American and Canadian economies change places

In a week of dramatic shifts for the world's two biggest trading partners, the U.S. economy is looking more Canadian and the Canadian economy more American.

Photo: American and Canadian economies change places

Despite the shambles of the U.S. housing market, the ingredients are brewing for a resurgence of U.S.A. Inc. as a weaker dollar and hope for more manageable health-care costs put American manufacturing on the kind of competitive footing Canada thrived under a decade ago.

Canadians, meanwhile, could soon begin to outspend their freewheeling American cousins as a loonie at par with the greenback finally filters down to store shelves. U.S.-style mortgage innovations and a potential new cut to the GST could also fuel our transformation to a most American-like consumer nation.

The historic deal announced Wednesday between General Motors Corp. and the United Auto Workers union takes US$50-billion of retiree health-care liabilities from the automaker's books and plunks them in a new union-tied trust. At a stroke, the agreement makes the company a lot more competitive -- as underscored by the near-9% rise in GM shares on the day of the deal -- and could spell particular trouble for GM Canada workers who have lost both a health-care and currency advantage against their U.S. counterparts, one analyst warned.

The deal is sure to be copied in other U.S. industries as companies struggle to dig their way out of an untenable health-care burden. Some as the Wall Street Journal outlined, are putting money into so-called "health reimbursement arrangements" that retirees can use to supplement Medicare, some are paying annual lump sums that retirees can use to buy coverage while others are trying to lower costs for current employees by raising co-payments and deductibles or getting rid of coverage all together.

"Increasingly, businesses are going to try and be more creative with their liabilities," said Mark Zandi, chief economist at Moody's Economy.com said in an interview.

At the same time, all Democratic contenders in the U.S. presidential race are offering schemes intended to help the 46-million uninsured Americans get coverage. The plans are catching the eye of Americans who are falling off their employer registers and President George Bush's plans for health savings accounts flounder.

Mark Iwry, senior fellow at The Brookings Institution, said this is important because measures like GM's are only stop-gap and will only go a small way to helping U.S. companies compete with other countries which have much broader public plans, like Canada.

"We cannot lose sight of the broader fact that these arrangements do not substitute for a national health-care solution," Mr. Iwry said.

Ironically, as Canada looks ever so slowly to more private sector solutions for health care, the United States is looking more intently at the public sector model.

Any U.S. solution however will be a long time coming but in the meantime, U.S. manufacturing is benefiting from a slide in the greenback, with exports soaring on global growth, a timely development considering the housing market looks uglier by the day and is likely to eventually bog down the consumer, Canada.com reports.

Government data to be released Thursday is expected to show the economy grew at a slightly slower pace in the second quarter than previously estimated.

Wall Street economists surveyed by Thomson/IFR expect the Commerce Department to report that second-quarter GDP grew at a 3.9 percent annual rate, down from the preliminary estimate of 4 percent issued last month.

A 3.9 percent rate still represents a significant increase from the first-quarter's sluggish 0.6 percent. Gross domestic product measures the value of goods and services produced in the United States.

Many economists are looking past the April-June quarter though to see what the impact will be of August turmoil in the credit markets and the Federal Reserve's half-point cut in interest rates earlier this month to ease a credit crunch.
Many experts predict growth will slow to 2 percent or less in the second half of this year, largely due to the housing market slump that some analysts have said could push the economy into recession.

In the latest sign the economy is wobbly, the Commerce Department reported Wednesday that orders for durable goods -- those designed to last three years or more -- dropped 4.9 percent in August, a much bigger drop than the 3.5 percent economists had expected.

Durable goods include automobiles, appliances and aircraft. Fueling the decline was an 11.2 percent drop in orders for transportation equipment. Boeing Co. (NYSE:BA) reported fewer orders in August after a big surge in July.

A bright spot for the economy was the announcement early Wednesday that the United Auto Workers ended a two-day strike against General Motors Corp. (NYSE:GM) A lengthy strike against the nation's largest automaker could have had ripple effects that would have dragged down business growth, the AP reports.

Source: agencies