11-010-XIB
Canadian Economic Observer
January 2006

Summary Table - Key Indicators

Overview*

Output growth slowed early in the autumn, partly due to strikes. The underlying trend of the economy remained strong, as investment and exports continued to grow while retail sales rebounded. This strength was reflected in further gains in hours worked in December.

Exports remained a driving force behind growth, posting an eighth straight increase. While energy has led these gains, the October advance also spread to forestry products and manufactured goods.

Business investment continued to grow, led by rising demand for imported machinery and equipment. Meanwhile, construction again saw growing non-residential demand supplant housing as the engine of growth.

While housing has softened, consumers continued to spend more. Retail sales rebounded in October once the spike in gasoline prices had passed, reflecting strong household balance sheets and solid job growth. Household wealth in the third quarter was buoyed by rising stock market prices, which continued to surge to a record high early in 2006.

Labour Markets

Overall employment was unchanged in December, although the year-long substitution of full-time for part-time positions continued to boost total hours worked. An increase in the labour force participation of youths helped to nudge the unemployment rate up to 6.5% from its record low in November.

Natural resources bounced back from a dip in November, ending the year with 8% more jobs than last December. Conversely, construction ended a year of strong growth with a decline. The steep drop in manufacturing jobs through most of the year levelled off over the last three months.

Employment in services fell for the second time in three months. The health care and social assistance sector was pulled down by declines in the latter, possibly reflecting fewer welfare cases as unemployment tumbled last year. Other services fell sharply, especially in Ontario. The booming financial sector fuelled job growth, while professional services also expanded.

Alberta and BC continued to lead job gains, as they did most of the year. BC was driven by its construction boom, which offset heavy job losses in manufacturing (dominated by the forestry industries). Growth in Alberta shifted to services, notably professional and educational. Central Canada was little changed, with gains in Quebec offset by losses in Ontario. The latter was concentrated in adult women, reflecting steep drops in the health care and social assistance sector and other services.

Leading indicators

The leading index rose by 0.3% in November, after a solid 0.5% gain in October. Business investment demand remained strong, helping all three manufacturing components rise in unison for the first time since March 2004. However, households were more hesitant to spend, and this accounted for the increase in the number of components falling from one in October to two in November.

New orders rose for the third straight month, with machinery and metals again breaking their records set earlier this year. Investment spending in the third quarter rose 10% in volume from a year-earlier, its largest gain since 1998.

Manufacturers also needed more labour inputs. They extended the average workweek for a third straight month, before boosting employment in November for one of the few times this year. Manufacturing demand also was partly met by reducing inventories, which boosted the ratio of shipments to stocks for the first time this year.

Sales of durable goods were the weakest sector of household spending, down 1.5%, its first drop in nine months and the largest since January 2004. The trend of auto sales was dampened by higher energy prices. Consumer confidence, however, began to recover some of its large loss when gasoline prices soared during the summer. The housing index levelled off after falling in October for the first time in seven months. Furniture and appliance sales eked out a 0.3% increase. Gains in the personal sector helped boost services employment, suggesting that firms are optimistic about shopping during the holiday season.

The US leading indicator improved after the passing of hurricane Katrina, improving from no change to a 0.2% gain. As in Canada, the components related to manufacturing and labour markets contributed the most to this gain.

Output

Real GDP growth resumed with a 0.2% gain in October, after a brief stall in September. Manufacturing and construction continued to recover from a slump in the first half, while consumer spending remained strong. Strikes lowered output in education and mining, each of which subtracted 0.1% points from overall growth.

Factory output rose 1%, as auto assemblies rebounded strongly from cuts in September. Other industries continued to do well, notably machinery where construction and mining demand is booming. Non-metallic minerals strengthened, the beneficiary of strong non-residential construction (which uses three times as much cement per dollar of output as home-building, according to the Input/Output tables). Aluminum output has risen steadily since January. Clothing output increased for the sixth straight month, regaining almost all of the 14% drop in the first four months of the year when import quotas were lifted. And aerospace has grown steadily over the past year as domestic demand recovered. The ICT sector suffered another setback after a strong first half.

Construction work rose 0.5%, but the sources of growth continued to shift from residential to non-residential. Housing has fallen steadily since the start of the year, while non-residential building was up 7% from last October. Elsewhere, the recent surge in primary output was interrupted by a drop in mining output.

Most services expanded outside of education, which was hampered by strikes. Consumer demand rose for retail goods, restaurants and recreation (notably gambling, partly as the NHL resumed play). Rising international trade boosted wholesale trade, although transportation posted its first drop since April. Demand grew steadily for business services.

Household Demand

Household spending remained resilient, buttressed by steady job growth and strong balance sheets. Household net worth jumped another 2.3% in the third quarter, led by stock market gains and rising homeowner equity.

Retail sales volume jumped nearly 1% in October, as consumer purchasing power recovered from the spike in gasoline prices in August and September. Overall, retail prices fell in October, as falling gasoline prices were reinforced by widespread discounts for clothing and electronic goods.

However, price cuts did not drive the course of consumer spending. The largest increase in spending was on autos, which continued to rise in November despite higher prices for new models. Sales of computers and electronics fell despite lower prices. Deep discounts for clothing sparked only a modest increase in demand. Furniture and appliance sales rose steadily.

The housing market continued to cool from its red-hot pace last year. Part of the weakness was due to a small dip in construction of multiple units so far this year. The national vacancy rate was steady at 2.7% in CMHCs annual survey conducted in October, well above its low of nearly 1% in 2001 as renters bought homes in increasing numbers in recent years.

Merchandise trade

Exports continued their eight-month upward climb, bringing the total increase since March to 13%. Over 80% of this increase reflected higher shipments of energy products to the US. Meanwhile, our import bill was again dampened by lower prices. This helped keep the monthly trade surplus above $7 billion, a monthly level it has exceeded only three times before this year.

Energy remained the driving force behind the 1% increase in export earnings in October, as non-energy exports were essentially unchanged. Soaring natural gas prices in the wake of hurricanes led the 10% hike in gas exports. Rebuilding from the hurricanes also sent lumber exports significantly higher for the first time since May 2004. Still, lumber and other forestry products are the only major export group which is below the level of a year-ago.

Agricultural exports were boosted by live cattle, where shipments quickly returned to their levels before the US closed the border to our cattle exports when mad cow disease was discovered.

Manufactured goods posted 2% gains across the border. For autos, this was the fourth straight increase as they hit a new high for the year. Passenger car exports, which are three times as large as trucks, led the way. Machinery and equipment was boosted by defense goods, which offset more weakness in aircraft. Consumer goods posted their first gain in six months.

Imports rose 1.2%, as surging volumes offset a 1.3% drop in import prices. Import prices have been falling steadily since May, as the dollar rose from 80 cents (US) to 85 cents.

Machinery and equipment imports led the increase, fuelled by aircraft. Aircraft imports have risen by a third since the start of the year, a reflection of how domestic air carriers have returned to prosperity. Demand also was strong for office machinery. Most other imports were little changed, apart from an increase for autos offset by a drop for clothing.

Prices

The CPI fell 0.2% between October and November, its second straight drop after a summer of large increases. As a result, the year-over-year rate of inflation fell to 2.0%, its lowest since July and down from a peak of 3.4% in September.

Gasoline prices continued to retreat from their September peak. Clothing prices fell sharply and are 1.4% below last November. The price of imported clothing dropped 4% since January. These declines were partly offset by a 5% hike in auto prices. The cost of housing also rose sharply.

Commodity prices ended the month little changed. Energy prices levelled off after a two-month retreat from their record high. Metals prices continued to strengthen, with gold hitting a 25-year high. Copper prices set another record, a barometer of growing demand from China. Higher metals prices also helped boosted prices for non-energy manufactured goods by 0.3%.

Financial markets

Despite the upturn in business investment, corporations continued to generate more funds than they spent. Firms used this surplus to continue to pay down debt, further lowering the ratio of debt to equity to 52% in the third quarter.

The stock market rose 4% to its highest level of the year, and broke its all-time record early in the new year. All sectors advanced, with mining and energy stocks again leading the way. Stock issues totalled nearly $5 billion in October and November, their best two months since 2002.

The Canadian dollar rose to a 14-year high of almost 87 cents (US), before settling at 86 cents at year-end. Interest rates were unchanged across the board.

Regional economy

Energy continued to dominate in the West. British Columbia exported 71% more energy this year, and as a result energy outranked forest products for the first time ever as its leading export. This mostly reflects soaring natural gas prices. Rebuilding in the US also boosted exports of forest products and building materials. This helps explain the renewed strength of manufacturing shipments, up 1.5% in October. Still, exports of forest products were down 8% this year as a result of weaker demand and increased competition: the US increased its imports of lumber from Europe and of processed wood from China by an amount equal to one-third of the drop in imports from British Columbia.

On the Prairies, shipments held onto their sizable 2.6% gain registered in September, led by goods destined for industrial use (plastics, metal products and capital goods such as machinery and computer products). Building permits this year were nearly double last year’s levels.

Resources were also a major source of growth in Quebec. Industrial building permits remained at high levels, and this was reflected in more shipments of capital goods such as electrical equipment, machinery and non-metallic minerals in October. These trends occurred as several major projects were launched in the energy sector: including the 2,000-MW wind energy project in Gaspésie-Iles-de-la-Madeleine (which generated planned investments of more than $3 billion) and $680 million on the Chutes-Allard and Rapides-des-Coeurs hydroelectric power stations in Mauricie. Whereas in Canada just under one-quarter of the increase in employment in 2005 came from construction, in Quebec nearly the entire increase was attributable to that industry.

Ontario saw a marked improvement in household demand. The largest drop in the price of gasoline in Canada (10%) in October led to a 1% rebound in retail sales after two consecutive declines of the same size. Ontario also posted the largest increase in housing starts in November, rebounding from their lowest level since 1998 largely because of an upturn in multiples in Toronto. In Ontario, vacancy rates fell in most large urban centres for the first time this decade. Furthermore, prices on the rental market remained the highest in Canada, boosted by the formation of new households. Windsor, home of several North American auto plants that shrank in the past year, was the only large Ontario urban centre where the vacancy rate increased by more than one percentage point (it rose 1.5 percentage points to 10.3%).

Overall, however, prospects remain good in Ontario’s auto sector, as consumers continued to snap up foreign models. Indeed, the auto industry led the turnaround in shipments in October. Japanese models now account for more than 40% of the province’s automotive production, compared with 25% five years ago. For the first time ever in Canada, the North American big three sold fewer vehicles than foreign automakers in November.

International economies

Energy was also behind the most interesting developments in the United States. Industrial production was given a boost by the recovery of oil and gas from hurricanes. But high energy prices sent the trade deficit to another record.

Industrial production rose 0.7%, completing its recovery from the September drop after hurricane Katrina (October’s initial recovery was revised up from 0.9% to 1.3%). Oil and gas extraction led the way, up 5% although it is still 8% below its pre-Katrina high. Manufacturing output slowed, as sharp cuts to auto assemblies partly offset more strong gains in business equipment and construction materials. New orders in November were buoyed by strong gains in global demand for aircraft. Boeing is on course to receive a record 900 orders for aircraft in 2005. However, orders for autos fell as inventories rose.

The deficit in trade in goods and services rose $3 billion to a record $68.9 billion. Energy imports rose, despite a slight drop in prices, making up for the shortfall in domestic output of oil and gas. The price of energy imports fell 8% in November. Meanwhile, exports recovered part of September’s drop after a strike at Boeing ended.

Consumer inflation slowed to a 0.2% increase in October, after three straight increases averaging over 0.7% a month. While drivers paid 5% less at the pump, this was largely offset by rising prices for energy for household use. Food prices also rose as a result of hurricane damage to crops and higher transport costs. Non-food and energy prices remained little changed.

Household demand picked up in November, led by autos and housing. Retail sales rose 0.3% for the third straight month (including a large upward revision to September), driven by autos. Still, autos were the only area where sales were down from a year ago. Sales ex autos and gasoline rose 0.5%, led by building materials and electronics. Rebuilding from hurricanes was not a factor in housing starts rising 5%, recapturing most of October’s drop, as starts rose everywhere but in the South. New home sales gave back all of October’s increase, but remained 6% ahead of last November. The backlog of unsold homes rose to a 9-year high of 4.9 months.

Growth continued to slow in the euro-zone with industrial production down 0.8% in October, its second monthly decline. Output contracted in every sector, led by energy and capital goods. New orders slowed as strong demand for machinery and equipment could not offset declines elsewhere. Retail sales volumes in October recovered just half their 1% fall in September. The growing energy deficit in external trade was matched by burgeoning surpluses for machinery, autos and chemicals, especially with India, Russia and China. Annual inflation eased to 2.3% in November, while the October unemployment rate was stable at 8.3%.

Industrial production in Germany posted strong growth in September and October. Similar strength in new orders helped boost business confidence to its highest level in over five years. Consumer spending rebounded in October, continued its see-saw pattern. Inflation eased for the third straight month to 2.3%.

French industrial production contracted sharply in October, more than reversing its gains in the previous two months. New orders also slid as both consumer demand and exports continued to wane. Unemployment in October eased slightly to 9.3%.

Industrial production in Italy fell sharply in September and October, matched by weak new orders. Consumer spending remained downbeat, with retail sales volumes falling for three of the last four months.

Industrial production in Japan rose for a fourth straight month in November, up 1.4%. Both domestic and foreign demand fuelled the recovery. Consumer confidence has begun to recover as seven years of deflation appeared to be coming to an end. Consumer prices rose for the first time in two years in November. Exports were buoyant, up 14.7% for their first double-digit growth in a year. Imports were also strong, gaining 16.6%, fuelled by both strengthening consumer demand and high oil prices.

Note

* Based on data available on January 6; all data references are in current dollars unless otherwise stated.