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11-010-XIB
Canadian Economic Observer
February 2007

Current economic conditions

Summary table - key indicators

Overview*

The economy continued to recover from its late summer slump. Output grew slowly in November, led by a rebound in auto assemblies. Output was hampered by a series of storms on the west coast, which disrupted transportation and trade. Employment in January added significantly to its gains in December, after trailing GDP growth in November.

Employment was driven by increases in the booming economies of Alberta and BC. These gains, along with rising stock market wealth, suggest that the lull in retail sales growth in November will be temporary. As well, factory jobs continued their slow recovery that began in September 2006.

Exports in November recovered most of their declines over the previous two months. The increase was broadly based, a reflection of the strength of US demand by year-end. The recent retreat in the exchange rate helped boost prices and export earnings.

The US economy accelerated at year-end. Both housing and autos recovered slightly in November and December, after being the weakest sectors most of the year. The slump in autos and housing never spread to other sectors, and consumer and business demand remained robust, especially for high-tech goods. Stronger export demand from overseas and a lower import bill also continued to shrink the trade deficit. Job growth remained sufficiently strong in January to boost consumer confidence to a 2-year high.

Labour markets

Employment rose 0.5% in January, its third straight solid advance. The increase was equally split between full-time and part-time jobs. Private sector payrolls continued to account for almost all of the employment gain as they have for most of the past year, rising 393,000 from January 2006, while the ranks of the public sector and the self-employed were little changed. An influx into the labour force nudged up unemployment to 6.2%.

The booming Alberta and BC economies contributed two out of three of the jobs added in January. Growth in Alberta continued to be driven by the goods-producing sector, notably natural resources and manufacturing. BC’s increase was more in services, although natural resources and construction also continued to expand. Despite the burst of jobs, Alberta’s population and participation rate both increased enough to keep unemployment steady at 3.3%. In BC, however, a smaller response of the labour force sent unemployment tumbling to a record low of 4.3%.

Employment in Ontario was little changed, as more losses in factory jobs offset gains in services. Together with an increase in the labour force, the unemployment rate returned to above the national average. Quebec posted modest job gains, led by natural resources and education, while manufacturing continued to fare better than in Ontario.

Leading indicators

The composite leading index grew by 0.3% in December, after a 0.5% surge the month before. Growth continued to be driven by consumer spending and financial markets. Sluggish export markets in the US restrained growth.

Consumers kept spending on durables as Christmas approached, led by more spending on furniture and appliances. Other durable goods were buoyed by strong sales of flat panel televisions, which offset slower auto demand. The personal sector also buttressed the growth in services employment. Housing turned up for the first time in nine months as existing home sales hit their highest level in 2006. Housing starts ended the year on a weak note.

The stock market set another record high. Metals completed a year of strong growth, while energy issues again were lacklustre. These trends were reflected in export earnings, where metals have jumped by one-third in the past year while energy fell 20%, pulling its ranking down from our leading export group to only the fourth largest export.

The trend of the US leading indicator was unchanged in the last two months, after five straight declines. After the first increase in new orders for Canadian manufactured goods in six months, orders slumped anew in October. Manufacturing activity appears to have bottomed out, at least temporarily, as jobs recovered slowly in November and December.

Output

Real GDP continued to rebound from its drop in September, with a 0.2% increase in November following no change in October. The increase was led by manufacturing, up 1.6% after three months of contraction.

The auto sector led the turnaround in manufacturing. Assemblies increased 14% to offset all of the losses over the previous four months. The recovery in autos boosted other industries such as steel, and reverberated downstream in goods-handling industries.

Construction-related industries snapped out of a prolonged slump, with sawmill output increasing for the first time in five months while non-metallic minerals ended a 7-month string of losses. The upturn in these construction-related industries reflected a rebound in construction on both sides of the border. Construction in Canada grew by 0.2%, while US housing starts rose in November and December. Building permits point to further gains on both sides of the border.

Metal mining continued to ramp up output in response to record prices. Its 10% gain was the best year-over-year increase since 2000 (excluding strikes). But overall mining output was dampened by further large losses in the energy sector. Warm weather also lowered demand for utilities.

Services continued to grow steadily outside of wholesale and retail trade. Travel and recreation services posted a fourth straight month of solid gains, with travel especially strong in Alberta. Business services continued to expand, while finance was buttressed by the stock market and merger activity.

Household Demand

Retail sales edged down 0.2% in November after a 0.6% drop in October. These declines follow robust growth totalling 9% over the previous year.

Clothing purchases fell over 2% for a second straight month, giving back all the ground gained in September. Unseasonably warm weather and higher prices in November dampened demand for winter clothing. Price hikes for food and gasoline also slowed consumption of non-durable goods.

Demand for big-ticket durable goods, usually a leading indicator of overall consumer spending, rebounded in November. Autos led the way, and sales continued to strengthen in December. Unit auto sales were stronger than dollar sales, reflecting a shift from trucks to the less-expensive car category in both months. Sales of other durable goods slipped, including a rare decline for computers and electronics.

The new housing market ended the year on a weak note. Housing starts fell 9% to near their lows for the year (although starts totalled a robust 227,400 units in 2006). More importantly, starts of single-family homes tumbled for a third straight month. Ground-breaking for multiple units also declined, despite mild weather in many regions which usually encourages work on high-rise apartments and condos.

New home sales fell sharply in December, apparently justifying the hesitancy of builders to construct. But sales of existing homes jumped nearly 5% to their highest level of the year.

Merchandise trade

Exports rebounded 2.8% in November, offsetting most of their losses over the previous two months. With imports little changed, this sent the trade surplus to an 8-month high of $4.7 billion.

The recovery of exports was evident in all sectors outside of forestry products. Autos and energy led the way, after bearing the brunt of slower US demand most of the year. Autos rose 5% as both output and sales on both sides of the border rose. Energy was led by gasoline, as the US mandated increased use of low sulphur diesel. As well, natural gas prices rallied briefly.

Elsewhere, increased demand for metals sent industrial goods exports to a record high of $8.5 billion. They have been Canada’s leading export since May. Just a year-earlier, they were only the fourth largest export, behind energy, machinery and equipment, and autos. Industrial goods and energy have reversed positions, reflecting the relative prices of metals and energy products in the past year. Exports of machinery and equipment remained in second place, buoyed by higher aircraft shipments in November.

Forestry products continued to shrink. At just $2.6 billion, they have fallen behind agricultural products to rank as Canada’s sixth largest export. Lumber prices retreated again, in the first full month of the new agreement with the US on softwood lumber trade.

Imports edged up 0.4%, driven by the revival of the auto sector and record imports of consumer goods. Business demand for machinery and equipment levelled off after touching a record high in October. Elsewhere, a sharp recovery in energy imports offset a large decline for industrial goods.

Prices

Consumer prices rose by 0.4% between in December after a 0.3% increase in November. As a result, prices were up 1.6% from December 2005, slightly below their 2.0% average for all of 2006. A temporary rebound in gasoline prices led the increase.

Elsewhere, the cost of housing continued to rise steadily. This reflected the soaring price of new homes in Alberta and higher mortgage rates across the country. Still, the cost of shelter has not accelerated since the year-over-year increase reached 4% in May. The upward pressure on new home prices has moderated, especially in Calgary where prices fell in two of the last three months. As a result, the national monthly index for new house prices in December did not increase for the first time in almost 7 years. Conversely, food price increases nearly doubled since the summer. As well, tobacco prices rose.

The price of durable and semi-durable goods remained over 2% below the level of a year-earlier. Retailers slashed clothing prices in the wake of slumping demand after winter arrived late in much of the country. Prices for a wide range of durable goods continued to fall, notably appliances and electronics.

The recent slide in commodity prices came to an abrupt end in mid-January. The belated arrival of winter in much of North America triggered a rebound in energy prices. Metals prices stayed high, notably nickel which set new records.

Crop prices stayed strong, notably for wheat as global supplies dwindled, but especially for corn as the shift to ethanol in gasoline boosted demand. A cold snap in California sent fruit and vegetable prices soaring. Conversely, livestock prices fell, partly as the higher price of feed forced some farmers to slaughter their animals. These shifts in agricultural commodity prices already have been felt by consumers: the cost of bread was up 10% from a year-earlier, while meat prices have fallen since September.

Prices for manufactured goods strengthened across the board at year-end. About one-third of the 1.4% increase reflected the decline in the exchange rate. As well, prices for metals (notably nickel and aluminum) and gasoline jumped over 4%.

Financial markets

The Canadian dollar continued to decline slowly, slipping below (US) 85 cents for the first time in 14 months. The retreat accompanied lower commodity prices, while interest rates were little changed.

The Toronto stock market set another record, up 1% in January. Energy and metals stocks did decline in tune with lower prices on world markets. But these declines were more than offset by gains in all other sectors, notably real estate, consumer and high-tech stocks.

Corporate demand for funds rose sharply in the fourth quarter. Short-term business credit jumped a record $10 billion in November, notably bankers’ acceptances and bank loans. Some of this may reflect the boom in mergers and acquisitions last year. New equity issues topped $3 billion in December, after takeovers of some large public mining companies by private equity firms triggered a drop in net equity issues in the autumn.

Regional economies

Retail sales and manufacturing shipments growth in November were strongest in the Atlantic provinces, followed by central Canada, while they fell in western Canada. This is a reversal of the trend through most of the year. Housing starts in December fell in all regions, despite the delayed arrival of winter in the east.

Shipments in the Atlantic provinces received a boost from the re-opening of an oil refinery and the recovery from a mining strike. Manufacturing in Ontario was driven by a recovery in autos, following substantial declines over the previous two months. Quebec’s growth was led by pharmaceutical products (such as vaccines) and primary metals.

Strong shipments of capital goods reflected the strength of business investment in Alberta, also evident in record building permits. But overall shipments have fallen for four straight months, reflecting the recent slump in oil prices, cooling retail sales. Frequent storms and power outages hampered retail sales in BC, with some malls closed for up to three days. These storms also hampered manufacturing and transportation.

One reason for the different regional fortunes of manufacturers originates in lumber. Sawmill production has fallen in recent months. But each province fared differently. BC has been immune to the cuts, reflecting its larger more efficient mills and need to keep cutting timber due to disease. Quebec suffered the largest losses, due to the mandatory 20% cut to logging operations and smaller inefficient mills.

International economies

In the United-States, fourth-quarter real GDP grew by 0.9%, sustaining year-over-year growth at 3.4%. A pick-up in consumer spending and net exports more than offset a fifth straight drop for housing (totalling 13%) and lower business spending on investment and inventories. Defense spending directly accounted for only 5% of growth. For all of 2006, growth improved slightly from the 3.2% gain in 2005, despite losses in both the auto and housing sectors.

The labour market remained strong, adding 111,000 jobs in January after large upward-revised gains late in 2006. Services continued to lead growth, and mild weather helped construction post its first gain since August. Housing continued to shed workers, while cuts in the auto industry pulled down factory jobs for a fifth straight month. Low unemployment and falling gas prices sent consumer confidence to a 2-year high in January: only 27% expect unemployment to rise in the next year, versus 41% in August when gas prices peaked.

The housing market ended its weakest year in over a decade with modest gains. New home sales rose 4.8% in December on top of an upward revised gain the month before. With the number of homes under construction falling steadily, this brought supply more in-line with demand: the inventory of unsold homes was up only 4.7%, the smallest year-over-year increase since July 2003. As a result, housing starts rose about 5% for a second straight month, after plunging 35% over the previous nine months, although warm weather may have played a role in the latest increase (the Northeast accounted for most of the advance, while starts in the South–which account for half of the US total–fell slightly).

Existing home sales also tentatively bottomed out at around 6.2 million units over the last four months. This also helped to nudge sales more in line with inventories, and stabilize prices after four consecutive year-over-year declines.

Retail sales continued to power ahead, up 0.9% in December after a 0.6% advance in November. Growth was led by electronic and appliance stores, up nearly 10% over the last two months as consumers loaded up on flat panel TVs and electronic games. Year-over-year growth in these stores hit 15%, the most since the early 1990s. Conversely, building materials sales fell from a year-earlier, after leading growth as recently as the spring.

Year-end incentives gave a slight push to auto sales. Still, for all of 2006 sales fell 3% to 16.5 million units. The market share of US manufacturers ended the year at a record low of 51.8%, partly because of a shift in demand from light trucks to more full-efficient passenger cars.

Industrial production increased in December, driven by a 0.7% gain in manufacturing, its largest since June after three months of no growth. Capital goods spearheaded the advance, reflecting demand for aircraft and high-tech goods. Output of construction materials and consumer goods (notably autos) began to recover from sharp cuts in the fall. New orders remained positive, especially for autos and capital goods.

Lower oil prices and higher exports of capital goods trimmed the nominal trade deficit for the third straight month. At $58.2 billion in November, the deficit has shrunk by $10.3 billion from its high in August. Oil imports contributed $8 billion to this decline. Exports rose for the fourth straight month, led by capital goods such as aircraft. Export prices rose 4.6% in the past year, twice the increase for imports as the terms of trade have shifted in favour of the US since September.


Note

* Based on data available on February 9; all data references are in current dollars unless otherwise stated.



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