September 22, 2009

 

Title: Green shoots are sprouting roots

Sub-title: Numerous indicators are signaling that an economic recovery is at hand. That’s great news for the housing sector.

 

Those who follow stock markets tend not to read too much into wild shorter-term fluctuations. The hedge funds and institutional traders who control much of the action there these days, are so focused on corporate quarterly profit targets, and more particularly their own bonuses and commissions, that reading too much into equity swings is hazardous business.

 

However recently North American stock markets have been pointing so strongly in one direction, that their signals are getting hard to ignore.  During the past six months the S&P/TSX has slowly and steadily gained more than 50 percent. The US S&P 500 is up by a similar percentage.

 

Gains that strong almost always imply that something else is going on below the surface says one expert. “Over the longer term the stock market is a strong leading indicator of economic activity,” says Pierre Lapointe, a market strategist at National Bank Financial. “And right now it is saying that a recovery is at hand.”

 

A slew of positive economic data

Stock markets data are not the only indications of positive economic activity. In fact practically all of the recent signals have been pointing upwards. For example last week the Conference Board released the results of its new Help Wanted Index, which rose during August for the second time in three months. That, coupled with rising numbers of job ads posted online, has led Pedro Antunes, the organization’s director of national and provincial forecasts to conclude that net job losses in Canada may have bottomed out.

 

The firming job market may be one reason that consumer confidence, another key economic indicators, is also looking up. Polling conducted by Nanos Economic Monitor, showed that 45 percent of Canadians believed that the economy would get better during the coming months. That is the highest level since November of last year.

 

As if that were not enough, things also appear to be getting better in the United States, Canada’s largest trading partner. True, America has not yet registered the full quarter of economic growth that would formally end its recession. However monthly indicators down south have all been pointing up, to the point that Federal Reserve governor Ben Bernanke recently stated that the recession is there is very likely over.

 

If that is true, this would be great news for Canadian companies, many of which ship an inordinate portion of their production to the United States. Local exporters have been hit hard during the past year by the rising Canadian dollar, which makes their products far more expensive in the United States – a trend far more damaging during recession times. The hope is that if Americans buy more, Canadian companies will need to manufacture more, and thus may need hire back recently laid off workers.

 

Housing sector looking better

The positive economic developments spilled over into the housing sector which. – spurred by continued low mortgage rates, -- had another excellent month in August. According to the Canadian Real Estate Association, sales made via its Multiple Listing Service increased by to 42,483 units during the month, up by 18.5 percent compared to the same month last year. Dramatic year over year gains were registered in Vancouver (117 percent), Toronto (17 percent) and Calgary (17 percent), cities which had been hit hard during the downturn.

 

Strength in the resale housing market can be seen most clearly in the average selling prices of homes, which rose to an impressive $324,779 during the month. That represents a healthy 11.3 percent increase from the average price of homes sold during the same month last year. New home construction activity also looks like it is picking up. According to the Canada Mortgage Housing Corporation (CMHC) housing starts in the country rose to 150,400 units on a seasonally adjusted basis during August, up from 134,200 units during July.

 

 

Trying to avoid the double dip

However despite all of the good news here in Canada, particularly in his beloved equities markets, National Bank Financial’s Lapointe warns that - as the old saying goes - “it ain’t over till it’s over.”

 

“Stock markets almost always get wind of an economic recovery about six to nine months before it happens, and when they do they start to bid up stock prices. That is almost certainly what is happening now,” says Lapointe. “However while the markets are excellent leading indicators, they are not always right. So it pays to be careful.”

 

 

Peter Diekmeyer is Bankrate.ca’s economics correspondent.

 

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