May 23, 2012

December 29, 2011

Approaching 2012 with caution, but also some optimism

Alex Carrick

Chief Economist, CanaData

During the last couple of months, the employment numbers in Canada have been disappointing.

The uncertainty about where Europe is headed and concern that output growth in China is slowing have caused business managers to be more cautious in their staffing.

But other statistics on the economy have been more upbeat.

For example, Statistics Canada’s leading indicator index in November rose 0.8% month to month. That was the fastest rate of increase since May 2010, which was also +0.8%.

Only three of the 10 sub-indices demonstrated weakness. They were housing (-1.5% month to month), stock prices on the TSX (-1.7%) and furniture and appliance store sales (-0.5%).

The other seven showed improvement. Manufacturing stole the spotlight. New durables orders in constant (inflation-adjusted) dollars rose 4.1% month to month. The average workweek in hours climbed 0.5%. And the ratio of shipments to inventories of finished goods increased 0.02 points.

Manufacturing also appeared favourably in Statistics Canada’s latest capacity utilization report . In the third quarter of this year, the sector’s plant usage finally climbed back over 80%.

The capacity utilization rate in manufacturing had dropped as low as 65% in the recession (i.e., in Q2 2009)

The fact that manufacturers operated at 81.1% of capacity in Q3 was a moderate improvement versus Q2’s level of 79.5%, but it was a big leap upward from 76.8% in Q3 of last year.

The manufacturing sub-sectors operating closest to capacity at this time are: computer and electronic products (94.0%); rubber products (93.6%); paper (91.6%); machinery (91.0%); textile mills (90.4%); and transportation equipment (89.1%).

The high percentage number for transportation reflects an auto sector that has made sales gains both north and south of the border. (About half of Canadian auto production is exported to the U.S.)

In October, total motor vehicle sales in Canada were +3.3% month to month and +3.1% year over year. In the U.S., year-to-date motor vehicle sales have been +10.4% versus the same January to November time frame of last year, according to Autodata Corp .

The mix of vehicles sold in Canada this year has been characterized by a sharp divergence between passenger cars and the category known as “vans, trucks and buses”.

Unit sales among the former are -3.7% year over year. In the latter, they are a robust +8.3%.

Someone magically brought forward from 30 or 40 years ago might have trouble recognizing today’s vehicle market.

There are now far more unit sales in the “vans, trucks and buses” category (82,100 seasonally adjusted in October) than in the passenger car designation (57,500).

For Canada, concern about the future focuses on commodity prices. If speculators continue to drive up the cost of borrowing for Euro-zone members and austerity takes an even firmer grip on spending, GDP in the region may plummet.

China, which depends on Europe to buy a lot of its goods, will suffer as a consequence and not need as many raw materials.

The saving grace for Canada may come from a U.S. economy that is more clearly on the mend.

In the U.S., the news continues to improve. Initial jobless claims from the Department of Labor for the latest week (ending December 10) were only 366,000, a drop of 19,000 from the period before. That’s the lowest number for the first-time out-o

f-work contingent since before the recession.

The last time the number was as low was three-and-a-half years ago, for the week ending May 31, 2008 (365,000).

The jobs picture in the U.S. appears to be perking up faster than many have been anticipating.

Huge increases to the money supply; near-zero interest rates provided by the Fed; ongoing strength in retail sales (i.e., which account for 70% of the economy); a car sector that has rebounded; and corporations that are sitting on piles of cash – these are all reasons for optimism concerning U.S. growth prospects.

Finally, with respect to the debt problems in Europe, the biggest shocks to the economy come from surprises.

The sub-prime mortgage mess was a problem lurking in the shadows before it became common knowledge. Collateral damage from derivatives trading also stunned most people, since they had no idea what it was.

The problems in Europe, however, have received a wide airing. There can be few on the planet not aware of the bankruptcy risks for Greece, Italy, Portugal, Spain and Ireland.

Furthermore, firms in the banking sector have been encouraged – through moral suasion and tighter regulation, not to mention that old standby, “a lesson learned” – to increase their capitalizations.

If worse things transpire in Europe, financial firms should not be caught off guard.

The extent of the damage might be so severe as to require government intervention to shore up some banks within the system.

But given all the advance warning, it will be inexcusable if contingency plans aren’t already in place.

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.