Section 1: Current economic conditions

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Overview ¹ 

Both total output and employment retreated after two months of marginal net growth. Natural resources were the weakest sector in both reports, notably mining.

It is not unusual for natural resources to lag the overall economy during a recovery. What is atypical is that growth in the rest of the economy was too weak to offset these declines. Manufacturing output and jobs both gave back some of their gains earlier in the summer, when the re-opening of auto plants gave a boost to this industry. And the services sector continued to be slowed by weak demand for goods-handling industries and business services and sluggish gains in consumer spending. Housing remained the bulwark of growth, as the year-long surge in house sales was followed by higher housing starts and more construction jobs in the last three months.

The sharp contraction in exports has been partly reversed, with the volume of exports up 4% from its low in May (despite a setback in August) while prices levelled-off. Energy and autos led the rebound, while demand stabilized for the other major sectors. The outlook for exports is boosted by the upturn in US real GDP in the third quarter, after a year of unbroken declines. Industrial production posted its largest quarterly increase in a decade, led by autos. Housing turned up after 14 consecutive declines, while the contraction of business investment levelled off.

Labour markets

Employment retreated by 0.3% in October after consecutive gains of 0.2% in each of August and September. Three-quarters of the decline originated in part-time employment among youths, as full-time jobs for adults increased for a second straight month. With the labour force falling slightly as a result of declines for youths, the unemployment rate rose 0.2 points to 8.6%, below its high of 8.7% in August.

The largest employment loss occurred in trade, down 31,000 after four months of increases. The fastest decline was in natural resources, off 3.6% after a drop in September signalled renewed weakness after jobs stabilized between April and August. Natural resources have equalled factory jobs for the largest drop in the past year, down 11%. Construction added jobs for a third straight month. Business services remained persistently weak.

Alberta and BC posted the largest drops in employment. For BC, the drop followed two months of growth and left it above its recent lows. For Alberta, employment hit its lowest level since June 2007. Alberta was most affected by declines in professional and business services (which include architectural and engineering services). Construction jobs also fell in Alberta, counter to the trend in most of the country. BC was weighed down by losses in manufacturing, which helped push up its unemployment rate nearly a full point to 8.3%. Ontario gave back its 0.2% gain in September, snapping a string of four consecutive increases. It held onto the September gain in full-time jobs. Construction and manufacturing continued to recover, but trade and public administration lowered services employment. Jobs were stable in Quebec, with small increases in manufacturing and construction offsetting widespread declines in services. After a sharp drop in June, employment in Quebec has hovered near its cyclical lows.

Leading indicators

The smoothed composite leading index rose by 1.1% in September, its fourth straight gain while August was revised up from 1.1% to 1.2%. Seven of the ten components advanced, led again by the stock market and the housing index. Two components declined, the same as the month before.

The housing index rose 4.1%, its fifth consecutive increase. However, the advance spread from existing home sales to housing starts in September, which posted their largest gains since March 2008 The rally in housing demand was reflected in furniture and appliance sales, which levelled off after seven straight declines. Consumer spending on other durable goods continued to expand as employment firmed over the summer.

The stock market recorded its sixth increase in a row, after leading the retreat last autumn. The increase was led by metals and energy stocks.

Two of the three manufacturing indicators advanced. The ratio of shipments to inventories posted its first back-to-back increases since March 2007. While inventories continued to decline, the drop in shipments slowed to 0.2%. The average workweek lengthened slowly but steadily, a precursor to September’s rebound in factory jobs. New orders for durable goods retreated slightly, after a surge of auto assemblies lifted orders by a record pace in July. The outlook for export demand was boosted by a 1.0% gain in the US leading index, as housing and industrial demand recovered slowly from prolonged slumps.

Employment in business and personal services remained the most persistently weak component, posting a drop of 0.4% after a year of declines or no growth. Both components fell in September, but the largest drops so far this year have been in business services.

Output

Real GDP dipped 0.1% in August, after a 0.1% gain in June and no change in July. Mining remained the weakest part of the economy, both in oil and gas and metal mining. This reverberated downstream in a sharp drop in smelting and refining, which accounted for almost all of a 0.7% retreat in manufacturing output. The weakness in mining and manufacturing also dampened wholesale trade and transportation.

Some areas of goods production improved after prolonged declines. Auto assemblies rose for the second straight month, and continued to expand in September. Iron and steel and textiles and clothing both posted their first gains of the year. Construction expanded for the first time in a year, as engineering continued to grow and residential construction levelled off.

Services expanded slowly for the fifth consecutive month. Besides the weakness in goods-handling industries, business services posted the largest declines. Information and culture remained weak due to falling demand for media (both print and broadcast). These decreases were offset by a sharp rebound for the public sector, partly because of the end of labour disputes in Ontario. Travel-related services also continued to recover from a sharp drop in June when the US introduced passport requirements for cross-border travel with Canada.

Household demand

Retail sales volume resumed its slow recovery, rising 0.4% in August after a pause in July followed gains averaging 0.5% in May and June. Automotive products led the increase, notably new and used vehicles. Unit auto sales edged up in September, capping a 5% gain in the third quarter.

Sales of other durable goods rose 0.2%, the smallest of four straight increases. Computers led the gain, as spending on furniture and appliances remained weak. Elsewhere, outlays fell for both semi- and non-durable goods, partly due to higher gasoline prices.

Housing starts retreated 5% in September, after increasing in July and August, leaving third-quarter starts up 16%. All of September’s drop originated in multiple units, reversing a large gain the month before. Ground-breaking on single-family dwellings rose 17%, the largest of five straight gains. The number of unsold vacant homes continued to decline in September, although sales remained weak. Existing home sales, however, recovered from a dip in August.

Merchandise trade

Exports fell 5.1% in August following strong increases in June and July. Volume declines, primarily in machinery and equipment, accounted for the majority of the drop as shipments of aircraft and telecommunication products spiked in July and then returned to more normal levels in August. Agricultural products also posted a large drop, with canola export sales falling sharply for the second consecutive month after record shipments to China throughout the spring. Machinery and equipment exports have demonstrated considerable volatility in recent months making it difficult to ascertain whether it had bottomed-out. The direction of agricultural export sales remained downward. All other sectors have seen sales fluctuate since the second quarter but overall have shown a stabilizing trend.

While exports of automotive products were weighed down by mild declines in parts and trucks, passenger car exports were stable in August. Car exports had been trending up in recent months as the cash for clunkers program, which stopped in August, cleared out inventories in US dealerships. Industrial goods fell as reduced shipments of sulphur and metal ores offset increases in copper and aluminum, which have been trending upward for several months. Fertilizer shipments had also been on the rise, but, a price drop in August led to values shrinking slightly. Forestry and consumer goods both edged down in August while energy exports were stable.

Imports fell by 2.8% as a further appreciation in the dollar continued to push import prices down. This $1 billion drop followed July’s $3 billion gain. Import volumes were stable or increasing in every sector except machinery and equipment and consumer goods, which were pulled down by aircraft, pharmaceutical products and apparel and footwear. Machinery imports retreated from the large gain in July but remained well above June’s low. After steadying around $4 billion from January to June, automotive imports recovered considerable ground in July and continued to rise, up 3.8%, in August to $5.1 billion. Despite lower crude oil exports resulting in a mild decline for the sector in August, energy products are also trending up.

Prices

The CPI rose by 0.1% in September, its fourth advance in the past five months. Still, the large drop in gasoline prices late in 2008 left prices in September 0.9% below their level of a year-earlier, despite the recent upturn in monthly prices.

The price increase in September originated in semi-durable goods (mostly clothing) and services, which were dominated by housing. These increases were largely offset by lower prices for durable goods, especially autos, and food and energy. Food prices fell throughout the summer, negating most of their hike over the winter when prices rose 2.4% between October and March.

Commodity prices rose sharply in October, after treading water for much of the summer. The increase was led by energy. Crude oil prices approached $80 (US) a barrel, while natural gas prices rose by over one-half from their lows plumbed in September, helped by cool weather in parts of the US. The price of industrial goods also picked-up, notably for metals.

Industrial prices fell 0.5% in September, offsetting the gain in August. Downward pressure on prices remained widespread, with a majority (11) of industries posting declines. Little of the decline was due to the rising Canadian/US exchange rate.

Financial markets

The stock market fell 4.3% in October, its first monthly decline since February, a rally that lifted the Toronto market 40%. Every sub-index fell, although the declines for metals and energy were minimal.

The Canadian dollar continued to appreciate. After hitting 93 cents (US) in September, it spent most of October hovering around 95 cents. Unlike September, however, the dollar rose against other currencies. As a result, the trade-weighted value of the loonie rose by 4% in October.

Total business credit rebounded by 0.6% in September to recover its losses in August. The increase was led by new stock and bond issues. As well, the drop in short-term business credit slowed to just 0.2% in September, after falling every month this year (down a cumulative 11.3% between December and August). This may reflect a slowdown in the reduction of inventories. Household demand grew steadily in July and August for both consumer credit and mortgages.

Regional economies

Retail sales in Ontario led the rebound in Canada with a 1.2% increase in August, their third increase in four months. Housing starts rose 12% in September, capping an 8% gain in the third quarter after declines of about 20% in the first two quarters of 2008. Manufacturing sales retreated 3% in August after a 12% hike in July, as autos gave back same of the ground gained the month before.

Manufacturing sales in the prairie provinces rebounded 2.3% in August. Petroleum shipments from Alberta led the way, rising 21% in their first gain of the year after maintenance was completed to refineries. Household demand continued to recover. Housing starts in September held on to their increase in September, and were twice their lows touched in the spring. Still, they remain about one-third below their highs set in the spring of 2008. Retail sales eked out a 0.1% gain in August, their third increase in four months.

Housing starts in BC dipped 18% in September, but were up 37% in the third quarter, equalling the prairies for the largest increase in Canada. However, following three straight quarterly declines, starts remain only half their level of a year earlier, the largest drop of any province. Retail sales also continued to improve gradually, rising 0.8% in August to match their average increase over the previous three months. Manufacturing sales were unchanged, as the boost housing gave to shipments of construction materials was offset by a drop for food.

Retail sales in Quebec rose 0.4% in August, and were only 1.0% below the level of August 2008. This compares with year-over-year declines of 3.4% in Ontario, 6.4% in BC and 6.8% in the prairie provinces. Housing starts retreated 17% in September, but were up for the second straight quarter. Manufacturing sales fell 4% to reverse all of July’s advance, mostly due to aerospace.

International economies

In the United States, third-quarter real GDP rose 0.9%, its first gain after four straight declines. All major sectors of final demand contributed, except business investment. Consumer spending received a large boost from auto sales, reflecting the success of ‘cash for clunkers’ program. Housing posted its first increase after fourteen consecutive declines. The drop in business investment slowed to 0.6%, compared with its peak quarterly rate of decline of 10% in the first quarter and 2.4% in the second. Inventories were reduced for the sixth straight quarter, although the rate of decline eased slightly.

Industrial production rose 0.7% in September, its third straight solid gain. Auto assemblies rose 8%, completing their first quarterly advance in over two years and a sign that firms were replenishing inventories after the surge of sales over the summer. Manufacturing output rose 1.9% in the third quarter, its largest advance so far this decade. Further gains were signalled by a rebound in new orders for durable goods. The increase was led by capital goods, confirming that the slump in business investment was ending.

The housing market continued to stabilize in the autumn. Existing home sales rose 9% in September, and prices in the third quarter rose 2.5%, the most since 2005. Housing starts were stable at about 590,000 units (at annual rates) for the fourth straight month. New home sales dipped, partly because of the impending expiry of government grants to first-time home buyers. Retail sales fell in September, as auto sales returned to more normal levels. Non-auto sales posted a second straight gain. Auto sales rose above 10 million units in October, partly as showrooms were re-stocked.

Industrial production rose in the euro-zone in August for the fourth consecutive month, buoyed by a surge in durable consumer goods. New orders followed suit, rising a further 2%. Construction remained weak, down for the fifth month in a row, despite continued low interest rates. Consumers held on to their wallets as the unemployment rate climbed to 9.7% in September.

German industrial production rebounded in August, continuing its recent see-saw pattern. New orders continued to post solid gains, boosted by a pick-up in foreign demand, while construction rose for the first time in five months. Consumers reined in spending even as the unemployment rate remained stable at 7.6%.

French industrial output rose for the fourth straight month in August, in line with steady gains in new orders. Domestic demand continued to spur growth, despite a rise in the unemployment rate to 10% in September.

UK real GDP contracted by 0.4% in the third quarter, its record sixth consecutive quarterly fall, as consumer spending and business investment retreated. After two months of tepid growth, industrial production fell 2.6% in August, while new orders retrenched for the fourth month in a row. Consumers remained unwilling to spend, boosting the savings rate from minus 0.5% in the first quarter of 2008 to 5.6% in the second quarter of this year. Inflation eased to a 1.1% annual rate in September.

China’s real GDP grew 8.9% in the third quarter year-over-year, accelerating from its 7.9% pace the quarter before. Retail sales and industrial output rose markedly in September, as auto sales exceeded 1.1 million units for the seventh straight month, boosted by tax cuts and government subsidies. The slump in exports eased in September to its slowest decline in nine months.

South Korea’s GDP grew 2.9% in the third quarter, its largest gain since 2002. Growth was led by strong gains in auto and electronic manufacturing, as government stimulus spending on goods and construction was scaled back. International trade began to pick up with year-over-year declines in exports narrowing in September. The same improvement occurred in Taiwan and Brazil.

Russian GDP grew 0.6% in the third quarter, spurred by gains in manufacturing and agriculture, and a rise in oil prices.

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