Building permits fell 1.9% in May to $6.8 billion

Week in review

Canada – Employment was essentially unchanged in June (-0.7K) according to the Labour Force Survey, slightly below consensus calling for a 5K rise. The jobless rate dropped one tick to 6.8% as the participation rate dropped to 65.5% from 65.7%. The rise in self-employment (+38K) was more than offset by declines in the private sector (-11K) and government (-28K). Full-time employment dropped 40K while part-time jobs were up 39K. The goods sector (-46K) was down with losses in all sectors. Major pullbacks were observed in construction (-29K) and manufacturing (-13K). Services sector employment was significantly up (+46K) with major gains in accommodation/food services, information/culture, trade and professional services while educational services and other services lagged. On a regional basis, BC employment rose a massive 16K while Quebec (-11K), Ontario (-4K) and Alberta (-2K) were down. All told, June’s report was slightly below expectations and the details of the report are not particularly impressive. Much of the previous month gains in full-time employment were erased while private sector jobs posted a second consecutive decline. In our view, such a moderation was in the cards after outsized gains in the previous three months. The Bank of Canada’s business outlook survey, conducted from May 9 to June 8, is showing a weak outlook for employment so we don’t expect a hiring spree in the coming months. We continue to see an 8K average monthly growth in 2016 as BC and Central Canada should continue to compensate for weaknesses in energy-producing provinces.

Canada’s merchandise trade deficit improved marginally to C$3.28 billion in May (from a revised C$3.32 billion in April) as nominal imports fell slightly faster than exports (−0.8% versus −0.7%). Gains in energy exports (+7.1%, due entirely to higher prices) and aerospace (+2.2%) were more than offset by declines elsewhere, including in autos and parts (−1%) and consumer goods (−1.2%). Imports fell in several categories including industrial machinery and aircraft, more than offsetting increases in energy. The energy trade surplus rose slightly to C$3.2 billion while the non-energy trade deficit was roughly unchanged at C$6.5 billion. In real terms, Canada’s exports fell 2.7% and imports fell 2.2%.This trade report was disappointing. Volume exports of non-energy products fell in a month when our main customer, the U.S., increased its volume imports of nonpetroleum products. The benefits of the currently cheap Canadian dollar seem to be blunted by lost market share courtesy of the loonie’s surge between 2002 and 2012. Real exports of non-energy products remain about 10% below the peak of 2007. Assuming no change in June and no revision to prior months, real exports will have declined roughly 19% annualized in Q2, the worst quarterly slump since the recession of 2009, while imports fell about 1%. In other words, expect trade to be a massive drag on economic growth in Q2. Adding to the bad news is a continuing decline in imports of industrial machinery, suggesting that the investment slump continued in Q2. The only good news, though scant consolation, is that terms of trade seem to be stabilizing. Overall, the trade data are consistent with a sharp cooling of the economy in the second quarter of 2016 from the 2.4% growth rate of Q1. We expect a contraction of more than 1% annualized for Canadian GDP in Q2.

Building permits fell 1.9% in May to $6.8 billion. The value of permits in the residential sector was down 1.1% on the month after a 0.9% decline in April. Permit value for single-family dwellings fell 7.2% in May after three consecutive increases, but rose 7.1% for multi-family dwellings. In the nonresidential sector the value of permits was also down on the month, falling 3.3% to $2.5 billion. The number of permits showed large increases for multiple units in Ontario outside Toronto, in Quebec (mostly Montreal), in Nova Scotia and in Manitoba, partly offset by large decreases in Alberta (mostly Calgary) and B.C. (mostly Vancouver). For single-family units the number of permits was down in all 10 provinces but Ontario accounted for slightly more than half the decrease. Overall, the seasonally adjusted number of residential building permits was about flat in May.

The Bank of Canada's Business Outlook Survey conducted from May 9 to June 8 showed a business outlook little improved from the previous survey (February 11 to March 7). Firms reported no sales growth over the past 12 months and expected just a marginal acceleration over the coming year. Intentions to invest in machinery and equipment remained unchanged at 9, i.e. in positive territory but low. Capacity pressure fell slightly. Only 35% of respondents said they would have either some or significant difficulty in meeting an unexpected increase in demand. The proportion of respondents facing labour shortages fell to 19% from 20% in the last survey, a decline reflected in weaker hiring intentions – the related balance of opinion fell to 21. Firms reported some easing in credit conditions compared to three months earlier. In sharp contrast, the separately released BoC Senior Loan Officer survey for Q2 (conducted June 6 to 10) showed lending conditions tightening sharply from the previous quarter, with the corresponding index moving to a seven-year high of 23.9. Both price and non-price conditions worsened for corporate and commercial borrowers, especially in the oil and gas sector.

United States – Nonfarm payrolls surged 287K in June, much stronger than the 180K expected by consensus. However, there were downward revisions to prior months that subtracted 6K from payrolls. In June, the private sector added 265K jobs with gains in services (+256K) and even the goods sector (+9K). The increase in goods sector employment was due to manufacturing, while construction payrolls were flat and mining lost jobs again. The private services sector job gains were driven by education/health (+59K), leisure/hospitality (+59K), information (+44K), and trade/transportation (+27K). Government added 22K positions. Average hourly earnings rose 0.1% and were up 2.6% on a year-on-year basis. The employment diffusion index jumped to 62.4, the highest in a year. The other US employment report, the household survey (similar methodology to Canada’s LFS) showed only 67K new jobs being created in June as strong gains in full-time jobs were offset by declines in part-time employment. But the weak overall number, coupled with the one tick increase in the participation rate to 62.7%, caused the jobless rate to rise two ticks to 4.9%. The US employment reports were much better than expected with a stunning NFP and a household survey showing strong gains in full-time positions. The rebound in NFP employment is encouraging after a soft couple of months, but more impressive is the widespread nature of the jobs created in June as evidenced by the private sector diffusion index which is at a oneyear high. The uptick in the manufacturing sector is good to see, although the lack of construction employment, is a bit disappointing. Wage inflation, despite the uptick, remains mild.

Factory orders fell 1.0% in May after two months of increases (1.8% in April and 1.7% in March). Durable goods orders were down 2.3%, largely because of a 5.7% drop in the transportation component. Excluding transportation, factory orders actually increased 0.1%. Inventories continued to shrink, declining 0.1% in May (−3.0% from a year earlier). The ratio of inventories to shipments was nevertheless down only slightly, to 1.36 from 1.37 in April. With May’s third consecutive increase, factory orders excluding transportation have stabilized after four substantial declines from November through February.

The U.S. trade deficit widened to $41.1 billion in May from $37.4 billion in April. The deterioration was due to higher imports (+1.6%) and lower exports (−0.2%). In real terms, imports were up 1% despite a decline in imports of crude, and exports were down 1.5%. Even after the May drop, real exports are on track for growth of about 2% annualized in Q2 (driven entirely by petroleum) and real imports are on track to come in roughly flat. So in sharp contrast to Canada, trade probably contributed to U.S. GDP growth in Q2.

The ISM Non-Manufacturing index rose to 56.5 in June from 52.9 in May. New orders rose to 59.9 from 54.2 and the employment subindex rose to 52.7 from 49.7. The business activity subindex also rose, to 59.5 from 55.1. The rebound of the Non-Manufacturing ISM to a seven-month high, significantly above consensus expectations, is welcome. New orders subindexes in the manufacturing (57.0) and non-manufacturing surveys (59.9) are comfortably in expansion territory and consistent with an acceleration of U.S. economic growth in Q2 after two consecutive subpar quarters. That said, these were pre-Brexit readings and the current environment marked by disappointing earnings is not conducive to more intensive hiring. Both manufacturing and non-manufacturing employment indexes remain less than stellar.

The minutes from the June 14-15 FOMC show participants differing in their interpretation of the recent slowing of payroll employment gains. Many suggested it could be just noise. Some thought it might instead indicate a broader economic slowdown. Almost all judged that the weak May jobs report increased their uncertainty about the labour market outlook. Opinions also diverged about the softness of business fixed investment since late last year. A variety of potential causes were put forward, but some thought it could portend a broader slowdown. In these conditions, most judged that they would need to accumulate additional information on the labour market, production and spending to decide whether the stance of monetary policy should be adjusted. Most participants shared the view that if incoming information confirmed enough momentum (GDP and employment growth), raising the target range for the fed funds rate would be appropriate. Members also generally thought it would be prudent to assess the consequences of the Brexit vote for the U.S. economic outlook before acting. Members expected inflation to remain low in the near term. As usual, several participants expressed concern that delaying further gradual rate hikes would increase the risk of financial instability or of overshooting the inflation target.

World – In China, the Caixin/Markit Services PMI edged up to 52.7 in June from 51.2 in May. Combined with the previously released manufacturing index (down 0.6 to 48.6), this result left the composite index marginally lower at 50.3 versus 50.5 in May.

In Japan, the Nikkei PMI services index fell 1 point to 49.4 in June. The preliminary reading of the leading economic indicator in May was unchanged (100) from April. The coincident index was down 1.5 points to 110.5.

In the Eurozone, May retail sales matched expectations, rising 0.4% m/m. The June services PMI edged up 4 ticks to 52.8, contributing to a 3-tick rise in the composite index to 53.1.

Download The Full Weekly Economic Letter