Positive year ahead for financial planners?

The economic stars could be aligning to make 2006 a profitable year for financial planners. The overall picture painted by analysts in the Winter 2006 edition of the Conference Board of Canada’s quarterly newsletter, Inside Edge, suggests the housing market will pull back to more sustainable levels and the U.S. economy could provide some interesting investment opportunities in the coming year. The most interesting numbers, however, are consumer confidence statistics and expected wage gains in 2006.

Housing

Mario Lefebvre, director of the board’s metropolitan outlook service, forecasting and economic analysis, says housing prices will not go off the rails, but will likely make a soft landing of sorts. He says continued price increases and rising interest rates will result in further declines in housing affordability in 2006 and 2007 before the situation stabilizes.

Despite this, Lefebvre says affordability will not be nearly as problematic as it was in the early 1980s. In British Columbia, the province where affordability is most likely to decline below historical averages (in other provinces affordability is expected to settle near historical averages), monthly household income is expected to settle at 5.1 times the average monthly mortgage payment. In the early 1980s and mid-1990s, by comparison, household income was just 3.2 times and 4.5 times the average monthly mortgage payment.

Hurricanes, rebuilding and the U.S. economy

In the Conference Board’s quarterly Economic Forecast, analysts predict that much of the loss that the U.S. economy suffered following the 2005 hurricane season will be made up in 2006 through rebuilding efforts as insurance money and government assistance arrive to help affected regions.

Kip Beckman, principal research associate, forecasting and economic analysis, says high oil prices will continue to slow U.S. growth in 2006. Energy prices will likely add $50 billion to the $500 billion that U.S. consumers were already spending on energy before the storms, with lower income families being hardest hit and forced to curtail spending. Consumer spending is forecast to grow by 2.8% in 2006, down from 3.5% in 2005. Rising employment numbers, however, are expected to help offset the overall impact of higher energy costs.

Beckman says investment spending will play an important role in the overall strength of the U.S. economy. Corporate profits, productivity gains and the weaker U.S. dollar led to an 11.1% growth in real investment spending in 2005. Profit growth, however, is forecast to pullback in 2006, perhaps creating new investment opportunities if company share prices follow suit.

Consumers, your clients

Consumer confidence dropped sharply at the end of 2005 but, by and large, consumer spending has climbed steadily, from 3.1% in 2003 and 3.4% in 2004, to an unexpected peak of 3.9% in 2005, says vice president and chief economist, Glen Hodgson. The Conference Board is calling for a soft landing ahead, with Canadian consumption growth slowing to a more sustainable 2.9% in 2006.

Along with this, consumers could be on the verge of recovering their savings habits in the coming year. “This past August, Canadians had the dubious distinction of joining Americans as negative savers for the first time in recent history,” writes Hodgson. “If the future unfolds as expected, higher interest rates in Canada and the United States will encourage domestic savings, gently squeeze consumers’ debt service capacity and slow consumption to a more sustainable pace.”

This tendency to save will be coupled with wage gains for many clients — a fortuitous alignment of conditions for savvy financial planners. Employment growth is expected to grow 1.7% in 2006, and employee attitudes are changing — many are feeling more secure about their jobs, more confident that they will have no problems finding new jobs and are demanding bigger pay raises. The Conference Board’s 2006 Compensation Planning Outlook survey of 347 medium and large-sized organization shows that firms are planning to provide base pay increases of 3.4% in 2006 for non-unionized employees. The firm’s research suggests that average increase will likely reach 4% nationally.

Filed by Kate McCaffery Advisor.ca, kate.mccaffery@advisor.rogers.com