11-010-XIB
Canadian Economic Observer
November 2008

Summary table - key indicators

Overview*

After a sharp advance in July, output dipped in August. However, employment in October held on to its advance the month before, fuelled by continued gains in Alberta.

There are few signs that the August dip in GDP was anything but a temporary setback after July’s large advance. Auto and housing sales rebounded in September, while employment grew significantly. So far, the weakness in the stock market in the autumn and the slowdown in the US economy has not visibly spread to the data on other sectors of Canada’s economy, outside of prices.

October was marked by a pronounced intensification of the turmoil in global financial markets. This led to a sharp drop in commodity prices, erasing their gains since August 2007, and the steepest monthly decline ever for the Canadian dollar. Canada was spared the instability in its domestic financial system that affected the US and Europe, although there was some increase in longer-term interest rates for private borrowers.

With so much focus on financial markets and debt, it is worth examining balance sheets in Canada at the end of the second quarter. Households had $7.3 trillion of assets, $3.1 trillion in non-financial forms (mostly housing and land) and $4.2 trillion in financial instruments. The latter comprises $0.8 trillion in cash and deposits, $1.5 trillion in life insurance and pension funds, and $1.6 trillion in stocks. By comparison, households had $1.3 trillion of liabilities, almost all consumer credit ($0.4 trillion) and mortgage debt ($0.8 trillion). It is noteworthy that household cash and deposits alone equalled almost two-thirds of total household debt.

Businesses also entered the autumn upheaval in global markets on a strong financial footing. Years of record profits and net savings allowed firms to slow the growth of debt, while strengthening balance sheets by lowering their ratio of debt to equity to an all-time low. Firms have record high liquidity, with the ratio of current assets to current liabilities twice as high as in 1990. Canada has also run consistent surpluses for its government and current account trade balances for several years.

Labour markets

Employment rose 0.1% in October, adding to its 0.6% hike the month before. Moreover, last month’s shift to part-time positions was largely reversed. Part-time employment fell 38,000, especially among youths, while full-time jobs grew 48,000. An influx of adults into the labour force nudged the unemployment rate from 6.1% to 6.2%.

The public sector replaced the private sector in leading job growth between September and October. Most of the gain in public administration reflects temporary jobs related to the federal election. Education and trade also posted gains. All goods-producing industries gave back some of the ground gained in September.

Alberta added another 0.7% to its employment, all of it full-time, lifting its employment rate to a North American record of 72.5%. Construction and trade led the advance, and its 3.7% unemployment remained the lowest in Canada. Employment also rose in Atlantic region. Meanwhile, employment fell again in BC, after posting the only notable decline in September, led by construction and manufacturing. BC’s unemployment rate rose from 4.6% to 5.1%, its highest since December 2006. Employment was little changed in the other provinces.

Leading Indicators

The composite leading index dipped 0.2% in September, after a 0.3% gain in August capped a string of five consecutive gains. Most of the reversal originated in the sharp drop in the stock market; excluding it, the composite index would have been unchanged. Five of the nine other components retreated, while one was unchanged.

The leading indicator for the United States fell for the thirteenth straight month, dating back to the onset of the global credit crisis in August 2007. The year-long weakness in autos and housing was followed by a further deterioration of labour market conditions. Nevertheless, consumer confidence recovered as the price of gas receded.

The outlook for a continued recovery of Canada’s manufacturing sector was marred by weaker US demand. New orders contracted 2.1% after two months of growth, led by lower demand for capital goods other than aerospace products. The ratio of shipments to inventories was unchanged, as both increased at the same rate for the third month in a row.

The buoyancy of household demand earlier in the year faded over the summer. While demand continued to grow for furniture and appliances, spending on other durable goods fell 0.3% for the second straight month. It had risen by over 1% a month early in the new year, just after the GST was cut. The housing index edged down for the fourth straight month.

Output

Real output retreated 0.3% in August after a 0.7% advance in July. Most of the slowdown originated in manufacturing and goods-handling industries. Energy held on to most of its July recovery.

Manufacturing production fell 1.1%, reversing the previous month’s increase. Auto assemblies slowed over the summer, while forestry and clothing-related sectors both weakened anew after a brief upturn in July. Output turned down in most capital goods industries, with the notable exceptions of iron and steel and aerospace. Transportation and wholesale trade fell in line with the drop in factory shipments.

Output in the primary sector dipped after a large gain in July. Oil and gas gave back less than a third of their increase the month before. Drilling for oil and gas rose for a third straight month, while metal mining posted a fifth consecutive gain. Agriculture reaped the reward of a good grain crop.

Services expanded slowly, outside of the drop in goods-handling industries. Business and public services grew modestly, while consumer spending was checked by a drop for recreational services. Finance was steady, heading into the upheaval in markets starting in September.

Household demand

Retail sales volume slipped 0.3% in August. After strong gains over the first four months of the year, sales fell slightly over the last four months. The August decline was concentrated in autos dealers and service stations, both of which were adversely affected by high gas prices over the summer.

The number of vehicles sold fell 4.3% between May and August. Although higher gas prices played a role, it is noteworthy that demand for trucks was stable, while passenger car sales fell. And unlike the US, there were no marked shifts in the share of vehicles produced by North American versus overseas-owned companies. Auto sales rebounded in September, when gas prices began to fall rapidly.

Spending on most other durable goods remained robust. Home entertainment equipment continued to lead the way. Furniture and appliance sales added to their 3% gain in July. Purchases of semi-durable goods also strengthened, helped by steep price discounts for clothing.

Housing starts in September held on to their August gain. Ground-breaking on single-family homes fell to an annual rate of 70,000 units, their lowest level since 2001 as slowing sales and the rising overhang of unsold homes dampened prices. But another strong month for multiple units (notably condos) offset this decline. Meanwhile, existing home sales rebounded 3% in September.

Merchandise trade

Export earnings in August fell for the first time this year, reflecting lower US demand. Meanwhile, imports retreated again after four straight declines. This raised the monthly merchandise trade balance to $5.8 billion, its second highest of the year.

Exports fell 1.6% due to a 4% drop in shipments to the US. Most of the decline originated in lower energy prices and continued weakness in auto and forestry products, where exports are over 10% below a year earlier.

Most other exports strengthened. Agricultural exports led the way as grain supplies were replenished. Industrial goods rose for the fourth straight month, led by metals such as iron ore and gold. Machinery and equipment reached a new high in 2008 thanks to widespread gains.

Two-thirds of the drop in imports originated in a lower volume of energy imports, after a large gain in oil imports over the previous two months. Auto imports also posted a double-digit decline after large increases in July. Machinery and equipment imports remained just above $10 billion for the third time in four months, as strength in industrial machinery offset a decline for aircraft. Consumer goods continued to trend upwards, led by clothing and home furnishings.

Prices

Consumer prices rose 0.2% between August and September, a continuation of their moderate trend over the last three months after increases averaging 0.7% during the second quarter. As a result, the year-over-year increase eased slightly to 3.4%, its first decrease since March 2008.

Energy prices continued to moderate in response to lower prices for natural gas and electricity, which offset a slight increase for gasoline. Drivers saw vehicle prices continue to decline rapidly, while the discounts for clothing were less pronounced.

Food remained the main source of upward pressure on prices. The grain harvest did push down the cost of bread. But these declines were outweighed by increases for meat, fish and dairy products, and grocery prices were 6.7% ahead of a year-earlier.

Commodity prices plunged over 20% in October, leaving the Bank of Canada index down one-third from its high in June. The index returned to about the same level as in August 2007, when the global financial crisis began. The drop again was led by crude oil, which tumbled over $30 (US) to under $70 a barrel. Natural gas prices were relatively stable. Some metals posted large declines, notably copper, nickel and zinc. The rate of decline for grain prices slowed from September.

Industrial prices fell 1.2% in September, their second straight drop after steady increases earlier in 2008. Most of the drop originated in petroleum, metals and food products. The exchange rate had little impact in September, but will give a large boost to prices in October.

Financial markets

The Toronto stock market plunged by 17% in October, approaching October 1987 (-22.6%) and August 1998 (-20.2%) for the largest monthly retreat on record (it is noteworthy that neither of the 1987 and 1998 declines were followed by a recession). However, this decline followed hard on the heels of a 15% contraction in September. The sell-off affected every sub-component. Mining stocks were hardest-hit, tumbling nearly 30% after losing just over one-quarter of their value the month before. Energy and real estate also posted above-average declines.

The slump in commodity markets was reflected in a sharp drop in the Canadian dollar. After hovering around 94 cents (US) in September, the loonie tumbled to a 4-year low of 83 cents by the end of October. This also marked the steepest monthly decline on record, with the dollar falling 5 cents every week during the month before a late rally.

Short-term interest rates fell three-quarters of a percentage point. Longer-term government bond yields were generally steady, but 5-year mortgage rates rose.

Credit continued to flow to businesses and households late in the summer, even as the global credit crisis grew. Short-term business credit expanded 1.6% in September, its largest increase of what had been a year of slow growth. Household credit grew steadily by 0.8% in August, despite the slowdown in auto and house sales. Bank loans to persons rose 1.1% in September.

Regional economies

Manufacturing sales fell sharply in all regions in August, while retail sales dipped everywhere but Ontario. Housing starts rebounded in September in western Canada, but were down across the country for the third quarter.

Ontario posted the largest retreat in manufacturing sales, down 3%, after it had led the recovery over the previous three months. The largest reversals were in autos and primary metals. Still, household demand remained firm. Retail sales were unchanged in August, after gains in the previous two months. Housing starts in September held on to almost all of their record 76% gain in August, as condo construction remained high in Toronto.

In Quebec, a drop in manufacturing originated in different sectors of transportation equipment and primary metals than Ontario. Whereas the latter was driven by autos and iron and steel, Quebec’s decline stemmed from aerospace and refined metals. Retail sales dipped 0.7% after four straight gains, but housing starts levelled off after back-to-back decreases.

In western Canada, losses in manufacturing were widespread. Capital goods sales were noticeably weaker in Alberta and BC. Continued declines in auto sales led to lower retail sales in BC and the prairies. Housing starts turned up in western Canada after a weak summer, although the market for existing homes remained much slower in BC.

International economies

In the United States, third-quarter GDP fell 0.1%. Consumer spending posted its first quarterly decline since 1991 (notably for autos), while housing contracted for the eleventh straight quarter. The steady slowdown of business investment continued with a slight dip, while inventories fell for the second straight quarter. These declines were largely offset by gains in exports and government spending.

Some of the third-quarter drop in output reflected the impact of hurricanes and strikes. Industrial production tumbled 2.8% in September, with over 2 points due to hurricanes Gustav and Ike and the strike of 27,000 machinists at Boeing starting September 6. A rebound in new orders in September suggests that supply disruptions played a larger role in the decline than falling demand, but a share drop in the purchasing managers index in October points to increasing difficulties arising from the credit crisis.

Despite these irregular events, new and existing home sales both rebounded in September. This partly reflects lower prices, as well as the government takeover of mortgage institutions facilitating mortgages even as credit elsewhere seized up in September. While the inventory of unsold homes fell a record 7.3%, the level remained high relative to sales. As a result, housing starts fell to a 17-year low of 872,000 units (at annual rates). Weak housing-related demand and slumping vehicle sales depressed retail sales for a third straight month in September. Subsequently, auto sales in October fell to a 25-year low, with 85% of the drop concentrated in the Detroit-based firms. Consumer prices edged down in late summer, largely due to lower gas prices. A 17% drop in the bill for oil imports helped lower the trade deficit in August.

Output rebounded in the euro-zone in August. Industrial production rose 1.1%, its first rise in four months, as every sector posted gains. New orders slipped, led by declines in the volatile transport equipment sector and textiles. Machinery and equipment picked up after three straight losses. The external trade deficit widened as the rising energy deficit more than offset the surplus in machinery and autos. Trade grew with most major partners, with the exception of exports to the US. Consumer spending rose slightly in August, led by food and beverages, while the annual rate of inflation eased to 3.6% in September as energy prices abated. The unemployment rate was stable at 7.5%.

German industrial production rebounded 3.3% in August, more than doubling its July retreat. New orders posted their first gain in six months as domestic demand strengthened. Consumers resumed spending after two months of austerity, and inflation dipped again in September to a 3% annual rate. Exports fell 2.5% in August year over year, due to declines in the US and the EU. The jobless rate eased to 7.1%.

Output continued its see-saw pattern in France, easing slightly in August, while new orders retreated after two consecutive monthly gains. Consumer spending rebounded in July. Import demand continued to surpass that of exports, pushing the external trade deficit to the third highest in the euro-zone. Inflation eased to a 3.3% annual rate in September, while the unemployment rate fell to 7.9%.

The United Kingdom continued to slow, with industrial production down for the sixth consecutive month in August. Consumers opened their wallets, however, as retailers offered more discounts. Going against the trend of most EU nations, inflation rose to 5.2% in September, its highest level in 16 years, reflecting higher food prices. Because Britain imports much of its food, food prices have been hit by both rising energy costs and the falling value of the pound. Housing demand waned as banks trimmed lending. The unemployment rate rose to 5.7% in August, the largest one month jump in unemployment in over 17 years.

The Japanese economy continued to contract. Industrial production fell 1.2% in the third quarter, its third straight quarterly decline despite a rebound in September. Exports have been dampened by the surging yen. Real retail sales fell for the first time in 14 months in September as consumers reined in spending amid stagnant wages and tight credit. The jobless rate was 4.2% in August.

Growth in China slowed to 9% year over year in the third quarter, after five years of double-digit expansion. Exports expanded 23%, buoyed by new markets in emerging economies. Exports to traditional markets began to slow however. Consumer spending was upbeat, with real retail sales up 18% in September, although auto sales declined for the second straight month. Housing faltered, with both prices and starts down in August. The rapid pace of imports slowed for the second straight month in September, due to both lower commodity prices and a slowdown in demand, particularly in steel production.

Note

* Based on data available on November 7; all data references are in current dollars unless otherwise stated.