January 17, 2012
With respect to GDP growth, Canada may soon find itself in an unfamiliar role
Chief Economist, CanaData
Statistics Canada’s latest monthly estimate of “real” (i.e., inflation-adjusted) gross domestic product (GDP ) growth was unimpressive.
October industry-based GDP was flat when compared with the month before.
Prior to October, there were four months in a row of fairly strong gains: +0.2% in both June and September and +0.4% in August as well as in July.
The latest 0.0% performance lowered the three-month moving average from +0.3% in September to +0.2% in October.
The year-over-year change in GDP was +2.7%, with goods-producing industries advancing 4.1% and services-producing industries gaining 2.1%.
The goods-versus-services proportions in the total were 29% and 71% respectively.
There are a couple of key points to keep in mind.
From our present vantage point, October was a while ago. At that time in the fall of last year, there were some pre-occupations holding back activity levels that have since quieted down.
For example, while the European debt situation has hardly disappeared, it’s no longer as front and centre as it was earlier. K
ey initial steps have been taken by the European Commission to fix its problems.
Additional money has been made available to the stabilization fund; the European Central Bank is taking a more active role in lending; and member states (with the exception of Britain) have agreed to move towards a fiscal union.
Most important for Canada, the U.S. economy is coming back to life.
The U.S. housing sector is set for what, at first, will be a mild turnaround. The monthly starts level has been only 500,000 to 600,000 units (annualized) over the last several years.
The annual need, based on demographics and demolitions, is about 1.5 million units.
Foreclosures in the existing homes market and tighter mortgage approvals have been holding back demand.
But there is at least one segment of the market that has been doing much better, rentals.
Accelerated hiring of young people in the high tech sector has been one spur. The need to accommodate people who have lost their homes through mortgage foreclosures has been another.
The bump upward in rental demand has been confirmed by Reis Inc., a New York-based property research firm. Reis
According to Reis (and reported by Bloomberg News), the U.S. apartment vacancy rate fell to 5.2% in the fourth quarter of 2011, its lowest reading since the final quarter of 2001.
The vacancy rate has been steadily declining since Q4 2009, when it topped out at 8%.
Rents nationally increased 2.3% year over year in the latest quarter and moved up to $1,009 per month on average across all apartment properties, according to the firm.
The U.S. rental market has been reflecting what has occurred in the overall economy.
Both occupancy rates and rental charges have increased the most in regions where high tech companies have been performing well and taking on staff.
Thanks to Amazon and Microsoft, rental rates in Seattle have increased 6% to 8% year over year.
San Francisco and San Jose (i.e., Silicon Valley) have been among the U.S. centres with the lowest rental vacancy rates.
As for the largest rental market in the country, New York, it’s been buffeted by layoffs in the financial services sector. (By the way, N.Y. average monthly rents are said to be $2,876.)
U.S. multi-unit housing starts through November of last year were +54% compared with the first 11 months of 2010, vastly overshadowing the single-family market (-11%). Initial jobless claims
Furthermore, the improvement in U.S. employment is becoming more widespread. Initial jobless claims for the latest week (ending December 31) were only 372,000, a decrease of 15,000 from the period before.
The figure has been less than 400,000 for the past four months, pointing to further declines in the jobless rate which currently stands at 8.6%.
The latest reading on U.S. manufacturing activity was also positive. The Purchasing Managers’ Index (PMI) of the Institute of Supply Management (ISM) rose to 53.9% in December from 52.7% in November.
A figure above 50.0% means both the overall economy and the manufacturing sector are growing. (Between 42.5% and 50%, the economy is growing but manufacturing isn’t; below 42.5%, everyone is out of luck.)
A 53.9% PMI figure historically corresponds with a real GDP growth rate of 4.0%.
The U.S. energy market has also taken a turn for the better. Domestic sources tapping into shale rock are now accounting for about one-third of natural gas requirements in the country.
Similar to what has occurred in the natural gas sector, new technology is allowing access to deposits of “shale” or “tight” oil. Colorado is expected to be a major supplier.
U.S. dependence on Middle Eastern oil is falling. So far, Canada has more than maintained its share of U.S. demand.
What about overall economic growth? Relative to the last several years, Canada may soon find itself in an unfamiliar role.
We’ve grown accustomed to being among the world’s leaders, but we may be about to spend some time lagging our neighbor to the south. Canadian household debt, which currently stands at 150% of income, still needs to be addressed.
Our governments at all levels will be slashing spending to bring down debt-to-GDP ratios.
Finally, commodity prices won’t be as supportive of resource sector projects as in the past. As just one example, the recent drop in aluminum prices has caused Rio Tinto Alcan to turn its attention away from investing in Quebec to dealing with some major labor issues.
Not all commodity prices have shifted into reverse. Statistics Canada says the prices our farmers have been receiving were 12.2% higher in October 2011 than in the same month the year before.
The livestock and animal products sub-index was +16.3% and the crops index, +7.4%.
Two of the most dramatic livestock changes occurred in cattle and calves (+18.4%) and hogs (+27.3%). The reasons given were lower inventories and higher feed grain costs.
Be it energy, metals and minerals, or agricultural products, Canada’s West continues to come out a winner relative to most of the rest of the country.
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.
(based on seasonally adjusted constant dollars)
