NEW YORK — As Canada's recovery appears to be running out of steam, the United States economy is heating up with a revitalized manufacturing sector showing the way.
Consumers — the engine driving about 70% of overall U.S. economic output – typically lead the economy out of recessions, but this time around it has been surprising strength in the long-downtrodden manufacturing sector.
"Years from now, when the fog clears, it will become apparent that the big recession gave birth to a profound change in the structure of the U.S. manufacturing sector — a process that is currently in full swing," said Benjamin Tal, deputy chief economist with CIBC World Markets in Toronto. "The combination of strong demand from emerging markets and U.S. manufacturing firms that are reformatting themselves to meet that demand is realigning the sources of U.S. economic growth, and opening up new investment opportunities in that space."
U.S. manufacturing shipments remain 14% below their pre-recession peak, but the gap is closing fast, bolstered by strong demand from emerging markets, Mr. Tal wrote in a research report published on Tuesday entitled "Manufacturing a Revival."
In the first three quarters of this year, U.S. merchandise exports surged by an annual rate of more than 10% — making it the fastest export recovery in the post-war era by a long shot, he added.
Canada's real exports slumped 13.9% in the third quarter compared with the same period in 2007, the most recent year of stable growth in both countries, while U.S. exports gained 6.3%, according to CIBC data. The strong loonie and weak greenback played a role.
Putting a spotlight on the U.S. strength, data released on Tuesday showed a Chicago-area manufacturing gauge reached its highest level since April: a better-than-anticipated gain.
"This was a weird recession," said Steven Ricchiuto, chief economist for Mizuho Securities USA in New York. "The automotive industry has never been shut down before," he said, referring to the bailouts and pre-packaged bankruptcies of General Motors and Chrysler. "Everyone blames the bank crisis [for the sputtering economic recovery], but, then, when the auto recovery got turned on, it's, Gee, what a surprise, the economy's improving."
It's too early to say the U.S. economy is revving up, however, he added. "Manufacturing is doing well, but by the same token you still have a situation where the housing industry is in distress. And although consumer confidence is up, that's based on expectations, not what's going on now, which is when consumers decide to spend."
Indeed, new data Tuesday showed that home prices are slumping again after the expiration of a tax credit from Uncle Sam.
And while consumer confidence hit a five-month high, according to other data released on Tuesday, Americans are still pretty gloomy about their present circumstances with unemployment stuck above 9% for more than a year and the value of their homes continuing to head lower.
"There's been a huge amount of stimulus thrown at the economy that's filled the void for a while," said Joshua Shapiro, chief U.S. economist with MFR Inc. in New York. "That bought us time to get some self-sustaining growth. But there are still a lot of impediments out there."
Besides the ongoing woes in the housing market, the U.S. economy will have to contend with the likelihood of higher taxes and spending cuts as U.S. lawmakers try to tackle the country's ballooning debt load.
Still, the outlook has improved considerably from only a few months ago when the markets were worried the U.S. economy could be headed for a "double dip" recession.
The U.S. economy saw better-than-expected 2.5% growth in the third quarter — much stronger than Canada's 1% gain.
Mr. Shapiro forecasts a 2.7% gain for the U.S. in the fourth quarter and signs — particularly evidence personal income is improving — have been encouraging enough for him to revise up his forecast for 2011 to about 3%.
Financial Post
jwhitman@nationalpost.com
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