Economic Indicators Review: January 2012

Canada – Retail sales rose 0.3% in November, topping consensus expectations. Excluding autos, sales were still up 0.3%. Gains in sales of gasoline, clothing, health/personal care more than offset declines elsewhere. The gasoline share of total retail sales jumped to 12.8%. However, this did not hinder sales of discretionary items (i.e., total retail sales excluding groceries, health/personal care products, and gasoline), which increased 0.4% for a fourth consecutive monthly advance. In real terms, retail sales grew a solid 0.5%. With two months in, Q4 retail volumes are tracking at 5.1% annualized growth, their best showing since 2010, indicating that consumption spending accelerated sharply in the quarter (Chart).



The Teranet–National Bank National Composite House Price Index decreased 0.2% in November after being flat the two previous months. Prices dropped in 8 of the 11 metropolitan areas covered. They were down markedly in Calgary (-1.6%) and Victoria (-0.9%) and moderately in Hamilton (-0.3%), Vancouver, Toronto, Ottawa-Gatineau, Quebec City (all four at -0.2%) and Winnipeg (-0.1%). Prices were up 0.5% in Halifax, 0.4% in Montreal and 0.1% in Edmonton. On a y/y basis, home price inflation reached 7.2% in November. The current period of softness in house prices follows a few months of abovenormal increases. This is the same pattern as occurred from April 2010 to November 2010, which ended in a limited price correction.

Canada's Survey of employment, payrolls and hours (SEPH) painted a slightly better picture of Canadian employment than did the Labour Force Survey. The SEPH data for November showed that Canada added 12,260 jobs. Average weekly earnings were flat in the month, bringing the year-on-year change to +2.2%. Hours worked fell 0.3% in the month, which means an offset in higher wages was necessary to keep earnings level.

Statcan revised its Labour Force Survey data to reflect updated seasonal adjustment factors. The new series shows an extra 10K jobs created over the period from 2009 to 2011, all of which in the services sector (mostly full-time and in the private sector). As a result, the job losses registered in Q4 turn out to be less severe than in the old series. The new LFS series show a net loss of 37K jobs in the quarter, which is roughly 20K better than first estimated. Still, downward revisions to the first half of the year resulted in the tally for 2011 as a whole being trimmed from 199K to 190K. Employment in both 2009 and 2010 was revised up. Regarding the bleak situation of the labour market in Quebec, the revisions do not alter the picture much. The survey now indicates a loss of 72K jobs (instead of 78K) over the past seven months, which arguably remains inconsistent with the healthy consumption and housing data released for the province in Q4. In the coming months, we can expect either LFS employment to shoot up (particularly in Quebec) or consumption-related data (e.g., retail sales) to plunge. Let’s hope for the former.

The Institut de la statistique du Québec (ISQ) reported that Quebec real GDP at basic prices held steady in October after progressing 0.4% in September. Goods production contracted 0.2% on lower output in the utilities, construction and mining segments. Services output eked up 0.1%, as advances in professional, scientific and technical services and in finance, insurance and real estate services more than offset a third straight monthly pullback in wholesale trade.

The ISQ also reported that Quebec’s trade deficit widened $472 million in November to $1.71 billion. The value of exports sank $263 million (or 4.6%) to $5.4 billion on a large decrease in aerospace products. Imports sprang $209 million (or 3.0%), with much of the impetus coming from crude oil. In constant dollars, the trade deficit widened $380 million to $1.93 billion. With two months in, the Q4 real trade deficit is on track to narrow, meaning that international trade is contributing to economic growth. United States – The advance estimate for Q4 GDP growth came in at 2.8% annualized, just below the 3% expected by consensus. The prior quarter was left unrevised at 1.8%. Domestic demand rose only 0.9% in Q4, versus 2.7% the prior quarter. Final sales (i.e., GDP excluding inventories) swelled only 0.8% after expanding a solid 3.2% in Q3. Support came from consumption spending (+2%), exports (+4.7%), and business nonresidential fixed investment (which moderated as expected to 5.2%). Government spending was again a drag on growth, shaving off 0.9%. After detracting from GDP in the prior two quarters, inventories contributed massively to growth in Q4, adding 1.9 percentage points. Residential construction grew 10.9% and thus contributed to GDP as well.

The GDP report was a bit softer than expected because much of the growth came from inventory accumulation rather than final sales (Chart). That said, the vigorous restocking activity broke a string of two successive quarters of drag from inventories and suggests that businesses are confident that demand will return. The fact that consumers have their mojo back is very promising, as they constitute the primary engine of the U.S. economy (accounting for over 70% of GDP). The moderation in the pace of business investment spending in Q4 has to be placed into perspective, coming as it did on the heels of a white-hot Q3 increase of 16.2%. This component of GDP should remain in decent shape given the stockpile of cash that corporations seem to be sitting on. The comeback in residential construction (third straight quarter of growth) is encouraging and in line with the better fundamentals witnessed in recent months (e.g., low supply, high affordability and improving job market).



New home sales slumped 2.2% in December to 307K, wiping out most of November's gains. The supply of homes ticked up to 6.1 months (though this remained close to multi-year lows).

Durable goods orders rose 3% in December topping consensus expectations for a 2% increase. Transportation orders sprang 5.5% thanks to Boeing’s strong order book in the month. Orders of vehicles and parts (+0.6%) also buoyed the transportation category. Ex-transportation, the numbers were more than double consensus expectations, with orders growing 2.1%. Non-defence capital goods orders excluding aircraft, a gauge of future investment spending, climbed 2.9%, almost three times what consensus expected. This reversed the losses recorded by this key category in the previous two months. Total shipments of durable goods rose 2.1% overall and 2.4% excluding transportation.

The Chicago Fed National Activity Index, which synthesizes 85 monthly economic indicators into a single number, rose to +0.17 in December from -0.46 the month before. This was its highest reading since Q1 of 2011 and shows that the U.S. economy picked up speed again in December after taking a breather in November.

Last but not least, the Fed announced it is keeping its target rate unchanged but now sees that economic conditions are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. There were no other hints at new initiatives or QE3. However, the Fed has decided to be clear about the inflation part of its dual mandate by stating that 2% inflation is most consistent over the long run with its statutory mandate. The Fed also downgraded its growth forecasts for the US with the central tendency forecast (Q4/Q4) now showing 2.2-2.7% in 2012 (versus 2.5-2.9% previously). The estimate for 2013 is 2.8-3.2% (versus 3.0-3.5% previously). Interestingly, despite the lower growth forecasts, the projection for the unemployment rate was revised lower: 8.2-8.5% for 2012 (versus 8.5-8.7% previously) and to 7.4-8.1% for 2013 (7.8-8.2% previously). The downward changes to the inflation projections (both PCE and core) were very minor.

For the first time, the FOMC presented information about how participants feel about the pace of policy firming going forward (although there's no information about voting and non-voting members' views). Three of the 17 participants thought that rate hikes were appropriate this year and three more saw higher rates as appropriate in 2013. Eleven of seventeen viewed rate hikes as appropriate by 2014. Yet, of those eleven, five saw rates at or lower than 1.0% by year end 2014 and six participants thought rates should still be unchanged by that time. This explains the extension of the low rate projection at least through late 2014. FOMC members view that the fed funds rate should be in the 4-4.5% range over the longer run.

Last year the dissenter in the FOMC was Charles Evans who wanted more stimulus (but who doesn’t vote this year), but this year the dissenter is the incoming member Jeffrey Lacker who tended to be more hawkish in his prior stints at the FOMC. Lacker is already showing his hawkish colours, dissenting against the decision to specify a time period over which federal funds rate will remain exceptionally low.