September 1, 2010
Economy at a Glance
Have U.S. and Canadian shoppers taken a vow of frugality?
ALEX CARRICK
Chief Economist, CanaData
Canadian retail sales were +0.1% this June versus May and +3.8% when compared with June of last year, Statistics Canada reports.
The U.S. Census Bureau recorded a 0.4% month-to-month increase in retail sales in July, which yielded a year-over-year gain of 5.5%. The numbers reported for the U.S. are usually a month ahead of Canada’s.
Since the retail sales series is often volatile, it is more instructive to look at three-month moving averages. In Canada, the smoothed series in June was +5.1% year over year. In the U.S., the smoothed series in July was +5.9%. These are strong results.
So what’s the worry? Both the Canadian and U.S. smoothed numbers are trending down versus a couple of months ago. Canada had been +7.4% in March and April and the U.S. was +8.0% in May.
Speculation concerning the possibility of a double-dip recession in the U.S. largely focuses on the notion that many U.S. consumers have taken a vow of frugality. That would be understandable.
U.S. consumers have been more subject to credit restrictions than Canadians since the financial crisis. Major banking institutions went belly up south of the border, whereas comparable firms in Canada avoided such an experience. Subject to stress tests, many smaller U.S. banks are still being exposed as at risk.
One in seven mortgages in the U.S. is said to be other in foreclosure or under water (i.e., where the value of the mortgage is greater than the market price). This is a serious blow to confidence.
Further yellow flags for consumer spending in the U.S. have recently come from the April 30 expiration of the homebuyer tax credit and the turnaround in job markets from month-over-month gains earlier this year to losses in June and July.
The recent triggers for caution in Canada have been an ever so slight downward trend in housing starts since April and the two recent upticks in interest rates enacted by the Bank of Canada.
Here are some more comparisons between U.S. and Canadian retail sales.
The motor vehicle sector (new, used and parts) comprises approximately one fifth of the total in both countries (actually 22% in Canada and 17% in the U.S.).
Canadian retail sales have climbed back to their pre-recession level; in the U.S., they have recovered only a little more than half (55%) of their peak-to-trough decline.
As for determining the degree to which shoppers have been sharpening their pencils, an interesting approach is to look at Internet sales. Such sales generally save money for buyers in several ways. They offer a wider range of price comparisons to achieve bargains and they eliminate the gas consumption that goes along with driving the family auto to the local mall.
The Census Bureau provides more information on Internet sales than Statistics Canada. Where total U.S. retail sales were +0.4% in July month to month and +5.5% year over year, the non-store sub-category (i.e. web-based) was +0.2% month to month, but +12.6% year over year.
What does all of this mean for the economy and construction? Without strong consumer spending, substantial GDP growth is hard to achieve. Personal consumption expenditures are 55% of GDP in Canada and 70% in the U.S.
The capital goods sector, of which construction is a major component, lags overall GDP growth. Private sector investment won’t be restored until there is clearer evidence that the rest of the economy is firing on more cylinders.
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
*“Year over year” is each month versus the same month of the previous year.
Based on latest three-month averages of current dollar adjusted data (and placed in latest month).
Data sources: Statistics Canada and U.S. Census Bureau (Department of Commerce).
Chart: Reed Construction Data - CanaData.
