11-010-XIB
Canadian Economic Observer
July 2008

Summary table - key indicators

Overview*

Output rebounded in April, while employment in June held onto its gains earlier in the spring. Notably, manufacturing led output growth, while job losses at factories in central Canada hit a 3-year low.

Manufacturing output in April led the recovery of GDP from its March decline, when a strike slowed auto assemblies and heavy snow hampered activity in eastern Canada. Still, manufacturing output remained nearly 4% below its November 2007 level. This drop in manufacturing has been the major factor in the slowdown of overall GDP over the last five months.

The reasons for the slump in manufacturing since last November are easily identified. Over half is attributable to a 19% drop in auto assemblies and the spin-off effects on suppliers of auto parts.

Meanwhile, the long-term structural decline in clothing and forestry-based manufacturing intensified. After falling 8% in the 12 months ending in November 2007, combined output in the textile, clothing, wood and paper industries tumbled 9% in the next five months, accounting for one-third of the drop in all manufacturing. Together with the losses in auto output, these sectors accounted for almost all of the decrease in manufacturing output since last November.

The concentration of manufacturing losses in clothing, forestry and autos has several implications. Few of these losses appear to reflect a loss of competitiveness to US factories as the loonie surpassed parity with the US dollar late last year. Rather, they reflect structural changes that have been going on for years. Clothing’s retreat began with the entry of China into the global market. Lumber was the victim of the collapse of the US housing market, while paper was side-swiped by the sharp drop in US newsprint demand. Autos were hurt by both a drop in US sales and a shift away from large vehicles.

Meanwhile, growth in the few manufacturing industries that have expanded over the last five months (including food, petroleum, primary metals and machinery) has been minimal, with the exception of aerospace. Overall, output in these other manufacturing industries was little changed (-0.4%) between November and April, as a 2.0% rebound in April recouped most of the losses caused by weather and holidays over the previous two months.

Lower energy production has also played a role in the recent economic slowdown. In 2007, higher energy output compensated for nearly three-quarters of the drop in manufacturing output. Since November, energy output has fallen 2.5%, and is off 6.8% from a year earlier. With energy prices hitting record highs, this has saddled the economy with the burden of higher costs without the benefit to GDP of higher energy production. Higher energy prices did boost export earnings, and energy exports have moved into first place among Canada’s exports.

Labour markets

The labour market remained tight in June. Employment was unchanged, while an influx of youths into the labour force nudged up the unemployment rate to 6.2%. Total hours worked rose 0.4%, mostly in Alberta and BC where job growth remained the fastest in the nation (at 3.1% and 2.7% respectively over the last 12 months).

Business services and trade led job growth in services, while the primary sector buoyed goods against a dip in construction (after eight straight gains). Manufacturing consolidated its rebound in May.

The pace of manufacturing job losses has slowed markedly so far this year. At the start of 2008, the year-over-year rate of decline in factory jobs was near 6%. By June, that loss slowed to 1.6% (October 2004 was the last time growth was positive). Moreover, the turnaround has been led by central Canada. Factories in Quebec employed 1.7% more than in June 2007, their first gains in over three years. Ontario swung from a 9% drop as recently as last June to a 1.5% decline this June, its smallest loss in over three years.

Despite the firming of its manufacturing base, overall employment dipped in central Canada in June. Mostly this reflected fewer jobs in Ontario’s public sector.

Instead, job growth was led by western Canada, notably Alberta and BC. Natural resources picked up in Alberta, while soaring energy prices also fuelled growth in business services. Goods-handling industries led the increase on the west coast, as trade with Asia continued to expand.

Leading Indicators

The composite index rose 0.2% in May, following no change in April and declines in the previous two months. May’s increase was widespread, with seven of the ten components expanding, the most since the turmoil began in global credit markets last August. One component was unchanged, while two declined.

Household demand remained the strongest sector in the economy. The housing index jumped 1.9% after seven straight declines. Housing starts strengthened in May, while existing home sales rebounded from a weak start to the year, which partly was due to poor weather. Consumer outlays for durable goods grew steadily, after a burst of spending at the start of the year when the GST rate was cut. The personal sector also was the driving force behind the growth of services employment.

The manufacturing sector continued to improve slowly after a very weak start to the year. The turnaround has been led by new orders, which expanded for the third straight month. Orders had tumbled 3.3% at the turn of 2008, their largest monthly decline in over a decade. Buoyed by the recovery of new orders, the steady drum-beat of cuts to labour demand began to soften in the spring. The average workweek stopped falling after five straight declines, while employment in manufacturing rose in May.

The leading indicator for the United States remained the most negative component in the composite index, posting its ninth straight decline. Weakness in the auto and housing sectors was partly offset by the lift rising exports gave to the industrial and agricultural sectors.

Output

Real GDP rebounded 0.4% in April, recouping almost all of the ground lost over the previous two months. The upturn was led by manufacturing and services like transportation and wholesaling that handle goods.

Manufacturing output rose 1.9% after a 2.4% drop in March. A majority of industries boosted output, as the auto industry began to recover from a strike at a parts supplier and several industries resumed more normal operations after a severe storm in March. However, the slump in output in the clothing and lumber industries continued unabated. It is also noteworthy that auto producers cut unit assemblies by 7% in May as they adjusted to a sharp slowdown in sales in the US.

Energy has been a more surprising source of weakness recently. Energy output fell 1.1%, and its 6.8% drop in the past year exceeds even the 5.5% retreat in manufacturing. In 2007, energy output rose 1.5%, offsetting almost three-quarters of the drop in manufacturing output. This year, the energy sector is compounding the weakness in manufacturing. Both oil and gas output and drilling have declined in recent months, despite record high prices. Oil and gas output has fallen 7.1% from its peak last June. Part of April’s decline reflected stoppages for repair. The 13% drop in drilling since January interrupted a recovery of 50% over the previous eight months.

Most other industries posted little change in output. Retail trade picked up, but this was offset by a drop in construction, especially home-building. Financial and business services continued to expand steadily.

Household demand

Retail sales volume rose 0.5% in April, returning to its January level after poor weather hampered sales in February and March. The effect of weather was most pronounced for clothing, where an early Easter and cold weather pushed consumer outlays for spring fashions into April, when sales jumped 2%. The return of good weather for driving also saw gasoline consumption jump 3%, after a dip in the first quarter.

Demand for durable goods overall was unchanged. A drop in vehicle sales (especially trucks) offset a sharp increase in spending on other durable goods, notably electronics. Preliminary data point to little change in auto sales in May.

Housing starts in May rebounded 4% to an annual rate of 227,000 units, still well below their first-quarter average. Starts of single-family homes recovered most of their drop the month before. However, starts of multiples were little changed after a 19% tumble in April. Multiples have become the dominant force in new construction, accounting for nearly two-thirds of housing starts so far in 2008 (after sharing the market about equally with singles in 2006 and 2007). This reflects not only a slowdown in the market for single-family homes, but also the increased popularity of condos and a burst in the construction of retirement homes as the population ages.

Existing home sales edged down in May, and were 17% below the level of a year earlier. Sales in Alberta and BC were off nearly one-third, as high prices dampened demand. Despite a pick-up in new home sales, the inventory of unsold new homes continued to increase.

Merchandise trade

Export earnings were up for the fourth consecutive month in April (+0.3%), inflated by the continued increase in commodity prices, notably energy. These rising export prices have boosted investment in energy and mining; however, production remains sluggish. As a result, overall export volumes have followed a slow downward trend through 2007 and into 2008.

Crude oil and natural gas prices have surged in 2008. A lesser-known trend is that the price of sulphur, a by-product of natural gas and crude oil processing and an important component of fertilizers, has also soared as demand has ramped up to fuel crop production. At the same time, governments in other major global suppliers have implemented export taxes to maximize the product available to domestic farmers.

Similar to potash, sulphur prices have more than tripled in early 2008. As a result, sulphur exports for the January to April 2008 period reached nearly $600 million, exceeding their 2007 total. April’s sulphur exports of $180 million were the largest monthly receipt on record. Canada is the second largest supplier of sulphur to the world market, with Alberta supplying the majority of exports. China is the top importer of sulphur, with Canada’s year-to-date shipments to China triple their 2007 level. Rising exports of sulphur, as well as canola seed and ethylene glycol, have contributed to exports to China showing on a 1% gain over 2007 (despite a lag in shipments of potash).

Exports of agricultural goods, industrial goods and machinery and equipment showed little movement in April. Agricultural exports, buoyed by high grain prices, held steady at their monthly high of $3.3 billion. Auto exports increased for the third consecutive month to solidify the rebound to autumn 2007 levels. This gain offset the decline in trucks and motor vehicle parts, which were affected by a labour dispute until the end of the month when parts were imported from an alternative supplier, allowing the beginning of a recovery to imports of automotive products. At almost $500 million in April, truck exports were on a par with lumber or fertilizer exports, but far below exports of crude oil ($5.3 billion), natural gas and passenger cars (both $3.1 billion) and about half the value of aluminum or gold.

Imports increased 3.7% for the month, following two monthly declines. A jump in energy imports, due primarily to crude oil, after a drop in shipments in March explained the rise.

Prices

The CPI rose 0.6% between April and May, lifting the annual inflation rate to 2.2%. Most of the increase was driven by the cost of gasoline, after the price of crude oil doubled on world markets in the past year.

The cost of non-energy goods continued to fall. Durable goods prices fell the most, largely as automakers stepped up rebates to boost lagging demand, especially for large vehicles. Clothing prices also fell sharply, despite a rebound in demand in April. Higher prices for bakery and cereal products boosted food prices, which overall were up 1.9% in the past year.

The cost of services continued to rise steadily, mostly due to housing. However, the source of the increase in housing over the past year has shifted from new home prices to mortgage interest. The annual increase in new home prices (used to estimate the replacement cost of housing in the CPI) has been halved in the past year, largely due to a cooling in Alberta.

Commodity prices continued their inexorable climb, fuelled by records for energy. Crude oil topped $140 a barrel, rising over $10 for the third straight month. Natural gas prices also hit a record, outside of the hurricane-induced spike in 2006. Natural gas has doubled in the past year, with 70% of the increase occurring in 2008. Flood damage to the mid-west US sent the price of corn soaring. Prices for most metals remained steady at very high levels. Newsprint prices continued to rise, as numerous mill closures have reduced supply faster than the 14% drop in US newsprint consumption in the first five months of 2008.

Industrial prices rose 0.6% between April and May, their seventh straight increase. However, the increase was largely confined to petroleum and food products. Prices fell in most industries, reflecting both a rise in the exchange rate and soft markets for metal, forestry and automotive products.

Financial markets

The stock market dipped 2% in June, after strong gains over the previous two months. The monthly drop reflected losses in financial, consumer and technology stocks, which offset further gains in energy, mining and materials. The latter have propelled the Toronto market to a 4.6% gain in the first half of the year, the best among the world’s 20 largest stock markets.

The Canadian dollar in June hovered just below parity with the US greenback, and both currencies fell slightly against the euro. The recent slide in interest rates did not continue in June, as most short-term rates were unchanged while some long-term yields edged up. Corporate credit demand in May shifted from short-term sources to stocks and, especially, bonds.

Regional economies

Economic conditions improved with the arrival of milder seasonal weather, especially in Eastern Canada. In Quebec, retail sales jumped 3.4% in April, reversing the 3.0% slide in March. New truck sales also rebounded strongly. So far this year, higher gasoline prices have not slowed sales, even for more energy‑consuming vehicles, but buyers have favoured overseas models over North American ones. Although shipments remained stable overall, volatility in aerospace shipments continued to mask changes elsewhere, as 16 of the 21 manufacturing industries posted increases. This improvement comes after 15 manufacturing industries, producing mostly goods shipped by truck or by train, experienced declines in March. There were also employment gains in manufacturing in May.

In Ontario, manufacturing sales posted their third increase in four months. Thirteen of 21 industries posted gains, after 14 saw declines in March largely in response to unusually severe weather. Growth appears to be focused on the domestic market, notably investment goods. Construction remained a source of strength. Ontario posted the largest growth in building permits in April (+12% to $2.4 billion) just after the value of construction intentions for multifamily dwellings rose by half. In May, it was the turn of the non‑residential sector to post strong gains, reaching its fourth highest value since January 1989. Retail sales rose 0.7%, up for the third time this year.

Manufacturing also turned up on the Prairies, led by oil, although most industries saw advances. Despite favourable underlying conditions for consumers, with labour income growing at an annual rate of 10% in the first quarter, retail sales declined in April. Motor vehicle sales fell, in contrast to trends in eastern parts of the country. Building permits also were down. Most indicators remained steady in British Columbia.

International economies

In the United States, the housing market remained weak as prices continued to decline. Inventories were stable at 11 months worth of sales, which have levelled off in recent months.

Existing home sales edged up 2% to 5 million units (at annual rates), continuing their stabilizing trend for the fifth consecutive month. A mild retreat in new home sales gave back some of the ground gained in April; however, the trend has levelled off since March. Housing starts dipped slightly below 1 million units in May but have also steadied since March.

Consumer spending was buoyant, with retail sales up 1.0% in May, their best month since November 2007. All categories of demand strengthened. Autos rose slightly after three consecutive declines. Excluding autos, overall sales advanced 1.2%. Electronics, furniture, sporting goods and building supplies all posted healthy gains as consumers spent their tax rebates. Auto sales fell substantially in June.

Industrial production was down 0.2% in May. This followed a 0.7% decline in April. Auto assemblies were up slightly as a strike at a major parts producer concluded toward the end of May. Computer products also registered a gain, but that was offset by declines for other durable goods. Business equipment was flat for a second straight month, and new orders for capital goods fell after a large increase in April.

The monthly trade deficit rose to $60.9 billion, after narrowing to $56 billion in March. Imports outpaced exports, as the crude oil bill ballooned despite a slight decline in shipments. Rising imports of capital and consumer goods also contributed to the gain in imports. Exports received a boost from capital goods, such as aircraft, agricultural machinery, and computer components, as well as from industrial supplies including plastics and minerals. The overall current account deficit widened to $177 billion in the first quarter, after shrinking in every quarter of 2007 to end the year at $167 billion.

Euro-zone industrial production rebounded strongly in April, as every sector strengthened with the exception of energy. New orders were also upbeat, led by renewed demand for textiles and metals. External trade remained brisk, boosting the surplus for machinery and autos. Consumer spending picked up for the first time in four months, even as inflation jumped to an annual rate of 3.7% in May due to the high cost of fuel and food. The unemployment rate was stable at 7.2% for the sixth straight month.

Factory output in Germany contracted for the second month in a row in April, while new orders posted their fifth consecutive contraction. Export demand from Asia continued to buoy trade, however, and consumer spending rebounded in May after two months of decline. At 3.1% in April, inflation was still one of the lowest rates in the euro-zone. The unemployment rate was steady at 7.4%.

Industrial production rebounded in France, in tune with a pick-up in new orders. While export demand remained sluggish, imports continued to expand, fuelled by a recovery in consumer spending. Inflation rose to 3.7% while unemployment eased to 7.4% in May.

Industrial output in Britain continued its see-saw pattern of late, picking up in April after a dip the month before. Consumers went on a spending spree in May, boosting retail sales volumes 2.2%. Prices rose 3.3% from a year earlier, the fastest rate in over 10 years. The weakening pound also pushed up the price of imports. Despite slower demand, however, Britain once again posted Europe’s largest external trade deficit in April.

The Japanese economy strengthened in May. Industrial production surged 2.9%, after a slight contraction the month before. Rising prices and lower summer bonuses dampened consumer confidence and spending. Prices rose to a 15-year high of 1.5% in May (excluding a one-time sales tax hike in 1998). Excluding energy and food, however, prices fell 0.1%.

Note

* Based on data available on July 11; all data references are in current dollars unless otherwise stated.