November 7, 2012

In Canada and U.S., strong ties bind retail sales and the housing sector


Chief Economist, CanaData

Retail sales in Canada in August were +0.3% month over month and +2.7% year over year, according to Statistics Canada.

One would really prefer to see year-over-year retail sales at +5.0% or higher. But we’ll take +2.7%, especially when inflation is so low (+1.2%).

When retail sales are +5.0% and inflation is +2.0% — in other words, at the Bank of Canada’s target level — that lays down a base of +3.0% growth in “real” (i.e., inflation-adjusted) consumer spending.

When the numbers are +2.7% for retail spending and +1.2% for inflation, the difference is +1.5% for consumption, half the desirable rate of +3.0%.

Consumer spending accounts for 55% of Canada’s total gross domestic product (GDP). In the U.S., the proportion is 70%.

The reason for the difference is Canada’s greater dependence on foreign trade.

Motor vehicles and parts dealers in Canada recorded a year-over-year sales gain in August that was +6.0%. That seems satisfactory until one looks at the history.

In August, the motor vehicles sales change was +7.3%. And in 6 of the other 7 months of 2012, the percentage change was higher than +6.0%, topped by January’s +11.5%.

Consider also that September’s motor vehicle sales increase in the U.S. was +8.7%.

In Canada, the auto sector comprises 22% of total retail sales. In the U.S., the figure is lower at 17%.

Leading sub-sectors in retail spending in September on a year-over-year basis — besides autos, of course — were “general merchandise stores” (+7.3%), “health and personal care stores” (+2.9%), and “sporting goods, hobby and music stores” (+2.8%).

“Electronics and appliance stores” sales were -4.3%. This may have been a price effect. The shiniest new electronic gadgetry is often imported. Major producers in Japan, South Korea and China are competing aggressively to attract customers.

For our industry, it’s notable that “building material and garden equipment and supplies dealers” recorded a year-over-year sales performance that was flat (0.0%).

Bank of Canada (BOC) Governor, Mark Carney, recently announced what everyone had been expecting. The BOC’s key policy-setting interest rate, termed “the overnight rate”, will remain at 1.00% for some time to come.

The overnight rate has been at that historically low position for the past 25 months straight.

A fuss has recently been made about the household-debt-to-disposable-income ratio rising to a record high of 163.4%. Keeping the overnight rate at 1.00% will cause that ratio to rise further.

Inevitably, some of the money borrowed will serve to pump up retail sales.

The outlook for American retail sales has also turned brighter, due to the latest housing statistics.

According to data that appears in a joint press release from the Census Bureau and the Department of Housing and Urban Development, the number of new U.S. single-family houses sold in September was 389,000 units seasonally adjusted and annualized. Versus August, that was an increase of 5.7%. Compared with September of last year, it was a gain of 27.1%.

The number of unsold new homes in September was 145,000 units, slightly up from July and August (both 143,000), but on a par with June, April and March of this year.

The number-of-months-inventory of unsold homes — which is the number of vacant properties divided by the current month’s sales rate — was 4.5. That’s the lowest unoccupied “stock” figure since October 2005, also 4.5.

October 2005 was just before the peak for housing starts that occurred in January 2006. That month’s level of ground-breakings was 2.2 million units seasonally adjusted and annualized.

The latest figure for U.S. housing starts was 872,000 units in September. At one point in the recession (April 2009), U.S. home starts dropped below 500,000 units.

The U.S. housing sector is more confidently entering a positive turnaround phase.

This will be good for the retail sector south of the border. Merchandisers of furniture, furnishings, appliances and carpeting, to name just a few, will be happy to fulfill orders from proud new homeowners.

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

Total retail sales in Canada

Data source: Statistics Canada. Chart: Reed Construction Data - CanaData.

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