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Despite European ills, North American economy shows bright spots

A shopper carries purchases while shopping at Dolphin Mall in Miami.

Lynne Sladky/AP

The economic turmoil in Europe is nasty but, so far, the North American economy is weathering the storm.

American consumers splurged in October, driving retail sales 0.5 per cent higher on the month, a better result than many Wall Street analysts were expecting.

New data released Tuesday also showed that manufacturing in the New York region is growing for the first time in six months, perhaps boosted by lower input costs, which declined 0.3 per cent in October amid falling gasoline prices.

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But the jump in factory production in New York pales next to gains in Canada, where factory sales rose 2.6 per cent in September, a better-than-expected result that caused some economists to boost their forecasts for third-quarter economic growth.

Another report said sales of previously owned Canadian homes increased 1.3 per cent in October, signalling a steady current of consumer demand that should at least partially offset weaker export sales to Europe, which sits on the verge of a recession.

The latest string of economic indicators supports a growing feeling of cautious optimism that the North American economy will push through the headwinds caused by the European debt crisis, provided the situation doesn't worsen significantly.

James Bullard, the head of the Federal Reserve Bank of St. Louis, said in a speech in St. Louis that while Europe remains a concern, the U.S. economy has avoided the "recession scare" that riveted investors this summer. In Washington, President Barack Obama's budget director said faster economic growth is needed to reduce the unemployment rate, but took solace in the fact that the trend is positive – for the first time in quite a while.

"The economy is coming back," Jacob Lew said at a conference organized by The Wall Street Journal.

Even a relatively mild recession in the European Union, the world's biggest market, will take a toll on global trade and limit the prospects for countries that depend heavily on exports, including Canada. Worries about the solvency of some European countries and the banks that hold their debt will constrain lending in the United States, Canada and elsewhere.

And with an unemployment rate of 9 per cent last month, there is a limit that American consumers can contribute to economic growth. With so many unemployed, companies face little pressure to offer wage increases. The result is stagnant incomes.

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Because there is inflation, however moderate, the purchasing power of American consumers is weaker. Many analysts noted Tuesday that the jump in retail sales in recent months has been matched with a decline in the savings rate.

"Disposable incomes have been falling for the last three months, and consumers have resorted to dipping into their savings to finance a higher level of expenditure," Toronto-Dominion Bank economist Chris Jones said in a report. "At some point, incomes will need to catch up or else broader consumer spending is bound to slow down."

U.S. retail sales have increased an average of 0.7 per cent a month for the past three months, compared with a three-month average of 0.2 per cent in July. The gain in October was fairly broadly based, but led by a 3.7-per-cent surge in sales of electronics, which many analysts attributed to the release of Apple Inc.'s latest smartphone, the iPhone 4S.

In another sign of resilience in the retail industry, Home Depot Inc. said Tuesday that sales in its fiscal third quarter jumped 4.4 per cent to $17.3-billion (U.S.), leading to a 12-per-cent gain in earnings.

The Federal Reserve Bank of New York's Empire State Index – which takes the pulse of manufacturing in New York, northern New Jersey and southern Connecticut – rose to 0.6 in November, the first positive reading since May.

Canada's big jump in factory sales in September outpaced a consensus forecast on Bay Street for an increase of 1.3 per cent, and a 1.4-per-cent rise in August. About half of all manufacturing industries posted increases, led by double-digit percentage surges in demand for petroleum products and aerospace equipment.

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Even more encouraging was the 4.8-per-cent increase in new orders, suggesting the strength in manufacturing has momentum. As a result, Capital Economics, a research firm based in London, England, raised its outlook for Canadian economic growth in the third quarter to an annual rate of 3 per cent from its previous estimate of 2.5 per cent.

Similarly, the firm said the U.S. is poised for growth in the final three months of the year that is faster than the 2.5-per-cent annual rate posted in the third quarter.

"It is becoming clear that the economy has a decent amount of momentum that should help it cope, at least for now, with the adverse effects emanating from Europe," said Paul Dales, Capital's senior U.S. economist. "Over all, the economy appears to be ending the year on a high note."



Quarterly change in sales*

Sears Canada: -7.8%

Wal-Mart: 1.3%

Home Depot: 4.2%

Staples: -1.9%

*Year over year, at stores open at least a year

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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