11-010-XIB
Canadian Economic Observer
November 2005

Summary Table - Key Indicators

Overview*

Output and job growth strengthened as fall approached, and stronger exports and investment helped boost manufacturing.

Household demand slowed, after leading growth in the previous two years. New home construction and auto sales were particularly weak late in the summer, partly as soaring gas prices finally braked sales of trucks and SUVs.

But even as household spending slowed, other sectors of the economy more than picked up the slack. Exports rose for a third straight month, led by the energy sector. Business investment strengthened, offsetting the slowdown in housing. The gains in exports and investment gave a boost to manufacturing, after a sluggish first half of the year.

Manufacturing had its best month in over a year in August, despite the high exchange rate and energy costs. And for the first time in a year, manufacturers have a positive outlook for output in the next quarter, according to the October business conditions survey. Only 10% reported orders falling, down from 22% in July. Higher output had already pushed capacity utilization in manufacturing to a record 86.7% in the second quarter.

Manufacturers boosted output 1.3% in the last 12 months. This growth was led by a recovery by ICT manufacturers, especially communications equipment. Machinery expanded nearly 8%, buoyed by a 22% gain in construction and mining machinery. Aluminum output also rose by nearly a quarter, even before a major expansion this fall. And the furniture industry grew by 7%, or enough to match the $400 million expansion of the auto industry.

Some manufacturers are clearly struggling (apart from smelting and refining where output was affected by production problems, not weak demand). Output in clothing fell 10% from last August and textiles dropped 5% after import quotas were removed. Iron and steel output fell nearly 9%, while weak export demand triggered a 5% cut in pulp and paper. Chemicals fell nearly 3%. Iron and steel, pulp and paper, and chemicals have all been squeezed by the soaring cost of energy, one of their largest inputs. Aerospace also has contracted slowly this year.

Even as output rose, factories shed 5% of their labour force. The drop in manufacturing jobs was driven by the need to boost productivity, especially by firms in central Canada. But shortages also played a role, with 42% of manufacturers in Alberta reporting shortages of skilled labour, up from 25% in July.

Part of the problem in Alberta is that while its population has grown, the labour force has not. Population growth in October was 2.2% ahead of last October, the most in Canada. But the labour force participation rate has fallen nearly a full point. This drop was concentrated among youths and adult women.

Labour Markets

Jobs rebounded 0.4% in October, continuing the pattern of pauses alternating with increases that has continued most of this year. Unlike previous months, however, growth was concentrated in part-time positions. While the labour force posted its largest increase of the year, this did not prevent the unemployment rate from falling to 6.6%, its lowest on record back to 1976.

Services and resources accounted for all of the increase in jobs. Trade, finance and business services drove the increase in services. Travel-related services such as in accommodation and recreation (notably gambling) stayed below last year’s level. Resources remained the fastest growing sector, as a sharp jump in October pushed employment 10% ahead of October 2004. Construction gave back some of its gains over the summer. But manufacturing remained the main area of job loss.

BC and Alberta continued to lead job growth, up over 0.5% in the month, although the increase shifted from goods to services. Growth in BC was restrained by the effect of a teacher’s strike. In Alberta, full-time jobs continued to grow in place of part-time positions. This may reflect employers trying to alleviate a labour shortage by getting more hours out of their labour force. Employment rose in both Ontario and Quebec in October, all in services.

Leading indicators

Driven by strong domestic demand, the composite leading indicator posted a 0.3% increase in September after 0.3% gain in August. Household spending continued to dominate. Seven of the ten components rose, the same as in August.

Outlays for durable goods rose briskly (1.3%) for the third straight month. Auto sales continued to trend up. Demand rose strongly for home electronics goods and appliances. Furniture and appliances rose only 0.2%.

With its sixth straight increase, the housing index hit a new record in September, edging past its previous high set in July 2004. Housing starts were up sharply, after a jump in existing home sales in August. The boom in the resource sector sent starts to well above where they started the year on the prairies and in BC. They also rose in Quebec, where the primary sector also is growing. However, housing did not grow in Ontario in September, and was little changed from the low touched in January. Ontario was the most adversely affected by the slack in the manufacturing sector in the first half of the year.

Manufacturing shipments fell rapidly again, led by the ongoing slump in autos and forestry products. Inventory accumulation resumed, pushing down the ratio of shipments to stocks by 1.1%. The average workweek also fell slightly. However, new orders turned up due to gains in aerospace and primary metals, both industries linked to business investment. These increases did not boost shipments due to the long lags in production in these industries.

The investment boom did show up in the growth of business and personal services. Employment rose another 0.4% on the heels of a 0.7% gain in August. Western Canada continued to dominate the increase. In Alberta alone, 25,000 more people were working in personal, scientific and technical services than at the start of the year, nearly a one-quarter increase.

The US leading indicator eked out a 0.2% gain, its third straight. This increase was both smaller and less widespread than Canada’s. Most of the increase was driven by the interest rate spread.

Output

The volume of GDP rose 0.5% in August after a 0.2% gain in July, leaving output poised to post its best quarterly gain in a year (it averaged 0.6% over the previous three quarters). The resource sector remained the fastest growing part of the economy, while manufacturing posted its largest gain in over a year.

Energy again fuelled the growth in natural resources, and its 1.4% increase was typical of advances posted in four of the last five months. Energy output accounted for most of the acceleration in GDP since the spring. Exploration and development drove this increase. While output of oil and gas began to recover over the summer from production problems, it remains below last year’s level. Several new projects will start up by year end.

Most other primary industries expanded. Forestry posted a ninth straight increase, up 13% so far this year. Agriculture picked up thanks to the re-opening of the US border to cattle. Metal mining was an exception to growth, due to strikes and maintenance. Higher resource shipments and the end of the Vancouver port strike boosted transportation, especially by water, rail and pipeline.

Strong demand from resources also played a part in the 1.7% hike in manufacturing output. Petrochemical output jumped by nearly a quarter, while aluminum continued its rapid growth in 2005. Machinery received another boost from demand for construction and mining machinery, up 22% in the past year.

ICT manufacturers continued to raise output, led by a ninth straight gain for communications equipment. Auto assemblies also rose, as dealers stocked up on the new models. Clothing and pulp and paper remained weak.

House construction has swung from one of the strongest sectors in 2004 to one of the weakest in 2005. A third straight drop in August brought the total decline from its December 2004 peak to 4.3%. This slack was largely offset by gains in non-residential investment.

Consumer spending also slowed over the summer, although not as much as housing. Lower auto sales pulled down retailing, while consumer services were hampered by declines at restaurants and casinos.

Household demand

The volume of retail sales plunged 1.1% in August, partly due to a sharp hike in gasoline prices. But prices rose for other goods as well, notably autos after heavy discounting in previous months.

Two-thirds of the drop in retail sales originated in an 8% tumble in auto sales. Auto demand fell another 8% in September, returning to its level in May before sales took off early this summer.

The drop in sales was concentrated in trucks, the first indication that high gas prices were influencing vehicle purchases (the truck category led sales growth in the first half of the year). The slack in truck sales was concentrated in central Canada, where demand was little changed from last August. It was a different story in western Canada, however, with truck sales up 30% in Alberta and 20% in BC, where strong incomes overcame the effect of high gas prices.

Most of the weakness in non-automotive sales was concentrated in clothing, where price cuts over the previous two months came to an end. Spending on furniture and appliances rose steadily. Computers and home electronics remained the fastest growing segment of consumer spending.

Housing starts rebounded in September, regaining about two-thirds of a 17% drop in August. Single-family homes recouped most of their losses, but are nearly 10% below last year’s record level. New home sales hit their second-highest level of the year in September, reducing the backlog of vacant homes. While mortgage rates began to creep up, the cost of building a new home continued to decelerate. Starts of multiple units were dampened by rising vacancy rates.

Merchandise trade

Exports rose for the third month in a row, buoyed by the energy sector. Meanwhile, a third straight drop for import prices dampened Canada’s import bill. As a result, the trade surplus widened steadily from $4.1 billion in May to $5.6 billion in August, the highest since August 2004.

Export growth continued to be driven by energy. A jump in natural gas prices sent energy receipts up 6% to $7.6 billion, or a record 20.1% of all export earnings. All areas of energy were strong, with crude oil prices also setting records while coal is nearly three times ahead of last summer’s pace.

Agricultural products received a boost from the re-opening of the US border to Canadian cattle. Shipments of live animals jumped 50%, while producers held on to recent gains in exports of prepared meat. Other resource products fared less well. Metals and fertilizers backed off from their recent highs, while lumber plumbed new depths with a sixth straight loss.

Machinery and equipment was pulled down by lower shipments of computers. At 20.4% of all exports, this component is within a hair of ceding its place as Canada’s largest export group to energy. Consumer goods fell for a third straight month. Autos received a boost from passenger cars, but remained 4% below last year’s level.

Imports edged down 0.4%: excluding a 45% jump in gasoline imports (mostly shipments from Europe), they fell 4%. Auto imports slipped after consecutive gains, matching the course of domestic sales. Consumer goods saw prices fall the most, which offset higher volumes. Imports of machinery and equipment were buoyed by strong demand for mining and transport, which offset declines for computers and related goods.

Prices

Fuelled by soaring energy prices, the CPI jumped 0.7% between August and September, its third largest monthly increase on record. This boosted the annual rate of inflation from 2.6% to a 30-month high of 3.4%. Excluding energy, inflation was unchanged at 1.6%.

Energy prices jumped 8% in the month and 21% from last year. Gasoline led the increase after hurricanes caused a shortage of refinery capacity. Fuel oil also rose by over a third. Low electricity rates helped dampen the increase in energy costs.

Clothing prices also rose in September. The cost of imported clothing fell only 1.4% from December to August, despite the lifting of quotas on goods from China.

Most other prices were restrained. Food prices were unchanged thanks to good crops and warm weather. Low rent hikes helped cap the cost of shelter. And the price of durable goods was checked by lower prices for TVs and other home entertainment.

Commodity prices retreated from their record highs set in September. Energy prices led the slide, with crude oil easing to $60 (US) a barrel from its peak of $71 after Hurricane Katrina. High prices helped lower US oil demand by 3% in the past year. Natural gas prices continued to climb, to a record $14 per million BTUs, double October 2004. Metals remained strong, buoyed by on 8-year high for zinc and new record for copper.

Prices for manufactured goods other than gasoline fell by 0.4% in September. The rising Canadian dollar dampened prices for most exported goods except lumber, which received a boost from demand for rebuilding following hurricanes in the US South. Still, lumber prices remained 15% below last September.

Financial markets

The recent euphoria in financial markets subsided in October. Both the stock market and the dollar backed off from their recent highs, while the Bank Rate rose for a second straight month.

The Toronto stock market slid 6%, after flirting with a record high in September. Lower energy prices led to a double-digit drop in energy stocks. But investor interest fell for every major sub-index.

The quarter-point hike in the Bank Rate boosted the prime lending rate, but had little effect on mortgage or bond rates. Still, firms stepped up bond issues in September to lock in low rates. The dollar eased from 86 cents (US) to 85 cents, although it continued to strengthen against the euro.

Regional economy

The West moved back into the lead in export growth. With the end of the strike by transport truck drivers, shipments in British Columbia surged 5.9% while pulp exports to China doubled, reversing the decline registered in the past year. Pulp is the largest Canadian export to that country. Wood exports were up slightly, even before Katrina’s impact on demand in the United States. Alberta’s exports jumped by almost $1.5 billion as oil plants came back into operation following the fires that had slowed production for almost a year.

Western Canada also continued to lead in the growth of household demand. Since January, retail sales growth in British Columbia and the Prairies had each exceeded the gains in both Ontario and Quebec, boosting the national rate to 4.1%. Population flows to the West have increased, although to a much lesser extent than in the early 1980s.

The improvement in consumer demand observed in recent months was reversed throughout Eastern Canada, where prices rose the most. However, practically all the decrease was attributable to car sales, where the negative effect of rising gasoline prices cancelled the positive effect of rebates. The steepest drop was in Ontario.

Investment remained the main source of strength in Ontario, with building permits surging 67.9% owing to the industrial and institutional sectors. Construction started this fall on a new Toyota plant.

Shipments rose substantially in August in Ontario. The increase is primarily attributable to auto exports to the United States. GM is beginning to manufacture three new models in two of its plants. Also contributing to the increase were the end of a strike in metals and a marked increase in shipments from refineries, even before the drop in oil output in the United States in September. According to the Business Conditions Survey, Ontario manufacturers were feeling less negative about prospects for the fourth quarter, with 89% of them expecting production levels to equal or exceed those in the third quarter, compared to 76% in the previous quarter.

Manufacturing continued to follow a different path in Quebec. After being the only province to register an increase in July, Quebec was the only one to register a decline in August. A majority of industries continued to grow, but aerospace, which is highly volatile on a monthly basis, registered its lowest level for the year. However, shipments so far this year have been fairly robust.

International economies

In the United States, real GDP rose 0.9% in the third quarter, matching its average gain in the past year. All areas of domestic demand improved. Strong auto sales led consumer spending. The major impact of Hurricane Katrina was to boost federal spending while dampening investment in structures. Last winter’s inventory build-up has been corrected. Real disposable income fell due to the jump in energy prices and the depressing effect of hurricanes on rental income (which fell 75% due to the destruction of homes) and uninsured losses of small business property.

Retail sales rose 0.2% in September, leaving sales little changed from where they started the third quarter. Lower auto sales and higher gasoline receipts largely offset each other, and all other sales rose 0.6%. Gasoline sales were inflated by higher prices and a surge in demand when the hurricane-related evacuation of 5 million residents from Houston sent demand soaring. The steady growth of non-auto demand was led by furniture and electronics, while rebuilding from hurricanes also boosted building materials. Auto sales fell for the second straight month, led by falling demand for trucks and SUVs, while car sales rose in response to a 55% jump in gas prices from last September. Vehicle demand slumped again in October to near an 8-year low.

Annual consumer price inflation jumped to a 14-year high of 4.7% in September, although core inflation was steady at 2%. A drop in the cost of shelter and clothing helped dampen the core rate.

Housing starts rose 3% in September, with almost all of the increase in the Southern states. The latter not only reflected rebuilding, but also continued strong sales. New home sales in the South were 14% ahead of last September, the most of any region.

Hurricanes had a much greater impact on industrial production, which fell 1.3% in September. Almost all of the drop was due to lower oil and gas and refinery output. Consumer goods received a boost from higher auto assemblies. Business equipment fell for a second straight month due to declines in the ICT sector, which is concentrated in the South.

The trade deficit rose $1 billion to $59 billion in August, just shy of the record $60 billion shortfall in February. Import prices rose 1.2% for the third month in a row, outweighing rising exports. Import prices jumped another 2.3% in September, mostly due to energy.

Euro-zone industrial production rose 0.8% in August after a small gain. Energy output fell again, but intermediate and consumer goods strengthened. New orders were pulled down by weak demand for transport equipment. Consumer confidence was upbeat despite soaring energy costs, and retail sales recovered in August. External trade went into deficit as the rapidly rising bill for oil imports outweighed increased exports of machinery and vehicles. The annual rate of inflation eased slightly to 2.5% in October.

German industrial production fell 1.6% in August, the first drop in three months. New orders gave back all their gain of the month before, while rising energy prices crimped household spending. Retail sales have now fallen in six of the last seven months.

Industrial production in France rebounded in August, while new orders more than recovered their previous loss. Consumer spending gained momentum over the summer, rising 1.2% in July and a further 1.9% in August (although half of this was imported goods). Exports picked up in the month, helping to boost business confidence.

Third-quarter GDP slowed in Britain as oil and gas fell due to maintenance work. Real GDP rose by 0.4%, after a 0.5% rise in the second quarter. Industrial production dropped 0.9% in August, its third straight decline, while consumers remained hesitant to spend when house prices were falling. A surge in imports boosted the trade deficit while exports were flat.

Japanese real GDP grew a revised 0.8% in the second quarter, up from 0.3%. Exports in August rose 9% year over year, particularly to China and South Korea. Imports soared 21%, boosted by high oil costs (Japan imports nearly all of its oil), resulting in the fifth straight contraction in the trade surplus. Business confidence picked up as bank lending rose for the first time in seven years. Banks scaled back lending following their spree in the 1980s which resulted in huge losses when the property offered as collateral by borrowers fell substantially in value. Consumer confidence received a boost from rising wages and falling unemployment. Retail sales rose in August for the first month since spring. The unemployment rate fell to 4.1% in June, its lowest rate since 1998.

China’s economy expanded by 9.4% in the third quarter from a year earlier. Investment growth began to slow in response to government measures, rising 29% in September year over year, down substantially from over 50% in early 2004. Instead, growth was increasingly driven by exports. GDP in South Korea grew 1.8% in the third quarter, its fastest pace in nearly two years, buoyed by exports and domestic demand.

Note

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