Real GDP grew just 1.2% annualized in the first quarter of 2014

Week in review

Canada – Real GDP grew just 1.2% annualized in the first quarter of 2014. There were downward revisions to last year’s Q2 and Q4 growth, but upward revisions to Q1 and Q3, leaving 2013 growth unchanged at 2.0%. Domestic demand was soft, contracting in Q1 due to a moderation in consumption spending growth and contraction in residential construction, business investment and government spending. Trade contributed to GDP but only because imports fell faster than exports. Inventories subtracted 0.1% from growth. All in all, final sales, i.e. GDP excluding inventories, rose 1.3%. Disposable income grew 4.5% annualized, but part of the reason that didn’t translate into stronger consumption growth was because consumers opted to save more as evidenced by a one tick increase in the savings rate to 4.9%. Nominal GDP grew a solid 6.8% annualized in Q1, the best performance since 2011. Higher commodity prices clearly helped in the quarter.

The monthly GDP data showed a 0.1% (unannualized) increase in March output. Growth was restricted by an expected drag from retailing which limited services output growth to just 0.1%. The goods sector saw a 0.3% increase in output as declines in construction and agriculture were dwarfed by increases in all the other categories, including a +0.9% print for mining, oil and gas. As a result, industrial output rose 0.6% in March. All told, the Canadian Q1 GDP results were weaker than expected, although it’s clear that the temporary US slowdown in that quarter was partly to blame.

The current account, the broadest measure of trade, showed the deficit narrowing to C$12.4 bn in the first quarter of 2014. The current account balance in the second half of 2013, was revised sharply with smaller deficits than first thought particularly in goods trade. Coming back to Q1, the C$3.3bn narrowing of the deficit was due to improvements on the goods trade account (which returned to surplus for the first time since 2011) and the investment income account (deficit narrowed by C$0.1 bn to C$6.6 bn). Those more than offset a deterioration on the services account deficit (deficit widened by C$0.4 bn to C$6.3 bn). The current account deficit in Q1 was financed by foreign direct investment, as well as portfolio inflows, currency and deposits.

The Survey of Employment, Payrolls and Hours (SEPH) a survey of establishments (unlike the Labour Force Survey which surveys households), showed that Canada lost 45K jobs in March. That contrasts sharply with the LFS which showed paid employment rising 43K in the month. The SEPH’s yearon- year earnings growth jumped to 3.1%, the highest since September 2012. Annual wage growth topped the national average in sectors like mining/oil/gas, utilities, construction, finance/insurance, real estate, management, arts/entertainment, transportation/warehousing. Sectors including health care, accommodation/food services, public admin and education had annual wage growth below the national average in March. Despite gains in March, wages grew at an annualized pace of just 1.8% in Q1, the smallest increase since the first quarter last year. Hours worked contracted in Q1 for the first time in a year.

United States – The Conference Board’s measure of consumer confidence rose more than a point to reach 83.0 in May (from a downwardly revised 81.7 in the prior month). The increase in the index was due to both perceptions about the present situation (sub-index rising roughly two points to 80.4) and to consumers’ view of economic prospects, the latter’s sub-index rising roughly one point to 84.8. Consumers were a bit more optimistic than in the prior month about future business conditions and employment. They were keener (than in recent months) to buy autos, but intentions to purchase a home or major appliances fell a bit.

Markit’s flash/preliminary estimate of the U.S. services purchasing managers index rose to a 26-month high of 58.4 in May (from 55 in April). A reading above 50 implies expansion in the services sector. In May, the “new business” sub-index rose further into expansion territory reaching 58.7 (from 55.1), while the employment sub-index also rose further to 53.1 (from 51.2), the highest in 4 months.

Weekly jobless claims data for the week of May 24th showed initial claims falling to 300K, from an upwardly revised 327K. That was better than consensus which was looking for a reading of 318K. The more reliable 4-week moving average fell to 312K. Continuing claims for the prior week fell 17K to 2.63 million.

The durables goods report showed a consensus-topping 0.8% increase in orders in April. Adding to the good news was the sharp upward revision to the prior month to +3.6% (from +2.6%). In April, there was a 2.3% increase in new orders of transportation equipment driven by defense which more than offset declines in orders of autos/parts and civilian aircrafts. Ex-transportation, orders rose 0.1% after an upwardly revised increase of 2.9%. Total shipments of durable goods fell 0.2% and those of non-defense capital goods ex-aircraft (a proxy for business investment spending) were down 0.4%, albeit after a 2.1% jump in the prior month. Despite the small drop in shipments of non-defense capital goods ex-aircraft, the latter is on track to grow sharply in Q2 (+5.3% annualized, even assuming no change in May and June) thanks to the excellent handoff from the prior quarter. That’s consistent with a sharp rebound in US GDP growth in the current quarter.

Personal income rose a consensus-matching 0.3% in April. Disposable income rose by 0.3% in nominal terms, and by 0.2% in real terms. However, personal spending fell 0.1%, disappointing consensus which was expecting a 0.2% increase. In real terms, spending fell 0.3%. With income rising and spending falling, the savings rate jumped four ticks to reach 4%. The PCE deflator rose 0.2% in April, taking the year-on-year rate up five ticks to 1.6%. The core PCE deflator was up 0.2%, pushing the annual core rate up two ticks to 1.4%.

March data showed the Case-Shiller home price index rising a consensus-topping 1.2% on a seasonally-adjusted basis. That’s the 26th increase in a row and it took the annual home price inflation to 12.4%. On a 3-month annualized basis, home price gains accelerated to +12%, with San Francisco (+26.5%) well ahead of the pack, followed by San Diego (+19.2%), Minneapolis (+18.1%), and even Detroit (+17.6%) which has been making strides in recent months. For Q1 as a whole, resale home prices were up 10.7% annualized, the fifth straight quarter of double-digit gains. Pending home sales rose 0.4% in April.

The second estimate by the Bureau of Economic Analysis of Q1 GDP, showed an annualized drop of 1.0% (revised down from the initial estimate of 0.1%). That’s the first quarterly U.S. GDP contraction in three years. As expected, there was a downward revision to trade. There was also a big downgrade to inventories which chopped 1.6% from growth (previously reported as cutting only 0.6% from growth). Those downgrades more than offset upgrades to domestic demand. The Q1 destocking is a clear positive for restocking and hence production in subsequent quarters.

World – In Japan, retail sales plunged 13.7% in April after the prior month’s 6.4% increase (the latter got a lift as consumers brought forward purchases in anticipation of the April sales tax hike). That’s much in line with our view that Japan is set to contract in Q2 after a strong first quarter of 2014. The annual inflation rate jumped to 3.4% in April (from 1.6% in the prior month) due to the sales tax hike in the month.