11-010-XIB
Canadian Economic Observer
November 2003

Summary Table - Key Indicators

Overview*

Output fell sharply in August, in line with the record drop in hours worked due to the power blackout in Ontario. Past experience with similar shocks to the economy, such as the ice storm in January 1998 (when GDP fell 0.4%) and the September 11 terrorist attacks (-0.6%), suggests that these setbacks are recouped the following month, setting the stage for renewed expansion the month after. In fact, employment already has followed this pattern, with a 0.3% gain in September followed by 0.4% growth in October.

While the brunt of the effort to conserve power was shouldered by the public sector and manufacturers, it is telling that household spending was little affected. Housing remained the fastest-growing sector of the economy, while retail sales in August held onto their gains in the previous three months. Consumer confidence rose in September, buoyed by the resumption of job growth, continued low inflation and another cut in interest rates. The appreciation of the Canadian dollar helped to lower the cost of imported goods, while the glut of Canadian beef in domestic markets after the BSE-induced halt to exports in May helped lower the price of food.

Strong household demand in the US sent its third-quarter GDP growth to a 20-year high. Spending was fuelled by tax cuts, which outweighed the corrosive effect of falling employment on incomes before jobs began to recover in the autumn. The beleaguered industrial sector, which has borne the brunt of job losses, showed signs of turning around, notably as investment spending picked up and exports began to respond to the falling US dollar.

Labour Markets

Employment jumped 0.4% in October after a 0.3% gain in September, the first time this year that strong growth was sustained over consecutive months. Just as impressively, growth again was driven by full-time positions. With the labour force little changed, the gain in jobs was reflected in lower unemployment, which fell from 8.0% to 7.6%.

Services accounted for virtually all of the increase in employment for the second straight month. Business services and finance led the way in the private sector, while consumer services posted steady gains. The public sector expanded for a third straight month, led by health care. The goods-producing sector was checked by continued weakness in manufacturing and a rare setback in construction, which has ridden the boom in housing most of this year. Natural resources continued to be the fastest growing industry, buoyed by mining and energy.

British Columbia’s employment rose 1.5%, its best in nearly a decade, contributing nearly half of the overall gain. BC moved to the head of the pack in the growth of housing starts, retail sales, shipments and non-residential building permits over the summer, and this was reflected in widespread job gains. Its unemployment rate tumbled over a full point to 7.8%. The prairie provinces all posted job increases, led by the resource sector. Quebec’s growth was dominated by health care, but Ontario was hamstrung by deepening losses in manufacturing.

Leading indicators

The composite leading index continued to accelerate, from revised gains of 0.4% in July and August to 0.7% in September. Growth also continued to broaden, as seven of the ten components rose, one more than in August. These increases, the largest since early 2002, have already begun to be translated into higher output and employment. The housing-related components again spearheaded growth, reinforced by a strong advance by the US leading index. The recent slump in manufacturing eased slightly.

All the indicators of household demand strengthened further. House sales supplanted housing starts as the source of growth in housing, which posted its largest gain (3.3%) since early in 2002. The upturn was particularly brisk in cities in Ontario, which had been affected by the blackout in August, as well as in Montreal and Quebec where demand remains very strong. Furniture and appliance sales continued to accelerate, boosted by housing. Sales of other durable goods rose for the fourth month in a row. The household sector has accounted for most of the growth in employment so far this year.

The US leading indicator posted its largest advance in 17 months. Without this gain, the Canadian index would have posted a much more modest gain of 0.4%. As in Canada, housing dominated, with building permits hitting their highest level of the year. New orders for capital goods continued to improve, an encouraging sign for a recovery in business investment. Initial claims for unemployment insurance trended down for a second straight month, which augurs well for jobs and incomes.

Manufacturing also showed signs of improving. New orders for durable goods rose for the first time in 11 months. The ratio of shipments to finished goods inventories fell for the sixth consecutive month, but inventories began to improve in areas which have deteriorated the most in recent months, notably wood and paper. The downward trend of the average workweek moderated, with losses due to the blackout completely recouped in September.

Output

The three-month rally in real GDP was interrupted by a 0.7% reversal in August. The power shortage in Ontario was reflected in lower utility output, which triggered large losses for several manufacturers (and industries which transport these goods) as well as the public service.

Public services posted the largest drop of any sector. Federal non-defense services fell 5% and provincial services (excluding health care) nearly as much, as large government office buildings in Ontario were closed for over a week. Local government was little affected, since many of its activities were either outdoors or essential to public order and safety. Manufacturers trimmed output 0.6%, with most of the large energy users in Ontario chipping in to conserve power. Together with cutbacks in mining and forestry, this led to a sharp drop in demand for wholesaling and transportation. Power interruptions also may help explain a rare drop in ICT services, notably telecommunications.

But the power shortage did not hamper all sectors. Construction continued to expand on the back of robust home-building. Consumer spending at retail stores held steady, while accommodation and food continued to recover from its spring slump. Some manufacturers raised output, notably in the ICT sector. In Western Canada, meat processing and slaughtering posted another solid gain, nearly returning to its pre-May levels. As well, exploration and development of oil and gas rose steadily, buoyed by high prices.

Household Demand

Housing remained the driving force behind more household spending. Buoyed by future job prospects, consumer confidence in the third quarter recovered its losses in the first half of the year, according to the Conference Board.

Retail sales volume was unchanged in August, after a three-month string of solid gains. Coincidentally, retail prices also posted their first significant increase since January, as the cost of non-durables jumped 1.3%. A shortage of inventory due to cuts in auto output may help explain why auto sales dipped. But even when normal production resumed in September, the drop in sales accelerated. However, demand advanced strongly (2%) for housing and computers, sectors where the underlying trend of demand was robust (partly because prices continued to fall).

Housing starts in September remained historically high at 235,000 units (at annual rates). Both single and multiple units contributed to this strength. So far this year, starts are running at an average of 218,000, on track for their best annual performance since 1988. Home sales rebounded in September, led by a recovery in southern Ontario. Demand for new homes was particularly strong.

Merchandise trade

The power shortage in Ontario sharply curtailed cross-border trade flows. Imports posted their largest drop in over a decade, outstripping the loss in exports and boosting the monthly trade surplus above $5 billion. Prices for both exports and imports eked out a second straight increase, taking advantage of a lull in the dollar’s appreciation over the summer. However, the exchange rate resumed its rise in the autumn, which will put renewed downward pressure on Canadian dollar prices of exports and imports.

Exports fell 3.8%, after a rally in prices had lifted earnings the month before, snapping a string of three decreases. The power shortage led to double-digit losses in exports by major power users like autos, refined petroleum and metals.

Most other exports fared well in the month, aided by an improving economy in many parts of the world. Food exports continued to increase, with a recovery in the harvest after last year’s drought doubling wheat exports from their lows early this year. The rate of decline of meat exports slowed, when the US border partly re-opened in August. Forestry products were buttressed by a sixth straight gain for lumber. Strong housing demand has pushed these exports almost back to last year’s level, fuelled by strong US demand even as Asian markets weakened. Machinery and equipment snapped four months of decline with a small gain, led by telecom and industrial machinery.

Imports tumbled 5.9% due to declines for almost every sector. Autos and energy led the way with double-digit losses, again because of assembly plants and refineries cutting back to conserve power. Machinery and equipment also retreated after two months of increase, but the drop was largely confined to the volatile aircraft component. Food imports fell for a third straight month, and meat imports have fallen 50% since the BSE incident disrupted trade across the border with the US. This drop in imports offset about half the loss of meat exports since May.

Prices

The consumer price index rose 0.2%, enough to put an end to the year-long slide in the annual rate of inflation, which edged up to 2.2%. Most of the increase was concentrated in semi-durable goods, especially clothing, after large discounts over the summer. As well, the cost of services inched up as a result of higher university fees.

Prices fell for durable and non-durable goods. Lower auto and computer prices drove the former. Non-durables were pulled down by an easing in the cost of energy, as well as further cuts to beef. Beef has fallen 16% in the last five months, leaving prices 10% below the level of a year-ago. This is the exact apposite of the US, where the embargo on Canadian beef raised prices 10% from last September.

The recent rally in commodity prices lost some of its steam in October. Industrial materials edged down, despite continued strength in metals. The cost of energy levelled off after falling the month before. Cattle received a welcome boost at the prospect of the US border re-opening. The resumption of a rising Canada/US exchange rate in September again began to exert a marked dampening effect on industrial prices.

Financial markets

The stock market rally resumed in October, with the Toronto market up 5% after a small dip in September interrupted five months of higher prices. Metal stocks led the way with a 20% hike, undeterred by the Canadian dollar nearing a 10-year high against the US dollar. Real estate and financials also benefited from low interest rates while the recent recovery in ICT stocks slowed. Energy was the only sector where prices did not advance. September’s interest rate cut accelerated the six-month-long shift of investment funds out of money markets.

The recent gains in the stock market encouraged firms to continue to issue new equity. Stock issues in September totalled over $1.3 billion for the third month in a row, the longest such string in over two years. Firms continued to substitute equity for short-term debt, which fell 1.6%, its largest drop of the year. The working-off of unwanted stocks accumulated during the blackout in August may have contributed to this decline. Conversely, consumers showed no aversion to credit, piling up another 0.8% in August after a 1.1% increase in July.

Regional economy

After the negative impact of SARS last spring, Ontario was again hit in August by the fall-out of a one-time event. This time it was the power blackout and the ensuing need to curtail energy. As a result, retail sales suffered another setback during the month, reducing their annual growth to the lowest level since the events of September 11, 2001. After increasing in July, exports declined sharply, leading to the steepest decline in manufacturing shipments since the series began in 1992.

Manufacturing also was weaker in Quebec, but mainly because of exports. Shipments were at their lowest level of the year; aerospace products, with several rounds of layoffs announced early in the summer, replaced computer products as the source of weakness, with shipments about 30% below their peak of July 2001. Aerospace and computer products account for nearly three-quarters of the decrease in shipments over the past two years. Manufacturing employment is down nearly 6% so far this year. Existing house sales accelerated, while the Outaouais and Mauricie regions and Montreal registered the highest price hikes (more than 20% compared with a year ago) in Canada. Boosted by the housing market, retail sales picked up with a gain of 0.8% in August.

In contrast with the weakness in Central Canada, manufacturing was strong in the West, especially in British Columbia, which registered its two strongest back-to-back increases in more than a year, led by domestic demand. Household demand in BC led the nation: retail sales registered their third straight increase, the strongest in more than two years, while housing starts reached their high for the year in September. Non-residential building permits have doubled since the start of the year, while a recovery in lumber exports offset weakness in energy and paper.

The Prairies were the only region in Canada presenting a favourable export picture. Exports were up a whopping 16% from their level a year ago, with Alberta replacing BC as the leader in natural gas exports to the US. Alberta’s exports of industrial materials also rose sharply. Food shipments recovered all the losses in June and July caused by mad cow disease. Meanwhile, the grain harvest looks more promising, with the drought of the past two years ending last spring.

International economies

In the United States, third-quarter GDP grew by 1.7%, double the gain in the second quarter and enough to sustain the year-over-year growth rate of 3.3%. Household spending remained the driving force. Flush with a $100 billion (8%) cut in taxes, consumer spending rose 1.6%, its largest gain since the buying splurge that followed the September 11 attacks. Demand remained heavily concentrated in durable goods, which for a second straight quarter grew nearly 7%. Lower auto prices lured consumers into showrooms, while the booming housing market sparked outlays for furniture and appliances. Residential construction rose 5%, its fastest increase in the current cycle dating back to 1996. The unexpected strength of demand forced firms to run down inventories.

Firms remained cautions about spending, with an increase in investment narrowly based in computers. Spending on other equipment was flat, while investment in structures gave back most of the ground gained in the spring.

The trade balance improved, reflecting rising exports and a levelling-off of imports after an extraordinary gain in the second quarter. Government spending was also flat, after the Iraq war sent defense spending up 11% in the spring.

The industrial sector continued to strengthen, underpinned by a lower dollar and a gradual recovery in business demand. Manufacturing production rose 0.7% in September. Auto assemblies jumped 6%, after a small dip due to the blackout in August. Business equipment posted a modest gain for the fifth straight month, led by information processing equipment. New orders for capital goods strengthened further. Firms kept a tight lid on inventories of durable goods in September, which fell for the 31st time in 32 months.

Household demand showed little sign of easing up in September. Housing starts rebounded to equal July’s record level. Retail sales held on to the gain made in August, which was revised from 0.6% to 1.2%. Consumer prices increased 0.3% in September, led by a 6% hike in gasoline and a 1.5% increase for beef. Beef prices have risen 10% in the past year, as the ban on imports from Canada sent livestock prices to records levels. Excluding food and energy, the CPI rose 0.1%, equal to its average monthly increase in the past year.

Industrial production fell in the euro-zone in August, down 0.4% after a revised 1% gain in the previous month. A sudden reversal in durable consumer and capital goods led the decline, after boosting output the month before. The drop in consumer goods reflected a 0.1% dip in retail sales. The heat wave sent sales of food and drink up 0.8%, but other sales fell 0.7%. The external trade surplus contracted as the growth in imports surpassed in exports. Trade with China was particularly brisk with imports rising 15% and exports up 19%. Prices were stable in October, leaving the annual inflation rate unchanged at 2.1%, while unemployment held at 8.8% in September.

Output contracted in France in August after being flat the month before, Consumer confidence was unchanged in September for the fourth straight month, holding near a six-and-a-half year low as concerns persisted about job security and taxes. Consumer spending was also dormant, with unemployment hitting its highest level in three years. Inflation was 0.5% in September, boosted by higher prices for fresh fruit and vegetables due to damage caused by the prolonged summer heat wave.

The German economy remained dampened by weak demand both at home and abroad. Industrial production fell 2.1% in August almost wiping out its recovery in the previous month. Retail sales worsened, leaving them 3% below the level last August. Pension plan reforms, designed to account for the ageing population and shrinking workforce, were introduced by the government to take effect over the next decade, making almost $16 billion (US) in income tax and social security cuts.

In Britain, third-quarter GDP rose 0.6%, matching the second quarter. Growth was confined to services, notably business services and finance and a rebound in the travel sector. After steady declines in 2001 and 2002, output in goods-producing industries was unchanged. This reflected weak demand from other EU countries, particularly for autos and machinery. New orders in September fell at their fastest pace in two months. Inflation remained stable, prompting the Bank of England to leave interest rates unchanged in the month.

Industrial production picked up 3% in Japan, after a 0.7% decline in August. Exports grew for the third consecutive month, but were outpaced by imports, partly due to the yen’s continued rise. Weak consumer demand kept prices falling, with the CPI in September down 0.1% from a year earlier, the 48th consecutive decline. The unemployment rate was steady at 5.1%, while the ratio of job offers to job seekers rose to 0.66 from 0.63 in August.

China’s economy grew by 9.1% in the third quarter of the year. The impact of SARS on consumer spending faded, although most of the expansion in the year to date has been driven by fixed-asset investments, up 31%. Deflation slowed in Hong Kong, after almost five years of falling prices. Consumer prices were 3.2% lower in September than a year ago, less than the 3.8% drop in August.

* Based on data available on November 7; all data references are in current dollars unless otherwise stated.