David A.

Rosenberg January 7, 2011

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

MARKET MUSINGS & DATA DECIPHERING

Lunch with Dave

DUE TO BUSINESS TRAVEL TO THE WEST COAST NEXT WEEK, BREAKFAST
WITH DAVE MAY WELL END UP BEING BRUNCH, LUNCH, DINNER, SNACK IN THIS ISSUE
OR COCKTAILS WITH DAVE
 U.S. jobs report — better
U.S. JOBS REPORT — BETTER THAN IT LOOKED, BUT STILL NOT GREAT than it looked, but still not
Before I delve into today’s U.S. employment report from the Bureau of Labor great: headline numbers
for nonfarm payrolls were
Statistics, the question must be asked: At what point do these folks at the ADP
light, Household survey
just throw in the towel and discontinue the survey? I mean, at what point do rebounded after two awful
they finally just come out and tell us “oops, our methodology is obviously doing months and was led by
more harm than good?” It’s obviously not helping anyone accurately predict the full-time positions
nonfarm payroll data. Through 2010, the average absolute “miss” was 90k, and  Northern exposure looking
when the typical headline figure is something around 150k, that “miss” is not pretty hot: Canadian
exactly trivial. employment report shows
that the economy is still
If it weren’t for the ADP report, investors would be treating today’s employment operating at a very high
data basically as an as-expected outcome. Yes, the headline for nonfarm level; record growth in
transports; manufacturing
payrolls was still light at +103k, but there were 70k of upward revisions to the coping well
prior two months. Sifting through the numbers, it is apparent that the blizzards
dampened the headline figure by roughly 25k. Moreover, for a change, even the
birth-death model did not add to the headline but in rare form actually
subtracted 1k in December (when this effect is measured appropriately as it is
not seasonally adjusted).

If you are bullish on the economic outlook, you can easily do some adjustments
and come to the conclusion that today’s payroll number was actually closer to
200k than 100k. On top of that, the Household survey did rebound by 297k
after two awful months, and led by full-time positions this time around. In fact,
when the BLS puts the Household survey on a comparable footing to the
Establishment survey (the payroll- and population-concept adjusted data) it
showed a whopper of a +500k increase last month, the largest increase since
January 2010. The payroll diffusion index also surged to 60 from 52, the best
level in two months, and indicative of more firms adding to their staff loads last
month. So while the low headline number did not show much in the way of size,
the diffusion index did show some decent “breadth” in equity market lingo.

While the details were obviously better than the headline, it would be a mistake
to read much into the unexpected decline in the unemployment rate, which fell
to 9.4% from 9.8% — the lowest it has been since May 2009 (when the economy
was still technically in recession) and the sharpest one-month decline since April
1998. While some of this “decline” did indeed reflect the rebound in Household
employment, it was largely due to the sharp decline in the labour force
participation rate, which tumbled to a 27-year low of 64.3% in December from
64.5% in each of the prior two months. The culprit — discouraged workers
soared to a new record high of 1.32 million.

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 highest
level of personalized client service. For more information or to subscribe to Gluskin Sheff economic reports, visit www.gluskinsheff.com
January 7, 2011 – LUNCH WITH DAVE

If the participation rate had not taken the dive that it did, the unemployment
rate would have come in at 9.7%, which is precisely what the consensus had The “employment rate” or the
penned in. Notice that we said “decline” above instead of “improvement”. employment-to-population
ratio barely rose and stands
When the all-inclusive U-6 jobless rate is stuck in the stratosphere at 16.7%, and now at 58.3%
when the average duration of unemployment heads back up to a near-record of
34.2 weeks; and when the share of the unemployed ranks looking for a job
without success rises two-percentage points to 44.3% (the actual level jumped
113k to 6.44 million), it is hardly time to uncork the champagne bottle. Based
on Ben Bernanke’s comments today, that day is at least four years away. Best
to keep it chilled.

The “employment rate” or the employment-to-population ratio barely rose and

now stands at 58.3%, which is no higher than it was in September 1983. For
the economy to get back to the peak level of labour force activity just prior to the
onset of the Great Recession, based on this metric, we would have to see more
than 11 million net new jobs created. So for even Bernanke to be correct, the
economy would have to generate 2.75 million jobs annually through 2014 —
something that has been accomplished just once in the past quarter-century (at
the height of the tech bubble over a decade ago).

Despite all the sprinkling of bright spots beneath the veneer of the report which I
highlighted above, if you were to ask me what the key takeaways from the report
were, I would point to three:

First, the workweek did not move at all — it is stuck at 34.3 hours for the third
month in a row. And we know from history that hours lead bodies so as a
forward-looking barometer, there isn’t much there to point to in terms of
strengthening labour demand ahead, with all deference to the gentle decline we
are seeing in jobless claims trends.

Second, state and local governments, which comprise 15% of the total jobs pie,
are clearly in a major downsizing mode with 20k net job losses last month. This
sector can be expected to remain a dead-weight drag on the overall jobs market State and local governments,
through the balance of the year, and if the new Congress has its way, the same which comprise 15% of the
holds true for the federal government as well. total jobs pie, are clearly in a
major downsizing mode with
Third, nothing is more important for the economy than personal income, and the 20k net job losses last month
work-based pay segment of the data was wholly disappointing, with average
hourly earnings barely eking out a gain at all last month on top of a flat
November. Together with the stagnant workweek and the prospect of a large
gas-induced increase in the CPI for December (consensus now is at +0.4%),
what we are talking about is a possible contraction in real personal income to
finish the year off, which may explain why it is that chain store sales
disappointed in December. But this also means that companies are continuing
to constrain their labour costs, which in turn suggests that Q4 profits will come
in decent — this has been the message from Mr. Market for the past few weeks
to be sure. Then again, why pay your workers anything when Uncle Sam is going

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January 7, 2011 – LUNCH WITH DAVE

to step in to do it for you? The payroll tax relief is just now beginning to take
hold.

CHART 1: PARTICIPATION RATE SLIDES

United States: Civilian Participation Rate: 16 year +
(percentage)
67.50

66.75

66.00

65.25

64.50

63.75

63.00
85 90 95 00 05 10
Source: Bureau of Labor Statistics /Haver Analytics
Source: Haver Analytics, Gluskin Sheff

CHART 2: TELL ME, IS THIS A BULLISH CHART?

United States: Average (mean) Duration of Unemployment
(weeks)
35

30

25

20

15

10
85 90 95 00 05 10
Source: Bureau of Labor Statistics /Haver Analytics
Source: Haver Analytics, Gluskin Sheff

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January 7, 2011 – LUNCH WITH DAVE

CHART 3: DITTO
United States: Unemployment for 27 Weeks and Over: Percentage of Civilians
Unemployed
(percentage)
52.5

45.0

37.5

30.0

22.5

15.0

7.5
85 90 95 00 05 10
Source: Bureau of Labor Statistics /Haver Analytics
Source: Haver Analytics, Gluskin Sheff

CHART 4: DISCOURAGED WORKERS AT NEW RECORD HIGH OF 1.32

MILLION
United States: Persons Not in Labour Force
(thousands, not seasonally adjusted)
1400

1200

1000

800

600

400

200
95 00 05 10
Source: Bureau of Labor Statistics /Haver Analytics
Source: Haver Analytics, Gluskin Sheff

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January 7, 2011 – LUNCH WITH DAVE

NORTHERN EXPOSURE LOOKING PRETTY HOT It should be duly noted that

No employment report is ever without its blemishes but there were very few in Canada is posting these
today’s Canadian jobs report, which portrays an economy that is still operating employment advances with
at a very high level even if the pace is off the mini-boom that immediately construction employment now
followed the depths of the recession. The only blemish was that the workweek on a downward trend
was down 0.3%, and the average duration of unemployment made a new 12-
year high of 20.1 weeks, but once again, no report is perfect. Overall
employment rose 22k in December; a tad above expectations, but the devil is
always in the details, which were actually more impressive than the headline
because all the gains and then some were in full-time jobs (+38k) as well as
private sector payrolls (+52.5k). The official unemployment rate stayed at 7.6%;
the consensus was looking for an up tick to 7.7%. A year ago, the jobless rate
was sitting at 8.4% and at the peak it was 8.7% in the summer of 2009. That is
otherwise known as progress.

As is typical in the Canadian data which is a survey of households, the sector

data bounces around a lot in any given month but it was encouraging
nonetheless to see a nice 66k rebound in manufacturing employment. This was
the best tally in over a year as well as a record +44.5k in transportation services.
Both these sectors are in discernible uptrends and this has very important
implications for the Canadian dollar because what the data is indicating is that
the areas of the economy most vulnerable to strong exchange rates are actually
weathering the loonie’s ascent quite well. It should also be noted that the two
regional manufacturing hubs, Ontario and Quebec, were the provinces with the
strongest job gains in December (+22.5k and +24.7k respectively) — just as
confirmation. As FX investors take notice, it would not surprise us to see them
drive the Canadian dollar even further above “par”, as seems to be the case in
light of the immediate reaction to today’s report.

It should also be duly noted that Canada is posting these employment advances
with construction employment now on a downward trend — in fact, payrolls in
this sector were down 27k last month in the worst showing in nearly two years.
The baton seems to have been handed to the smokestack and transportation
sectors, as well as accommodation/food, which is somewhat of a proxy for
tourism. To be sure, it is a tad unusual to be seeing the segments of the
Canadian economy most linked to the global backdrop (which the Bank of A meaningful job recovery that
Canada has expressed verbal concern over) and the ever-stronger currency, to has proven to be so elusive
be outperforming the other sectors at this time. But this is exactly the picture state-side, has become very
the data are portraying. There may be a “payback” in coming months, but by well entrenched north of the
then, we could very well see domestic cyclical services regain their previous border
strength. All that can be said is that a meaningful job recovery that has proven
to be so elusive state-side, has become very well entrenched north of the
border.

Through the first nine months of the year, the Canadian economy was
generating about 40k net new jobs per month and in Q4, that pace moderated
to an average of 20k, which is as close to not-too-hot/not-too-cold as you can
get. Nothing here for the Bank of Canada to get excited about, that is for sure.

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January 7, 2011 – LUNCH WITH DAVE

Growth has moderated, the expected closing of the output gap has been
delayed by a full year and underlying inflation pressures remain well contained —
as evidenced by the fact that median wage growth was basically flat last month.

While the junior hockey team may have the vast majority of Canadians in
lingering disbelief, there is nothing shameful about what the economy here is
doing, because without the need for the Bank of Canada to jeopardize the
sanctity of its balance sheet, and without the need of the federal government to
blow a hole in its fiscal finances (as is the case south of the border), 370k net
new jobs were created in 2010, which made this the best year for employment
growth in eight years. The unemployment rate, on an apples-to-apples
comparison to the U.S.A., is now at 6.5% on a seasonally adjusted basis versus
9.8% state-side, a record gap in Canada’s favour. Little wonder that the loonie
has flown above the eagle in recent weeks. Canadian employment reached a
new all-time high in August and has built on that performance since and is now
nearly 50k above the pre-recession while U.S. payrolls, despite the
improvement, are still languishing below the former peak by over 7 million.

CHART 5: ONTARIO + QUEBEC EMPLOYMENT GROWTH — IN A CLEAR

UPTREND
Canada: Ontario and Quebec Employment
(year-over-year percent change)
3

-1

-2

-3
06 07 08 09 10
Source: Haver Analytics
Source: Haver Analytics, Gluskin Sheff

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January 7, 2011 – LUNCH WITH DAVE

CHART 6: RECORD GROWTH IN TRANSPORTS

Canada: Transport and Warehousing Employment
(year-over-year percent change)
12

-4

-8

-12
06 07 08 09 10
Source: Statistics Canada /Haver Analytics
Source: Haver Analytics, Gluskin Sheff

CHART 7: MANUFACTURING ALSO COPING RATHER WELL WITH THE

LOONIE’S STRENGTH
Canada: Manufacturing Employment
(year-over-year percent change)
2.5

0.0

-2.5

-5.0

-7.5

-10.0

-12.5
06 07 08 09 10
Source: Statistics Canada /Haver Analytics
Source: Haver Analytics, Gluskin Sheff

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January 7, 2011 – LUNCH WITH DAVE

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January 7, 2011 – LUNCH WITH DAVE
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