Week in review

Canada – After making an error in July’s Labour Force Survey, Statistics Canada published new results this week. As it turns out, Canada created a net 42K jobs in July (instead of zero in the erroneous report). The participation rate held steady at 66.1%, but the job gains were strong enough to cause the jobless rate to drop one tick to 7% (from 7.1%). Employment gains in the private sector (55K) and in government (+24K) dwarfed decreases in self-employment (- 37K). All in all, paid employment i.e. total employment excluding self-employeds, jumped 79K, the biggest increase in over a year. The goods sector lost 26K jobs (the fifth decline in a row) as losses in construction more than offset gains in resources and manufacturing. But services sector employment soared 68K. Full-time employment fell 18K (i.e not as brutal as in the erroneous report), while part-time employment was up 60K. Hours worked grew 0.8%. Overall, the revised LFS shows a better picture of the Canadian labour market. The major upward revisions were in the private services sector and in Central Canada. But given how choppy the series has been this year, it’s best to look at the longer-term trend for a more reliable picture of the Canadian labour market. On a 12-month moving average basis, Canada is creating on average roughly 13K/month, mostly in the private sector, and mostly part-time. So, even with the upward revisions, the overall long-term trend is one of a Canadian labour market that is creating jobs but not at an impressive pace.

Manufacturing shipments rose 0.6% in June, topping consensus which was looking for just a 0.4% increase. Adding to the good news, the prior month was revised up one tick to +1.7% (from +1.6%). In June, there was a decline in sales of auto and parts, but that was dwarfed by gains in most other categories. In real terms, factory sales rose 0.2%. Overall, real manufacturing shipments expanded 8.2% annualized in the second quarter (after a 3.7% contraction in Q1), consistent with a sharp acceleration of Canadian GDP growth in Q2 to around 2.7% annualized after a slow start to the year.

Housing starts rose 0.7% in July to 200K (from an upwardly revised 198.7K in the prior month) due to an increase in both rural (+5.1%) and urban areas (+0.3%). Urban starts were supported by singles (+4.7%), which dwarfed the decline for multis (-2%). On a regional basis in urban areas, gains in Ontario (+22.7%), Atlantic Canada (+65.2%) more than offset declines in Quebec (-0.6%), BC (-3.7%), and the Prairies (- 24.4%). Overall, July’s housing starts were better than expected. True, not all was rosy in the report given the decline in multiple starts. But a deceleration in multis may be exactly what the market needs considering that overbuilding earlier had caused gluts in some regions of the country. The tilt towards singles is good news because that segment contributes more (per unit) to GDP.

The Teranet–National Bank House Price Index rose 1.1% in July thanks to gains in 10 of the 11 metropolitan regions covered (Winnipeg was the only city seeing a price drop). On a year-on-year basis, home prices were up 4.9% nationally, but with contrasting fortunes across cities. Calgary led the pack with a 8.2% year-on-year increase, followed by Hamilton (+7.1%), Toronto (+6.6%), Vancouver (+6.1%), Edmonton (+3.7%), Victoria (+2.5%), and Montreal (+1.5%), while the rest were in deflation mode: Winnipeg (-0.1%), Ottawa-Gatineau (- 0.1%), Quebec City (-1.2%) and Halifax (-1.2%).

United States – Retail sales were flat in July, restrained by a 0.2% drop in motor vehicles/parts sales. Excluding autos, sales were up 0.1% supported by gains for sellers of food/beverage, health/personal care products, building materials, clothing, sporting goods and gasoline, which more than offset declines in sales of electronics, furniture and general merchandise. Assuming CPI grew 0.1% in the month, real retail sales fell 0.1% in July, which puts Q3 on the back foot with regards to consumption spending growth. However, we are not overly concerned about this considering that a give back was always in the cards after a hot Q2. More importantly, consumer fundamentals remain good, e.g. jobs, confidence, credit. In our view, the U.S. remains on track for Q3 GDP growth above 2% annualized after the impressive 4% print in the prior quarter.

Industrial production rose a consensus-topping 0.4% in July (market expectations were for a 0.3% increase). Adding to the good news was the upward revision to the prior month to +0.4% (from the +0.2% print reported initially). Driving the increase in July was the manufacturing sector (+1% overall, as a 10.1% increase for auto/parts output was complemented by a 0.4% increase ex-autos). The mining sector (+0.3%) also contributed, and both of those dwarfed the 3.4% decline in output for utilities. Capacity utilization rose to 79.2%.

The National Federation of independent business index (NFIB) rose seven ticks to 95.7 in July (from the prior month’s print of 95), the second highest since 2007. Businesses were a bit more optimistic about the economy, although the index remained negative in July. The ease of credit improved a bit. The index relating to hiring plans rose to the highest in 7 years.

The producer price index rose just 0.1% in July, causing the year-on-year rate to move down two ticks to 1.7% (from 1.9% in the prior month). Food prices bounced back after two declines in a row (+0.4%), while energy prices fell 0.6% after the prior month’s sharp increase. Excluding food and energy, producer prices rose 0.2%, although base effects caused the year-on-year core PPI to drop two ticks to 1.6%.

The New York Fed’s Empire index of manufacturing activity fell to 14.7 in August (from 25.6 in the prior month). Gains in the shipments sub-index were offset by a decrease in the new orders and employment sub-indices, although all of the major sub-indices remained comfortably above 50.

The preliminary estimate for August’s Michigan consumer sentiment index is 79.2 (the lowest since November 2013), a decrease from the prior month’s print of 81.8. Consumers felt less confident about the economic outlook (sub-index falling to 66.2) but were more upbeat about current conditions (subindex rising to 99.6).

Weekly jobless claims data for the week of August 9th showed initial claims rising to 311K, from an upwardly revised 290K. The more reliable 4-week moving average rose slightly to 296K. Continuing claims for the prior week increased 25K to 2.54 million.

World – Japan’s real GDP fell 6.8% annualized in Q2, more than erasing the prior quarter’s gains. That was the steepest decline since 2011Q1. The Q2 rout was entirely due to domestic demand, particularly consumption spending which suffered from the April sales tax hike. On a positive note, however, trade contributed to growth for the first time in a year. In China, July data showed retail sales and industrial production higher than year-ago levels by 12.2% and 9% respectively. However, credit growth seems to be slowing based on the “social financing” measure. The latter was up by only 273 bn yuan in July, about one sixth what was expected by consensus. Social financing continues to contract on a yearon- year 12-month cumulative basis (-4.2%), as growth in bank loans (which make up about 54% of social financing) are more than offset by declines in non-bank loans. In the U.K., the Bank of England said in its inflation report that it now expects the jobless rate to drop below 6% by year-end. However, the BoE expects wage inflation to remain weak thanks in part to an increase in labour supply especially among older age groups after recent reforms to retirement and benefit rules.

The eurozone’s GDP was flat in Q2 i.e. much weaker than the +0.1% unannualized print expected by consensus. Of the thirteen countries that reported quarterly growth rates (out of 18 eurozone members), nine showed expanding output, three printed negative growth and one was flat, namely France. Those posting output gains were Spain (+0.6%), Portugal (+0.6%), the Netherlands (+0.5%), Belgium (+0.1%), Austria (+0.2%), Finland (+0.1%), Estonia (+0.5%), Latvia (+1.0%) and Slovakia (+0.6%). In contrast, output declined in Germany (- 0.2%), Italy (-0.2%), and Cyprus (-0.3%), all in unannualized terms. The weak Q2 results, in all likelihood impacted by ongoing structural problems and geopolitical uncertainty, reinforce our long held view that the eurozone’s real GDP will grow less than 1% this year.

This presentation may contain certain forward-looking statements about the 2009 Economic and Financial Outlook. Such statements are subject to risk and uncertainties. Actual results may differ materially due to a variety of factors, including legislative or regulatory developments, competition, technological change and economic conditions in Canada, North America or internationally. These and other factors should be considered carefully and readers should not rely unduly on National Bank of Canada’s forward-looking statements. This presentation may not be reproduced in whole or in part, or further distributed or published or referred to in any manner whatsoever, nor may the information, opinions or conclusions contained in it be referred to without in each case the prior express consent of National Bank.

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