Oregon Office of Economic Analysis

As we have been highlighting here on the blog and in our forecasts, there are currently two major headwinds facing the recovery: housing and government. Not wanting to rehash the previous arguments regarding these headwinds and industries, please see these previous posts for more information:

• Where’s My Recovery? (illustrating these employment headwinds in Oregon and U.S.)
• Economic Update (see the bottom half of the post for information on residential investment’s importance to economic recovery – based on Vernon Smith and Steven Gjerstad’s paper)
• Oregon’s Public Sector Employment (detailing public sector changes)

With all that being said, the purpose of this post is to take a quick look at Canada. What follows is a very brief overview and a few graphs. Economic news out of Canada has certainly been much better than U.S. news over the business cycle. The country did not experience a housing bubble like most of the industrialized world in the 2000s, rather home prices grew, and continue to do so, at strong rates. Also bank (and mortgage) regulations in Canada were stronger and prevented the worst practices that helped fuel the bubble from occurring in Canada. See this Dec ’09 article by the Cleveland Fed for more information. Other factors, such as higher energy and commodity prices, also help the Canadian economy, however that has been the basic premise or view of the country’s economic performance. With this as a background, the first graph below shows total nonfarm employment in Canada and the U.S. since January 2008. Employment only fell 2.74 percent in Canada during the recession compared to 6.34 percent in the U.S. and recent growth has been stronger. In fact Canada’s employment has recently surpassed its pre-recession peak levels while the U.S.’s employment still remains some 4.83 percent below its pre-recession peak.

Data Sources: The seasonally adjusted payroll data from Statistics Canada (SEPH) and BLS (CES). Note that Canadian employment is only through July 2011 while U.S. employment is through September 2011, due to data availability.

Clearly, Canada’s labor market has outperformed the U.S. labor market this business cycle. Given that we also know Canada’s housing markets have not burst like the U.S.’ did and construction is a good source of growth during economic recoveries, I was curious to see if Canada’s stronger performance can be measured in the same way that Oregon and the U.S.’ tepid recovery can be measured – namely housing and government.

First up is a graph of home prices in both countries. Will Canadian home prices come crashing down and possibly pull the country’s economy with it? So far the answer is no, however that does not rule out future price corrections, if any.

During the recession, as noted above, Canadian employment fell only 2.74 percent compared to the U.S.’ 6.34 percent decline. The graphs below breakdown employment by various industries. While previous posts have focused on Housing-Related industries, here our definition changes slightly due to data issues.  In its place we use Construction plus Finance and Insurance plus Real Estate. These industries are, generally speaking, related to housing and construction activity in the larger sense, however these graphs do not yield themselves to a perfect, apples to apples comparisons with previous posts’ graphs.

When it comes to the current expansion to date, it is interesting to see the industry breakouts for Canada and the U.S. We know the U.S. (and Oregon) story – housing and government are holding down employment gains relative to historical recoveries. In Canada, the story is different as construction related and government are aiding the labor market figures. In fact, U.S. employment growth excluding construction and the F.I.R.E industries has actually increased more, in percentage terms, since the trough than it has in Canada.

Just to make sure that there are not necessarily industry composition issues, the next graph breaks out the Construction, Finance and Insurance and Real Estate components. Clearly the construction industry in Canada is doing much better, however the F.I.R.E components tell a similar story (just not as extreme).

All told, it does appear that the housing and government headwind issues are still able to tell the story of the recovery, even with our neighbors to the North. A major question moving forward is how long can the U.S. economy limp along with 25-27% of individuals employed in these headwind industries? Is the economy able to continue to grow at a solid pace in all other industries even with these two large industries cutting back or will the weight of these industries pull the rest of the economy down with them? Those are the bigger, macroeconomic questions we will be discussing with the Governor’s Council of Economic Advisors at our next set of meetings this month.