The Weekly Bottom Line

HIGHLIGHTS OF THE WEEK

• GM files for bankruptcy protection in the U.S.
• Employment losses in the U.S. moderate - 345,000 jobs shed in May
• Crude oil prices hit a 7-month high of US$69 per barrel

UNITED STATES - PACE OF ECONOMIC CONTRACTION MODERATING

This week kicked off by creating yet again, another piece of history, as the world's largest automaker went bankrupt. GM is the largest manufacturer, and the third largest company to seek bankruptcy protection in the U.S., and comes just one month after fellow Detroit-automaker Chrysler landed itself in the same position. Similar to Chrysler, GM will engage in a "363 sale", whereby the 'good' assets will be sold to a new entity, while the 'bad' assets remain in bankruptcy protection. The U.S. and Canadian governments have agreed to finance the courtsupervised restructuring plan, with the Obama Administration extending another US$30 billion - in addition to the US$20 billion already loaned to the automaker - in exchange for a 60% stake in the new entity, and the Canadian and Ontario governments providing US$9.5 billion for a 12.5% stake in the new GM. The VEBA healthcare fund will hold a 17.5% stake and bondholders will acquire the remaining 10%. While definitely not the preferred route, this was the only path that would give GM an opportunity to return to profitability.
On a brighter note, recent economic data suggest that the pace of the economic contraction in the U.S. may be slowing. The manufacturing ISM index rose for a 5th consecutive month in May, reaching its highest level since September, while the non-manufacturing ISM index hit a 7- month high. Nonetheless, at 42.8 and 44.0, respectively, both indices remain below the expansion/contraction 50- threshold.
Perhaps even more telling, is the deceleration in job losses seen recently. Following an upwardly revised 504K drop in employment in April, the U.S. economy shed 345K jobs in May - largely due to a slowdown in the pace of private sector layoffs. But notwithstanding this moderation, the U.S. economy has still lost a total of 5.9 million jobs since the recession began and the unemployment rate is now running at 9.4% - the highest level since 1983. What's more, the aggregate number of hours worked slid 0.7% on the month, suggesting that some employers are cutting back hours rather than letting workers go.
As such, consumers have been tightening their purse strings. Personal spending slid 1.5% in April compared to year-ago levels, and in real terms (1.9%), dropped by even more. This more cautious spending nature exhibited by U.S. consumers has translated into a higher savings rate, which jumped to 5.7% in April, from 4.5% in March. This is a trend that will likely continue as consumers wait for an economic recovery to take hold.
But while the data is increasingly becoming 'less bad', it is important to note that several sectors of the economy remain quite weak. And as echoed by Fed Chairman Bernanke this week, "even once the recovery gets underway, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while". Bernanke also expressed concern over the size of the U.S. fiscal debt. While supportive of the fiscal policy actions taken in the midst of a crisis, he noted that unless the U.S. "demonstrates a strong commitment to fiscal sustainability in the longer term, it will have neither financial stability nor healthy economic growth".

U.S.: UPCOMING KEY ECONOMIC RELEASES

U.S. International Trade - April

• Release Date: June 10/09
• March Result: -$27.6B
• TD Forecast: -$26.5B
• Consensus: -$28.7B

The U.S. trade balance has benefited immensely from the weakening domestic economy as the combination of soft import demand and weak energy prices have combined to slash the trade deficit from a once daunting $62B in early 2008 to a much more modest $27.5B in March. This pattern is likely to remain largely intact, and we expect the trade deficit to narrow marginally to $26.5B. The key factor underpinning this call is our expectations for further weakness in imports, as we suspect the weakening domestic economy will likely push U.S. imports lower for the eighth straight month. Despite the decline in imports, the petroleum deficit should widen further as the gains in crude oil prices should put upward pressure on the energy import bill. Exports are also expected to be soft on the month, though the weakening dollar and greater export demand from China for heavy machinery (in light of the massive infrastructure spending in recent month) should limit the magnitude of the decline. In the months ahead, we expect the U.S. trade deficit to begin widening as rising crude oil prices offset the benefits that will invariably accrue from the weakening U.S. dollar.

U.S. Retail Sales - May

• Release Date: June 11/09
• April Result: total -0.4% M/M; ex-autos -0.5% M/M
• TD Forecast: total 0.9% M/M; ex-autos 0.3% M/M
• Consensus: total 0.4% M/M; ex-autos 0.2% M/M

After showing some encouraging signs of life in the first two months of this year, U.S. retail sales dip back into negative territory as consumer spending weakened in the last two months under the weight of the mounting job losses and weakening domestic economic fundamentals. In May, however, we expect retail sales to move back into positive territory with a rather respectable 0.9% M/M advance. Most of the gains are likely to come from auto sales, which have risen by a strong 6.4% M/M in May. Higher gasoline prices, which have climbed at a double-digit pace for the first time in two years, should also bolster the headline number. Excluding autos, sales should rise by a more modest 0.3% M/M. Looking ahead, it appears possible that the rebound in retail sales could gather some traction as the impact of the massive fiscal stimulus and the improvement in overall sentiment buoy consumer spending

TD Bank Financial Group
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.