www.td.

com/economics

TD Economics
The Weekly Bottom Line
May 15, 2009

HIGHLIGHTS
REAL INCOME AND SPENDING CONVERGING*
• U.S.: April retail sales -0.4% m/m; CPI -0.7% y/y
2-qtr annualized % change
• Canada: March manufacturing shipments -2.7% m/m 15

• March trade: Canada surplus rises to $1.1bn; U.S. 12

deficit widens to $28bn 9

6
3
A funny thing happened on the way to the recovery. It
0
turns out the global economic mending process is more of
-3
a meandering creek than a beeline back to the top. This
-6
does not mean recovery is not happening, but the data cer- Recession
-9
tainly shows why it will take time. U.S. consumers are Real income
-12
moderating the pace at which they moderate their spend- Real spending
-15
ing, but they are still spending less. U.S. industrial produc- 1979 1983 1988 1992 1997 2001 2006
tion fell less than expected in April, but businesses con- *Q2 figure assumes flat growth for spending and income in May
tinue to produce less. Canadian new auto sales were un- and June; Source: Haver Analytics

expectedly strong in March, but manufacturing shipments

fell and were broadly weak.
Race to the bottom
Estimates for first-quarter GDP continue to roll in around
the world, and they are none too pretty. The Russian
economy shrank by 9.5% in the first three months of 2009,
nearly twice as bad as its worst quarter during the 1998
crisis (all numbers reported are unannualized). The Hong
Kong economy shrank by 4.4% in the first quarter and
nearly 8% over the last year. The Eurozone reported a
2.5% Q1 contraction, with Germany feeling the brunt with
a 3.8% decline. All of this makes the U.S. reported 1.6%
contraction look good by comparison. All told, the US,
French, UK, and Canadian economies (given our expecta-
tions for Canadian data to be released June 1st) have now
Recent TD Economics Research
May 15, 2009 - Cdn. Manuf. Shipments Commentary
May 14, 2009 - Canadian Resale Housing Commentary
May 13, 2009 - U.S Retail Sales Commentary
May 12, 2009 - Canadian International Trade Commentary
May 11, 2009 - Weekly Commodity Price Report
returned to their mid-2006 size. The German economy is
now as big as it was in late 2005, while Italy and Japan
(whose data will be released next week) have lost five
years of economic growth. Across the G-7, it’s as if the
last several years didn’t happen. If only that were the
case, but, if Star Trek can reboot and start anew, why not
the global economy?
Under the hood
A reboot is very different from a rewind. A rewind
insinuates you are going to do things the same way all over
again. A reboot is a fresh start, and while the cast may
stay the same, the path taken will almost certainly diverge.
Markets were hoping the U.S. consumer might be able to
eke out a flat reading for April, but U.S. consumers once
again pulled back on spending on a fairly broad basis. As
the chart on the first page shows, the collapse in U.S. re-
tail sales at the end of last year was fairly anomalous.
However, the current pace of consumer retrenchment is
about on par with the pace at which income is falling. While
job losses are likely to continue into 2010, they should mod-
erate. And real purchasing power will at that point start to
improve and drive renewed spending, with headline infla-

The Weekly Bottom Line 1 May 15, 2009


tion in the U.S. already running at -0.7% y/y and likely to
ease further. In this reboot, however, consumers seem to
be turning their attention to paying down debts and rebuild-
ing their savings. Neither can be criticized, but imply less
momentum in spending.
Trading blows
Not only is the pace of U.S. consumer spending likely
be weaker than the past, but it is likely to be less import-
dependent, as well. This is crucial for the global rebalancing
underway. Rewinding several years, the public debate
centered on the massive U.S. current account deficit that
sat at 6.5% of GDP at the end of 2005. With U.S. con-
sumers pulling back, the U.S. trade deficit has been cut in
half in only six months. As a result – and in spite of the
contraction in the overall economy – the U.S. current ac-
count deficit was likely just 2.4% in the first quarter of
2009. In comparison, the current account deficit of the
Euro region was 1.5% in the fourth quarter of 2008, while
Canada swung to a deficit of 1.9%. This global reboot is
therefore starting with an implosion of global imbalances.
It’s somewhat ironic that many feared it would take a
massive depreciation of the U.S. dollar for this to take place.
Instead, in came in spite of a strengthening dollar, but at
the expense of consumers.
But few around the world have been spared the
rebalancing pain. Canadian exports generally stabilized –
or at least stopped their free fall – in February or March,
but remain 19% lower than last year. Eurozone, Hong
Kong, Singapore, and Chinese exports are also down by
20-25%. And so far, this rebalancing has also been re-
flected in overall economic performance – those econo-
U.S. NONPETROLEUM IMPORTS
25
3-month % change
20
China
15
10
5 5
0 0
-5
-10
-15
Non-China
-20
-25
97.Nov 99.Nov 01.Nov 03.Nov 05.Nov 07.Nov
Source: Census, Haver, and seasonal adjustment of Chinese
data by TD Economics
The Weekly Bottom Line
www.td.com/economics
AVERAGE U.S. BOND YIELDS
Yield
25 25
LIBOR (1 week)
20 High Stress: High-yield corporate, BBB 20
financial, and ABS HELOC
Medium Stress: BBB corporate and ABS
15 Auto/Credit Card 15
Low Stress: AAA financial and corporates
10 10
5 5
0 0
Aug.97 Apr.99 Dec.00 Aug.02 Apr.04 Jan.06 Sep.07 May.09
Source: Merrill Lynch and Haver Analytics; Last update: 5/11/09
mies which had leveraged the most from global imbalances
in the recent past are seeing some of the most rebalancing.
Russian exports fell 48% in the first quarter over last year,
and they saw one of the worst GDP prints, as well. Ger-
man manufacturers had become export machines, driven
by machinery and equipment investment especially in Asia,
and the German economy is now one of the worst per-
forming in the Eurozone.
Perhaps the one oddity is China. The economy there
has continued to grow despite being at the center of the
global imbalance debate. However, looking at the details
of the U.S.-China trade data, U.S. nonpetroleum imports from
China have recovered sooner and sharper than U.S.
nonpetroleum imports from the rest of the world. While much
has been made of the success of the Chinese stimulus plan,
perhaps it is the old driver of Chinese growth – U.S. imports
of Chinese goods – which has played an important role in the
Chinese economic exceptionalism seen so far this year.
25
The undiscovered country
20 So, looking backwards, the data were atrocious. This
15 is no surprise. Looking ahead, however, we have seen the
10 stress in some of the most impaired corners of the credit
and financial markets show significant progress. The cost
of credit is still very high in many corners, though, and this
-5 will continue to limit the speed at which corporations and
-10 households can reboot. We have seen inventories in many
-15
industries worked off, but spare capacity is large and grow-
-20
ing, so rebooting production will take time. But, with the
-25
help of hindsight, our reboot should eventually prove a step
forward. Richard Kelly, Senior Economist
416-982-2559
2 May 15, 2009
 www.td.com/economics

UPCOMING KEY ECONOMIC RELEASES

U.S. Housing Starts - April U.S. HOUSING STARTS
Release Date: May 19/09
Thousands of units*
March Result: 510K 1,200

TD Forecast: 530K 1,100

Consensus: 520K
1,000

U.S. housing starts have fallen at a double-digit pace in 900

5 of the last 6 months, and after plunging a staggering 78% 800

from its peak of early 2006, there is a sense that new resi-
700
dential construction may be stabilising. Indeed, with the
NAHB housing market index appearing to have gotten some 600

upward momentum, and the level of permits approved al- 500

most equivalent to the actual level of starts, it appears that
400
the correction in the new homes market may be abating. Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09
As such, our call is for new residential construction to rise
*Seasonally adjusted at annual rates; Source: U.S. Census
by a modest 20K units to 530K in April. The increase is B
likely to be on account of a bounce-back in the volatile
multi-units component, which declined by 29.0% M/M the
month before, while single-family construction should re-
main relatively unchanged.
Millan Mulraine 416-308-2911

Canadian CPI - April CANADIAN CONSUMER PRICE INDEX (CPI)

Release Date: May 20/09 Y/Y % change Y/Y % change
4.0 4.0
March Result: core 0.3% M/M, 2.0% Y/Y; all-items 0.2%
M/M, 1.2% Y/Y 3.5 3.5
CPI: All Items
TD Forecast: core 0.0% M/M, 1.7% Y/Y; all-items 0.3% 3.0 3.0
M/M, 0.7% Y/Y
2.5 2.5
Consensus: core 0.1% M/M, 1.8% Y/Y; all-items 0.2%
M/M, 0.6% Y/Y 2.0 2.0

1.5 1.5
Despite the ongoing economic recession, Canadian
consumer price inflation has remained stubbornly high, as 1.0 1.0

rising food prices have keep the headline inflation number 0.5 Bank of Canada Core CPI ex. 8 most volatile 0.5
above the 1.0% Y/Y level. Core consumer inflation has items & indirect taxes
0.0 0.0
also been high, hovering around the 2.0% Y/Y for a number Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09
of months. The resistance, however, should come to an Source: Statistics Canada/Haver Analytics
end in April. During the month we expect Canadian head-
line CPI to rise by a further 0.3% M/M (but down 0.1% seasonally-adjusted basis), with the annual core inflation
M/M on a seasonally-adjusted basis) on account of higher rate falling to 1.7% Y/Y from 2.0% Y/Y. In the coming
gas and food prices. However, due to base effects, the months, with the domestic economy likely to remain very
annual pace of consumer price inflation should ease to weak, we expect consumer price inflation to soften even
0.7% Y/Y, from 1.2% Y/Y the month before. The Bank further.
of Canada’s core consumer price index, however, is ex-
pected to be flat on the month (though up 0.1% M/M on a Millan Mulraine 416-308-2911

The Weekly Bottom Line 3 May 15, 2009

 www.td.com/economics

Canadian Wholesale Sales - March CANADIAN WHOLESALE SALES*

Release Date: May 21/09
February Result: -0.6% M/M M/M % change
3 3
TD Forecast: -1.0% M/M
2 2
Consensus: -0.8% M/M
1 1
The poor domestic economic fundamentals and weak
0 0
global appetite for Canadian export products have resulted
in 5 consecutive monthly drops in wholesales sale, and -1 -1
with the outlook for both factors remaining well intact, -2 -2
Total
we expect this weakness in wholesales sales to stretch
-3 -3
into a sixth straight month. Indeed, with domestic manu- Ex. Motor
Vehicles
facturing shipments falling by a sizeable 2.7% M/M, and -4 -4

exports declining by an equally disappointing 1.8% M/M, -5 -5

we expect wholesale sales to drop by a sizeable 1.0% M/ Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09
*Seasonally Adjusted data; Source: Statistics Canada/Haver Analytics
M. The weakness is expected to be broadly-based, with
slower sales of motor vehicles and machinery and equip-
ment expected to be the main contributor to the soft head-
line number. Real wholesale activity should also decline
on the month. In the coming months we expect whole-
sale sales to remain soft as the weak Canadian economy
and ongoing global economic recession push sales lower.

Millan Mulraine 416-308-2911

Canadian Retail Sales - March

Release Date: May 22/09
February Result: total 0.2% M/M; ex-autos 0.6% M/M
TD Forecast: total 1.0% M/M; ex-autos 0.3% M/M
Consensus: total 0.5% M/M; ex-autos -0.1% M/M
CANADIAN RETAIL SALES*
M/M % change
3 3
2 2

After falling in 4 of the last 6 months of 2008, Cana-
dian retail sales moved back into positive territory this year
as shoppers took advantage of the aggressive discounts
1 1
0 0
-1 -1

offered by retailers after the dismal Christmas shopping -2 -2

season. And despite the dismal economy and poor labour -3 -3
market conditions, there are indications that the positive Total
-4 -4
Ex. Motor Vehicles
tone in Canadian consumer spending may continue into
-5 -5
March. In fact, with existing home sales rising by a brisk
7.7% M/M and new motor vehicle sales advancing by -6 -6
Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09
6.3% M/M during the month, we expect retail sales to *Seasonally Adjusted data; Source: Statistics Canada/Haver Analytics
rise by a respectable 1.0% M/M in March. Higher gaso-
line prices should also contribute favourably to the head-
line numbers. Excluding autos, sales are expected to rise main subdued, as Canadian consumers economise on their
by a more modest 0.3% M/M, while real retail sales should spending in the face of the very difficult economic envi-
also be up. Looking ahead, we expect retail sales to re- ronment.
Millan Mulraine 416-308-2911

The Weekly Bottom Line 4 May 15, 2009

 www.td.com/economics

RECENT KEY ECONOMIC INDICATORS

May 11 - May 15, 2009
Release Data for
Economic Indicators Units Current Prior
Date Period
Canada
May 11 New Housing Price Index Mar. M/M % chg. -0.5 -0.7
May 12 International Merchandise Trade Mar. $C, blns 1.1 0.3 R
May 13 New Motor Vehicles Sales Mar. M/M % chg. 6.3 -2.4 R
May 15 Manufacturing Shipments Mar. M/M % chg. -2.7 2.2
United States
May 12 Trade Balance Mar. US$, blns -27.6 -26.1 R
May 13 Import Price Index Apr. Y/Y % chg. -16.3 -15.3 R
May 13 Advance Retail Sales Apr. M/M % chg. -0.4 -1.3 R
May 13 Retail Sales Less Auto Apr. M/M % chg. -0.5 -1.2 R
May 13 Business Inventories Mar. M/M % chg. -1.0 -1.4 R
May 14 Producer Price Index (PPI) Apr. % change 0.3 -1.2
May 14 PPI excl. food and energy Apr. % change 0.1 0.0
May 14 Initial Jobless Claims 9-May. Thousands 637 605 R
May 15 CPI Apr. Y/Y % chg. -0.7 -0.4
May 15 CPI ex. Food and Energy Apr. Y/Y % chg. 1.9 1.8
May 15 Empire Manufacturing May % change -4.6 -14.7
May 15 Industrial Production Apr. % change -0.5 -1.7 R
May 15 U. of Michigan Confidence May Index 67.9 65.1
Source: Bloomberg, TD Economics

UPCOMING NORTH AMERICAN ECONOMIC CALENDAR

May 18-22, 2009
Release Data for Consensus
Economic Indicators Units Prior
Date Period Forecast
Canada
May 19 Bank of Canada Deputy Governor Murray speaks on unconventional monetary policy in Philadelphia
May 20 Consumer Price Index Apr. Y/Y % chg. 0.6 1.2
May 20 Core Consumer Price Index Apr. Y/Y % chg. 1.8 2.0
May 20 Leading Indicators Apr. M/M % chg. -- -1.3
May 21 International Securities Transactions Mar. $C, blns -- 6.107
May 21 Wholesale Sales Mar. M/M % chg. -0.8 -0.6
May 22 Retail Sales Mar. M/M % chg. 0.5 0.2
May 22 Retail Sales Less Autos Mar. M/M % chg. -0.1 0.6
United States
May 18 U.S. Treasury Secretary Geithner to speak at Newsweek Magazine Event
May 18 NAHB Housing Market Index May Index 16 14
May 19 Housing Starts Apr. Thousands 520 510
May 19 Building Permits Apr. Thousands 530 516
May 19 Minneapolis Fed President Stern speaks in Willmar, Minnesota
May 19 ABC Consumer Confidence 17-May Index -42 -42
May 20 U.S. Treasury Secretary Geithner speaks at Senate Hearing on TARP
May 20 FOMC April 28-29 Meeting Minutes Released
May 21 Initial Jobless Claims 16-May. Thousands 625 637
May 21 Leading Indicators Apr. M/M % chg. 0.7 -0.3
May 21 Philadelphia Fed Index May Index -19.0 -24.4
May 21 Philadelphia Fed President Plosser speaks on economic outlook in New York
May 22 Federal Reserve Chairman Bernanke speaks at Boston College
Source: Bloomberg, TD Economics

The Weekly Bottom Line 5 May 15, 2009

 www.td.com/economics

G-7 ECONOMIC RELEASES AND EVENTS

Data for Consensus
Date Time* Country Economic Indicator/Event Units Last Period
Period Forecast

May 18 5:00 E.C. Trade Balance Mar. Eur, blns -3.8 -4.0
11:30 U.S. U.S. Treasury Secretary Geithner to speak at Newsweek Magazine Event
13:00 U.S. NAHB Housing Market Index May Index 16 14
18:10 AU RBA Governer Stevens speaks in Sydney
21:30 AU Reserve Bank of Australia publishes May board minutes
22:30 AU Australia Treasury Secretary Henry speaks on economy

May 19 4:30 U.K. Consumer Price Index Apr. Y/Y % chg. 2.4 2.9
4:30 U.K. Core Consumer Price Index Apr. Y/Y % chg. 1.6 1.7
4:30 U.K. Retail Price Index Apr. Y/Y % chg. -1.1 -0.4
5:00 Germany ZEW Survey - Economic Sentiment May Index 20.0 13.0
5:00 Germany ZEW Survey - Current Situation May Index -90.0 -91.6
5:00 E.C. ZEW Survey - Economic Sentiment May Index -- 11.8
8:30 U.S. Housing Starts Apr. Thousands 520 510
8:30 U.S. Building Permits Apr. Thousands 530 516
12:00 Canada Bank of Canada Deputy Governor Murray speaks on unconventional monetary policy in Philadelphia
13:15 U.S. Minneapolis Fed President Stern speaks in Willmar, Minnesota
17:00 U.S. ABC Consumer Confidence 17-May Index -42 -42
19:50 Japan GDP (annualized) Q1-09 Q/Q % chg. -15.9 -12.1
19:50 Japan GDP Deflator Q1-09 Y/Y % chg. 1.8 0.7

May 20 3:00 Germany Producer Prices Apr. Y/Y % chg. -1.3 -0.5
4:30 U.K. Bank of England Minutes
7:00 Canada Consumer Price Index Apr. Y/Y % chg. 0.6 1.2
7:00 Canada Core Consumer Price Index Apr. Y/Y % chg. 1.8 2.0
8:30 Canada Leading Indicators Apr. M/M % chg. -- -1.3
9:30 U.S. U.S. Treasury Secretary Geithner speaks at Senate Hearing on TARP
14:00 U.S. FOMC April 28-29 Meeting Minutes Released
19:50 Japan Tertiary Industry Index Mar. % change -1.5 -0.8
21:30 AU New Motor Vehicle Sales Apr. Y/Y % chg. -- -22.6

May 21 0:00 Japan Bank of Japan Monetary Policy Meeting

3:00 France Purchasing Managers Index (Manufacturing) May Index 41.0 40.1
3:00 France Purchasing Managers Index (Services) May Index 46.8 46.5
3:30 Germany Purchasing Managers Index (Manufacturing) May Index 37.0 35.4
3:30 Germany Purchasing Managers Index (Services) May Index 44.2 43.8
4:00 E.C. Purchasing Managers Index (Manufacturing) May Index 38.5 36.7
4:00 E.C. Purchasing Managers Index (Services) May Index 44.4 43.8
4:00 E.C. Purchasing Managers Index (Composite) May Index 42.3 41.1
4:30 U.K. Retail Sales Apr. Y/Y % chg. 2.5 1.5
4:30 U.K. M4 Money Supply Apr. Y/Y % chg. -- 17.8
8:30 Canada International Securities Transactions Mar. $C, blns -- 6.107
8:30 Canada Wholesale Sales Mar. M/M % chg. -0.8 -0.6
8:30 U.S. Initial Jobless Claims 16-May. Thousands 625 637
10:00 U.S. Leading Indicators Apr. M/M % chg. 0.7 -0.3
10:00 U.S. Philadelphia Fed Index May Index -19.0 -24.4
19:00 U.S. Philadelphia Fed President Plosser speaks on economic outlook in New York

May 22 -- Japan Bank of Japan Target Rate 22-May Overnight rate 0.10 0.10
4:30 U.K. GDP Q1-09 Q/Q % chg. -1.9 -1.9
8:30 Canada Retail Sales Mar. M/M % chg. 0.5 0.2
8:30 Canada Retail Sales Less Autos Mar. M/M % chg. -0.1 0.6
14:00 U.S. Federal Reserve Chairman Bernanke speaks at Boston College
* Eastern Standard Time; Sources: Bloomberg, TD Economics

This report is provided by TD Economics for customers of TD Bank Financial Group. It is for information purposes only and may not
be appropriate for other purposes. The report does not provide material information about the business and affairs of TD Bank
Financial Group and the members of TD Economics are not spokespersons for TD Bank Financial Group with respect to its
business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not
guaranteed to be accurate or complete. The report contains economic analysis and views, including about future economic and
financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and
uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that
comprise TD Bank Financial Group are not liable for any errors or omissions in the information, analysis or views contained in this
report, or for any loss or damage suffered.

The Weekly Bottom Line 6 May 15, 2009