11-010-XIB
Canadian Economic Observer
August 2006

Summary table - key indicators

Overview*

Jobs and output were little changed in the most recent estimates, unable to add to sizeable gains earlier in the year. Consumer and industrial prices fell in June.

Consumers took a break in May, after retail sales had risen for seven straight months. The housing market remained robust in June. This is in marked contrast with the US, where lower housing demand led the slowdown in economic growth in the second quarter.

Outside the US, demand improved. China’s growth was the fastest in over a decade. Europe’s industrial output picked up in May, while the recovery in demand in Japan helped end six years of deflation. These gains helped spur a rebound in commodity prices in July, which spread from energy and metals to agricultural commodities. Higher commodity prices and steady interest rates also helped the stock market rebound in July.

Labour Markets

Employment was little changed in July, the second straight levelling off after May’s large advance. Instead, the most notable change was a large increase in the labour force, particularly adult women in Ontario. As a result, the unemployment rate rose from 6.1% to 6.4%, with two-thirds of the increase in Ontario.

Manufacturing and transportation shed jobs in July, and were the only non-agricultural industries where employment was down from a year-ago. Conversely, construction and natural resources have led job growth over the past year, up 7%, with education not far behind. Overall, the mix of jobs continued to shift from part-time to full-time positions.

Unemployment rose in all the regions, partly as the participation rate rose everywhere outside of Alberta and Atlantic Canada. Central Canada continued to bear the brunt of job losses in manufacturing, offset by sharp gains in trade and construction. Employment in Alberta has levelled off after May’s record gains. BC posted the largest job growth, driven by its construction boom.

Leading indicators

The composite index rose by 0.2% in June, after an upward-revised gain of 0.4% in May. The estimate for March also was revised up, to a 0.6% increase. Consumer spending remained the bedrock of growth, while the weakness in manufacturing was less pronounced. Instead, housing and the stock market were the weakest components, after leading growth early in 2006.

Households shifted their spending from housing to durable goods. Housing had led growth in the first quarter, but retreated slightly during the second quarter. Furniture and appliance sales grew steadily, while spending on other durable goods rebounded from declines early in 2006 to trend up in the last three months. The increase was driven by non-automotive demand. The personal sector also drove the increase in services employment, taking over from business services which slowed after a strong start to the year.

The manufacturing components improved slightly. The average workweek and the ratio of shipments to inventories levelled off after declining the previous month. New orders dipped, although the previous month’s preliminary estimate of a decline was revised to an increase. Manufacturing employment stabilised in the second quarter after seven consecutive declines.

The leading indicator for the United States dipped 0.1%, its first decline in a year. High gasoline prices have had a larger negative impact on consumer confidence in the US than in Canada. This reflects sharper price hikes for gas in the US, and a stronger job market in Canada. Building permits also fell, after being given a sharp boost in recent months by post-hurricane rebuilding and a mild winter.

The financial indicators were mixed. The money supply grew steadily.

Output

Monthly real GDP was unchanged in May, as sharp losses in mining and construction offset increases elsewhere. Mining output fell for the fourth time in five months. Warm weather and low gas prices continued to dampen energy output, while metal mining dropped for a fifth straight month, despite record high prices in May. Construction continued to return to more normal levels after surging during the mild winter. An upturn in housing starts in May and June points to a renewed gains.

Services continued to account for all economic growth so far in 2006. They expanded another 0.2% in May. Wholesalers led the increase, followed by solid gains in finance and information. The goods-handling segment of transportation continued to expand as trade increased, notably air and truck transport despite higher fuel prices. Urban transit was the only area of transportation where demand fell over the past year, partly due to strikes in May. Many consumer-related industries took a respite from their recent rapid gains. This was partly offset by a pick-up in government spending, notably for the Census.

Manufacturing eked out its first increase of the year. Growth was narrowly based. Aerospace continued to lead the way with an eighth straight increase, while chemicals were buoyed by growth in pharmaceuticals. Metal refining was hampered by the lack of output from mines, while the slowdown in home-building was reflected in lumber and non-metallic minerals. Auto assemblies continued to trend down more in Canada than in the US so far this year, as the popularity of models produced in Canada (notably full-size trucks) have suffered from high gas prices.

Manufacturers expect their output to be resilient in the third quarter, after a weak second, according to the business conditions survey. New orders were improving while inventories stayed under control. Petroleum, chemicals and metals were the most optimistic, although labour shortages continued to hinder production throughout western Canada.

Household demand

Retail sales volume dipped 0.4% in May after seven straight large advances. Demand growth stalled across the board: durables were restrained by slower auto sales, while price hikes dampened clothing and food and energy. The prospect of a 1% cut in the GST on July 1 (announced in the May budget) may have delayed sales of big-ticket items, and many retailers responded by lowering prices 1% in June.

Outside of autos, spending on durable goods was brisk. Partly, this reflects unrelenting price cuts so far this year (totalling 2% by May). Lower prices clearly played a role in boosting demand for TVs, the strongest-growing segment. Strong house sales also kept demand for furniture and appliances growing rapidly. Elsewhere, clothing purchases fell for the first time in nine months, partly as consumers balked at paying more for summer fashions.

Consumers continued to shrug off high gasoline prices, which have not significantly altered the type of vehicle purchased or gas consumption. Trucks and SUVs accounted for 47.7% of sales in the first half of the year, essentially the same as in 2005 (48.6%) and 2004 (47.9%). And gasoline consumption continued to increase steadily.

Housing starts rose 4.5% to 232,000 units (at annual rates) in June. This was their second straight increase, after a sharp dip in the spring when construction returned to more normal levels after warm weather boosted work during the winter. Growth was led by the Prairies (notably Alberta), which was the only region to post higher starts in the second quarter. Construction in Alberta was encouraged by sharply higher prices, which have risen 41% in Calgary and 24% in Edmonton from a year earlier.

New home sales hit their highest level since late in 2004. Existing home sales dipped in June, but remained on a record clip for the first half of the year, and prices continued to rise at a double-digit rate.

Merchandise trade

The rising Canadian dollar continued to dampen the value of both exports and imports in May, with prices falling 1.6% and 1.2% respectively. The trade surplus continued to hover around $4 billion. Exports have fallen $3 billion since December: $1.7 billion reflects lower energy receipts, mostly due to falling natural gas prices, while the volume of auto exports fell over 10%.

Exports edged down 0.2% in May, leaving them just above $37 billion for the fourth straight month. While the volume of exports rose 1.4%, prices were dampened by continued declines for natural gas and the soaring Canadian dollar.

A 5% loss for energy exports led the drop in export earnings. High prices kept crude oil near its record high set in April. But natural gas prices fell nearly 10% because of the glut in North America after a warm winter, and gas exports are less than half of the record $4.5 billion set last October. While natural gas is largely used for heating and cooling buildings, over half of crude oil is used for transportation (mostly gasoline, where demand has been firm).

Forestry and food exports also fell. The decline for forestry was the fourth straight, as lumber demand in the US slowed. Wheat led the drop in food, but global demand remains strong and prices hit a 10-year high in July after poor weather stunted the crop in the US and Europe. Metals were an exception to the weakness in resource exports, buoyed by large gains for gold and copper.

Exports of manufactured goods turned up in May. Autos rebounded from a weak performance in April. Machinery and equipment receipts were steady despite a sharp drop in prices, as increases for high-tech goods offset losses in aircraft. Aircraft sales this year have been hampered by losses in regional jets outweighing gains for business jets.

Lower prices also dampened our import bill, down 0.8% in May. The underling trend of non-energy import volume has been strong since the start of the year, reflecting buoyant consumer and business spending in Canada. Machinery and equipment imports rebounded 1.9% in May as volumes hit a record high, led by insatiable demand from the oilpatch. The volume of consumer goods imports also rose steadily, as prices fell nearly 4% since January. Autos were an exception, reflecting both slack sales and production in Canada. Oil imports fell after refiners replenished stocks in April.

Prices

The CPI dipped 0.1% between May and June, after three straight increases totalling 1%. As a result, the annual rate of inflation slowed to 2.5%, matching its average in the first half of the year.

Prices fell for a wide range of goods in June. Some of the decline reflected retailers, especially auto dealers, offering lower prices to remove the incentive for consumers to delay purchases until after July 1, when the GST was to fall by 1%. Other price cuts exceeded this 1% threshold, and appeared to be more related to the accelerating drop in import prices this year, notably for clothing and electronic goods. As well, consumers paid slightly less for energy in June after sharp increases in the spring.

Housing remained the major source of upward pressure on prices, driven by escalating costs in Alberta. Food prices also rose, led by fruit and bread. Bread cost 7% more than a year ago, as the price of wheat has jumped on world markets.

Commodity prices approached their recent high, after a small decline over the previous two months. All the major sectors participated in the increase. Energy was led by oil, where the latest conflicts in the Middle East boosted prices, while a heat wave in the US raised natural gas. Metals were inflated by nickel, which hit a record high.

Agricultural commodities turned up this summer, after lagging the other sectors in the current upswing. Wheat led the way, with prices up nearly a third due to hot, dry weather damaging crops in the US and Europe. This will give a much-needed boost to wheat farmers, whose cash receipts last year fell to $1.7 billion, the lowest since 1978. In the process, floriculture (at $2.0 billion) surpassed wheat for the first time ever as the leading cash crop. Other grains and corn profited from rising ethanol demand.

Prices of manufactured goods fell by 0.4% in June. A sharp retreat in refined metals prices led the drop, after rising to record levels in April and May. Only three other commodities saw prices fall, partly a reflection of how quickly the lower exchange rate helped to boost prices.

Financial markets

Short-term interest rates were unchanged in Canada while continuing to rise in the US. As a result, the prime rate was 8.25% in the US versus 6% in Canada, while 10-year bond yields are nearly a full point lower in Canada. After hovering around 90 cents (US) for three months, the loonie retreated to 88 cents in July.

The stock market recovered from its spring correction, rising 2% in July. The rally was led by a resumption of higher demand for metals and gains for financial and real estate stocks. Firms continued to show a marked preference for issuing new equity and retiring long-term debt in June.

Regional economy

On the Prairies, all components of household demand continued their steady growth. Retail sales increased again in May, and are up nearly 10% since December. Housing starts rose to 51,000 units (at an annual rate) in June, close to their all-time high recorded in March. Alberta’s population has grown by nearly 10,000 every month this year. This alone would represent a need for some 50,000 additional dwellings per year, since according to 2001 Census data, the average household in Alberta had 2.6 persons.

After a slow start to the second quarter, economic conditions in British Columbia quickly improved. Non-residential construction expanded rapidly earlier in the year, and in May this began to have an impact on manufacturing production.

Ontario again relied primarily on the housing sector for its growth, with housing starts continuing to rise in June from their low in April. The exports and shipments of the automotive sector continued to decline despite a rebound by the Canadian plants of foreign manufacturers. This weakness helped curtail retail sales, which registered a 1.9% drop, the steepest in Canada.

Household demand also remained weak in Quebec. However, manufacturing picked up, as in the West. Shipments jumped 3.2% in May, led by capital goods, which largely offset a sudden one-third drop of refinery shipments, following temporary stoppages for maintenance. Shipments rose 67% for transportation equipment (including nearly $600 million for aircraft), 11% for primary metals, 9% for electrical products, 5% for machinery and 3% for manufactured metal products. The metals were destined for export and the aircraft for the domestic market.

International economies

In the United States, real GDP grew by 0.6% in the second quarter, less than half its first-quarter gain. Much of the slowdown originated in housing, which contracted for the first time in over 3 years. Consumer spending also slowed, especially for durable goods, and real incomes rose only fractionally. Instead, growth was increasingly reliant on business investment and exports, both of which slowed from sharp gains in the first quarter. GDP growth for the three previous years was revised down by 0.3 points each year.

New orders rose for the fourth time in five months, led by capital goods and aircraft. This was reflected in industrial production, which rose 0.8% in June. As a result, capacity utilization in manufacturing jumped to 81.1%, a new peak in the current cycle. This is despite a 2.4% increase in capacity over the past year as firms invested more. Capacity use in mining hit a 5-year high of 91.1%, although oil and gas operations in the Gulf have still not returned to their pre-Katrina level.

Exports rose 2.4% in May, and were 12% ahead of last year, driven by capital goods. The trade deficit edged up, however, as the price of imported oil rose by $5 to $61.7 a barrel, adding $4 billion to the overall import bill. Non-energy imports fell slightly.

The housing sector continued to cool. Housing starts fell 5%, and were 11% below last year. Existing home sales fell 9% from last June, which slowed housing price increases from 12% last year to just 1%.

Retail sales were flat in June for the second straight month. Auto sales fell for the second straight month (although unit sales rose in response to discounts). Non-auto demand remained steady, as did consumer confidence, despite high gas prices.

Economic growth switched gears in the euro-zone in May. Industrial production surged 1.6% as every sector except energy rebounded strongly. New orders rose 2.3% with demand robust across-the-board. The external trade deficit widened in May as rising energy imports continued to offset gains in chemical, machinery and auto exports. Consumer spending was flat, while inflation was remained stable at 2.5% in June and the unemployment rate eased to 7.9%.

Output was upbeat in Germany in May, with industrial production rising strongly following a recent spate of strikes and bad weather. New orders retreated slightly, however, as business confidence began to waver in the wake of persistently high oil prices. Exports continued to be upbeat despite the strong euro, while consumer demand received a boost from soccer’s World Cup tournament, while boosted retail sales for the third straight month in June. Inflation eased to 2% in June.

French industrial production continued its see-saw pattern in May, rebounding 2% to more than recoup its April drop. New orders rose for the first time this year, in tune with rising business confidence. Consumer spending waned as inflation jumped to an annual rate of 2.4% in May.

Industrial production picked up slightly in Britain in May, boosted by upbeat domestic demand. Strong consumer spending, along with high oil prices, continued to buoy imports, while exports remained dampened by the steady appreciation of the pound.

Consumer demand picked up slightly in Japan in June, as prices rose for the eighth straight month from year-earlier levels. The apparent end of deflation also prompted the Bank of Japan to raise interest rates for the first time in six years in July. The unemployment rate inched up to 4.2%, although 108 jobs were available per 100 applicants.

China’s economy grew 11.3% in the second quarter, its fastest pace in almost 12 years, fuelled by soaring exports and business investment. The monthly trade surplus hit a record $14.5 billion (US) in June as exports rose 23% and imports grew 18.9% from a year earlier. Foreign exchange reserves hit $941 billion (US) at the end of June, allowing China to overtake Japan as the world’s largest holder of reserves.

Note

* Based on data available on August 4; all data references are in current dollars unless otherwise stated.