November 1, 2011
Becalmed after smoother sailing but hoping to avoid storm-tossed seas
Chief Economist, CanaData
Statistics Canada’s leading indicator index in September fell 0.1% versus August.
The level of the index has been flat for the past five months. In June and August, the month-to-month performance was 0.0%. In July, it was +0.1%.
The record of the leading indicator index seems in perfect keeping with what is happening in the overall economy. In maritime parlance, the ship is becalmed.
The days of relatively smooth sailing have passed. But storm-tossed seas haven’t arrived yet either.
Maybe they never will, if the “bad weather” dissipates as a result of some corrective policy action.
That would include aggressive measures to deal with sovereign debt problems in Europe and congressional teamwork in the U.S. to reduce the fiscal deficit long-term and lower the unemployment rate short-term.
The most recent leading indicator measure received support from the housing sector.
The September sub-component housing index advanced 1.2% versus August, its fastest increase since the spring. In two of the last three months, housing starts have exceeded 200,000 units, seasonally adjusted and annualized.
That’s an exceptionally high level of starts, particularly for this early stage of the cycle.
Employment growth has continued to be strong in Canada. There were 61,000 net new jobs in September compared with August.
The new jobs provide the incomes to take advantage of historically low mortgage rates.
Buoyancy in the residential real estate sector has spilled over into retail sales, where furniture and appliance stores realized a revenue gain of 0.4% in the latest month.
Weakness in the leading indicator index came mainly in the stock market and the manufacturing sector.
The world economic slowdown, retreating commodity prices and uncertainty about corporate profit levels caused the S&P/TSX equities index to fall 3.5% month over month.
New orders in durables manufacturing were -0.7%, the average workweek fell 0.5% and the shipments-to-inventories of finished goods ratio dropped by 0.02 points.
The latter resulted from an accumulation of higher stockpiles.
The latest (Autumn 2011) Business Outlook Survey from the Bank of Canada yielded results that were in keeping with the leading indicator index.
This survey summarizes interviews with the senior management of about 100 firms in Canada chosen to represent the composition of gross domestic product (GDP).
It presents a “balance of opinion” on several questions, which is a “difference” measure – for example the percentage of respondents who think sales will go up in the next 12 months versus the previous year, minus the percentage who think they will go down.
Those who think they will stay the same are left out of the mix.
On that very “sales-expectation” question, the BOC’s balance-of-opinion measure dropped to only +6% in the latest survey period versus a figure that reached as high as +50% in the third quarter of 2009.
In other words, corporate executives expect selling conditions to remain pretty much the same as they are right now through at least the mid-point of 2012.
That’s better than in the final quarter of 2008 and first quarter of 2009, when the “balance of opinion” was deeply negative.
Significant for productivity improvement, +22% is the difference between firms planning to increase machinery and equipment expenditures over the next 12 months versus those budgeting cutbacks.
And finally, the disparity between those firms anticipating a higher level of employment over the next 12 months (versus the previous 12 months), compared with those thinking they will cut staff, remains lofty at +38%.
But that’s down from a record-high +50% in the second quarter of this year.
All in all, the outlook has deteriorated somewhat from the BOC’s previous Business Outlook Survey. But it hasn’t taken on too much water.
At this time, staying afloat may be the new definition of “upbeat”. At least no-one’s been sent below to man the pumps yet.
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog. His lifestyle blog is at www.alexcarrick.com
