Friday, October 31, 2008

North American Woe: U.S., Canadian Economies Both Contract

Washington Post - In Tightfisted Turn, Economy Contracts
Bloomberg - Canada's Economy Shrank 0.3% in August on Wholesale

The economies in the United States and Canada have begun to shrink. In the third quarter ending September 30, the U.S. economy contracted by 0.3 percent, and in the month of August, the Canadian economy also shrank by 0.3 percent.

The shrinking economies confirm what many economists fear: that these countries are slipping into a recession. A recession is indicated by two straight quarters of negative GDP growth. Despite the bad news on the economy, stocks in the U.S. were up nearly 200 points on the day of the announcement of the economic figures, reflecting that many thought the figures on the economic contraction would be even worse. Such is the chaotic nature of the U.S. stock market in the past several months, where a several-hundred-point loss may be viewed with signs of relief.

The shrinking U.S. economy was led by a decline in consumer spending of 3.1 percent, the first decline in 17 years and the worst fall overall since 1980. In contrast to the U.S. economic turmoil after 9/11, where consumer spending was not greatly affected, this time around U.S. consumers have stopped buying. Previously free-flowing credit lines have dried up, and U.S. consumer credit will be the next casualty of the expanding economic crisis.

The U.S. economy would have shrank even more if not for the growth in exports over the last quarter. Exports grew at a 5.9 percent annual rate. However, even exports are likely to slow over the next few months as the U.S. dollar appreciates rapidly against many global currencies, making U.S. exports more expensive and less competitive.

In Canada, the economy shrank largely on declines in wholesaling and manufacturing, which fell 3.1 and 1.1 percent, respectively. Canada is also being hurt by the shrinking U.S. economy. Three-fourths of Canadian exports go to the U.S., where consumer demands have weakened. Canada has also been afflicted, like much of the world, by a falling currency value relative to the U.S. dollar and the Japanese yen.

1) What is the relation between the falls in the U.S. stock market and the overall growth rate of the economy (GDP growth)?
2) As the U.S., Canadian, and many European economies face downturns, which countries are in a position to benefit comparatively?

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