Juggling Dynamite

Canadian businesses are closing at one of the fastest rates in history. See: Canada Just Saw One in Twenty Businesses Close in a Month, Biggest Wave Since the Pandemic.

Since the vast majority of private sector job growth is driven by small—to medium-sized companies, it’s not surprising that job vacancies (blue line on the lower right since 2014, courtesy of NBC, government job openings in red) are plunging along with the employment rate (blue line on the lower left since 2007, with labour force growth in red). While the official unemployment rate of 6.6% (up from 4.8% in June 2022) is, so far, significantly below the 8%+ seen in past recessions, record household indebtedness is magnifying fragility. According to the latest Hoyes, Michalos Consumer Solvency Report, consumer insolvencies in Canada are already just 5% below the recessionary high set in August 2009:

In August 2024, insolvency volumes increased by 8.9% across Canada and 15.4% in Ontario compared to the previous year. When adjusting for two fewer working days in 2024, the average daily volumes show an even starker rise: 19.3% nationwide and 26.3% in Ontario.

The current figures are alarmingly close to previous records. Canadian consumer insolvencies are just 5% below their peak for the month of August, which was set in 2009 as the country emerged from the last major recession. Ontario’s insolvency numbers are only 18% short of their August 2009 highs.

It bears remembering that historically, recessions have arrived within 24 months of the first-rate hike (March 2024 marked the 24-month this cycle) and ended within 18 months of the first-rate cut (January 2026 would be 18 months after the BoC’s June 2024 first cut this cycle).

At the end of August, Canadian GDP growth was tracking at a mere .9% for 2024. Retrospective measurements will revise this estimate multiple times in the coming quarters. But the trend is not friendly. GDP per capita has been shrinking since 2022, similar to the contractions seen at the outset of the deepest recessions of the past 45 years (grey bars below since 1980).

Canadian inventory-to-sales ratios for manufacturers, wholesalers, and retailers are already near the highs of the 2020 and 2008 recessions, higher than in 2001.

Excess inventories suggest disinflation and potentially some coming deflation in the price of goods. They also suggest many companies are overstaffed, with thirteen of fifteen sectors reporting a fall in output per employee between the third quarter of 2022 and the second quarter of 2024. From here, an acceleration in layoffs, financial strain, and central bank easing efforts look likely.

When Canada’s unemployment rate was 6.6% in 2017, the Bank of Canada had base rates in the banking system at .50% versus 4.25% today.  See NBC report, Bank of Canada needs to step up the pace:

With widespread inflation a thing of the past in Canada, we believe the door is wide open for the Bank of Canada to return its policy rate to neutral (between 2.5% and 3.0%) as soon as possible. In the meantime, the damage to the labour market could be greater than necessary. We anticipate economic growth of just 0.9% in 2024 and 1.3% in 2025, which would translate into an unemployment rate of around 7.4% by mid-2025.

In past recessions, 80 to 90% of the prior rate hiking cycle was ultimately reversed, but only after widespread financial pain, including crashing stock markets.

2024 has seen the most aggressive central bank easing globally since the 2020 pandemic and 2008-09. Whatever ‘stimulus’ impacts may flow from this will filter into the economy over the next few years. In the nearer term, the 22-fold tightening cycle of 2022-2023 will continue to weigh on borrowing and spending ability over the next year and beyond as ultra-low interest rate loans come up for refinancing.
Negative economic momentum and moribund asset prices prompted the Chinese central bank (PBOC) to launch another flurry of easing efforts over the last week. While Chinese stocks have spiked on the news, similar spates of jubilance proved short-lived (CSI 300 Index price below since June 2023) as a balance sheet recession continues to weigh on consumer confidence. See, China’s Bumper Stimulus Leaves Consumers Wanting More:

“For China’s long-suffering homeowners, help cannot come soon enough. “I don’t feel optimistic,” said another Beijing homeowner who asked not to be identified. “Prices are dropping, so no one is buying or selling. I don’t know how they [the government] can solve this problem.”

China Beige Book’s Leland Miller offers his assessment in the segment below.

China’s central bank just shocked markets with several impressive sounding stimulus measures, causing the biggest one-week rally in Chinese stocks since 2008. But how effective is this stimulus actually going to be to the Chinese economy? Leland Miller, co-founder & CEO of China Beige Book, joins Monetary Matters to weigh on this very important issue. Leland says he thinks the rally in Chinese stocks could continue for up to two months but that the effect on the Chinese economy will be to stabilize rather than to stimulate. Here is a direct video link.

Nationally, the supply of new one-family homes in America (shown below since the 1960s) has only been higher in the 2005 housing bubble peak. As more existing homes come on the market from stretched households and investors, home supply is rising in most areas.

The median price of a new single-family home fell by 4.6% year over year in August—the largest drop since October 2023 and an acceleration to the downside compared to the prior month. As shown below, since 2000 (courtesy of Liz Ann Saunders), this degree of negative price action was last seen in 2019-2020 and 2005-09. While mortgage rates have moved significantly down from their peak of last October (because Treasury bonds have rallied), the rates on offer remain sharply above those of existing mortgages. As shown below, the US 30-year mortgage rate of 6.18% versus 7.62% last October remains daunting compared to the 3.89% average rate on the existing active mortgages coming up for renewal. See, Lower Interest Rates Don’t Guarantee A Soft-Landing.

Too-high home prices remain out of reach for most. A record of eighty-seven percent of Americans surveyed by the University of Michigan say that now is a bad time to buy a home in America. This will get worse as unemployment rises. Housing analyst Nick Gerli offers valuable insight into how selling pressure from price indiscriminate buyers in the easy money era is accelerating price writedowns now.

Blackstone is selling yet another house in Florida, this time at a loss of $15,000. This house is located in the city of Palmetto, south of Tampa. And reflects a continued effort by corporate real estate investors to leave the Florida housing market before the downturn gets worse in 2024 and 2025. Access data on Reventure App: https://www.reventure.app The number of homes for sale in the area has spiked due to these investors selling. And values are now going down. But they are still very high compared to long-term norms. Reventure’s home price forecast suggests that values will keep declining in markets like Tampa, Sarasota, Naples, and Bradenton so long as inventory levels remain high. Here is a direct video link.