11-010-XIB
Canadian Economic Observer
August 2007

Summary table - key indicators

Overview*

Output in May recovered from its lull in April, while employment growth continued into July.  While the unemployment rate hit a 33-year  low and commodity prices remain high, financial market conditions weakened in response to a global reassessment of risk.

One of the most striking features this summer was an upturn in manufacturing.  In the July business conditions survey, more manufacturers plan to expand than lower output in the third quarter.  This optimism was reflected in factory employment in July, which posted its first significant increase in nearly a year.  These July improvements in mood and jobs followed the sharp rise in the dollar to above US 95 cents in the second quarter.

The improvement in manufacturing has been evident in output in the first half of 2007.  After steady declines throughout 2006, manufacturing output stabilized in the first quarter.  After an increase in May, it likely posted its first quarterly increase since late 2005.  The upturn has been led by capital goods industries such as machinery and non-metallic minerals which are needed to feed growing business investment.  The aerospace industry and resource-based manufacturers (outside of forestry) also continue to fare well.

With the unemployment rate at 6.0%, it is not surprising that household spending remains robust.  Retail sales in May posted their largest increase in almost six years.  Meanwhile, existing home sales in the first half of the year were on a record-setting pace.

The buoyancy of household spending in Canada is in marked contrast with the US, where consumer spending slowed in the second quarter and housing remains in a slump.  Nevertheless, overall growth in the US accelerated, reflecting strong gains in business investment and exports.  Canadian exporters continued to diversify away from the US market, however, as the dollar approached parity with the US greenback.

Labour markets

Employment eked out a 0.1% gain in July, led by continued growth in full-time positions. With the labour force unchanged, this lowered the unemployment rate to a 6.0%. The decline was concentrated among youths, whose 3% job growth in the past year outstripped that for adult men and women.

Goods-producing industries added jobs last month while services shrank, a reversal of their trend in the first half of the year. The turnaround was led by manufacturing, which expanded by 20,000. Services were pulled down by a sharp decline in education. Business services and goods-handling industries continued to grow steadily.

Alberta led all provinces in job growth, fuelled by gains in its service sector. This sent its unemployment rate down to 3.3%, as Alberta by itself accounted for all of the drop in the national rate. Ontario was the only other province to add jobs, as factories recouped about half of their job losses in the first half of the year. Nevertheless, Ontario’s unemployment rate edged up, mostly in Toronto. In fact, the 7.3% unemployment rate in Toronto was significantly above Montreal’s 6.7% rate, after moving higher for the first time ever in June. Employment was little changed in the other provinces in July.

Leading Indicators

The composite index rose 0.2% in June, after a downward-revised increase of 0.4% in May. Only five of the ten components were up, the fewest since last autumn’s slowdown, while two were unchanged and three decreased. Consumer spending remained the bulwark of growth.

Consumer demand for furniture and appliances accelerated to a 0.7% gain, its largest so far this year. Spending on other durable goods also equaled its high for the year, driven by strong auto sales. Personal services remained the major source of growth in services employment. The housing index slowed, as higher existing home sales were offset by fewer starts in the volatile multiple units category. Ground-breaking on single-family homes continued to strengthen.

All the manufacturing indicators softened. New orders posted their first decline of the year, notably as auto sales slowed in the U.S. Demand for capital goods remains strong, however, especially machinery needed by the oilpatch. Shipments growth stalled, which held in check the ratio of shipments to stocks. The average workweek shrank again.

The sharp upward movement in the exchange rate in the second quarter compounded the slack in U.S. demand for our exports. The U.S. leading indicator remained little changed, reflecting ongoing weakness in the auto and housing markets. Partly as a result, Canada’s exports south of the border were up only 2.3% in the past year. Instead, exporters have diversified to overseas markets, where exports have risen 31% since May 2006.  

Output

Real GDP growth resumed with a 0.3% gain in May, following no change in April and an upward–revised 0.4% increase in March. Services drove May’s advance, while goods were checked by losses in the primary sector offsetting increases for manufacturing and construction.

Services benefited from the strength of consumer spending. Retailers saw the biggest gains, but recreation (notably gambling) and accommodation and food also rose. For the latter, it was the first gain of the year, with accommodation particularly affected by the dampening effect of the rising dollar on the flow of visitors from the US.

Business and financial services continued to post strong gains. Robust trading on financial and real estate markets encouraged these gains. Stagnant trade flows slowed growth in the goods-handling industries.

Mining output fell for a third straight month, primarily due to double-digit cuts in exploration and development for natural gas. As a result, the services to mining industry has shrunk 40% just since January, and is operating at its lowest level this decade.  Persistently low natural gas prices have curtailed drilling. While oil prices remain high, drilling for conventional sources of oil has not picked up, as the industry focuses on developing the oilsands (which require little drilling).

Elsewhere, mining activity continued on its upward trend in response to high prices. Output of metal mines rose 6%, buoyed by strong gains for copper and nickel. Non-metallic mining output dipped, but after 13 consecutive increases totaling 30% this industry remains one of the fastest-growing in the economy. This largely reflects higher output of potash.

Manufacturing output continued to recover from its slump last fall. Its 0.3% gain in May was the third in four months, and left output 1.8% above its low last October. Capital goods industries continued to expand, led by non-metallic minerals and machinery. These industries stepped up output to meet the growth of business investment, notably non-residential building which rose again in May to bring its growth so far this year to 8%.

Household demand

Retail sales volume jumped 2.5% in May, their largest monthly gain since November 2001. Autos set the pace, with strong gains in demand for both new and used vehicles. While unit sales of new vehicles dipped in June, for the first half of 2007 they were on pace for their second–strongest year ever (just shy of the record set in 2002).

Consumer demand for clothing jumped 4%, sparked by deep discounts for prices. The cost of clothing imports dropped over 4% in May as the dollar soared, bringing the total decline so far this year to 10%. A strong housing market continued to boost sales of furniture and appliances. Consumers took a respite from spending more on other durable goods, notably TVs, after this area had led growth since the start of the year.

Sales of existing homes continued to strengthen in June, and remain on track to easily surpass last year’s record number of transactions. Sales so far this year were rising at a double-digit rate in most major cities. The notable exceptions were Calgary and Vancouver, where double-digit price increases have squeezed some buyers out of the market.

The new home market remains more subdued than that for existing homes. Sales improved steadily through the second quarter. This helped lower the backlog of unsold homes. Partly as a result, developers boosted starts of single-family dwellings for a third straight month in June, although the average for the first half of the year was 5.8% below 2006. Ground-breaking on multiple units was on pace to slightly surpass last year’s 30-year high, despite a slight drop in June.

Merchandise trade

A steep appreciation of the Canadian dollar led to falling export and import prices in May. Price declines accounted for lower export and import values, which fell 1.2% and 1.4% respectively. Volumes were stable for the month.

The overall trade surplus was unchanged at $5.9 billion in May, as both the trade surplus with the US and the deficit with the rest of the world narrowed. The trade deficit with countries other than the US fell to $1.8 billion in May, its lowest level in nearly six years, from $3.4 billion in February. This shift in the trade deficit with countries other than the US was led by a sharp rise in exports, attributable to higher aircraft shipments and the continued growth of industrial good export prices. There was also a drop in import values reflecting lower import prices as the dollar climbed.

Given the decline in prices, export volumes of agricultural, forestry and automotive products were less affected than export values. However, their declines were sufficient to offset gains in the volume of energy (+1.3%) and machinery (+3.8%). Aircraft exports spiked to a record-high volume, surpassing the earlier record of November 2001. Prices continued to buoy earnings for industrial goods, which hit a record $9.2 billion in May as uranium, iron ore and nickel export values reached new highs. 

Increased demand for crude oil and refined petroleum by the Eastern provinces accounted for an 11.3% increase in energy imports. Agricultural imports, which eked out a 0.3% rise for the month, showed much stronger volume growth, primarily in fruits and vegetables. Demand for foreign machinery was up in May, with volumes advancing 1.2%. Price declines resulted in importers paying 2.2% less for their machinery purchases for the month. Finally, Canadians’ appetites for imported consumer goods remained strong, only slightly below April’s record high volumes.

Prices

Consumer prices were unchanged between May and June, leaving the annual inflation rate steady at 2.2% for the third straight month.  Energy prices levelled off during the second quarter, after leading price hikes early in the year.  Instead, new home prices have exerted the most upward pressure on prices, notably in Alberta.  As a result, inflation in Alberta was nearly triple the national average at 6.3% in June.

Prices slowed for a number of non-energy products as summer began.  The cost of clothing fell sharply again, after the stronger loonie had lowered the cost of imports in May.  The cost of food fell steadily through the second quarter, notably for fruit and vegetables which have a high import content.  As a result, the year-over-year increase of food prices has slowed a full point from its high of  4.1% in February, defying predictions that higher demand for bio-fuels would raise food costs.

Commodity prices in July recovered most of their small losses in June.  Energy led the turnaround, with crude oil prices approaching their record of $78 (US) a barrel on reports of strong demand from US refineries.  Metals prices continued to rise, except a dip for nickel.

The soaring Canadian dollar continued to dampen prices received by manufacturers.  Industrial prices fell 1.3% in June after a 0.5% drop the month before.  While the bulk of the decline was due to the exchange rate, prices otherwise still would have slipped 0.5%.  This mostly reflected lower prices for refined metals and gasoline.

Financial markets

The Canadian dollar continued to appreciate, rising above 96 cents (US) in July after its rapid climb during the second quarter. The increase accompanied the first hike in short-term interest rates in over a year. Bond yields were mixed. Federal government rates eased slightly in July, but corporate rates rose for a third straight month. This mirrored a similar trend away from riskier assets in the US.

The Toronto stock market dipped about 1% for the second straight month, its first back-to-back declines since June 2006. Real estate and financial stocks suffered the largest losses. While metal mining continued to benefit from high prices, energy stocks did not gain from rising oil prices.

Business demand for short-term credit fell in June for the first time in nearly a year. Some of the drop reflected a shift to bond issues, which exceeded $3 billion for a fourth straight month. The softening of the stock market was reflected in a slowdown in new equity issues in June.

Regional economy

Quebec led national household demand growth. Pay equity pay-outs again caused retail sales to jump by a remarkable 4.5%, raising its year – to – date growth to 7.6%, ahead even of prosperous Alberta (7.1%) and British Columbia (6%). Housing starts continued to grow, reaching their highest level since September 2005, with the construction of multi-family units primarily driving the market in June. Nevertheless, starts of single-family homes continued to gradually recover, with unsold inventories barely moving from their lowest level in 10 years. Shipments of capital goods are close to their highs for its year. Paper and printing held back manufacturing, making it one of the few sources of weakness.

The economy of the Prairies continued to move full steam ahead. Retail sales jumped by 2.7% in May. The demand for office space in downtown Calgary raised the total value of permits in this city alone to over $1 billion for the first time ever. Driven by household demand and investment, total shipments grew by 3.5% in May and by 6.5% since the beginning of the year. Double-digit increases were recorded for computer shipments, which have risen by more than one-third in a year. Nevertheless, 76% of shipments from Alberta in May were from resource-based industries, compared to 65% in 1997. The increase was widespread among many sectors other than petroleum products.

British Columbia also saw noticeable retail sales growth of 1.7% in May, following gains of 1.9% in March and 0.6% in April. Housing starts reached their January high. However, the weak US economy lowered BC exports. Only energy exports overseas provided growth. Although the largest part of the decline in shipments stems from the forestry industry, it was widespread.

Ontario was the only province to record a drop in shipments since the beginning of the year, which continued in May (-0.2%). However, the decline was concentrated in autos. Elsewhere in manufacturing, the textile and clothing industries, which suffered in 2006, showed marked growth. Leather shipments especially have doubled since December. These increases came while clothing sales rose 8% in the past year in Canada.

International economies

In the United States, real GDP growth picked-up from 0.2% in the first quarter to 0.8% in the second. The acceleration was largely due to increased inventories and federal spending and lower imports. Consumer spending decelerated as income growth stalled. Business investment rebounded strongly, while the slump in housing moderated.

Household demand weakened across the board in June. Retail sales fell 0.9%, led by slower auto sales. Foreign brands captured over 50% of the US market for the first time ever. Sales of housing-related items also declined, in line with lower existing home sales. Still, new home sales and housing starts both eked out small gains for the second quarter.

American industry fared better in June. Industrial output rose 0.5%, driven by a recovery in auto assemblies. New orders also rebounded, as strong demand for aircraft offset a dip for other capital goods. Aircraft shipments helped keep exports growing steadily in May. However, a surge of imports of consumer goods pushed the trade deficit up to $60.0 billion.

Industrial production rebounded in the euro-zone in May, as every sector recouped from the wide-spread weakness in April.  New orders also recovered, led by strong gains for machinery and transport equipment.  The external trade surplus narrowed as exports to the US slowed in tune with the strengthening euro and weaker US demand, while imports continued to pour in from China.  Consumers reined in their spending in May after several months of robust buying.  Inflation was stable in June at 1.9%, as was the unemployment rate at 6.9%.

Output rebounded in Germany in May, with industrial production recouping all of its loss in the previous month.  New orders surged as foreign demand remained high despite the rising euro.  Consumers were reluctant to spend, however, despite rising employment and increased wage settlements.  Retail sales volumes fell 1.8% in May.  The unemployment rate continued to ease, while the inflation rate was stable at 2%.

French industrial production picked up slightly in May after a sudden drop in April.  New orders were also up, albeit at a declining rate since March.  Consumer demand remained stagnant, despite having the lowest annual rate of inflation in the euro-zone at 1.3%.  The unemployment rate fell to 8% in June, its lowest level in 25 years, but still one of the highest in the euro-zone.

Output in Britain continued to pick up speed, with GDP rising 0.8% in the second quarter. Manufacturing and construction led the upturn.

Japan’s industrial production rose 1.2% in June, ending three months of decline.  The gain was led by robust output of electronics and autos.  Consumer prices fell again for the fifth straight month, while retail sales slid as domestic demand for autos waned.  Overseas demand remained upbeat, however, boosting exports particularly to China and Europe.

China’s economy grew 11.9% year-over-year in the second quarter, its fastest pace in 12 years, boosted by its soaring trade surplus.  Inflation jumped to a 33-month high of 4.4% in June, prompting the third hike in interest rates this year.

Note

* Based on data available on August 10; all data references are in current dollars unless otherwise stated.