11-010-XIB
Canadian Economic Observer
August 2004

Summary Table - Key Indicators

Overview*

Both output and jobs accelerated in recent months, even as the US economy slowed in the second quarter. In both countries, the engine of growth shifted from consumer to business spending. However, Canada had the added benefit of its booming resource sector.

There were more signs that firms were beginning to step up outlays, after building an enormous war chest in recent quarters. Corporate saving totalled $69 billion in the 12 months ending in the first quarter. Profits rose to new highs but business investment outlays grew only 1.2% over the same period, inventories were cut after last summer’s build-up, and private sector payrolls rose less than 1% in the year to March.

Starting in the second quarter, corporate outlays began to accelerate noticeably. Imports of machinery and equipment jumped 14% in May, their largest increase in two decades, and reinforcing a gain in April. The surge in demand was broadly based, with the sharpest increase in the oilpatch where record prices stimulated exploration and development after a lengthy decline. Other spending on non-residential construction also turned up in April and May. Meanwhile, private sector payrolls grew by 57,000 people (or 0.5%) since March.

Firms also seem to be more satisfied that inventories are under control: 14% of manufacturers said inventories in July were too high, down from 24% a year-ago. With sentiment about orders at a 4-year high, the major difficulty reported by firms was a shortage of raw materials, especially in metals. The increase in imports of machinery and equipment occurred despite higher prices so far this year. The rise of the Canadian dollar over the summer should exert renewed downward pressure on prices of these imports (which fell 12% in 2003 when the dollar soared). But the rising loonie also has begun to squeeze prices received by manufacturers, after five straight increases to start the year.

Labour Markets

Employment rose 0.1% in July, after three straight months of solid gains. All of the increase originated in part-time positions. Full-time jobs fell 0.3%, their first drop since last August, with a total gain of 2.7% over that period. With the labour force contracting marginally after over a year of almost unbroken growth, the unemployment rate edged down to 7.2%. The drop in the labour force was concentrated in youths, while there was a large influx of people 55 and over.

Most of the slowdown in job growth originated in the public sector, down 1% due to losses in health and education. Meanwhile, private sector payrolls posted their largest gain of the year, continuing a recovery that began in the second quarter after a drop in the first. Construction again led the way, riding the wave of the housing boom. Manufacturing jobs posted their fastest increase since before their slump in 2003. Business services also picked-up, another sign of increased business spending.

Regionally, July’s results were the mirror image of June, with the largest job increases east of the Ottawa river and weaker results in western Canada. A 5% gain in Newfoundland led employment growth in the Atlantic region, fuelled by investment in the resource sector. While construction was strong across the country, Quebec posted the largest increase. Gains in Ontario’s manufacturing base offset losses in its service sector. But there was no such counter-weight in western Canada, where jobs fell.

Leading indicators

The leading indicator grew 1.1% in June, comparable to the 1.2% advance in May, and their largest increases since spring 2002. Nine out of the ten components continued to rise, led again by housing and the US leading indicator. The three manufacturing components again rose in unison.

The housing sector remained a pillar of strength, up 3% in June. This was the largest of four straight increases, as the West reinforced gains in central Canada. The prairies led the way with a 17% jump, hitting one of their highest levels in 25 years. At the same time, existing home sales in British Columbia set a new record high in the second quarter, up one quarter from a year earlier.

Driven by the housing boom, outlays for furniture and appliances accelerated for the third month in a row, up 1.1%. The renewed strength in demand for housing and household goods reflects low interest rates coupled with an upturn in employment. Job growth was particularly strong in Alberta and British Columbia whose resource base benefited from strong demand in commodity markets.

The US leading indicator posted its thirteenth straight increase. As in Canada, growth was spread among nine of its ten components. This upturn has accompanied a sharp rebound in our exports to the US. Export growth was shared by natural resources, notably lumber as construction demand surged in the US, as well as autos.

The upswing in final demand reinforced the recovery in manufacturing. This was most evident in the ratio of shipments to stocks, which over the last eight months has recovered all of the ground lost over the previous three years. New orders posted their second straight increase after a one-month dip. Manufacturers met their growing demand for labour by extending the workweek.

Services employment was the one component to fall, for a fifth straight month. The weakness mostly comes from food and accommodation, at a time when travel to Canada remained weak, especially from the US.

Output

The volume of GDP grew 0.3% in May, after gains totalling 1% over the previous three months. The increase in the last three months was the largest in over 2 years, excluding the rebound from last year’s blackout. An upturn in GDP growth has been signalled by the leading indicator since last autumn. Growth was driven by the resource sector, housing and a recovery from public sector strikes in April.

Energy and mining continued to lead the boom in resources. Oil and gas output rose strongly for a second straight month, fuelled by natural gas exports. The recent gains in the oilpatch also triggered higher exploration and development in the second quarter, after cold weather hampered drilling at the start of the year. Metal mining posted a third straight advance, while increased diamond output sent non-metallic minerals up at a double-digit rate for the second time in three months. Forestry operations levelled off after three straight gains, although lumber exports hit a 2-year high. Construction work grew thanks to a third straight increase in home-building.

Transportation posted a third consecutive gain of 1%, largely due to gains in areas most dependent on resources (rail, water and pipelines). However, wholesale activity was dampened by weak auto sales.

Overall, services were little changed for a second straight month. Some public services rebounded from strikes in the provincial sector, although labour disputes continued to hamper health care as well as gambling. Business demand for services remained cautious, while consumer demand stumbled.

Household Demand

The volume of retail sales edged down 0.2% in May, its second straight dip after a strong start to the year. Part of the weakness originated in a 14% jump in gasoline prices, the largest monthly increase in
21 years. Not only did this hike drain purchasing power from other goods, but the higher cost of filling up at the pump also discouraged vehicle sales, to judge by the larger declines for trucks than cars. The slump in auto demand continued for a third straight month in June.

Elsewhere, consumer spending was sluggish across the board. A cool, wet spring helped dampen clothing purchases for a second straight month. Higher prices deterred consumption of both food and computers. Not even a brisk housing market could stimulate higher sales of furniture and appliances.

Housing starts held at about 232,000 units (at annual rates) in June, the same level as in April and May and well above the first-quarter average. But starts of single-family homes slipped to their lowest level since last summer (except for the dip induced by the extreme cold at the start of this year). The drop in ground-breaking on new homes partly reflects the recent retreat in new home sales, a trend that accelerated in June. Existing home sales remained steady, while new listings of homes have risen sharply this year.

Merchandise trade

Propelled by a surge in business investment, imports jumped nearly 8% in May, their largest monthly increase since January 1997. Meanwhile, exports continued to grow for a fourth consecutive month. But the growth of imports swamped exports, driving down the monthly trade surplus to its lowest level since January.

Machinery and equipment imports soared 14%, accounting for about half of the increase in our total imports. In turn, about one-third of this gain reflected the one-time effect of the arrival of specialised drilling equipment. But there also were sizeable gains for a wide range of capital goods, notably computers.

Elsewhere, import demand rose sharply for autos, consumer goods and energy. Autos were driven by parts needed by the faster pace of assemblies destined for export, as weak sales in Canada dampened demand for imported vehicles already assembled. Pharmaceuticals led the growth in consumer goods, while higher prices inflated our energy bill.

Exports expanded a further 1.3% in May, bringing their cumulative increase since January to 14%. This rebound has recouped all of the losses posted in 2003, allowing exports to touch new highs. Increases of 20% or more in shipments to Europe and Asia have reinforced a solid 14% gain in exports to the US since the start of the year.

Resource products remained the stellar performers in the export sector. Forestry products were propelled by a 16% surge for lumber, after new home sales in the US jumped 15%. Lumber has recouped all of its drop following the imposition of punitive tariffs by the US in 2002. Energy was boosted by rising US demand for natural gas, while food was lifted by shipments overseas of fish and wheat.

Exports of end products stalled after three months of solid growth. Most of the weakness originated in machinery and equipment, notably in the volatile aircraft category. Autos posted a fourth straight increase, with US sales particularly strong for models produced in Canada.

Prices

The consumer price index edged up 0.1% between May and June, after jumping a full percent over the previous two months. This left the annual inflation rate at 2.5%, driven by a 25% hike in the cost of filling up at the pump.

Consumers got a temporary respite from higher gasoline prices last month, which partly explains the sudden deceleration in inflation. Sluggish sales in May helped trigger price discounts for autos, clothing, and furniture and appliances.

Prices rose for food and housing. Food was inflated by higher meat prices, especially beef which has recovered to its level before the discovery of mad cow disease in Alberta in May 2003. As well, the mass slaughter in BC because of avian flu sent chicken prices there up 14%.The price of housing continued to rise, with new home prices up sharply, outweighing the lower cost of mortgage finance.

Oil prices resumed their upward march, with crude hitting a 21-year high of $43 (US) a barrel at the end of July. Concerns over the reliability of supplies in the Middle East and Russia occurred against the backdrop of strong global economic growth. The latter also supported strong markets for metals and lumber. Food prices retreated at the prospect of a good grain harvest.

The rising Canadian dollar began to squeeze prices received by Canadian manufacturers. Industrial prices fell 0.5% in June, entirely due to the rising Canada/US exchange rate which continued into July. Prices had risen steadily in the first five months of the year encouraged by a lower exchange rate.

Financial markets

The stock market retreated 1% in July, giving back one-third of the ground gained over the previous two months and leaving prices at about the same level as at the start of the year. Info tech stocks suffered a sharp setback, while metals lost some of their lustre after two months of sharp increases. But record prices kept energy stocks soaring.

The Canadian dollar continued to strengthen, up over a full cent to 76 cents (US), not far from its 10-year high set in 2003. The prospect of higher interest rates may have encouraged a sharp increase in household credit demand in April and May. As well, there was a spike in short-term rates in June, accompanying a drying-up of fundraising in bond and stock markets.

Regional economy

Natural resources continued to drive the economies of Western Canada. With the end of the strike that paralysed rail transport for much of April, wood and paper shipments rebounded in British Columbia. In fact, they more than made up for the decline recorded in April and approached the highs recorded in early 2000. The booming US housing market continued to dominate exports, accounting for half their growth since the same period last year. The second biggest source of growth was China, which is rapidly catching up to the United States and Japan as BC’s main export market. China accounted for one-quarter of the province’s year-over-year increase in exports. Exports from the Prairies also continued to climb, rising 30% from last year on the strength of industrial goods and energy. However, manufacturing shipments from Alberta fell sharply, pulled down by computer products.

In Central Canada, domestic demand rather than exports continued to account for the economy’s solid performance. Ontario’s retail sales made up their April loss, while housing starts edged up for a second consecutive month to approach their high for the year, recorded in March. These sectors contributed the most to an increase in manufacturing shipments, which rose 1.8% in May for their fourth consecutive advance. They were also buoyed by the continuing recovery of the auto sector. For the first time in May, Ontario shipments exceeded their previous record high set in October 2000.

Retail sales also rebounded in Quebec. Housing starts slipped from their 15-year high registered in March, but non-residential building permits strengthened in the commercial sector. Quebec still surpassed the national trend in permits by a wide margin. Shipments declined as wood and metal shipments shifted westward with the resumption of rail transport in BC: in April, Quebec had picked up the slack from Western Canada for wood and metal shipments.

International economies

Second-quarter GDP in the United States eased to 0.8% largely due to the smallest gain in consumer spending since the 2001 recession, especially in sectors sensitive to higher oil prices. Auto sales fell for a third straight quarter, while lower energy consumption pulled down non-durable goods. Most other sectors of household spending remained strong, notably housing. This reflects steady growth in real incomes, as more jobs offset the effect of higher gasoline and food prices.

The recovery of business investment continued for a fifth straight quarter, after over two years of steady declines. In fact, the increase in investment spread from equipment and software to structures. Strong investment demand kept imports rising briskly. Export volume continued to grow faster than imports (12% versus 10% over the past year), in response to the lower US dollar and stronger growth overseas. But the nominal trade deficit was swollen again by higher oil prices.

Revisions slightly altered the pattern of the 2001 recession. Instead of three straight quarterly declines in GDP, a gain in the second quarter interrupts declines in the first and third, with an overall drop of 0.2% instead of 0.5%. As well, corporate profits were revised down further for the last three years, including a $48.8 billion (or 4.6%) revision to 2003.

The boom in autos and housing appeared to be waning as summer started, which had spillover effects on retail sales and industrial production. New housing starts fell 8.5% in June. More notably, they were at their lowest level in over a year. A more encouraging note was that new home sales remained at an historically high level, despite a slight dip in June.

Retail sales retreated 1.1% in June. Most of the drop reflected slower auto sales, which at an annual rate of 15.4 million were the weakest in over a year. The drop was especially pronounced for trucks produced in the US, while sales of imports held up. Demand recovered in July.

Elsewhere, the cooling of the housing market was reflected in lower sales of a host of related items over the last two months (furniture, appliances and building materials). Gasoline consumption fell, partly as prices continued to soar, up 3% to a new record and one-third higher than last June. Food prices also jumped due to increases for dairy products and a recovery of beef from its BSE-induced slump in the first quarter. Excluding food and energy, prices rose only 0.1%.

Industrial production slipped 0.3% in June, as manufacturers trimmed output for the first time in over a year. Auto assemblies fell 4%, after a 5% drop in May, putting an end to a string of three consecutive quarterly increases. Output of construction materials also stalled, after having been a reliable source of growth all year. Business investment remained the leading sector of growth, notably high-tech goods. New orders in June suggest demand remains strong for capital goods. But non-defense orders fell for a third month in a row, with weakness in autos, electronics and metals.

The pace of production accelerated in the euro-zone in May. Output rose 0.7%, its fourth straight increase, buoyed by a strong gain in capital goods. The energy sector rebounded 0.8%, recovering half of its loss the month before. New orders fell slightly after three strong gains due to a sudden reversal for electronics. The external trade surplus grew in May when the energy deficit decreased and the surplus for machinery and vehicles widened. Inflation eased to 2.4% in June as price hikes for fuel, alcohol, tobacco and health care were offset by declines in clothing, telecommunications and autos.

French industrial production continued its see-saw pattern, rising 0.2% in May after a similar drop the month before. On a year-over-year basis, however, output was up 4.4%, led by capital goods. New orders fell slightly for the second month in a row, but remained up 25% year-over-year since March. Consumer spending retreated in May, leading to a dip in imports, while exports gained 5%.

Output remained upbeat in Germany in May. Industrial production grew 1.2% on the heels of a 1.5% gain in April, while new orders accelerated 3.4%. External demand drove the increase, as consumers remained pessimistic in the wake of rising unemployment, welfare and health care reforms, as well as increased pressure from firms for wage concessions and productivity improvements. The volume of retail sales fell 1.8% in May and was down 2.9% from a year earlier.

Japan’s trade surplus continued to expand in June, rising for the 12th straight month, propelled by robust exports to Southeast Asia. The surplus with other Asian countries jumped 65% for the month, and was up 20% with the US. Overall, exports rose 19%, while imports gained 15% on the strength of a rebound in domestic demand. The unemployment rate was unchanged at 4.7% in May.

China’s year-over-year growth eased to 9.6%, despite the depressed level in the second quarter of 2003 due to the SARS outbreak. Business investment slowed from its torrid pace, while industrial production growth decelerated in June for the fourth straight month as government lending curbs cooled the economy. Singapore’s economy expanded 11.7% on the strength of rising global demand for its electronic exports.

Note

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