There has been considerable talk of late about ‘green shoots’  in the Canadian economy.  These are apparent signs of renewal in parts of the economy that suggest that the bottom of the recession has now passed and the beginning of a recovery is now underway.

If this is the case, those who fear further losses in wealth, incomes and jobs can find some hope.  So too  can governments,  whose fiscal, credit and bail out measures of the past few months have been extraordinary.

It is in fact difficult to find much comfort in the facts.

Statistics  Canada tracks what is happening in the economy through a set of monthly leading indicators.  If there are in fact green shoots it should be possible to locate them in these indicators.

The most reliable indicator of what is happening is a composite that brings together all of the indicators into one overall measure.  Dramatic and indeed unprecedented declines in the composite index starting in October 2008 accelerated until March, 2009.  In April the rate of decline slowed from -1.4% in February and March to -1.0% in April and to -0.1% in May and June.    In other words, overall economic activity continued to drop each month, although it dropped less precipitously in April,  and moderated again in May and June.

This reduction in the rate of decline in the economy  is an important source of the optimism that is now heard from time to time from serious observors.

Two things about this are worth noting.  First, a slowing of the rate of decline is hardly a reversal in our fortunes.  The cumulative effect of the continuing declines mean that there is now a gap between potential and actual activity larger than any time since the Great Depression.  Further monthly  declines, whatever their size, simply make this gap larger, meaning conditions are in fact worsening.  Things cannot be said to be getting better until the indicator moves into positive territory.

A further problem with taking too much comfort from the slowing rate of decline is that the sources of this slowing are not all that convincing.  The composite leading indicator is an amalgam of ten separate indicators.  The main factors explaining the reduced rate of decline since March are increases in the stock market (TSX)  index and in the money supply.  Neither are good measures of improved conditions in the economy.  There have also been increases in sales of houses already built, but this does little for jobs or business, and thus does not represent improvement in the working economy.

The growth in the money supply is a measure of credit easing by the Bank of Canada.  It says nothing about improved economic conditions unless private lending and investment increase.  To date there has been no improvement in either.

The growth in the stock market has had the largest impact on the composite index since March and is the main source of its reduced rate of decline.  It is also one of the main factors that has created the perception that things are starting to get better.

However unlike the other components of the composite index, the stock market does not necessarily bear any relationship to actual conditions in the economy.  Rather it is a measure of expectations of those who have savings or funds to invest.  Its increase reflects two things.  One is a correction for an excess of pessimism that may have existed at the low point in the February – March period when fears about the future were running high.  Second it measures hopes for improvement based on what they see is happening now.  The main and perhaps only things they have as a basis for positive expectations are the various stimulative and credit easing policy measures of government.  The bounce in the stock market is thus nothing more than an expectation that these policies will work.    If they work as expected the stock market will have already factored that in and the market will remain stable at the current levels into the foreseeable future.  If the measures don’t turn out to bring the improvements in employment, production, investment, trade and incomes that investors expect, the market can be expected to fall back to previous low levels.

So all that we can really say from the indicators is those with money to invest expect that the various policy measures taken to date will work, at least to the extent that justify current stock prices.  If that expectation turns out to be wrong, more stimulation will be required and other options pursued.  For the moment it is too early to tell.  But talk of green shoots must be largely discounted.  Actual conditions in the economy generally continue to worsen, and it will be a while yet before we will know whether government policies are working.