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Canada Outpaces U.S. in Confidence, Economic Performance—News Analysis

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When Global Sticks, the company that holds your corndog together, keeps your popsicles intact and helps doctors get a good look at the back of your throat, was looking to locate a state-of-the-art manufacturing facility, it actually moved from China to Thunder Bay, Ontario. The words “made in China” are practically a synonym for “globalization.” How did costly Canada pull this off?

The rising cost of energy was a key factor. Being closer to the customer, naturally, brings down transportation costs; and after a certain point, power outages that idle factories in China begin to trump cheap labor costs. In Canada, Global Sticks also has the advantage of proximity to the raw forest products from which it fashions our ice cream handles.

Global Sticks is but one company, but economic statistics may suggest a trend. First quarter growth came in at a robust 1%, for an annualized rate of 3.9%. That compares with a measly 1.8%, annualized, for the U.S. in the first quarter. And at a time when the U.S. regional Fed branches are producing a string of negative reports, business conditions in all four of Canada’s economic regions are only slightly down (and strongest in Alberta and British Columbia). While Canadian manufacturing decelerated in the May report, it is growing at a notably better clip than in the U.S. and without the sharp downswing we’re seeing here.  

The Canadian economy is heavily dependent on exports and the U.S. is by far its biggest market, for which reason the two neighboring economies should be expected to closely track each other. And while they indeed do, their current differences seem more flattering to Canada. From the start of the credit crisis until March 2009, when global fears were greatest, the U.S. dollar rallied. But when the U.S. embarked on a historic spending and money-printing campaign, the two currencies parted. The U.S. dollar, which then bought C$1.28, is now worth just C$0.98.

The most notable difference between the two economies right now may be in the area of consumer confidence, a very important leading indicator. The Conference Board of Canada’s index shows a tiny two-point dip in May down to 85.6. The U.S. index plunged in the same period from 66 to 60.8. According to Yale economist Robert Shiller, a lack of confidence is at the root of current U.S. economic weakness. Including discouraged workers no longer seeking jobs, he put long-term U.S. unemployment at 15.9%; officially U.S. unemployment is 9% compared to 7.6% in Canada.

Another factor that must surely contribute to the high level of confidence is Canada’s booming housing sector, where real estate prices have steadily risen in all the years U.S. prices have declined. There was no subprime mortgage crisis in Canada, where sensible regulations precluded the aggressive lending shenanigans from which the U.S. is still struggling to recover. Indeed, Canadian housing prices are up 8% from last year and while Global Sticks has moved from China to Canada, a boomlet of wealthy Chinese buying homes in Vancouver has driven prices in that city up 21% from a year ago. In the U.S., home prices hit a new recession low, falling 5.1%; Minneapolis saw a 10% decline.

The U.S. and Canadian economies naturally travel in tandem. Their stock markets have both done well over the past few years, though Canadian stocks have outpaced their U.S. counterparts since the March 2009 market low — compare, for example, the iShares MSCI Canada Index (EWC) vs. the S&P 500; the commodities boom surely had something to do with that. But the differences that stand out and which give Canada its current advantage — particularly the indispensable consumer confidence that predicts and enables economic growth — is likely rooted in the greater stability Canada has recently enjoyed.

Canadians have not seen their most valuable asset plunge in value nor had so many of their close kin unemployed; their government finances have not been quite so out of control. Newly reelected Prime Minister Stephen Harper commands a large parliamentary majority that is behind spending restraint and deficit reduction, something the American people also favor but on which their political leaders display less consensus. Historically it has been the U.S. that has been first among equals in the North American partnership. For now it seems that it is Canada that is leading the way.