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TD Economics
The Weekly Bottom Line
February 20, 2009

HIGHLIGHTS
• Inflation continues to decelerate in the U.S. and AMERICAN RECOVERY AND REINVESTMENT ACT*

Canada US$ Billions

450
• Details continue to emerge in U.S. recovery plans 400 Tax cuts
$349bn
While the Best Picture award will be decided this week- 350 Spending
300
end, for financial markets and the global economy, the $235bn
250 $186bn
concern remains around the Big Picture. The data this
200
week for the U.S. and Canada, and globally for that mat- 150
ter, was generally downbeat. The pace of U.S. housing 100
starts reached a new post-war low in January, and early 50
$17bn

manufacturing indicators are pointing toward a lower read- 0

ing for the February ISM report. Canadian wholesale sales
in December fell the most since the August 2003 black-
out, while the 8% m/m decline in manufacturing shipments
was the largest decline on record. But, we already knew
the pace of economic activity in North America was abys-
mal at the end of 2008 and the kickoff to 2009. That’s one
of the reasons CPI data for January showed ongoing
decelerations in the rate of headline and core inflation in
both the U.S. and Canada. The big picture still revolves
around U.S. plans to recapitalize the banking sector, pro-
vide economic stimulus through tax cuts and government
spending, and forestall mortgage foreclosures. The ex-
tent to which these programs are successful will deter-
mine the extent to which U.S. consumers start spending
and U.S. housing reaches a bottom and begins a sustain-
able recovery. And ultimately, no amount of government
Recent TD Economics Research
February 20, 2009 - Global Synchronicity
February 20, 2009 - U.S. CPI
February 20, 2009 - Canadian CPI
February 19, 2009 - A Primer on Fiscal Stimulus
February 18, 2009 - The 2009 British Columbia Budget
February 18, 2009 - U.S. Housing Starts
February 18, 2009 - Canadian Wholesale Sales
February 17, 2009 - Canadian Manufacturing Shipments
-50
Stimulative in Stimulative in Status quo in Status quo in
FY09/10 FY11/19 FY09/10 FY11/19
*$787 billion dollar stimulus plan; Source: CBO and calculations by
TD Economics
spending in Canada will replace the stimulative impact of
a reinvigorated U.S. economy.
The Hottie and the Nottie
Unfortunately, the U.S. stimulus programs announced
to date seem more likely to be candidates for a Razzie
than an Oscar. We do expect the fiscal stimulus measures
announced to date will have a positive impact on economic
growth in the United States. But if the banking sector is
not put back into order first, all this spending will be for
naught. If you give a man a dollar, he spends it today. But
if he can’t get a job or a loan, his spending will go away.
(and the award for Worst Attempt at Poetry in an Eco-
nomic Publication goes to…)
The banking sector plans announced by the Treasury
are not bad, just short of details beyond the vague 3-step
outline provided. First, they will determine which banks
are illiquid but still solvent and which are both illiquid and
insolvent. Many in the latter category will likely need major
restructurings or bankruptcy, while the former can be helped
through targeted capital injections. That brings the Treas-
ury’s second part of the plan to try and use federal money
as a teaser to bring in much more private sector financing.

The Weekly Bottom Line 1 February 20, 2009


And this is crucial. Because without a substantial new
appropriation from Congress, the Treasury is trying to fill a
hole in the aggregate balance sheet of U.S. banks that is
estimated at over $2 trillion with just $350 billion in remain-
ing TARP money. But in the meanwhile, credit is needed
to help finance new car purchases, student loans, mort-
gages, etc. This is why the current TALF program, in
which government loans directly finance securitized prod-
ucts in these areas, was broadened. Credit needs to flow
to these sectors now, and at least on the auto and credit
card side, this effort has seemed to improve the spreads
on these products.
Slumdog Thousandaire
No one is going to become a millionaire from the U.S.
stimulus spending, but it will help. Nevertheless, there are
still legitimate questions over the extent and timing of the
stimulus spending signed into law this week by President
Obama. While our expectations can be found in the TD
Economics Special Report A Primer on Fiscal Stimulus
( h t t p : / / w w w. t d . c o m / e c o n o m i c s / s p e c i a l /
jm0209_stimulus.pdf), the big picture is this. The $787
billion dollar plan portends to spend $584 billion between
the current fiscal year and the next, with about $245 billion
in tax cuts and $339 billion in spending. However, included
in those tax cuts are $85 billion in extension of the AMT
(Alternative Minimum Tax) credit, something which Con-
gress has provided every year. The AMT fix is not stimu-
lus for the economy, but simply prevents more of a drag.
Likewise on the spending side, there is about $150 billion
of funding which either allow states to retain jobs or pro-
grams they already have in place or allow those already
collecting unemployment or low-income medical benefits
from reaching the proscribed time limit for receiving this
assistance. All told, this means about 40% of both the tax
cuts and spending provisions for the first two years are not
new stimulus, but simply maintain the status quo.
The infrastructure spending will still be a significant
positive boost for the economy, but most of this will come
in 2010 and beyond. The tax cuts will still help, but a large
percent of these will be saved, and much will not reach
taxpayers until the end of this year and early into 2010.
This is one reason we expect the stimulus to raise 2009
GDP growth by only 0.6 percentage points in 2009 but by
1.5 percentage points in 2010. However, the world of fis-
cal stimulus can be a tangled web. Take the new homebuyer
tax credit, for example. Anyone who buys a home this
year, who has not owned a home in the last three years,
will receive an $8000 tax credit from the government.
The Weekly Bottom Line
www.td.com/economics
Several important questions when looking at this are what
is the cost to the government, and will it help the housing
market. On the cost, while the federal government will
pay the $8,000 credit, each home bought will provide addi-
tional revenue to the states in the form of property taxes.
The average national property tax in the U.S. is 1.1%, and
the average home price is $200,000, so each government
credit of $8,000 will on average bring in $2,200 in revenue
for the state. Moreover, each one percentage point de-
cline in U.S. home prices leads to a $2.5 billion loss in
property tax revenues nationally (based on the existing U.S.
housing stock). So any influence on moderating the de-
cline in home prices will mean less lost revenue for the
states. But, some of these homes would have been sold
anyway, so the tax credit in these cases is free money for
the home buyer.
The Curious Case of Mortgage Foreclosures
The most important point to keep in mind when it comes
to the U.S. housing market is that income and interest rates
are still important drivers in the decision to buy a home.
U.S. mortgage rates are now at an all-time low, but some
of this stimulus will be offset by the hit to incomes from
lost jobs, slower wage growth, and more conservative buy-
ing habits. While the above homebuyer tax credit can help
mitigate some of those short-term income concerns for a
potential homebuyer, the big detractor in the housing mar-
ket remains the large and increasing inventories of vacant
and foreclosed homes that are driving down prices. Tax
credits will not make the monthly payments of mortgages
that have reset any cheaper. Nor, can the credits augment
household income forever. Government money to help
lower the principal or extend the term of otherwise
unaffordable mortgages will help to reduce the pressure
on home prices feeding back into the banking sector prob-
lems and lack of credit getting to businesses and consum-
ers. And like the homebuyer tax credit, there will be leak-
ages, as some mortgages will be renegotiated which would
have otherwise still been paid, or will nevertheless still go
into foreclosure. But, leakage is a two-way street since in
those cases, you have more disposable income that can go
to spending in the economy. Ultimately, job and income
losses in recessions lead to rising foreclosures. In the cur-
rent environment of banking sector fragility, to ignore this
area of stress would be to invite more problems for U.S.
banks and households. And that would certainly not be an
Oscar-worthy performance.
Richard Kelly, Senior Economist 416-982-2559
2 February 20, 2009
 www.td.com/economics

UPCOMING KEY ECONOMIC RELEASES

Canadian Retail Sales - December CANADIAN RETAIL SALES*
Release Date: February 23/09 M/M % change
November Result: total -2.4%% M/M; 3 3

ex-autos -2.3% M/M

2 2
TD Forecast: total -3.0% M/M; ex-autos -2.5% M/M
Consensus: total -2.7% M/M; ex-autos -2.0% M/M 1 1

The wheels have clearly fallen off the Canadian retail

0 0
trade sector as consumers tightened the grip on their pock-
etbooks in recent months, in the face of the worse global -1 -1
financial and economic crises since the Great Depres-
sion. Indeed, with the Canadian labour market turning belly- -2 -2
Total
up in December and the economy appearing to have en-
Ex. Motor Vehicles
tered a rather deep recession in the last few months of -3 -3
Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08
2008, it is no wonder why Canadian consumers are being
*Seasonally Adjusted data; Source: Statistics Canada/Haver Analytics
increasingly cautious with their spending. For December,
our call is for retail sales to fall by a further 3.0% M/M, mean that the volume of sales will likely fall by less. In the
following the 2.4% M/M drop the month before. Much of months ahead, we expect retail sales to remain fairly soft,
the decline will come from slumping auto sales and lower as Canadian consumers ease spending even further, though
gasoline prices, while sales excluding autos are expected January may provide a brief positive interlude based on
to fall by an equally disappointing 2.5% M/M. Real retail available data.
sales, however, are likely to perform slightly better as the Millan Mulraine 416-308-2911
aggressive discounting by retailers during the month should

U.S. Durable Goods Orders – January U.S. DURABLE GOODS ORDERS*

Release Date: February 26/09 % change
November Result: total -3.0% M/M; 5

ex-transportation -3.9% M/M 3

TD Forecast: total -2.5% M/M;
1
ex-transportation -2.0% M/M
Consensus: total -2.3% M/M; -1
ex-transportation -2.0% M/M -3

With the U.S. economy well into what is expected to -5

be its longest lasting and most intense economic recession
-7
since the Great Depression, the continued retrenchment
in capital expenditures by U.S. businesses in not entirely -9
Dec-07 Mar-08 Jun-08 Sep-08 Dec-08
surprising. Indeed, new durable goods orders have declined
in every month since August, and there is every indication *New orders for durable goods industries, Seasonally adjusted;
Source: U.S. Census Bureau
that this trend will continue for more months to come as
businesses scale back on big-ticket purchase in the face cline should be a more modest 2.0% M/M. In the coming
of softening consumer demand. For January, we expect months, we expect new orders to decline even further as
the unprecedented decline in durable goods orders to con- the impact of the continuing U.S. economic recession gains
tinue for the sixth consecutive month, with a further 2.5% traction.
M/M drop. Excluding transportation equipment, the de- Millan Mulraine 416-308-2911

The Weekly Bottom Line 3 February 20, 2009

 www.td.com/economics

RECENT KEY ECONOMIC INDICATORS

February 16 - February 20, 2009
Release Data for
Economic Indicators Units Current Prior
Date Period
Canada
Feb. 16 Manufacturing Shipments Dec. M/M % chg. -8.0 6.4 R
Feb. 16 International Securities Transactions Dec. $C, blns -2.835 -4.300 R
Feb. 18 Wholesale Sales Dec. M/M % chg. -3.4 -1.6 R
Feb. 19 Leading Indicators Jan. M/M % chg. -0.8 -0.6 R
Feb. 20 CPI Jan. Y/Y % chg. 1.1 1.2
Feb. 20 Bank of Canada Core CPI Jan. Y/Y % chg. 1.9 2.4
United States
Feb. 17 Empire Manufacturing Index Feb. Index -34.7 -22.2
Feb. 17 TIC Flows Dec. US$, blns 74.0 61.3
Feb. 17 NAHB Housing Market Feb. Index 9 8 R
Feb. 17 ABC Consumer Confidence 15 Feb. Index -49 -53
Feb. 18 MBA Mortgage Applications 13 Feb. % change 45.7 -24.5
Feb. 18 Import Price Index Jan. Y/Y % chg. -12.5 -10.3 R
Feb. 18 Housing Starts Jan. Thousands 466 550 R
Feb. 18 Industrial Production Jan. Y/Y % chg. -1.8 -2.4 R
Feb. 18 Capacity Utilization Jan. Percent 72 73 R
Feb. 19 Producer Price Index Jan. Y/Y % chg. 0.8 -1.9
Feb. 19 Producer Price Index excluding Food and Energy Jan. Y/Y % chg. 4.2 4.3
Feb. 19 Initial Jobless Claims 14 Feb. Thousands 627 627 R
Feb. 19 Continuing Claims 7 Feb. Thousands 4987 4817 R
Feb. 19 Leading Indicators Jan. % change 0.4 0.2
Feb. 19 Philadelphia Fed Index Jan. Index -41.3 -24.3
Feb. 20 CPI Jan. Y/Y % chg. 0.0 0.1
Feb. 20 CPI ex. Food and Energy Jan. Y/Y % chg. 1.7 1.7
Source: Bloomberg, TD Economics

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 www.td.com/economics

UPCOMING NORTH AMERICAN ECONOMIC CALENDAR

February 23 - February 27, 2009
Release Data for Consensus
Economic Indicators Units Prior
Date Period Forecast
Canada
Feb. 23 Retail Sales Dec. M/M % chg. -2.4 -2.4
Feb. 23 Retail Sales Less Autos Dec. M/M % chg. -1.5 -2.3
Feb. 23 BoC Senior Deputy Governor Jenkins speaks in Toronto
Feb. 27 Current Account Balance (SA) Q4 $C, blns -6.0 5.6
Feb. 27 Industrial Product Price Jan. M/M % chg. -0.3 --
Feb. 27 Raw Materials Price Index Jan. M/M % chg. 0.4 --
United States
Feb. 23 Atlanta Fed President Lockhart speaks on economy in Orlando
Feb. 23 Dallas Fed President Fisher speaks at Harvard on Financial Crisis
Feb. 24 Fed Chairman Bernanke testifies before Senate
Feb. 24 Dallas Fed President Fisher speaks in Rhode Island on financial crisis
Feb. 24 ABC Consumer Confidence 22 Feb. Index -- -49
Feb. 25 MBA Mortgage Applications 20 Feb. % change -- 45.7
Feb. 25 Fed Chairman Bernanke gives monetary policy report before House panel
Feb. 25 Existing Home Sales Jan. M/M % chg.
Feb. 27 GDP (prelim) Q4 Annual rate -5.4 -3.8
Feb. 27 Personal Consumption Q4 Q/Q % chg. -- -3.5
Feb. 27 GDP Price Index Q4 Q/Q % chg. -0.1 -0.1
Feb. 27 GDP Core Price Index Q4 Q/Q % chg. 0.6 0.6
Feb. 27 Chicago Purchasing Managers Feb. Index 33.3 33.3
Feb. 27 University of Michigan Confidence Feb. Index 56.2 56.2
Source: Bloomberg, TD Economics

The Weekly Bottom Line 5 February 20, 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

Feb. 23 8:30 Canada Retail Sales Dec. M/M % chg. -2.7 -2.4
8:30 Canada Retail Sales Less Autos Dec. M/M % chg. -2.0 -2.3
8:30 Canada BoC Senior Deputy Governor Jenkins speaks in Toronto
12:40 U.S. Atlanta Fed President Lockhart speaks on economy in Orlando
18:00 U.S. Dallas Fed President Fisher speaks at Harvard on Financial Crisis
18:50 Japan Bank of Japan meeting minutes January

Feb. 24 2:45 France Consumer Confidence Indicator Feb. Index -42.0 -41.0
4:00 Germany IFO Business Climate Survey Feb. Index 83.0 83.0
4:00 Germany IFO Survey - Current Assessment Feb. Index 84.9 86.8
4:00 Germany IFO Survey - Business Expectations Feb. Index 81.1 79.4
4:00 E.C. Euro-zone Current Account SA Dec. Eur, blns -- -16.0
4:30 U.K. Total Business Investment (prelim.) Q4 Y/Y % chg. -5.5 -0.1
5:00 E.C. Industrial New Orders Dec. Y/Y % chg. -21.7 -26.2
9:00 U.S. S&P/CaseShiller Home Price Dec. Index -- 154.6
10:00 U.S. Fed Chairman Bernanke testifies before Senate
10:00 U.S. Consumer Confidence Feb. Index 36.0 38
10:00 U.S. House Price Dec. M/M % chg. -- -1.8
11:30 U.S. Dallas Fed President Fisher speaks in Rhode Island on financial crisis
17:00 U.S. ABC Consumer Confidence 22 Feb. Index -- -49
18:50 Japan Merchandise Trade Balance Total Jan. ¥, blns -1179.5 320.7

Feb. 25 2:00 Germany GDP Q4 Y/Y % chg. -1.6 -1.6

2:00 Germany Imports Q4 Q/Q % chg. -1.4 3.8
2:00 Germany Exports Q4 Q/Q % chg. -5.4 -0.4
4:30 U.K. GDP Q4 Y/Y % chg. -1.9 -1.8
4:30 U.K. Imports Q4 Q/Q % chg. -3.7 1.0
4:30 U.K. Exports Q4 Q/Q % chg. -4.9 0.3
7:00 U.S. MBA Mortgage Applications 20 Feb. % change -- 46
10:00 U.S. Fed Chairman Bernanke gives monetary policy report before House panel
10:00 U.S. Existing Home Sales Jan. M/M % chg. 1.4 6.5

Feb. 26 3:55 Germany Unemployment Change Feb. Thousands 60.0 56.0

3:55 Germany Unemployment Rate Feb. Percent 7.9 7.8
4:00 E.C. M3 Money Supply Growth Feb. Y/Y % chg. 6.9 7.3
5:00 E.C. Business Climate Indicator Feb. Index -3.20 -3.16
5:00 E.C. Consumer Confidence Feb. Index -31 -31
8:30 U.S. Durable Orders Jan. M/M % chg. -2.5 -2.6
8:30 U.S. Durable Orders ex. Transportation Jan. M/M % chg. -2.1 -3.6
8:30 U.S. Initial Jobless Claims 21 Feb. Thousands 630.0 627
8:30 U.S. Continuing Claims 14 Feb. Thousands 4981.0 4987
10:00 U.S. New Home Sales Jan. M/M % chg. -1.8 -14.7
18:30 Japan Jobless Rate Jan. Percent 4.6 4.4
18:30 Japan Consumer Price Index Jan. Y/Y % chg. 0.0 0.4
18:30 Japan Industrial Production Jan. Y/Y % chg. -30.7 -20.8

Feb. 27 5:00 E.C. CPI Jan. Y/Y % chg. 1.1 1.6

5:00 E.C. Core CPI Jan. Y/Y % chg. 1.8 1.8
5:00 E.C. Unemployment rate Jan. Percent 8.1 8.0
8:30 Canada Current Account Balance (SA) Q4 $C, blns -6.0 5.6
8:30 Canada Industrial Product Price Jan. M/M % chg. -0.3 --
8:30 Canada Raw Materials Price Index Jan. M/M % chg. 0.4 --
8:30 U.S. GDP (prelim) Q4 Annual rate -5.4 -3.8
8:30 U.S. Personal Consumption Q4 Q/Q % chg. -- -3.5
8:30 U.S. GDP Price Index Q4 Q/Q % chg. -0.1 -0.1
8:30 U.S. GDP Core Price Index Q4 Q/Q % chg. 0.6 0.6
9:45 U.S. Chicago Purchasing Managers Feb. Index 33.3 33.3
10:00 U.S. University of Michigan Confidence Feb. Index 56.2 56.2
* Eastern Standard Time; Sources: Bloomberg, TD Economics

The Weekly Bottom Line 6 February 20, 2009

 www.td.com/economics

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The Weekly Bottom Line 7 February 20, 2009