The United States economy turned a corner this month when the Federal Reserve Board began to taper its quantitative easing. In response to improving job and output numbers, the central bank reduced the rate at which it will pump money into American banks.
The move, immediately applauded by stock markets, reflected signs of expansion in the U.S. private sector and signs of a truce in the partisan warfare that has paralyzed federal fiscal policy for the last two years.
Canada, which has undergone slow job and output growth since the 2009 credit crunch, has not yet turned the corresponding corner. The acceleration of growth in the U.S., our largest trading partner, should, however, soon benefit Canadian industry.
The political truce in the U.S. Congress took shape when the budget committee chairwoman and chairman of the two houses -- Democrat Patty Murray for the Senate and Republican Paul Ryan for the House of Representatives -- agreed on the outline of a 2014 budget. They ducked the tough issue of chronic deficits, deferring to some future time the decisions that must eventually be made about spending cuts and tax increases that will slow the growth of U.S. national debt. But they did agree on levels of taxing and spending for one year, marking an improved level of political maturity and willingness to compromise in Washington. For the last two years, the two parties and the two houses have shut down the government rather than agree on a budget or a level of borrowing.
The U.S. unemployment rate dropped to seven per cent in November from 7.8 per cent a year earlier and from the 10 per cent peak it reached in the depths of the 2009 recession. The Federal Reserve, encouraged by employment growth, increased business investment and increased consumer spending, concluded it could start curtailing its monthly purchases of bonds and mortgage-backed securities from U.S. banks.
This long-awaited taper, which may or may not continue in the coming months depending on the economic circumstances, was equivalent to the doctor saying the patient was healthy enough to reduce the dose of medication. It was not yet a clean bill of health, but it was an important milestone on the road to recovery. Christine Lagarde, managing director of the International Monetary Fund, chimed in a few days later to say the IMF would be raising its outlook for the U.S. economy.
U.S. stock markets also loved the news. Markets have occasionally shown conflicting views of the Federal Reserve's policy since some investors thought recent stock price rises merely reflected the surge of credit issued from Washington and not genuine strength in the U.S. private economy.
But when the first step of tapering was announced in mid-December, markets shot up and continued rising in the following days. Markets took the Federal Reserve move as confirmation the American economy has strengthened.
Canadians should feel the effects of these U.S. events. Canadian sales of natural resources and manufactured goods depend heavily on customers in the U.S. Successive governments have done what they could to find new markets in Latin America, Asia and Europe, but Canada is still, for most purposes, a small boat dragged along behind the U.S. mega-ship. The main thing Canada's finance minister and its central bank governor have to know each day is: What is the U.S. doing?
As 2013 drew to a close, the United States was shifting out of first gear and into second gear. Canada should expect the tow rope that connects us to the American mega-ship to snap tight in a few months and start speeding this country's progress.
If the effect is seen soon enough, Finance Minister Jim Flaherty and Prime Minister Stephen Harper will be able to point to employment growth and spreading prosperity and accept praise for their wise economic management.