Friday, February 6, 2009


The TD report released Wednesday on the economy for 2009: The number that many have talking about is a prediction of 325,000 job losses (or about 27,000 per month). In light of today’s report that the Canadian economy lost 129,000 jobs in January (and 234,000 in the past three months), I think even TD knows that their numbers stink.

I have been asked about this TD report recently and here are my thoughts:

In a January posting, I mentioned that the Canadian economy was losing about 50,000 to 100,000 jobs per month.

Where did I come up with this number? We lost 71K in November and 34K in December (average of -52K jobs per month).

I assumed that since the economy went south in the fourth quarter, the real ugly numbers would begin in the first quarter. Why? First of all, most companies do not just fire people before Christmas for obvious reasons and secondly, most companies did not have a -4% GDP planned in their internal budgets. To announce layoffs, it often takes companies a month or two to go through the payrolls, formulate plans for severances, get legal involved, etc…

TD assumed that job losses will just magically decelerate to 27K per month.

The good news is I doubt that we lose 129,000 jobs each month. I suspect that we are in the midst of a job loss hurricane that is tracking the steep fall in GDP in recent months. Once this round of job cuts is finished (spring?), we may get a lull for a few months where job losses continue but at a much lower pace. Another round may begin in the fall once people return from summer vacation and realize that the economy won’t magically pick up in 2009.

The unemployment rate has risen 1% in just 3 months (6.2% to 7.2%). This is the same 1% increase as in the US (Yes, as much as we keep claiming that we are doing better than the US, I don’t see it in the employment data). Using somewhat complicated calculations from the esteemed John Hussman, a 1% increase in unemployment PER QUARTER is perfectly consistent with a 5% drop in GDP, which is exactly what is happening right now.

Here is what these bank jokers had to say today after the report, as reported in the G&M:

“The recession deepened at the start of 2009, and we are likely to see the
jobless rate rise above eight per cent by year end,” warned Benjamin Reitzes,
economist at BMO Nesbitt Burns.

My thought: At this rate, it will be at 8% in April. By mid year, at the absolute latest. 9% by year end is looking conservative. Remember in the last 2 recessions, unemployment went to 12%.

“The fact that most of the job losses were in the private sector adds to worries
that the economy has significantly throttled back,” said Charmaine Buskas,
senior economics strategist at TD Securities.

My thought: Is it not obvious that the economy has significantly throttled back by now?

Canadian Imperial Bank of Commerce economist Krishen Rangasamy said in an
interview that economists “knew things were going to get worse, but they got
worse a lot faster than expected.”

My thought: Faster than you expected….

The Big Banks are either deliberating understating their predictions or they are using models based on recent recessions (early 80s and early 90s). When they are wrong, they are surprised. They will say this is unprecedented. It isn’t unprecedented. There is a precedent. The 1930s. The Great Depression. Their models can’t capture this, so they will keep on acting surprised every month.

Conclusion: For 2009, I would look for an average of 50-60K in job losses (600K-720K annualized). This is optimistic, and it could be worse. I project an increase to 9% or 10% unemployment by the end of 2009.

The job losses are not just in the US anymore. This week, there have been layoffs announced by many high profile Canadian companies (which are not even reflected in the January numbers).

In this job loss hurricane for the next few months, 50 to 100K should be the range. I hope that I am wrong but I think it is better to be realistic here. If you can, build up an emergency fund (I will have more on Emergency Funds in a future posting). If you are thinking of selling your house, sell now while you still have a nice profit. Pay down debt before deflation makes it even more expensive.

I laugh at Carney. How is the consumer supposed to come back in 2010? As I wrote recently, there is a secular trend at hand with the savings rate. To add fuel to the fire, the consumer is now getting hit by massive job losses. Even if you haven’t lost your job, you are starting to fell worried about losing it or you may know someone who has lost their job. That is going to affect your spending. Your portfolio may be down 40%. Your house may soon be down 30%.

Let’s be honest here. We are in a depression. Maybe(?) not the Great Depression, but definitely a depression. Expect the "surprises" to be negative.

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