www.td.
com/economics
TD Economics
The Weekly Bottom Line
January 16, 2009
HIGHLIGHTS
• U.S. retail sales and prices are falling
• Falling commodity prices drive Canadian trade
balance lower and U.S. higher
Economists are a group of individuals who took their
mother’s advice to heart a little too literally to grow up and
live in the “Real World.” For an economist, the “Real
World,” or real economy, looks at what is going on once
we strip out the changes in prices. There is good reason to
do this. Imagine the price of every good in the world was
suddenly cut in half. Well, if spending was also cut in half,
then nothing changed for spending really. The same number
of goods still circulated around the economy, only the price
tags changed. It was all just a David Copperfield-esque
monetary illusion. There are important caveats to this idea
that are now being placed center stage in the global
economy.
Will the real U.S. consumer please stand up
Over the last five months of 2008, American consumer
spending (nominal) fell 10%. Prior to this, the biggest such
decline had been 2.6% during both the 1980s and 1990s
recession – when oddly enough the 5-month inflation rate
in both cases was also running at 2.4%. This means in
each case, the real decline in spending was 5%. So, con-
sumer spending did not keep pace with the 3.2% increase
in prices, and it also contracted by an additional 2.6%. The
math works in the opposite direction in the current context.
The amount of cash consumers have spent has fallen by
Recent TD Economics Research
January 16, 2009 - U.S. Consumer Price Index
January 15, 2009 - Monetary Policy Monitor
January 15, 2009 - ECB Interest Rate Decision
January 14, 2009 - U.S. Retail Sales
January 13, 2009 - Canadian International Trade
The Weekly Bottom Line
REAL U.S. RETAIL SALES SPEND ING
5 month % chg.
8
6
4
2
0
-2
-4
Recession
-6
shading
-8
196 7 1 970 1974 19 77 1 980 198 4 1 987 1990 199 4 1 997 200 0 20 04 2 007
Last plotted December 2008; Source: Haver Analytics
10%, but the prices of those products consumers are buy-
ing has fallen by 3.5% over the same period – meaning
real consumer spending has fallen by the far less shocking
6.5%. In fact, in the 1980’s recession and the 1974 reces-
sion, the real decline in spending had fallen to as low as
7.5% (over a 5-month period). In real terms, the current
“death of the U.S. consumer” is not unprecedented.
This also leads to another key extension. Outside of
changes in prices and changes in spending, it is also impor-
tant to look at changes in income. If prices are falling
faster than consumer spending, then real spending is ris-
ing. Equally important, if prices are falling faster than in-
come, then real income is rising, meaning individuals have
more purchasing power. Through the first nine months of
2008, the 5-month growth rate of wages was never higher
than the 5-month growth in prices. With skyrocketing fuel
costs, Americans were quickly losing their purchasing
power. However, in October, these two rates were equal,
and by November, real wages were growing by 2.4% and
could possibly be increasing by over 3.5% when Decem-
ber data becomes available.
This is critical because looking at the chart here, real
1 January 16, 2009
 www.td.com/economics

wage growth and real GDP growth move very much hand- AMERICAN CONSUMER SPENDING AND ASIAN
in-hand, raising a possibility for a bounce in U.S. economic GLOBAL EXPORTS
growth to kick off 2009 after what was unequivocally an 40 0
Billion $ Billion $
40 0
atrocious fourth quarter. The dramatic collapse in gas prices
35 0 35 0
means consumers can spend that much less on gas, and U.S. Retail Sales
30 0 30 0
that much more on other purchases. While much will be
raised of the year/year rate of headline inflation having 25 0 25 0

fallen in just 0.1% as a sign of a deflationary trap in the 20 0 20 0

U.S., core inflation remains at 1.8%. Inflation will recede 15 0 15 0

further in the months ahead (inflation reflects past eco-
10 0 10 0
nomic changes), but the critical area to focus on is the Asian exports
50 50
change of spending and wages relative to these prices.
0 0
Especially in these unusual times of falling prices and nomi-
70 73 77 81 85 89 93 96 00 04 08
nal values in the United States.
Seasonally adjusted; Last plotted Dec 2008
Asia plays follow the leader Data: Haver Analytics

Plotting out the level (nominal, not real) of U.S. retail

portant is not only how many U.S. dollars they are receiv-
sales and total Asian exports over the last 40 years dem-
ing for their exports, but also how these stack up in their
onstrates just how unique the current environment is. As
own domestic currencies and against their own changes in
we noted, U.S. retail spending has declined before on a
inflation.
nominal basis, but never of the current magnitude in the
post-WWII era. Likewise, nominal Asian exports to the Global deflation imported to Canada
rest of the world have also never collapsed by this scale And when it comes to relative price shocks, Canada
for the last 40 years that we have data. Asian exports fell again appears to be the biggest loser in the current global
by 16% (11 months peak to trough) during the 2001 U.S. climate. In Canada, merchandise exports fell by 11% from
recession, 10% during the 1997-98 Asian financial crises July-November, but Canada has seen similar sized changes
(over 3 months) , but 27% over the last five months of five times over the last decade, so this in itself is not unique.
2008. This brings up a crucial issue for how this shock is On a real basis, though, Canadian exports have fallen nearly
being distributed around the world. All relative price shocks 10% since they peaked in November 2007, and threaten to
are not created equal. Over the last decade, Asian trade post the largest decline, as well as the longest lasting de-
flows and U.S. retail sales have been closely correlated. cline, since at least the 1974 recession. With this decline
However, for each of these Asian economies, what is im- driven by the remarkable collapse in commodity prices,
not only is demand for Canadian exports falling, but so is
U.S. REAL WAGES DRIVES REAL GDP the return collected for each shipment of those products, a
2 Quarter % chg. relative double-whammy for Canada. This means falling
9 corporate profit margins, and likely falling profits outright,
7 for many exporters, which must then filter through into
5 reduced corporate investment and hiring decisions.
3 For the economy, it’s all relative. With the large shocks
1 simultaneously working through the global system – hous-
-1 ing bubbles, oil prices skyrocketing and then crashing, credit
-3 squeezes – it is unfortunately impossible to say for certain
-5 Recession how they will all intermix, and the U.S. is likely not done
-7
shading Real Wages contracting. But, while there is a global deflation under
Real GDP
-9 way, this is not the same thing as being stuck in a deflation-
1 959 19 63 1968 1 972 197 7 1981 19 86 1990 1 995 199 9 2004 2 008 ary trap.
Last plotted: Q3 2008 and Q4 2008 for GDP and wages respectively Richard Kelly, Senior Economist
Source: Haver Analytics 416-982-2559

The Weekly Bottom Line 2 January 16, 2009

 www.td.com/economics

UPCOMING KEY ECONOMIC RELEASES

Canadian Manufacturing Shipments - November
Release Date: January 20/09
October Result: -0.5% M/M CANADIAN MANUFACTURING SHIPMENTS
TD Forecast: -3.0% M/M
M/M % Change Seasonally Adjusted Ratio
Consensus: -0.5% M/M 4 1.38
Manufacturing
3 Shipments 1.36
With the Canadian and U.S. economic woes clearly (left scale)
2
intensifying in the last quarter of 2008, it is not surprising 1.34
that the wheels on the Canadian manufacturing sector 1
1.32
are slowly falling off. Indeed, given the sluggish domestic 0
1.30
and foreign demand for manufacturing products, and -1
slumping energy prices, we expect Canadian manufac- -2
1.28

turing shipments to post its fourth consecutive monthly 1.26

-3
decline in November, with a rather dramatic 3.0% M/M Inventory-to-Shipments
-4 1.24
drop. In real terms, the decline in shipments is likely to be Ratio (right scale)

somewhat more modest as much of the fall in the head- -5 1.22

Oct-07 Dec-07 F eb-08 Apr- 08 Jun-08 Aug-08 Oct-08
line number is expected to be on account of price effects.
Source: Statistics Canada
In the coming months, further retrenchment in manufac-
turing sector activity is expected as the intensifying global
economic recession restrains demand for Canadian manu-
facturing products.
Millan Mulraine 416-308-2911

Bank of Canada Interest Rate Decision BANK OF CANADA OVERNIGHT RATE

%
Release Date: January 20/09 6
Current Rate: 1.50%
TD Forecast: 1.00% 5
Consensus: 1.00%
4
The economic data in Canada has categorically dete-
riorated further, and against this backdrop much of the world 3
is in recession, which suggests that the turnaround will be
slow. Against a backdrop of a slumping economy, an ex- 2

pected moderation in inflation, weak global growth and a

1
slow pace of credit market repair, the Bank of Canada has
a good case to deliver more easing when it meets on Janu-
0
ary 20. We therefore look for the Bank of Canada to cut Jan. 03 Jan. 04 Jan. 05 Jan. 06 Jan. 07 Jan. 08
rates by 50 basis points, leaving the overnight rate at 1.0%.
The communiqué is unlikely to depart significantly from A ctual data to Jan 14, 2008; Source: Bank of Canada

the December statement, though the Bank might scale back

their rhetoric on further rate cuts. That said, the tone will
remain broadly dovish.

Charmaine Buskas 416-982 3297

The Weekly Bottom Line 3 January 16, 2009

 www.td.com/economics

Canadian Wholesale Sales - November CANADIAN WHOLESALE SALE S*

Release Date: January 21/09
M/M % change
October Result: total -1.8% M/M 3 3
TD Forecast: total -1.5% M/M
2 2
Weak consumer spending is becoming a millstone
1 1
around the neck of Canadian economic activity, and as
consumer spending continues to weaken we expect re- 0 0
tailers to cut-back on purchases even further as they en-
-1 -1
deavour to manage the level of their inventories. This will
put further downward pressure on wholesale sales. For -2 -2
November, our call is for wholesale trade to post its sec-
-3 -3
ond consecutive monthly decline, with a further 1.5% M/ Total
Ex. Motor Vehicles
M drop. Much of the weakness in the nominal headline -4 -4
number is expected to come from declines in orders for Oct -07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 O ct -08
*Seasonally Adjusted data; Source: Statistics Canada/Haver Analytics
motor vehicles, machinery and equipment, and household
and personal products. In real terms, the decline is likely
to be more modest as declining prices should play an im-
portant role. Looking ahead, as the Canadian economic
recession intensifies, we expect wholesale sales to de-
cline even further.
Millan Mulraine 416-308-2911

Canadian Retail Sales - November CANADIAN RETAIL SALES*

Release Date: January 22/09 3
M/M % change
3
October Result: total -0.9%% M/M;
ex-autos -1.1% M/M
2 2
TD Forecast: total -2.0% M/M; ex-autos -1.5% M/M

1 1
With a domestic economic recession under way, wors-
ening labour market conditions, plunging financial and hous-
0 0
ing wealth, and tightening lending conditions, Canadian
consumers now have their backs against the wall. It is
therefore no wonder that consumer confidence is begin- -1 -1

ning to crack. For November, we expect consumer spend- Total

Ex. Motor Vehicles
ing to reflect the growing unease among Canadian house- -2 -2
holds about their economic fortune, with retail sales fall- Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 O ct-0 8
*Seasonally Adjusted data; Source: Statistics Canada/Haver A nalytics
ing by a dramatic 2.0% M/M. The continued slump in
motor vehicle sales and sharp decline in gasoline prices
are also expected to drag the headline number lower. As as the nominal headline number. In the months ahead, we
such, sales excluding autos are expected to be slightly expect Canadian consumers to retrench spending even
better, falling by a more modest 1.5% M/M. Real retail further as the global economic recession intensifies.
sales is also likely to be weak, though perhaps not as weak
Millan Mulraine 416-308-2911

The Weekly Bottom Line 4 January 16, 2009

 www.td.com/economics

U.S. Housing Starts - December

U.S. HOUSING STARTS
Release Date: January 22/09
November Result: 625K 1,200
Thousands of units*

TD Forecast: 600K
Consensus: 610K 1,100

The U.S. housing market correction has clearly taken 1,000

a dramatic turn for the worse in November with housing
starts plunging by its largest margin this cycle. And with 900

the U.S. economic recession appearing to have intensified

800
during the last quarter, housing market activity is expected
to remain dismal for some time to come. In December, we 700
expect housing starts to plunge a further 4% M/M, with
new residential construction falling to a record low of 600K. 600
Nov-07 Jan-08 Mar -08 May-08 Jul-08 Sep-08 N ov-08
Both single-unit and multi-unit construction should decline.
In the months ahead, we expect new residential construc- *Seasonally adjusted at annual rates; Source: U.S. Census
tion to moderate even further as the drag from a worsen-
ing domestic economy, tighter lending conditions and the
massive overhang in inventories continue to temper new
building activity.

Millan Mulraine 416-308-2911

Canadian CPI - December

CANADIAN CONSUMER PRICE INDEX (CPI)
Release Date: January 23/09
November Result: core 0.7% M/M, 2.4% Y/Y; Y/Y % change
3.5 3.5
all-items -0.3% M/M, 2.0% Y/Y CPI: All Items
3.0 3.0
TD Forecast: core -0.5% M/M, 2.3% Y/Y;
all-items -1.1% M/M, 0.7% Y/Y 2.5 2.5

2.0 2.0
Last month’s inflation report was a bit of a head-
scratcher, and in our view it was at odds with the growing 1.5 1.5
economic slack evident in the Canadian economy. With
1.0 1.0
the economy appearing to have weakened even further in
the latter part of Q4, and energy prices plunging at a dou- Bank of Canada Core CPI ex. 8 most volatile
0.5 0.5
items & indirect taxes
ble-digit clip in December, we expect consumer prices to
0.0 0.0
ease dramatically. In particular, our call is for the headline
Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08
consumer price index to fall by its largest margin on record, Source: Statistics Canada/Haver Analytics
with a 1.1% M/M drop (both on a seasonally and non-
seasonally adjusted basis). The annual rate of price infla-
tion should also fall, declining to 0.7% Y/Y, which will be basis), while the pace of annual core inflation should fall to
the lowest print on headline consumer inflation in just over 2.3% Y/Y. In the months ahead, with the Canadian economy
two years. In terms of core inflation, we expect to see expected to decline further, and commodity prices likely to
last month’s surge in core prices to begin unravelling in remain soft, Canadian consumer inflation should continue
December, with the core consumer price index falling by to moderate.
0.5% M/M (down 0.1% M/M on a seasonally adjusted
Millan Mulraine 416-308-2911

The Weekly Bottom Line 5 January 16, 2009

 www.td.com/economics

RECENT KEY ECONOMIC INDICATORS

January 12 - January 16, 2009
Release Data for
Economic Indicators Units Current Prior
Date Period
Canada
Jan. 12 New Housing Price Index Nov. M/M % chg. -0.3 -0.4
Jan. 13 International Merchandise Trade Nov. $C, blns 1.3 3.8 R
Jan. 15 New Motor Vehicle Sales Nov. M/M % chg. -7.0 -0.9 R
United States
Jan. 13 Trade Balance Nov. US$, blns -40.4 -57.2 R
Jan. 13 Monthly Budget Statement Dec. US$, blns -83.6 48.3
Jan. 13 ABC Consumer Confidence 11-Jan Index -49.0 -49.0
Jan. 14 MBA Mortgage Applications 9-Jan % change 15.8 -8.2
Jan. 14 Import Price Index Dec. Y/Y % chg. -9.3 -6.7 R
Jan. 14 Advance Retail Sales Dec. % change -2.7 -1.8 R
Jan. 14 Advance Retail Sales Less Auto Dec. % change -3.1 -1.6 R
Jan. 14 Business Inventories Nov. % change -0.7 -0.6
Jan. 15 Producer Price Index Dec. Y/Y % chg. -0.9 0.4
Jan. 15 Producer Price Index excluding Food and Energy Dec. Y/Y % chg. 4.3 4.2
Jan. 15 Initial Jobless Claims 10-Jan Thousands 524 467 R
Jan. 15 Continuing Claims 3-Jan Thousands 4497 4611 R
Jan. 15 Empire Manufacturing Index Jan. Index -22.2 -26 R
Jan. 15 Philadelphia Fed Index Dec. Index -24 -33 R
Jan. 16 CPI Dec. Y/Y % chg. 0.1 1.1
Jan. 16 CPI excluding Food and Energy Dec. Y/Y % chg. 1.8 2.0
Jan. 16 CPI - Core (SA) Index Dec. Index 216.8 216.8
Jan. 16 TIC Flows Nov. US$, blns 56.8 286.3
Jan. 16 Industrial Production Dec. Y/Y % chg. -2.0 -0.6
Jan. 16 Capacity Utilization Dec. Percent 73.6 75.4 R
Jan. 16 U. of Michigan Confidence Index Jan. Index 61.9 60.1
Source: Bloomberg, TD Economics

The Weekly Bottom Line 6 January 16, 2009

 www.td.com/economics

UPCOMING NORTH AMERICAN ECONOMIC CALENDAR

January 19 - January 23, 2009
Release Data for Consensus
Economic Indicators Units Prior
Date Period Forecast
Canada
Jan 19 International Securities Transactions Nov. M/M % chg. 1.0 3
Jan. 20 Manufacturing Shipments Nov. M/M % chg. -0.5 -0.5
Jan. 20 Bank of Canada Rate Jan. 20 Percent 1.00 1.50
Jan. 21 Wholesale Sales Nov. M/M % chg. -- -1.8
Jan. 22 Leading Indicators Dec. M/M % chg. -- -0.7
Jan. 22 Retail Sales Nov. M/M % chg. -- -0.9
Jan. 22 Retail Sales Less Autos Nov. M/M % chg. -- -1.1
Jan. 22 Bank of Canada Monetary Policy Report
Jan. 23 Consumer Price Index (CPI) Dec. Y/Y % chg. -- 2.0
Jan. 23 Bank of Canada Core CPI Dec. Y/Y % chg. -- 2.4
United States
Jan. 20 ABC Consumer Confidence Jan. 18 Index -- -49
Jan. 21 MBA Mortgage Applications Jan. 16 % change -- 15.8
Jan. 21 NAHB Housing Market Index Jan. Index 9.0 9.0
Jan. 22 Housing Starts Dec. Thousands 610 625
Jan. 22 Initial Jobless Claims Jan. 17 Thousands 553 524
Jan. 22 Building Permits Dec. Thousands 610 616
Jan. 22 Continuing Claims Jan. 10 Thousands -- 4497
Jan. 22 House Price Index Nov. M/M % chg. -1.2 -1.1
Source: Bloomberg, TD Economics

The Weekly Bottom Line 7 January 16, 2009

 www.td.com/economics

G-7 ECONOMIC RELEASES AND EVENTS

Data for Consensus
Date Time* Country Economic Indicator/Event Units Last Period
Period Forecast

Jan 19 4:45 EU-12 European Commission Releases Economic Growth Forecasts

8:30 Canada International Securities Transactions Nov. M/M % chg. 1.0 2.9
18:50 Japan Tertiary Industry Index Nov. M/M % chg. -- 0.4

Jan. 20 0:00 Japan Consumer Confidence Dec. Index 27.5 28.7

1:00 Japan Machine Tool Orders Dec. Y/Y % chg. -- -71.9
4:30 U.K. Consumer Price Index (CPI) Dec. Y/Y % chg. 2.6 4.1
4:30 U.K. Core CPI Dec. Y/Y % chg. 1.3 2.0
4:30 U.K. Retail Price Index Dec. Y/Y % chg. 0.8 3.0
4:30 U.K. Retail Price Index excl. Mortgages (RPIX) Dec. Y/Y % chg. 2.4 3.9
5:00 Germany ZEW Survey - Economic Sentiment Jan. Index -43.1 -45.2
5:00 Germany ZEW Survey - Current Situation Jan. Index -71.5 -64.5
5:00 EU-12 ZEW Survey - Economic Sentiment Jan. Index -46.0 -46.1
8:30 Canada Manufacturing Shipments Nov. M/M % chg. -0.5 -0.5
9:00 Canada Bank of Canada Rate Decision Jan. 20 Percent 1.00 1.50
17:00 U.S. ABC Consumer Confidence Jan. 18 Index -- -49
23:00 Japan Bank of Japan Monetary Policy Meeting

Jan. 21 0:00 Japan Leading Index CI Nov. Index -- 81.5

0:00 Japan Coincident Index CI Nov. Index -- 94.9
2:00 Germany Producer Prices Dec. Y/Y % chg. 4.2 5.3
4:30 U.K. Bank of England Minutes
4:30 U.K. Jobless Claims Change Dec. Thousands 81.0 75.7
7:00 U.S. MBA Mortgage Applications Jan. 16 % change -- 15.8
8:30 Canada Wholesale Sales Nov. M/M % chg. -- -1.8
13:00 U.S. NAHB Housing Market Index Jan. Index 9.0 9.0
18:50 Japan Merchandise Trade Balance Total Dec. ¥, blns -278.0 -223.4
22:00 Japan Bank of Japan Target Rate Jan. 22 Percent 0.10 0.10

Jan. 22 4:00 EU-12 ECB Publishes Monthly Report Jan. 18

5:00 EU-12 Industrial New Orders Nov. Y/Y % chg. -20.0 -15.1
6:00 U.K. CBI Quarterly Industrial New Total Orders Jan. 22 -- --
8:30 Canada Leading Indicators Dec. M/M % chg. -- -0.7
8:30 Canada Retail Sales Nov. M/M % chg. -- -0.9
8:30 Canada Retail Sales Less Autos Nov. M/M % chg. -- -1.1
8:30 U.S. Housing Starts Dec. Thousands 610 625
8:30 U.S. Initial Jobless Claims Jan. 17 553 524
8:30 U.S. Building Permits Dec. Thousands 610 616
8:30 U.S. Continuing Claims Jan. 10 -- 4497.0
10:00 U.S. House Price Index Nov. M/M % chg. -1.2 -1.1
10:30 Canada Bank of Canada Monetary Policy Report Update Jan. 22
18:50 Japan All Industry Activity Index Nov. M/M % chg. -2.2 -0.5

Jan. 23 0:00 Japan Bank of Japan Monthly Report Jan. 22

2:45 France Business Confidence Indicator Jan. Index 71.0 73.0
2:45 France Production Outlook Indicator Jan. Index -76.0 -73.0
3:00 France Purchasing Managers Index (Manufacturing) Jan. Index 34.4 34.9
3:00 France Purchasing Managers Index (Services) Jan. Index 40.1 40.6
3:30 Germany Purchasing Managers Index (Manufacturing) Jan. Index 32.0 32.7
3:30 Germany Purchasing Managers Index (Services) Jan. Index 45.7 46.6
4:00 EU-12 Purchasing Managers Index (Manufacturing) Jan. Index 33.1 33.9
4:00 EU-12 Purchasing Managers Index (Services) Jan. Index 41.5 42.1
4:00 EU-12 Purchasing Managers Index (Composite) Jan. Index 37.4 38.2
4:30 U.K. GDP Q4 Y/Y % chg. -1.4 0.3
4:30 U.K. Retail Sales Dec. Y/Y % chg. 1.5 1.5
7:00 Canada Consumer Price Index (CPI) Dec. Y/Y % chg. -- 2.0
7:00 Canada Bank of Canada Core CPI Dec. Y/Y % chg. -- 2.4
* Eastern Standard Time; Sources: Bloomberg, TD Economics

The Weekly Bottom Line 8 January 16, 2009

 www.td.com/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 9 January 16, 2009