Counting on US consumers for growth

Prime Minister Justin Trudeau and his Liberal colleagues have reason to worry about the macroeconomic picture, but good news south of the border could have a ripple effect in Canada.

Several forecasters, including the Bank of Canada, have (again) downgraded their growth projections for the Canadian economy as the international outlook continues to disappoint.

The world oil price collapse, in tandem with the downturn in many other commodity markets, has hammered Canada’s resource-centric economy. That triggered a sharp fall in trade, and brought on job and capital spending cuts in the energy and mining industries, as well as many of the service sectors that supply them. It’s hard for commodity producers to see much light at the end of the tunnel. For Canada, mustering an annual growth rate of even 2% (after inflation) may prove to be a formidable challenge, particularly given that apart from low commodity prices our economy will also be held back by record levels of household indebtedness and stretched housing valuations.

How Canada fares through 2016-17 will hinge, in large part, on developments in the US. Although America has also lost a step at a time of choppy world growth, there is an underlying momentum that should keep its economy on a solid, if unspectacular, expansion trajectory.

Armed with a more competitive exchange rate and a host of domestic industries hungrily looking beyond our own somnolent market for new business, Canada stands to benefit as the giant US$18-trillion economy chugs along.

The role of American consumers in driving global demand should not be underestimated. The US still accounts for 22% of all global economic activity, most coming from consumption spending, plus investment in residential construction, both of which remain strong.

Low inflation and falling energy prices are boosting the real incomes of many households. Unlike Canada, the US is a net beneficiary of slumping commodity prices. The labour market looks poised to add a net 1.6 million jobs in 2015, on the heels of 2.1 million last year. Housing markets are normalizing.

Steady recovery

One of the most notable trends in the US since 2007 has been the subdued pace of household formation. New households help determine demand for housing, and other goods and services – everything from mortgages, real estate services and home renovation, cleaning and landscaping services, to cable and internet subscriptions.

During the 2007-09 recession and the sub-par economic recovery that followed, household formation in the US plummeted, residential investment was unusually weak and homeowners’ equity dropped significantly. This painful adjustment process weighed on economic growth for several years.

With improvements in labour and housing markets, the conditions are set for US household formation to rebound. Researchers estimate an underlying demand to form new US households in the vicinity of 1.3 million per year. This compares to average annual growth of just over one million per year over 2008-14. In the next five years, household growth could very well rise above trend due to pent-up demand. Some studies suggest there are perhaps 3.5 million “missing” households, some of which can be expected to enter the housing market between now and 2020. These households will be in addition to those stemming from ongoing population growth and demographic change.

Add it all up and there is reason to hope for a sustained lift in both US residential investment, and consumer outlays on goods and services. From a Canadian perspective, the prospect of a revival in American households, homebuilding and consumer spending is perhaps the only bright light on the economic horizon.

Jock Finlayson is executive vice-president of the Business Council of British Columbia. This column is distributed by Troy Media.