11-010-XIB
Canadian Economic Observer
November 2007

Summary table - key indicators

Overview*

Output and employment continued to expand steadily, unfazed by the late-summer turmoil in credit markets and the rapid ascent of the Canadian dollar.

Output grew 0.2% in August, its fourth straight month of solid growth. Employment expanded 0.4% in October, adding to another large gain in September. Both output and employment have advanced about 2.5% in the past 12 months.

The resiliency of the economy reflects a number of factors. While the turmoil in financial markets was reflected in a drop in commercial paper in August, total short-term business credit grew steadily in August and September as borrowers switched to other instruments (notably bank loans). The stock market recovered in September and October from small losses over the summer.

Nowhere was the resilience of the economy to shocks better demonstrated than in manufacturing. Even after the exchange rate hit parity with the US, two indicators of manufacturing remained positive in October. The business conditions survey reported that more manufacturers plan to expand than reduce both output and payrolls in the fourth quarter. This was borne out by factory employment in October, which held onto its gain over the summer despite growing reports of shortages of both skilled and unskilled labour. The steady rise in the dollar will further test the resiliency of manufacturers.

The global economy also showed remarkable buoyancy in the third quarter, helping to keep commodity prices high. Growth in China continued to exceed an annual rate of 11%. The US also posted steady growth. While the slump in housing intensified, this was offset by increases in exports, business investment and consumer spending.

Labour markets

Employment rose 0.4% in October, on the heels of a 0.3% gain the month before. These were the largest back-to-back increases since the turn of the year. Some of the advance represented part-time jobs related to Ontario’s election, but the bulk were full-time positions in most regions. The labour force continued to expand rapidly, but could not keep up with employment, pushing the unemployment rate down to a 30-year low of 5.8%. The labour force has grown 2.5% in the past year, its most in over four years, led by the inflow of nearly 200,000 adult women (over half of whom were over 55 years old).

Job growth remained concentrated in services, notably trade and finance along with the public sector. Construction and manufacturing expanded over the summer months before small declines in October, while cuts in forestry lowered employment in natural resources. Manufacturers continue to report widespread shortages.

While Ontario accounted for nearly half of overall job growth, employment rose in all provinces. Growth in Quebec was led by construction, after housing starts jumped to a 29-year high. Business services continued to fuel growth in Alberta, while trade led BC. Saskatchewan’s employment growth was the weakest outside of Newfoundland, up only 0.5% in the past year, largely because a small grain crop led to 10% fewer jobs in agriculture and transportation. However, export earnings so far this year were up 7%, as higher prices raised exports of agricultural and industrial goods by 40% (offsetting a decline for energy).

Leading Indicators

The composite leading index rose 0.4% in September, a slight improvement on its 0.3% gain in August. More importantly, the index is showing little or no effect from the turmoil in some parts of financial markets beginning in mid-August. In particular, strong gains in housing starts and jobs in September show that concerns about a contagion of unsettled financial market conditions to the real economy of output and employment apparently were unfounded. The unsmoothed index jumped 1.3% in September, equaling its largest increase of the year.

Household demand remained the driving force behind growth. The housing index rose 5.3%, its largest gain in almost six years, due to higher housing starts. Spending on durable goods also accelerated. Strong consumer demand for services was the largest contributor to the growth of services employment.

Financial market conditions improved after slowing over the summer. The stock market rebounded  due to widespread gains, as investors did not expect the rise of the loonie to parity with the US greenback to dampen the outlook for overall corporate profits, especially with commodity prices still rising.

The manufacturing sector remained mixed, with one component rising, another declining and the third unchanged in the month. The only change was that new orders turned up while the average workweek turned down. The ratio of shipments to inventories was unchanged for a second straight month.

The US leading indicator also was unchanged. Housing market conditions deteriorated late in the summer. Instead, exports and business investment took the lead in growth. Employment increased again in September, after sharply upward revisions to July and August.

Output

Real GDP in August grew by 0.2% for the third month in a row. Construction and mining both increased output by 0.5%, while tourism and business services led the expansion of services.

Metal mines and forestry led the increase in resources. It was the third gain in four months for metals, as copper and nickel backed a recovery of iron ore from strikes. Diamond output also rose. Construction was driven by engineering projects, which include the oilsands in Alberta. Oil and gas output overall was unchanged, as increases for crude oil offset more declines for natural gas. In the past year, crude oil production has risen 10% while gas has fallen 6%.

Manufacturing output was steady in August, and remained 2.3% above its low touched in September 2006. Wireless communications equipment increased rapidly again, having doubled in the past two years. Auto assemblies also rose over the summer, before a slight pull back in September. These gains were offset by further losses in lumber and clothing.

Strong gains in tourism were reflected in increased demand for industries such as accommodation and air transport. Goods-handling industries also grew, although less rapidly than in July as international trade slowed. Consumer demand for goods rebounded, although real estate was dampened by a drop in house sales.

Household demand

Retail sales volume rebounded by 1.4% in August, recouping all of the ground lost over the previous two months. A recovery of auto demand led the increase. However, auto sales slowed again in September, leaving them down for the third quarter after a strong advance in the second quarter.

Prices fell across the board for retail goods, stimulating the recovery of demand. The largest price drop was for gasoline, which freed up discretionary income. Prices also fell nearly 1% for goods ranging from computers and TVs to autos and clothing. As a result, sales of all these goods rose by more than 1%.

House sales slowed in August and September for both new and existing homes. New home sales fell sharply in August, when the turmoil in financial markets peaked, and remained slow in September. Existing home sales fell another 3% in September after a 4% drop in August. The drop was most pronounced in cities in Alberta and BC where prices are the highest. Still, nation-wide prices remained 11% above the level of September 2006.

Housing starts jumped 20% to an annual rate of 281,300 units in September, their highest level since 1978. The surge in starts reflected a burst in construction of multiple units, notably nursing homes for the elderly in Quebec. Ground-breaking on single-family homes continued to hover around 90,000 units for a sixth straight month. With home construction steady and sales falling, the inventory of unsold vacant units rose for the second month in a row. This helped alleviate the upward pressure on new home prices, which has slowed from a peak of 12% late last year to 6.5% in August. This moderation was concentrated in central Canada and Calgary, which offset increases of 30% or more in Saskatchewan and Edmonton.

Merchandise trade

Both exports and imports receded in August, reversing their gains the month before. Much of this see-saw movement occurred in the auto sector, where the seasonal shutdown of plants occurred later than usual this summer. With imports falling more than exports, the trade surplus rebounded to $4.1 billion in August.

Along with autos, industrial goods exerted the strongest drag on both exports and imports. Exports were pulled down by metal ores, which had nearly doubled to $2 billion the month before. Still, at $1.4 billion, exports of metal ores remain at their second-highest level ever. The drop in imports was concentrated in organic chemicals used by the pharmaceutical industry.

Most other exports fared well in August. Machinery and equipment jumped 7%, as the volatile aircraft component hit a new record. Agriculture received a boost from soaring exports of canola. Energy exports were little changed, while forestry was checked by the labour dispute in BC.

Imports of machinery and equipment fell almost 3%, also due to the aircraft component. The volume of machinery and equipment imports has risen only 5% in the past year, despite a 4% drop in prices. Imports of consumer goods fell in August, but their volume remained 8% ahead of last year.

Prices

Consumer prices rose 0.4% between August and September, after a small decline over the previous three months. The annual rate of inflation jumped from 1.7% in August to 2.5%, largely because the sharp drop in gasoline prices in September 2006 was not repeated this year. Excluding energy, the annual inflation rate slowed from 2.3% to 2.1%.

Services continued to exert the most upward pressure on prices. Housing led this increase, although mortgage rates recently have played a larger role than the replacement cost component. Elsewhere, auto prices returned to more normal levels after discounts were offered to boost sales in the summer. The cost of gasoline edged up, although its price remains well below its peak in the spring despite crude oil prices moving to record highs (the spring surge reflected a shortage of refining capacity in North America).

Prices continued to fall for a number of goods, especially those with a large import content. The cost of clothing fell again, and is down nearly 3% since April. Electronics continued to cost less. Alcohol remained an exception, with prices up 2% in the past year.

Commodity prices hit new highs for the year in October, surpassing their previous peak set in May. Crude oil prices led the way, jumping $12 a barrel to US$94. Most other commodity prices were little changed, with wheat and metals holding onto their increases the month before.

Prices for manufactured continued to be squeezed by the rising loonie, falling for the fifth straight month to return to their same level as in September 2006. Only food and energy managed to escape the downward pressure on prices. Autos and forestry products posted the largest declines.

Financial markets

The Canadian dollar continued to appreciate to a 50-year high, rising past US$1.05 after hitting parity in September. The dollar posted smaller gains against overseas currencies. Mortgage rates edged up, as falling yields for government bonds accompanied increased rates for corporates as investors continued to be risk adverse.

Short-term business credit continued to expand despite the freeze in some parts of asset-backed commercial paper. While commercial paper contracted for a second straight month in September, overall business credit expanded 1.1% on top of its 3% surge in August. Increased bank loans have more than offset the drop in commercial paper.

The stock market continued to recover slowly from a mild slide early in the summer. The Toronto market rose 4%, after a 3% gain in August. Technology led the way, epitomized by the growth of Research in Motion, whose stock price has doubled in the past year to single-handedly account for one-fifth of the advance of the TSX, according to newspaper reports. Gold and potash also performed well in recent months.

Regional economies

Household demand rebounded strongly in central Canada in August and September. Quebec took the lead with a jump of almost 50% in housing starts in September. The unusual strength was largely due to construction of housing for the elderly in Montréal. The increase of almost 1,000 new and vacant multiple units in this city since its low in April, and the summer slowdown in sales of existing homes, indicate that the underlying trend is more modest. However, new home prices were up only 4.3% year-over-year, one of the lowest in the country, making owning a home easier. Retail sales saw an end to two straight monthly decreases. 

Housing starts in Ontario recovered to near their high set in January, while retail sales increased 2%, driven by a wide range of goods. At the same time, there were 30,000 more American tourists visiting the province than in July, despite the higher dollar. Moreover, the higher dollar does not appear to have discouraged employment either, which picked up throughout the summer, stimulating labour income. In October, Ontario posted the strongest year-over-year increase in employment (up 2.5%) since July 2003. This represents 164,000 more jobs in the past year. Manufacturing sales fell for the fourth time in five months in August, largely due to the automobile industry.

Retail sales fell in British Columbia for the first time this year, after slowing over the summer. Shipments, however, halted a three‑month slide. Shipments of metals rebounded sharply, offsetting the negative impact of the forestry strike. The drop in forestry products aggravated the decrease in exports to Japan, where GDP fell in the second quarter.

In the Prairies, shipments also strengthened, climbing 2.6% to reverse decreases in June and July. Saskatchewan has been the exception in this region for a number of months, recording its sixth increase in retail sales since the start of the year. Its Canada-high year-over-year growth of 13.5% occurs at a time when property values are on the rise. In Saskatoon, for example, new home prices have risen by about 50%, driven by employment growth of nearly 10% in only two years.

International economies

Real GDP growth in the United States was steady at 1.0% in the third quarter. Exports jumped 4% and business investment grew 2% to lead growth. While the housing slump worsened and auto sales fell, consumer spending picked up as real disposable incomes increased 1.1%. While housing weakened further in the fall, most other sectors posted gains in September.

Aside from a 5% increase in new home sales, brought about by builders lowering prices on new construction in the West, housing indicators were gloomy in September. The decline of housing starts accelerated, falling 10% to register its fifth decline in six months. This was accompanied by an 8% drop in existing home sales while the backlog of unsold homes reached its highest level since 1999. The number of building permits issued also declined further in September, falling 7% lower than August levels.

However, gains in all other sectors bolstered the notion that the real economy remains robust. Retail sales rose 0.6% in September on the strength of cars and electronics, indicating continued spending following the peak of the housing turmoil.

Industrial production edged up 0.1% in September as business equipment rebounded from a rare decline in August. This offset a drop in consumer goods, notably auto assemblies. New orders for transportation equipment retreated in August and September following a spike in July while core capital goods showed mild growth during this period.

Climbing exports and falling imports led to a further narrowing of the US trade deficit to $57.6 billion in August. The deficit has shrunk $2 billion since May and $10 billion from its peak last August. Metals and wheat pushed forward export values, which grew 0.4%. This was the sixth consecutive rise in exports and the fifth in which exports outpaced imports. Imports fell as rising demand and prices for crude oil were offset by lower imports of natural gas and gasoline.

Industrial production in the euro-zone ramped up in August, posting a 1.2% gain as every sector strengthened.  New orders rose slightly, boosted by demand for chemicals.  Exports to the US continued to contract, narrowing the external trade surplus in August, although trade with Russia and China remained brisk.  Consumer spending tapered off with waning demand for clothing and household items.  Rising prices for education, alcohol and tobacco pushed the annual rate of inflation from 1.7% to 2.1% in September, while the August unemployment rate was stable at 6.9%.

German industrial production recovered in August after being dormant over most of the summer.  New orders also picked up as exports continued to expand despite the strength of the euro.  Consumer demand was weak as the confidence index fell for the third straight month amidst rising prices.  Inflation jumped to an annual rate of 2.7% in September from 2% the month before.

The pace of production slowed in France in August, while new orders posted their second consecutive decline.  Consumer spending remained upbeat as inflation posted one of the lowest rates in the euro area and unemployment fell to 8.6% in August.

Industrial output continued to stagnate in Britain as export demand remained weak, dampened by the strength of the pound.  Consumers took up the slack, however, boosting both retail sales and imports, while inflation was moderate.

Japanese industrial production rose 2.3% in the third quarter (despite a dip in September), driven by export demand from Asia.  The trade surplus surged in September, despite a 9.2% fall in shipments to the US.  Exports to Asia rose 8.3% and were also strong to Europe, lifted by the yen’s weakness against the euro, while imports fell for the first time since 2004.

China’s economy grew 11.5% in the third quarter, down slightly from its 11.9% year-over-year gain in the second.  Growth was buoyed by strong exports and business investment, despite government curbs on investment in the auto, real estate and textile industries.  The trade surplus widened with exports up 22.8% in September from a year earlier, and imports 16.1%.  Consumer prices jumped 6.2% due to higher food costs, particularly pork.

Note

* Based on data available on November 2; all data references are in current dollars unless otherwise stated.