11-010-XIB
Canadian Economic Observer
August 2008

Summary table - key indicators

Overview*

The volume of GDP in May edged down after a rebound in April. The economy has not posted consecutive gains in monthly output since November 2007. Employment continued to decelerate steadily, from moderate gains early in the year to a notable decline in July.

The energy sector remained the hub of many key changes in the economy. Higher prices continued to fuel rapid gains in export earnings as well as rising consumer prices. However, energy production continued to fall despite these price increases. Some of the decline in electricity and oil production reflects temporary disruptions, while natural gas appears constrained by higher costs.

Consumers were hit with a second straight sharp hike in prices in June, entirely due to the escalating cost of food and energy. Lower prices on commodity markets in July promise some relief from these increases. Consumer spending continued to advance in May, and auto sales remained strong in June and July. Housing has become the slowest sector of household spending in response to sharply higher prices last year, especially in western Canada.

Manufacturing output in May held on to its recovery in April. Resource-based industries led these increases, while output of capital goods industries remained robust. The sharp drop in auto sales in the US did not significantly affect auto assemblies in Canada until July, when lower auto output was a factor in the contraction of manufacturing jobs. US auto sales have fallen 27% since the start of the year, supplanting housing as the weakest sector in their economy. Still, real GDP in the US rose 0.4% in the second quarter, lifted by rising exports and steady business investment and consumer spending outside of autos.

Labour markets

Employment fell 0.3% in July, its first decline since March 2005. The decline was all in private sector payrolls, and mostly reflected fewer part-time jobs, especially for adult women. Still, the unemployment rate edged down, largely due to an exodus of youths from the labour force.

The drop in employment was concentrated in manufacturing, business services and trade. The loss of 32,000 factory jobs reflects a return to the pattern of rapidly shedding jobs, after employment briefly stabilized in the second quarter. Other goods-producing industries expanded, notably construction and agriculture.

With their loss in July, business services passed manufacturing as the weakest industry in the past year. These declines were partly offset by increases in the public sector and accommodation and food.

Central Canada saw employment fall the most in July. Ontario bore the brunt of factory job losses, reflecting its heavy reliance on auto assemblies. Business services slumped in both Ontario and Quebec. Accommodation and food in Quebec received a boost from the celebration to the 400th anniversary of the founding of Quebec City.

Employment fell slightly in western Canada, although full-time jobs rose in all four provinces. Alberta’s natural resource sector continued to cut back, and it employed fewer people than in July 2007. Agriculture boosted employment on the prairies as a potentially lucrative harvest approached. Construction continued to lead job growth in BC, having expanded by 18% since July 2007.

Leading Indicators

The composite leading index was unchanged in June after increases of 0.1% in April and 0.2% in May. Both new orders for manufactured goods and the housing index turned down, after exceptional gains the month before. Elsewhere, household spending remained the driving force behind growth, a reflection of strong labour market conditions. The unsmoothed index rose for the third month in a row.

Consumer spending on durable goods continued to grow strongly so far this year. Average hourly earnings continue to expand by 4% in the year to July, above the 3% annual rate of inflation up to June. The downturn in the housing index followed a sharp turnaround in May. Housing starts have become more volatile partly because multiple units accounted for over half of all starts so far in 2008, and these units fluctuate more on a monthly basis than simple-family dwellings.

Manufacturing remained mixed. The drop in new orders continues its see-saw pattern of recent months. This volatility partly originates in the growing importance in manufacturing of the aerospace industry, where orders also tend to fluctuate markedly from month to month.  Inventories levelled off, and higher output in April suggests firms at least temporarily were satisfied with the ratio of stocks to shipments. The average workweek also stabilized in May and June, and employment growth at factories resumed in these two months.

The leading index for the United States fell 0.1 %, its smallest decline since October 2007. Gains in manufacturing orders helped offset lower consumer confidence and building permits.

Output

Real GDP dipped 0.1% in May after rebounding by 0.4% in April. The drop was concentrated in the energy sector, where output fell nearly 1%. Energy production was hampered by lower electricity generation. While Canadians consumed more power in May, supply disruptions forced utilities to import electricity to meet this demand. As well, oil and gas production was slowed by longer-than-planned maintenance, particularly in the oilsands. Despite high natural gas prices, drilling declined for the fifth time in six months.

Manufacturing added slightly to the gain it made in April. Petroleum refiners led the increases, as output continued to recover from scheduled maintenance. Most capital goods industries also boosted output. Auto assemblies were the main source of weakness, and ongoing cuts in the auto sector were reflected in a tenth straight decline for producers of rubber and plastics for motor vehicles. Losses intensified in the beleaguered clothing sector.

Most other goods-producing industries trimmed output in May. Construction eased, led by a third straight decrease in home-building. Forestry contracted sharply for the sixth time in seven months, while lower output at non-metal mines helped reduce mining production (outside of oil and gas). All of these declines in goods output were reflected in small decreases in demand for goods-handling industries (transportation and wholesaling).

Most other services recorded small gains, notably business and public services. Finance posted the only notable decline, largely due to slower trading in financial markets. Recreation recorded a significant advance, driven by an increase in gambling.

Household demand

Retail sales volume rose 0.1% in May, its third straight increase. The advance was concentrated in semi-durable and non-automotive durable goods. Auto sales were little changed for a second straight month, while higher prices for food and energy dampened consumption of non-durable goods.

Spending on durable goods other than autos rose 1.3% after a 1.6% advance in April. Lower prices helped stimulate demand in both months. Price discounts also gave a lift to clothing purchases. While overall auto sales were flat, steep cuts to truck prices lifted their sales while cars slowed.

Food and energy demand continued to falter as prices rose. Food purchases fell in constant dollars for the fifth time in six months. Constant dollar receipts by gas stations fell nearly 4% in May: however, this does not reflect a drop in overall gasoline consumption, which dipped just 0.3% (the latter is used in calculating personal expenditure in GDP). This is because gas stations sell many goods besides gasoline, while several large general merchandise stores sell gasoline but are not classified as gas stations.

Housing starts slipped 4.4% to an annual rate of 216,000 units in June. So far this year, starts have exactly matched their level in the first six months of 2007. The composition of starts continued to shift from single-family homes to multiples. However, slower new home sales have kept the backlog of unsold vacant units rising steadily in the first half of this year. Meanwhile the number of existing home sales edged up for the third consecutive month.

Merchandise trade

Both current dollar exports and imports increased in May, strengthening the upward trend that has dominated 2008. The overall trade surplus widened to $5.5 billion as a result of export growth to countries other than the US outpacing imports. The surplus with the US was stable as the gain in exports offset the rise in imports.

For the month, export and import volume growth was more muted as commodity prices continued to climb. Export volumes have registered a downward trend since November 2007 while import volumes have edged down only slightly. Also of note is that so far in the second quarter export volume growth as measured by the Fisher volume index is lower than that of the Laspeyres volume index while import volume growth is higher, a gap created as a result of rapid price increases combined with rising sales in sectors such as energy and industrial goods.

Rising receipts for coal, grains, metal ores, diesel fuel, sulphur and fertilizer contributed to export growth. Higher demand in Asia, notably Japan and South Korea, for coal pushed up prices and shipments. Copper ore, sulphur and fertilizer exports also were boosted by demand in Asia, while diesel fuel shipped to Europe from the Atlantic Provinces was up sharply. Exports of grains and iron ore to both US and the rest of the world have been on the rise throughout 2008 and registered a further sizeable gain in May.

An increase in industrial goods led the rise in imports, with a large shipment of copper ore from Chile in combination with other metal imports accounting for most of the sector’s gain. After a dip starting in summer 2007, machinery and equipment import values and volumes returned to record high levels, led by aerospace as both military and commercial airlines renew their fleets. The launch of new wireless technology, wind turbine projects, and heightened demand for agricultural machinery also contributed to the growth.

Imports of petroleum products fell, returning to more normal levels as refinery output in the Western provinces recovered from setbacks related to winter weather and maintenance. This followed unusually high imports from the US in early 2008.

Prices

Consumer prices rose 0.8% between May and June, on the heels of a 0.7% hike in May. These increases lifted the year-over-year rate of inflation to a 3-year high of 3.1%. The upturn was driven by gasoline and food prices: excluding food and energy, prices were 1.2% higher than in June 2007.

Gasoline prices jumped 5.8% in the month, continuing their year-long upward trend. Natural gas prices also rose sharply. Overall energy prices rose 4.4%, as stable electricity prices helped cushion the squeeze on household energy budgets. The cost of food rose 1%, and was 3.0% higher than last June. The increase was led by rice, pasta and meat. The cost of bread fell for the first time this year, as wheat prices have retreated since the spring on the prospect of a good harvest worldwide.

Prices outside of food and energy were stable in the month. The cost of housing continued to increase, while travel costs were inflated by the rising cost of oil. Lower prices for durable and semi-durable goods offset these increases. Auto prices were cut again, and were 8.4% below June 2007. Large price declines also were posted for furniture, appliances, home entertainment equipment and books, all items with a large import content.

Commodity prices retreated in July for the first time in 2008. The drop was led by crude oil and natural gas, after reaching record levels early in the summer. Food prices also fell to their lowest level since prices spiked in February as concern eased about shortages as the harvest approached for corn and grains. Prices for industrial goods were little changed, as declines for metals offset gains for forestry products.

Prices for manufactured goods continued to recover in June after the swift rise in the exchange rate dampened prices in 2007. Factory prices (excluding petroleum) rose 0.6%, helped by a dip in the value of the loonie during June. Prices rose the most for auto and forestry products, sectors where profitability has fallen sharply in the past year. Smaller price gains were recorded for producers of capital goods. Primary metals was the only major industry where prices fell.

Financial markets

Stock market prices fell 6% in July, after a 2% drop in June. These were the first back-to-back declines since the turmoil in the global financial system erupted last summer. The market was below its level of a year earlier for the first time since June 2003. July’s decline reflected double-digit losses for energy and mining stocks, in response to steep declines in prices on commodity markets. Consumer and financial stocks rebounded, after leading the decline in June.

Lower commodity prices helped push the Canadian dollar on average fell below 98 cents (US) during July for the first time since last August.

Regional economies

The economy continued to improve in Eastern Canada on the heels of the rebound in the previous month. After a revised hike of 3.6% in April, retail sales in Quebec rose another 0.6% in May. Shipments posted their largest of three gains made since the start of the year. The increase was due mainly to the petroleum refineries, which saw prices soar, but the aeronautics and computer products industries also contributed to growth. Exports of electronics to the US rose in April and May. In June, employment in the information, culture and recreation industry posted 12‑month growth of 2.1%, the first such gain since December. In 2007, growth in this industry was 7.2%, its strongest since 2001. Over the past two years, a number of companies in this sector have announced major investments in Montréal. The 400th anniversary celebrations in Quebec City may also have contributed to the revitalization of this industry.

In Ontario, manufacturing reported its fourth increase in five months. Along with a slight rise in transportation equipment, primary metals was the driving forces behind higher shipments, especially iron and steel. Shipments of iron were up 17% from last year, with steel shipments up 23%. The growth appears to have originated in the domestic market, since exports have remained stable since the start of the year. The improvement seems to be linked to strong investment, with the non‑residential permits in May reaching its fourth highest value since January 1989. Retail sales were up 0.2%, a third straight period of growth.

Retail sales rebounded in the Prairies and BC, while manufacturing consolidated its April gains in both regions. In the Prairies, the growth in shipments was again largely driven by oil, although the majority of industries continued to report improvements. A majority of industries in BC also advanced, posting the strongest growth since April 2007. Shipments in BC had fallen by over 7% since then, mostly due to the slump in forestry products. Sales of motor vehicles rose in BC and in the Prairies, reversing the trend of the previous year when sales were the lowest in the country.

International economies

In the United States, real GDP rose by 0.5% in the second quarter after little change in the previous two quarters. Exports again led the increase, having expanded by 10% in the past year. Business investment grew at a steady pace of 0.6%. Consumer spending picked up in response to tax rebates, which outweighed sharply lower auto sales. The weakness in demand remained largely confined to autos (-10%) and housing (-4%), which by themselves have cut output growth by nearly two full points in the past year.

There were some signs that the housing crisis was easing by early summer. New home sales have risen slightly from their low in March, and housing starts in June remained about 1.0 million units (at annual rates) for the seventh straight month. Most importantly, the overhang of vacant units continued to fall slowly, easing the downward pressure on home prices.

Conversely, the slump in auto sales deepened as gasoline prices reached $4 a gallon (US). Vehicle sales tumbled 8% in July, bringing their drop since December to 22%. Trucks bore the brunt of this decline, off by one-third so far this year. Car sales were down, partly due to a lack of supply, especially for more fuel-efficient imports.

Exports continued to expand in May, up almost 1%. Their 10% gain in volume in the past year has been driven by food (+14%) and industrial goods (+16%), supplemented by small gains for capital goods and autos. Despite soaring oil prices, import growth has lagged behind exports.

Economic growth ground to a halt in the euro-zone in May. Industrial production fell 1.9% as every sector retrenched. New orders followed suit, with demand down across-the-board.  External trade registered a deficit in May as soaring energy imports more than offset a pick-up in exports of autos and machinery. Retail sales rose after three straight months of decline. However, prices continued to mount, boosted by soaring energy and food costs, with the annual rate of inflation hitting 4% in June. This prompted the European Central Bank to hike rates in July.

The German economy appeared to falter in May with industrial production falling 2.4%, its largest monthly drop in a decade, on the heels of a slight decline in April. New orders posted their sixth consecutive fall. Nonetheless, external trade remained brisk despite the strong euro, boosted by demand from commodity-producing countries such as Russia. Consumer spending picked up in May after back-to-back declines. While the annual rate of inflation rose to 3.4% in June, it remained one of the lowest in the euro-zone. The unemployment rate eased to 7.3%.

French industrial production retreated in May, down 2.6% after a 1.5% gain the month before.  New orders mirrored the see-saw pattern, giving up their entire April rise. Consumer spending was dampened by a drop in car sales in June, marking the fourth overall decline in six months.  Consumer confidence fell to its lowest point since tracking began in 1987 as prices continued to rise. The unemployment rate was stable at 7.5%.

Real GDP in Britain rose 0.2% in the second quarter of 2008, down slightly from 0.3% in the first quarter. Strength in the services sector offset weaker construction and industrial production. Housing starts stagnated as house prices plummeted amid tightener mortgage financing. Consumers reined in their spending in the wake of rising oil and food prices, with retail sales volume slumping 3.9% in June, their largest decline in over 20 years. Annual inflation jumped to 3.8% in June, up from 3.3% in May.

The Japanese economy slowed in June, when exports shrank for the first time in nearly five years. The decline, coupled with an increase in imports (driven up by surging energy costs) halved the trade surplus. Consumer confidence remained fragile as the jobless rate edged close to a two-year high in June, while inflation accelerated to 1.9%, its fastest pace in over a decade.

China’s real GDP grew 10% in the first half of 2008, year-over-year. Buoyant consumer spending and government investment in infrastructure offset a decline in exports and weather-related shocks (such as blizzards, flooding and earthquakes).

Note

* Based on data available on August 8; all data references are in current dollars unless otherwise stated.