David A. RosenbergSeptember 4, 2009

Chief Economist & Strategist Economic Commentarydrosenberg@gluskinsheff.com+ 1 416 681 8919

MARKET MUSINGS & DATA DECIPHERING

Lunch with Dave

NOT LABOUR’S DAY

No matter how you slice it or dice it, the U.S. economy remains fundamentallyweak. While it is 100% true that the earthquake is behind us, what follows nextare the aftershocks. The government is doing its utmost to cushion the blow,and the magnitude of the intervention and incursion of the public sector into theprivate economy is breathtaking; for the time being, it has made the auto andhousing data appear better than would otherwise be the case. The criticalquestion, of course, is what happens once the heavy doses of medication wearoff. We estimate that absent all the forms of government stimulus in the secondquarter, real GDP would have contracted at a decidedly brown-shooty 6% annualrate as opposed to the posted 1% decline. And, while consensus forecasts arecentered around 3.0-3.5% for current quarter growth, again the pace of economic activity would be flat-to-negative absent Cash-for-Clunkers,government auto purchases, and first-time homebuyer subsidies, not to mention the FHA’s best efforts to recreate the housing and credit bubble as it takes up40% of new mortgage originations via a 96.5 insured loan-to-value ratio and a taxpayer on the hook for a 7% delinquency rate that is on the rise. This can’tpossibly end very well, but for the time being, all these painkillers doled out by the federal government is … well, dulling the pain.

No matter how you sliceand dice it, the U.S.economy remainsfundamentally weak

While the Obama economics team is pulling rabbits out of the hat to reviveautos and housing, there is nothing they can really do about employment;barring legislation that would prevent companies from continuing to adjust theirstaffing requirements to the new world order of credit contraction. Whilenonfarm payrolls were basically in line with the consensus, declining 216,000 inAugust, there were downward revisions of 49,000 and the details were simplyawful. The fact that 65% of companies are still in the process of cutting theirstaff loads is quite disturbing — even manufacturing employment fell 63,000 inAugust, to its lowest level since April 1941 (!), despite the inventoryreplenishment in the automotive sector and all the excitement over the recent50+ print in the ballyhooed ISM index. The fact that temp agency employment isstill declining, albeit at a slower pace, alongside the flat workweek and joblessclaims stuck at 570,000, are all foreshadowing continued weakness in thelabour market ahead. Until we see signs of a sustained turnaround in the jobsmarket all bets are off over the sustainability of any economic recovery.

The government is pullingrabbits out of the hat torevive autos and housing…but what about theemployment situation?The government is pullingrabbits out of the hat torevive autos and housing…but what about theemployment situation?

Please see important disclosures at the end of this document.

Gluskin Sheff + Associates Inc.is one of Canada’s pre-eminent wealth management firms. Founded in 1984 and focused primarily on high net worth private clients, we are dedicated to meeting the needs of our clients by delivering strong, risk-adjusted returns together with the highestlevel of personalized client service. For more information or to subscribe to Gluskin Sheff economic reports

visit www.gluskinsheff.com

September 4, 2009

– LUNCH WITH DAVE

What was really key were the details of the Household Survey, which provide arather alarming picture of what is happening in the labour market.

The HouseholdEmployment Surveydepicts a rather alarmingpicture of what ishappening in the labourmarket

First, employment in this survey showed a plunge of 392,000, but that numberwas flattered by a surge in self-employment (whether these newly mintedconsultants were making any money is another story) as wage & salary workers(the ones that work at companies, big and small) plunged 637,000 — the largestdecline since March (when the stock market was testing its lows for the cycle).As an aside, the Bureau of Labor Statistics also publishes a number from theHousehold survey that is comparable to the nonfarm survey (dubbed thepopulation and payroll-adjusted Household number), and on this basis,employment sank — brace yourself — by over 1 million, which is unprecedented.We shall see if the nattering nabobs of positivity discuss that particularly statisticin their post-payroll assessments; we are not exactly holding our breath.Second, the unemployment rate jumped to 9.7% from 9.4% in July, the highestsince June 1983 and at the pace it is rising, it will pierce the post-WWII high of 10.8% in time for next year’s midterm election. And, this has nothing to do witha swelling labour force, which normally accompanies a turnaround in the jobsmarket — the ranks of the unemployed surged 466,000 last month.

CHART 1: RECORD 9 MILLION WORKING PART-TIMEBECAUSE THEY HAVE TO, NOT WANT TO

Employed Part-Time for Economic Reasons

(thousands)

050505050505 1000080006000400020000

Source: Haver Analytics, Gluskin Sheff

Page 2 of 12

September 4, 2009

– LUNCH WITH DAVE

The adult male joblessrate has already climbedabove the 10% level … theall encompassing U6 jobless rate is at a recordhigh

As with the headline data, the details beneath the surface of the unemploymentrate figure are very troubling. The adult male unemployment rate has alreadyclimbed above the 10% level. When all the labour market slack is included, forexample, the fact that full-time employment cratered 336,000 and thoseworking part-time for economic reasons surged 298,000, the all-inclusive U6 jobless rate rose to an all-time high of 16.8% from 16.3% in July. Unless thelaws of supply and demand have been permanently repealed, this record andgrowing amount of slack in the labour market is only going to exert moredownward pressure on wages at a time when organic personal income isdeflating at nearly a 5% annual rate. Unless Uncle Sam extends his generosity, the outlook for the consumer is fraught with fragility, and all one has to do ishave a read of those tortured FOMC minutes that were released earlier thisweek from the August meeting to see how nervous the Fed really is overprospects for a sustainable recovery.

CHART 2: THE “REAL” UNEMPLOYMENT RATE HITS A NEW HIGH

U6 Unemployment Rate*

(percent)

0505181614121086

*Includes all marginally attached workers and those employed part-time for economic reasonsSource: Haver Analytics, Gluskin Sheff

The number of people not on temporary layoff surged 220,000 in August and the level continues to reach new highs, now at 8.1 million. This accounts for53.9% of the unemployed — again a record high — and this is a proxy forpermanent job loss, in other words, these jobs are not coming back. Against that backdrop, the number of people who have been looking for a job for at leastsix months with no success rose a further half-percent in August, to stand at 5million — the long-term unemployed now represent a record 33% of the totalpool of joblessness.