Section 1: Current economic conditions

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Overview ¹ 

The economy continued to stabilize over the summer. Real GDP in July held on to its 0.1% gain in June, while employment rose 0.2% in both August and September. Meanwhile, the leading indicators rose by 1.2%, an increase typical of the early stages of a recovery.

The most cyclically-sensitive industries led the turnaround in output and jobs over the summer. The largest increase was in the auto manufacturing, as Chrysler resumed production after stopping assemblies during its bankruptcy, according to the Canadian Motor Vehicle Manufacturers Association. Construction activity also levelled off, with housing starts in August 27% above their April low. However, output and employment in the resource sector remained a major drag on growth, reflecting the overhang of inventories in mining while poor weather hampered farming and utilities.

Exports rose for a second straight month in response to the improving global economy. Industrial production in the US posted consecutive increases over the summer, while its housing market continued to improve gradually. The upturn in industrial demand was reflected in gains in commodity prices and the Canadian dollar since June.

US auto sales in September fell to an annual rate of 9.2 million. This was only 0.5 million below their level before the ‘cash for clunkers’ program sent sales soaring to 11.2 million units in July and 14.1 million in August. This allays concerns that the program boosted sales in July and August by shifting sales forward from September. Instead, the program appears to have activated the small percentage of households that rarely buy vehicles and likely would not have been in the market for a vehicle in the short-term.

Labour markets

Employment in September rose 0.2% for the second straight month, its first consecutive gains since last August and September. Unlike recent gains, however, job growth was led by a 0.7% increase in full-time positions. With a slight drop in the labour force, the unemployment rate fell from 8.7% to 8.4%, its first monthly decline since July 2008.

Construction and manufacturing led the rebound with employment rising about 25,000 in each industry. The increase for construction was the second straight, and lifted its employment to the highest level since February. Manufacturing hit a 4-month high. However, natural resources continued to shed labour, while services gave back about half of their gain in August. Services were hampered by persistent losses in business services and a setback in transportation.

BC and Ontario posted the largest gains in employment. Both were led by construction and manufacturing, while business services dampened overall services in the two provinces. Alberta was buoyed by a large gain in construction, which offset the steepest monthly drop in natural resources on record (-7.4%, equalling the drop in May 1999). Employment in Quebec fell slightly due to declines in services that handle goods.

Leading indicators

The composite leading index rose by 1.1% in August, after a 0.6% gain in July. The increase was the largest since April 2002. Growth in the leading index usually only exceeds 1% early in the recovery from a downturn. Eight of the ten components contributed to the advance, up from five the month before, as the manufacturing sector joined the advance.

The housing index rose by 3.1% after sizeable gains in June and July. This is the strongest three months of growth since the spring of 1991. The upturn that began in existing home sales in March was reinforced by higher housing starts over the summer. Consumer spending for other durable goods also continued to expand, even before auto sales rose sharply in July.

The Toronto stock market continued to trend upwards for the fifth straight month. While the rally has been widespread, metals led the gains over the summer.

The leading indicator for the United States continued to recover, up 0.7% for its third straight gain. The index had fallen steadily for nearly two years. Both housing and manufacturing turned up after prolonged slumps.

New orders for durable goods manufactured in Canada jumped 8.1% as summer began, its largest gain on record after marked declines in each of the previous seven months. Transportation equipment led the gain. The ratio of shipments to inventories also rebounded after eight consecutive declines, as the drop in inventories accelerated while shipments began to level off.

Services employment remained on a steady downward trend, falling 0.2% due to declines in both personal and business services.

Output

Real GDP was unchanged in July after eking out a 0.1% gain in June. Excluding irregular factors, output rose 0.2%. The rate of decline of goods production continued to moderate, as manufacturing posted its first increase since last September. However, services were slowed by strikes in the public sector.

Manufacturing output rose 0.8%, only its second (and largest) gain in the past year which saw production tumble 17%. The increase was driven by a recovery in auto assemblies, mostly at Chrysler plants which re-opened as it emerged from bankruptcy. Output at Chrysler plants fell to nearly nothing in May and June. As well, a large smelting and refining operation resumed in Ontario. Non-durable manufacturing continued to fall, reflecting cuts in food, petroleum paper and chemicals.

Construction also began to level off, with a 0.2% dip in July, the smallest of nine straight declines (averaging 1% before July). The drop in house construction slowed in response to the gradual upturn in housing starts, while engineering projects grew for the second month in a row.

Output in primary industries slumped sharply for a third straight month. Mining was hampered by temporary closures of iron ore and diamond mines. Drilling for oil and gas continued to fall rapidly. Forestry posted a sixth straight drop (totalling 25%). Poor weather dampened agriculture for a third consecutive month. The cool weather also helped lower utility demand.

Services edged up 0.1% after a 0.4% gain in June. Public services fell, largely due to strikes by municipal workers in Toronto and Windsor. While wholesalers received a boost from the upturn in auto trade, transportation was checked by the drop in bulky resource products (notably those carried by train). Information and culture was dampened by the move of some newspapers to one less issue per week. Accommodation received a boost from a rebound in travellers from the US after the initial switch to passports to cross the border led to a sharp drop in June.

Household demand

The volume of retail sales was little changed in July, after consecutive gains in May and June. Spending on autos was unchanged, despite a 5% increase in the number of new vehicles sold. This reflects a shift in sales to lower-priced units, notably passenger cars built by Detroit-based companies after GM and Chrysler emerged from bankruptcy.

Non-automotive durable goods sales rose at a steady pace of 0.5%. Furniture and appliances led the increase. Clothing led a 0.4% gain for semi-durables. However, consumption of non-durable goods fell, with unusually cool and rainy weather dampening demand for food and alcohol.

Housing starts rebounded 12% to 150,000 units (at annual rates) in August, their highest level so far in 2009. Starts have been on an upward trend since hitting a low of 118,000 units in April, with the largest gains for multiple units. The recovery for single-family homes has been hampered by slow sales, although an upturn in August snapped four months of decline and accelerated the drop in vacant units. Existing home sales levelled off in August, after rapid gains since February.

Merchandise trade

The monthly trade balance registered a deficit of $1.4 billion in July as gains in imports outpaced exports. This is in contrast to the four other months since December 2008 which posted deficits as these were the result of exports falling faster than imports.

Exports increased 3.3% to $30.3 billion, their second consecutive rise while imports shifted gears from four straight declines to an 8.3% increase to $31.7 billion. Both gains were driven by volume growth, with export volumes rising 5.9% and import volumes up 8.7%. Increased trade with the United States bolstered both exports and imports, with other OECD countries rounding out the gain for exports and other countries for imports.

Machinery and equipment drove the overall increase in exports as shipments of aircraft and telecommunication products rallied. Machinery and equipment exports have followed a downward trend since late 2008; however, their drop was more muted than sectors such as industrial goods and energy as the fall in this sector was limited to volume declines while these other sectors prices and volumes were falling concurrently. The volume declines were concentrated in areas such as industrial machinery and other equipment and tools where reduced demand for metals and oil and gas meant expansion projects in North America were postponed, lowering demand for tools and machinery. Aircraft exports and imports also registered large increases although the trends for both series through late 2008 and 2009 were relatively stable.

Exports of automotive parts edged up as a result of US inventories being drawn on, thanks to the federal cash for clunkers program. Reports indicated that the supply of vehicles was reduced to 48 days by August 1st compared to 64 days one month earlier, with a 60 day supply considered normal by the industry. The rise in imports was concentrated in machinery and equipment, energy and automotive products, but all sectors posted gains with the exception of agricultural products. While prices remained lower than their 2008 peak, crude oil import volumes shot up to a record in July. Aircraft, other transportation equipment and cars and car parts also contributed to the increase.

Prices

Consumer prices rose 0.3% in August, their third increase in four months. Still, prices remained below their level of a year-earlier largely because of the steep decline of energy prices last fall.

The cost of durable goods fell for a second straight month. Non-automotive goods led the decrease, notably computers and electronics. And food prices posted their first monthly decline since March 2008, after slowing steadily from their peak rate of increase early in the year. Clothing prices were unchanged over the summer.

Energy prices led the increase, as gasoline prices rebounded from their drop in July. Elsewhere, the cost of services continued to moderate, largely due to declines in both mortgage rates and new house prices.

Commodity prices were little changed in September. Energy was dampened by lingering weakness for natural gas, as inventories in the US hit record levels. Food prices continued to trend downward on the prospect of a good global grain crop. Industrial goods eked out a small gain, led by further increases for metals.

Prices for manufactured goods rose 0.5% in August, reversing July’s decline. However, the increase was largely confined to petroleum and metals. Prices fell outright in a majority (12 out of 19) of other industries. This largely reflected the widespread downward pressure exerted on export prices from the rising Canadian dollar.

Financial markets

The Toronto stock market rose another 5% in September, its sixth advance in the last seven months. Energy and metals rebounded from a sluggish August with double-digit gains to lead the increase. Outside of real estate, growth in most other sectors was marginal.

Total business credit fell for a second straight month in August. Short-term borrowing fell steadily. However, there was no offset from stock and bond issues, which had grown rapidly in the first half of the year. Household credit demand rose steadily in June.

The Canadian dollar in September rose above 93 cents (US), up two cents from August and its highest level in a year. However, much of the increase reflected a drop in the US dollar against most currencies, as the trade-weighted index of the loonie was little changed.

Regional economies

Quebec’s economy continued to outperform the rest of Canada. Housing starts in August rose to 41,100 units (at annual rates), returning to their levels of last autumn. Retail sales in July were steady, holding on to gains of 2% in June and 1% in May. Household spending was buoyed by labour income, which rose 0.4% in the second quarter, the most in Canada. Manufacturing sales rose for a second consecutive month after hitting their low in May. Growth was widespread in capital goods.

Ontario began to grow again, but remained well below last fall’s highs. Manufacturing sales recovered 12% as auto plants began to re-open, but were still $5 billion below their peak in 2008. Housing starts also rebounded in August, but were still only half their level of a year earlier. Consumers remained skittish about spending, with retail sales little changed for a second straight month. Labour income fell 1.1% in the second quarter, the only region where the rate of decline did not slow.

BC also struggled to recover from steep declines since last fall. Housing starts rose over 50% in August, but the level of starts still was only half of their high in 2008. Manufacturing sales retreated 1% in July after a brief upturn in June. Food replaced petroleum as the source of weakness in Alberta, as low demand led to the temporary closing of a meat packing plant. Since April, food has surpassed petroleum refining as Alberta’s leading manufacturer (in mid-2008, petroleum was nearly twice as large). Retail sales fell 0.8% after three consecutive gains.

Housing led the recovery on the prairies. Housing starts rose another 16%, and have nearly recouped their losses since last fall. However, manufacturing sales continued to slide, falling another 4% and remain close to their recent low set in May. Retail sales fell 1.1% in July after two months of growth.

International economies

In the United States, retail sales jumped 2.7% in August, fuelled by the ‘cash for clunkers’ program that drove auto sales to an annual rate of 14.1 million. While auto sales subsided in September, they remained near their level before this program started. Non-automotive sales posted a 1.1%, reflecting the resumption of labour income growth as job losses slowed over the summer and wage rates rose steadily.

Employment fell by 0.2% in September, the same in July and August. However, losses over the year ending in March were revised from 4.8 million to 5.6 million. Lower labour force participation slowed the increase in unemployment to 9.8% from 9.7%.

The drop in auto inventories due to the burst in sales helped boost industrial production by nearly 1% in both July and August, the first back-to-back gains since December 2007. Auto assemblies rose 6% after a 20% gain in July when GM and Chrysler emerged from bankruptcy. Non-automotive industries increased output by 0.4%, with gains in most capital goods. New orders for core capital goods were little changed over the summer, after a rebound in May and June.

The housing market continued to improve gradually in August. Another increase in new home sales helped to stabilize housing starts at about 570,000 units (at annual rates) over the last three months, compared with its low of 500,000 units early in 2009. Existing home sales fell slightly, but the inventory of unsold homes continued to recede and house prices firmed.

The current account deficit fell to $99 billion in the second quarter, half its level a year-earlier. At 2.8% of GDP, this was the smallest deficit since 1999. The monthly trade deficit in goods and services grew by $4.3 billion in July, as imports responded to the increase in consumer and industrial demand.

Industrial production in the euro-zone edged down again in July as declines in energy, capital and durable goods more than offset gains elsewhere. New orders posted a strong increase for the second month in a row, dampened only by a slowdown in non-durable consumer goods. Despite easing credit conditions and low interest rates, construction retreated for the fourth straight month. Although foreign demand for machinery and autos was weak, a drop in the energy deficit shifted the external trade balance into a surplus. Consumer spending remained tepid as the unemployment rate inched up to 9.6%.

German industrial production contracted in July, giving up most of its gain the month before. New orders remained upbeat, posting their third straight increase, as export demand continued to strengthen. Consumers were more willing to spend as rising disposable incomes, low inflation, tax cuts and the car scrappage scheme boosted demand. The unemployment rate was stable at 7.7% in August.

Industrial production continued to rise in France in July, albeit at a much slower pace, although new orders strengthened in the month. Domestic demand fuelled growth, as exports remained weak with France posting the second largest deficit in the euro-zone. Consumer spending was upbeat, even as the unemployment rate rose from 9.5% in June to 9.9% in August.

Industrial production in Britain picked up in July for the second consecutive month, fuelled by autos. A government subsidy for new vehicles boosted demand and resulted in the largest rise in manufacturing in three years. However, consumer spending tapered off in July. Imports continued to outpace exports, while construction remained stalled.

Japanese industrial production rose in August for the fourth month in a row. Exports increased again, but the rising strength of the yen began to slow their advance. Consumer prices fell at a record rate in August, largely as a result of lower energy prices. Consumer demand was weak, however, in tune with a record unemployment rate of 5.7% in July.

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