Summary

• So far, there have been only 185k real estate sector-related job losses in the U.S. We estimate that there could be as many as 800,000 more.
• Furthermore, we are also seeing a slowdown in business investment in machinery and equipment (IME). In fact IME, which is typically a key driver of economic expansion, risks slipping technically into recession levels.
• The real estate sector implosion and slowing business investment have pushed the U.S. job market??™s prospects to their worst levels in years.
• We thus believe that our estimate that there is a 40% chance that the U.S. economy will slip into recession, is fully justified and the Wall Street economists??™ consensus estimate (which assigns a 25% chance of a recession) is overly optimistic. Even the Maestro, Alan Greenspan, is more pessimistic than the current consensus.

Weekly indicators

United States ??“ The publication of the latest FOMC meeting minutes show that the Federal Reserve was surprised by the weakness in business investment. Furthermore the Fed regards the downside risks to economic growth as greater than before. On the other side of the coin, the productivity slowdown and the increase in world oil prices are increasing uncertainty regarding the expected moderation of inflation. We are not expecting any movement in the Fed??™s key rate over the short term. The Producer Price Index increased significantly in March. However the core index (excluding food and energy) remained unchanged, with year-over-year inflation coming in at just 1.7%. The trade deficit improved in February to $58.4 billion. However the improvement stems primarily from a drop in oil prices in January. Excluding petroleum, the deficit deteriorated by $3 billion. The US dollar depreciated strongly this week. The greenback lost 0.7% of its value against the yen, 1.0% against the euro and 1.3% against the loonie.

Canada ??“ Housing starts rose by 7.6% in March to 210.9K units on a seasonally adjusted basis. The pickup was expected because housing starts were abnormally low in February due to the fact that many builders advanced starts into January to take advantage of the warmer weather that month. However housing starts during Q1/2007 were fewer than in Q4/2006. The pullback is in line with our forecast that construction activity will be weaker in 2007. The Canadian trade surplus fell to $4.8 billion in February due to a pullback in exports. That pullback was primarily attributable to a 15-day strike at Canadian National Railway. The March trade data should be better.