumer Credit Mar. -3.8 Bank of Japan Monetary Policy meeting minutes for April 6-7th released Reserve Bank Quarterly Monetary Policy statement released

-4.1 -38.2 0.50 1.25 -0.4 5.7 631 6271

2:00 2:00 4:30 4:30 6:00 7:00 7:00 8:15 8:30 8:30 8:30 8:30 10:00 13:00

Germany Germany U.K. U.K. Germany Canada Canada Canada U.S. U.S. U.S. U.S. U.S. U.S.

Mar. Eur, blns Trade Balance 8.0 Mar. Eur, blns 7.0 Current Account Apr. Y/Y % chg. Purchasing Price Index Input -3.5 Apr. Y/Y % chg. 0.7 Purchasing Price Index Output Mar. Y/Y % chg. -20.9 Industrial Production Apr. Percent 8.3 Unemployment Rate Apr. Thousands -50.0 Net Change in Employment Apr. Thousands Housing Starts 140.0 Mar. Thousands Change in Non-farm Payroll -610 Mar. Percent Unemployment Rate 8.9 Mar. Thousands -159 Change in Manufacturing Payrolls Mar. Average Hourly Earnings Y/Y % chg. 3.3 M/M % chg. Wholesale Inventories Mar. -1.0 Richmond Fed President Lacker speaks on the economic outlook at the DC Chamber of Commerce

8.7 5.6 -0.4 2.0 -20.6 8.0 -61.3 146.5 -663 8.5 -161 3.4 -1.5

May 7

May 8

Units

Consensus Last Period Forecast

Time*

May 6

Economic Indicator/Event

Data for Period

Date

Mar. Retail Sales Y/Y % chg. Mar. M/M % chg. Pending Home Sales M/M % chg. Construction Spending Mar. Kansas City Fed President Hoenig speaks on Financial Crisis in New York Richmond Fed President Lacker speaks on the economy in Charlottesville

0.2 0.0 -1.5

-0.2 2.1 -0.9

3.00 30.9 -1.8

-45 2,109.0 -2.0

-7.5

* Eastern Standard Time; Sources: Bloomberg, TD Economics

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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.

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