Nearby, But Not Necessarily Close The United States has a close trading relationship with the Great White North.

November 30, 2007  by in UnCategorized   

By Home Furnishings Business in on December 2007 For a very long time, residents of the United States of America have pretty much taken for granted their relationship with their neighbors to the north. Other than Mexico, Canada is the only country sharing a land border with the U.S., a border that is largely unguarded or lightly guarded due to the similarities between the two nations and the historically positive relationship the two have had.

Added to the similarities is the fact that, with the exception of the province of Quebec, Canada is also populated by English-speakers, facilitating trade between the two countries. And many, if not most, Quebecois speak English in addition to their native French. The two countries also share a mostly European heritage and modern histories comprised of just decades, not the centuries of many countries throughout the world.

It has been easy to assume over the years that the similarities between the two nations would lead to parallel economies. But, just as Canadians are fiercely independent thinkers when it comes to world events, social activism and politics in general, the Canadian economy is not bound to any other nation, despite geographical proximity. To ignore the inter-relationships and also the differences between the U.S. and Canadian economies is to sell both countries short.

Easily shipped between the nations via rail or road, home furnishings have an advantage over many other internationally produced goods, due to their size and established distribution channels. Buyers and sellers on both sides of the Canadian-U.S. border keep a watchful eye on each other’s economy, looking for future bargains on which to capitalize.

Home Is Where the Economy Is

In 2007, much attention has been focused on housing statistics in the U.S. Monthly data on new home sales, housing starts and sales of existing homes have been eagerly awaited by consumers and economists alike. The reason for this intent interest is the ongoing decline—usually a significant one—in the U.S. housing market. Economists and others point to housing statistics as a reliable measure of the strength of the national economy and avidly watch for the monthly figures.

The Canadian housing market, specifically housing starts, isn’t suffering a comparable fall. According to Statistics Canada, the branch of the Canadian government that collects economic data, housing starts in September increased 19.3 percent over August results. In the same time period, U.S. housing starts fell 10.2 percent and were off 30.8 percent from September 2006 results.

Another noticeable difference between the two nations is in their mortgage industries. The standard “conventional” mortgage rate in the U.S. is the 30-year fixed-rate, although adjustable-rate mortgages (ARMs) have surged in popularity in the last half-decade. Traditionally, home buyers were expected to have a home down payment of 20 percent, with the balance financed by a fixed rate mortgage.

In Canada, the traditional down payment has been 25 percent, with a conventional mortgage loan term of 25 years, just five fewer years than what used to be the norm in the U.S. Both countries have seen an upswing in recent years of ARMs, some with a term as short as six months in Canada. At present, both countries are seeing mortgage rates in the 5 percent to 7 percent range.

The Two ‘I’s’—Interest and Inflation Rates

Another interest rate attracting attention is the prime interest rate. In September, the Canadian prime interest rate stood at 6.25 percent, off more than a full percentage point from the U.S. rate of 7.5 percent. In 1998, the Canadian prime rate was 6.64 percent measured against 8.0 percent in the U.S.

In the past 10 years, the Canadian prime interest rate has fluctuated from a low of 4.08 percent to a high of 7.19 percent.

Inflation has also affected the countries differently. The Consumer Price Index (CPI), which measures inflation, was 1.0 percent in Canada in 1998 and was reported by Statistics Canada as 2.5 percent this past September, up from 1.7 percent in August. In the U.S., CPI was 1.2 percent in 1998 and stood at 0.3 percent in September. Neither country has recently experienced the jumps in inflation recorded in the 1970s and 1980s in the U.S.

Where the Money Is

One of the areas of greatest contrast between the two countries is the unemployment rate. In October of 1998, the U.S. unemployment rate was 4.5 percent, compared with 4.4 percent in October of 2006 and 4.7 percent in October of 2007. Unemployed people focus on food and shelter, not home furnishings, so a growing or stagnant unemployment rate isn’t good for business.

In Canada, the unemployment rate in 1998 stood at 8.3 percent, falling to 7.5 percent a year later and then to 6.9 percent in 2000. In the 10-year period between 1998 and 2007, Canada’s unemployment rate has continued to fall, with the lowest rate to date reached in October of 2007: 5.9 percent.

National debt statistics show a wide difference between Canada and its neighbor to the south. While in recent years the U.S. national debt has soared by billions, the Canadian national federal debt has dropped 14 percent from C$559.9 billion in 1998 to C$481.5 billion in 2006. The U.S. debt, ballooning under the pressure of war costs and rising fuel costs, is expected to continue to rise in the foreseeable future.

As reported in the November issue of Home Furnishings Business, one U.S. dollar had the purchasing power of C$1.58 in 2002. That margin shrank to C$1.17 to one U.S. dollar at the end of 2006. As of Oct. 2, 2007, the Canadian and U.S. dollars reached a state of equilibrium and started to swing in favor of the Canadian loony as the U.S. dollar steadily weakened.

What this means to the economy of both countries is that Canadian consumers are finding U.S. products less and less expensive as their home currency strengthens against the American greenback. In just five short years, the exchange rate balance shifted sharply, giving U.S. exports to Canada an advantage.

Furnishings are Hot Sellers

In terms of retail sales, the Canadian economy is burgeoning. According to Statistics Canada, sales of commodities through the country’s large retailers grew 19.0 percent from 2002 to 2005, reaching C$98.9 billion in 2005. In that same period, sales of indoor furniture grew 18.5 percent, home furnishings sales increased 13.7 percent and housewares sales were up 9 percent.

In comparison, the U.S. Department of Commerce reported furniture sales through all distribution channels grew to $79.9 billion in 2005, up 15.9 percent over 2002 sales. In September of 2007, furniture sales were at an annualized rate of $86.8 billion, up 0.5 percent over August sales.

Who’s Buying

For years, savvy home furnishings sellers have known that the woman of the household is the one making the buying decisions for the home. Whether it’s furniture, home accents or home textiles, she’s got the last word.

In 2006, Statistics Canada counted 32.6 million Canadians of all ages. The balance was split 49.5 percent male and 50.5 percent female. Separated into age groups, males are the predominant gender until the 45-to-49 age group, which is evenly split between the sexes.

At that point, women become the more numerous gender. Translated, this means that at a prime home-furnishing age, there are more women than men in Canada. Whether the purchaser is downsizing a home or helping offspring set up a new home, she’s in the driver’s seat and home goods vendors and retailers need to understand that.

And the Crystal Ball Says ...

There’s not an economist out there who wouldn’t be a billionaire, in either Canadian or U.S. dollars, if s/he could accurately predict the economic future for either the U.S. or Canada. Without a doubt, interest rates, unemployment statistics, housing figures, etc., will change— possibly without a lot of notice—over the next few years. The one thing that is most likely to happen is that the two economies will continue to vary, but will certainly manage to coexist, each adapting to the other’s markets and learning how to sell to or buy from those markets.

If, however, as a noted U.S. psychologist is fond of saying, the best predictor of future behavior is past behavior, then tomorrow’s Canadian economy—and its market for U.S. goods—shouldn’t be a huge surprise. Throughout the recent past, Canada has shown itself to be a strong vendor and buyer of home furnishings products and a valuable trading partner.

Perhaps the most noteworthy aspect of the future U.S.-Canadian trade partnership is the role currency exchange rates will play. At present, the playing field is fairly even, with neither the U.S. or Canadian dollar having the dominant position. How that plays out will definitely have an impact on the buying and selling of home furnishings in both countries.