Section 1: Current economic conditions

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Overview ¹ 

Output stalled in April, after seven straight gains. However, employment continued to strengthen in June and the composite leading index rose steadily.

While total output was unchanged in April, the sources of growth continued to shift. Household demand slowed after leading the initial recovery in the second half of 2009, most noticeably for housing. Exports continued a slow recovery. However, business spending showed clear signs of improvement, ranging from outlays for investment to business services to employment.

Business investment is usually the last component of demand to turn up in a recovery. This has continued in the current cycle, with the volume of investment falling 2.1% over the last three quarters even as total GDP began to increase. However, business investment growth appeared to resume in the spring. Imports of machinery and equipment in April rose for the third straight month, up 7% since January. Non-residential building posted their largest consecutive gains since before the recession. This is consistent with an upturn of commercial and industrial building permits between January and April to $2.0 billion, the most since September 2008 when the recession began, before a dip in May. Exploration and development for oil and gas rose for the eighth time in nine months. These gains in investment spending were reflected in higher factory output of capital goods, notably machinery and non-metallic minerals which both expanded for the fourth straight month.

The increased willingness of firms to spend was evident in areas other than investment in plant and equipment. Demand for business services (including both professional, scientific and technical services and administrative services) posted consecutive gains for the first time since the recession began. Most importantly, employment grew by 1.0% in the second quarter, its largest quarterly gain in eight years. Private sector payrolls have led job growth so far this year with a 2.7% gain, after the initial upturn in jobs last year was driven by the public sector and the self-employed. In turn, the boost employment gives to personal incomes helps sustain household spending.

This shift in the sources of growth was evident in the leading indicators. While overall growth was steady at about 1%, the housing and stock market components stopped growing while manufacturing picked up. The US saw a similar shift in growth. Household spending dipped in May, exacerbated by the impending end of a tax break for homebuyers, but industrial production accelerated for the fourth straight month, led by gains in business equipment. So far, however, employment has been slower to recover in the US, with private sector jobs in June up only 0.6% from their trough in December 2009.

Labour markets

Employment rose 0.5% in June, capping a 1.3% gain in the last three months, the most since December 1987.The monthly increase was about evenly-divided between full-time and part-time positions. Adult men led the advance, and have recouped all of their losses during the recession (adult women did so last fall). Youth employment remains 6.8% below its September 2008 peak. But because the adult population is growing nearly 2% a year (versus 0.2% for youths), the employment rate for adults remains over a percentage point below its previous peak. With the labour force expanding another 0.3%, the unemployment rate dipped below 8% for the first time since January 2009.

Private sector payrolls continued to drive job growth, as they have so far in 2010 (accounting for 82% of the increase since December). Services accounted for all of the gains throughout the second quarter. This advance was widespread, with trade and business services both posting a third straight increase. Within goods, a rebound in construction offset renewed declines in manufacturing.

Ontario continued to lead job growth, with a 0.9% monthly gain lifting its year-over-year growth to a national high of 3.1%. Services dominated growth as factory jobs continued to dwindle. At 8.3%, the unemployment rate was down from its peak of 9.5% in May 2009. Quebec also posted above-average job growth, and its unemployment rate dipped below 8%. Alberta and BC led growth in western Canada, as increases for services outweighed declines in goods. The increase for Alberta was its third straight, after it lagged the recovery in the rest of Canada before April.

Leading indicators

The composite leading index rose by 0.9% in May, about equal to its average increase over the past year. However, the upturn in the index a year ago was led by housing and the stock market. These components have stopped contributing to growth, replaced instead by the manufacturing components. The US leading indicator has been a consistent source of growth over the past year.

The housing index fell 1.2%, its first decline since April 2009. Existing home sales continued to retreat slowly from their record high reached over the winter, while the year-long rally in housing starts stalled. Despite the slowdown in housing, furniture and appliance sales continued to strengthen. Demand for other durable goods remained soft, notably for autos.

The Toronto stock market stopped trending up after thirteen straight increases.

All three manufacturing indicators rose in unison. New orders led the way, up 4.0% for a fourth consecutive increase. The ratio of shipments to inventories strengthened for the tenth month in a row. The average workweek posted its first increase since September 2009.

The US leading indicator advanced by 0.7%, continuing a string of twelve straight gains. Growth was led by manufacturing demand and a continued positive interest rate spread.

Output

Real GDP was unchanged in April, snapping a string of seven straight increases. The interruption to growth was evident in both goods and services.

In services, the weakness was confined to household demand, notably for retail trade, restaurants and homes. Wholesale trade and transportation continued to expand slowly. An encouraging sign for business spending was the first back-to-back gains in demand for business services since before the recession. Public services rose steadily.

Manufacturing and residential construction led the slowdown in goods, shrinking slightly after consecutive gains of seven and nine months, respectively. The drop in manufacturing was led by non-durable goods industries such as food and pharmaceuticals. Capital goods industries continued to ramp up production, notably machinery, iron and steel and ICT goods. This reflects another solid increase in non-residential building, which more than offset the dip in home-building to keep overall construction growing.

The primary sector continued to recover, led by mining and forestry. Mining received a boost from oil and gas, where output continued to recover from accidents over the winter. Exploration and development of oil and gas also rose for the eighth time in nine months.

Household demand

Retail sales volumes fell 1.9% in April, reversing most of March’s gains. This was only the second decline in sales since the beginning of 2009 and sales remained nearly 1% above pre-recession levels.

Durable goods, notably autos, led the drop although the losses were widespread. Slower sales of used trucks and cars explained nearly two-thirds of the monthly drop in autos. This followed rapid growth in sales in March. New car sales dipped as well. Both used vehicles and new cars fell below February levels in April, while new truck sales maintained most of the previous month’s gain. Preliminary data point to little change in auto sales in May.

Clothing sales volumes fell after posting robust gains during the four previous months, accounting for the decline in semi-durables. Non-durables remained unchanged in April after posting steady increases in the first three months of 2010.

The housing market softened again in May with existing home sales falling nearly 10% on top of a downward revision to April, resulting in current levels sitting 14% below December’s record-high. Housing starts also posted a weak month, down 6% in May, after having levelled off around 200,000 units (at annual rates) between February and April, a level still about 40,000 units shy of pre-recession starts. While the drop in the number of starts for multiples followed a large increase in April, single-family homes fell for the second consecutive month, with May’s rate of decline a slight acceleration of the previous month’s drop. Average home prices also eased slightly, while real estate listings dropped 4% from April’s record levels.

Merchandise trade

Export and import volumes continued to rise slowly in April. Since December, export volumes have risen 2% and imports by 3%. However, the rising exchange rate has dampened prices, and nominal exports and imports both remained about where they started the year.

Exports fell the most for industrial goods and agricultural products, as a result of both lower prices and volumes. However, both decreases followed steady gains earlier this year. Forestry products sustained their recovery with an eighth consecutive increase, totalling 17%. Auto exports hovered near their highs for the year. Machinery and equipment exports rebounded 5%, their largest advance since last summer, led by aircraft.

Industrial goods also led the drop in imports, especially precious metals imported for refining and then re-export. Consumer goods imports also declined. However, consumer goods imports volume excluding pharmaceuticals continued to strengthen, while pharmaceutical imports continued to subside from their highs late in 2009 when flu vaccination was at its peak. The volume of machinery and equipment imports rose for a third straight month to their highest level since late 2008, including a 6.4% gain so far this year.

Prices

Consumer prices dipped 0.1% between April and May, reversing their gain the month before and lowering the year-over-year change to 1.4%. Prices fell for durable and semi-durable goods and food, all commodities with a large import content. Food prices were up less than 1% from a year ago, a sharp reversal from their peak rate of increase of over 8% early in 2009.

Energy was the major source of upward pressure on prices. While drivers got a temporary respite from higher gasoline prices, this was offset by rising rates for electricity and natural gas. Shelter continued to dampen the cost of services.

Commodity prices in June recovered some of their losses in May. Energy prices led the way, with oil levelling off after a sharp drop in May and natural gas edging up. Non-energy prices overall were little changed. Further declines for metals and renewed weakness for lumber offset increases for agricultural products.

Manufacturing prices rose 0.3% in May, their fifth gain in the last six months. As a result, industrial prices posted their first year-over-year increase since early in 2009. While the increase in prices earlier in the year was driven by metal and petroleum refining, the May increase was mostly due to the retreat of the Canadian dollar from near-parity with the US greenback in April. Excluding the impact of the dollar, prices would have fallen 0.6%, largely due to a retreat for metal and petroleum refiners.

Financial markets

The Toronto stock market fell 4% for a second straight month, with all the major sectors posting declines. The largest decrease was posted by metals as prices continued to slide on commodity markets.

Despite lower commodity prices, the Canadian dollar hovered around 95 cents (US), after a drop in May, while rising sharply against the euro. Since the start of the year, the loonie has risen over 10% against the euro.

The Bank Rate rose 25 basis points, its first increase since 2007. Longer-term mortgage and bond rates were little changed.

Short-term business credit rose in May for the first time since December 2008. Together with new equity issues, this kept total corporate fund-raising increasing despite a slowdown in bond issues. Household credit expanded steadily in April. So far this year it has risen at an annual rate of 3.9%, up slightly from its growth in both halves of 2009.

Regional economies

The prairie provinces posted the largest declines in household demand and manufacturing sales, after leading growth most of 2010. Manufacturing sales in April dipped 2.6% after five straight gains, led by a decline in receipts for Alberta’s oil refineries. Housing starts dropped 22% in May, the most of any region, after steady gains early this year. Retail sales fell 1.9% after four straight gains.

BC also saw above-average declines in manufacturing and housing. Manufacturing sales fell 2.5%, after leading growth over the previous three months. Computers and electronics led the drop, bringing their losses to over 20% in the past year. Housing starts dipped 13%, although they remained above an annual rate of 20,000 units so far this year, double their low early in 2009. Retail sales retreated 0.7%, the smallest decrease in Canada.

Ontario posted small declines across the board. Housing starts dipped only 3%, while retail sales fell 1.2%, or one-third of their gain in March. Manufacturing sales edged down 0.3% after four consecutive declines.

Quebec went against the grain. Manufacturing sales rose 1.2%, the only major region to post a gain thanks to increases in aerospace and oil and metal refining. Retail sales tumbled 4%, by far the most of any region, after five straight gains. Housing starts fell 13%, but remained above their 5-year average of 40,000 units.

International economies

In the United States, growth continued to shift from the household to the industrial sectors, a hand-off accelerated by the impending end of the tax credit for home-buyers. New home sales fell by a third in May, as homebuyers had to commit to buying before April 30 to qualify for an $8,000 tax credit. In response to slower sales, housing starts in May fell 10%, offsetting their gains in March and April. The slowdown in housing also was evident in retail sales. Half of their 1.2% drop in May originated in building materials, which had jumped 8% in both March and April. Still, overall retail sales were 7% ahead of their May 2009 level.

Industrial production accelerated for the fourth straight month to a 1.2% gain in May. Manufacturers continued to rebuild inventories for a fourth straight month. Manufacturing output was boosted by business equipment and consumer durable goods, which offset a slowdown for construction materials. New orders for core capital goods rebounded in May from a dip in April.

The current account trade deficit widened slightly for the fourth straight quarter to 3.0% of GDP in the first quarter. The monthly trade deficit for goods and services in April was little changed at $40 billion for the third consecutive month. Net long-term capital flows continued to enter the US at a high rate of $83 billion in April, after a record $140.5 billion inflow in March. This reflected increased purchases of both government and corporate securities. As well, US holdings of non-resident capital fell by $27.8 billion in April. In the past year, US holdings of foreign bonds and stocks have fallen by $145 billion and $77 billion, respectively.

The euro-zone economy expanded in April with industrial production up 0.8% as strong gains for capital and intermediate goods offset declines elsewhere. The pace of new orders slowed, however, dragged down by weaker demand for capital and consumer goods. Construction retrenched after a pickup in March and although exports were boosted by the declining euro, the external trade surplus narrowed due to a rise in the energy deficit. Consumers reined in spending as the unemployment rate climbed to 10.1% in April and inflation hit an annual rate of 1.6% in May.

Industrial production in Germany rose for the second month in a row in April, while new orders saw their fourth straight gain. Robust foreign demand boosted exports by 10.7% in March, the most in 18 years. Construction eked out a slight gain after a surge in March and consumer spending picked up as the unemployment rate eased to 7.7%.

French industrial production retrenched in April after three months of expansion and new orders also declined. Construction retreated following a brief uptick in March. Consumers remained optimistic, however, with retail sales volumes up for the third straight month in April as inflation and the unemployment rate were stable.

In Britain, industrial production stalled in April after two months of growth, led by a decline in manufacturing. New orders fell for the first time in seven months and construction remained weak. Retail sales volumes rose in May, while the inflation rate eased to 3.4%.

The Japanese economy continued to enjoy robust exports which rose for the sixth straight month in May, led by autos and electronics. Auto exports to Asia jumped 34.4% and by 23.4% to the US from a year earlier. Consumer spending remained upbeat, boosted by government incentives as prices continued to fall.

Industrial production in China eased slightly in May to a year-over-year gain of 16.5%, dampened by government restraint measures. Inflation rose to 3.1% from 2.8% the month before.

India’s GDP grew 8.6% in the first quarter from a year earlier, buoyed by strong domestic consumption and investment. Industrial production rose 17.6% in April, led by a 56% gain in machinery and equipment. Inflation continued to increase, sparking two interest rate hikes since March.

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