And the winner of the delinking debate is ………

Travis Fast

Wow. The time lag I predicted was almost non existent. According to the new StatsCan report the economic output contracted by 0.7% in December. I would claim some savvy in my prediction that decoupling was a myth, but any child with grade eight math knew that the Delinking story was fantasy. And now things are going to get worse. We have a high dollar, an economic apologist for a finance minister, and a massive shock still rippling through the markets. Mark my words this is the beginning of a significant switch point. Now we are going to get to test drive the lean mean welfare state that the Liberals built and the Cons prostrated.

Economic growth slowed considerably in the fourth quarter as real gross domestic product grew 0.2%, down from 0.7% in the third quarter. Economic output contracted 0.7% in December. Significant reductions in manufacturing activities, wholesaling and in oil and gas extraction were the main sources of the December decline. In manufacturing, the major drop in motor vehicle production was primarily due to extended holiday shutdowns. The economy advanced 2.7% for the year, matching the average growth of the last five years. A more detailed analysis is available in Canadian Economic Accounts Quarterly Review.

The devil is of course in the details. I am keeping my eye on three key metrics: Corporate profits, Investment, and Inventories. Investment in machinery and equipment remained strong but corporate profits leveled off and inventories began to build.

In my heuristic model causation runs in the following manner. Corporate profits are the well spring of future investment–better stated they are a necessary but not a sufficient condition for investment. So first we should see declines in profits which then after a lag should show up in declining investment rates. Moreover increased inventories point to decreasing corporate sentiment in their capacity to ensure future sales and thereby compound negative sentiment toward future investment (out of what are decreasing profits).

Interest rate cuts are rather likely ineffectual because access to credit is not what is driving corporate confidence at this point it is uncertainty over future sales. Similarly corporate tax cuts are of little use at this point in time as tax is relative to profits. And finally the consumer is all but tapped-out. Now we get down to the dirty business of massive global capacity competing for stagnant or declining vents for their wares. This is the nasty spiral of concentration, centralization and rationalization.

With this mindset, defensive cost cutting strategies become the rule of the day. Marginal lines are slashed, product launches are put on hold and production is scaled back and workers are laid off. Workers start acting defensively too. Big ticket items such as renovations, and discretionary spending are parsed back.

Buckle up you are going to get what you voted for.

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