Building permits rose 12.7% in dollar terms in September

Week in review

Canada – Employment rose 43K in October according to the Labour Force Survey, surprising consensus which was expecting a 5K decline. With the participation rate remaining unchanged at 66%, the employment gains caused the jobless rate to fall to 6.5%, the lowest since November 2008. Private sector employment which soared a record 124K in the prior month, added another 71K. Government, however, cut 54K jobs, the first drop in four months. Self employment rose 26K. All in all, paid employment i.e. total employment excluding selfemployeds, rose 17K. The services sector saw employment increase 24K, with increases for trade, finance, insurance, real estate, and education among others, more than offsetting declines in health care and accommodation. The goods sector added 19K jobs, the third increase in a row, as sharp gains in manufacturing (+33K), construction, utilities and agriculture, more than offset declines in resources. Full-time employment rose 27K, while part-time employment was up 17K. Hours worked grew 0.4%.

All told, the October LFS was unambiguously strong. The private sector has created 194K jobs in the last two months, the best tally on records. The employment increase in manufacturing is the best in over two years. The report’s only disappointment is the decline in government jobs, which capped gains for paid employment. The latter, however, still grew a solid 146K in the last couple of months. On a more reliable 12-month moving average basis, Canada is creating a decent 15K jobs per month, of which 12K are paid private sector jobs (i.e. zero in government and 3K self employed). The ramp up in U.S. demand is clearly having positive spillovers on this side of the border not just with regards to growth but also employment.

The merchandise trade balance returned to surplus (+C$0.71 bn) in September. Adding to the good news, the prior month’s deficit was revised to just C$0.46 bn (from the C$0.61 bn deficit previously reported). The improvement in September was due to falling nominal imports (-1.5%) and rising nominal exports (+1.1%). The export increase was felt in most categories, including energy, autos, forestry, electronics and industrial machinery, which more than offset decreases for aerospace, and agricultural products. The energy trade surplus rebounded to C$7.3 bn, while the non-energy trade deficit narrowed to C$6.5 bn. The trade surplus with the U.S. rose to C$3.9 bn. In real terms, Canada’s exports rose 1.4%, while imports fell 1.8%. For Q3 as a whole, export volumes grew at an annualized pace of 10.4% in Q3, while imports grew just 6.6%, meaning that trade likely contributed to GDP growth in the third quarter.

Building permits rose 12.7% in dollar terms in September, erasing about half of the prior month’s decline. Consensus was expecting just a 5% increase. There was a 23.9% increase in the value of non-residential permits. The residential sector saw a 6.1% increase in the value of permits due to the 10.8% jump for multis and a 2.5% gain for singles. In real terms, residential permits rose 9.4% erasing about half of the prior month’s losses thanks to a 12.9% increase for multis and a 9.4% gain for singles.

Quarterly GDP revisions by Statistics Canada for the period 2011Q1 to 2014Q2 show upgrades in 11 of those 14 quarters. As a result, real GDP growth for 2011 was revised up to 3.0% (from 2.5%), 2012 growth was upgraded to 1.9% (from 1.7%), while 2013 growth was left unchanged at 2.0%. The first half of 2014 was also revised up ― e.g. Q2 growth ended up at 3.6% annualized versus the first estimate of 3.1%. Nominal GDP and corporate profits were also upgraded. The real GDP upgrades were largely due to business investment in non-residential structures.

In a speech this week, Bank of Canada Governor Stephen Poloz reiterated his belief that there is material slack in the economy and the labour market. He was, however, still counting on a sustained expansion in exports to boost the economy and to allow for excess capacity to be absorbed. The Governor again said that it will take two years to absorb the excess capacity and that continued monetary policy stimulus is needed to keep this process in motion. He also said that policy stimulus may be needed even after the output gap is closed. The Governor attributed the weakness in investment spending to ongoing uncertainties: “...the expected risk-adjusted rate of return on a new investment can appear low to a company, and we can settle into a temporary low-confidence/low-investment equilibrium, even when borrowing costs are extraordinarily low, until uncertainty subsides and confidence returns.” He thought that the combined effects of deleveraging, fiscal normalization and uncertainties could continue to restrain global economic growth for a prolonged period.

United States – Non farm payrolls rose 214K in October, below the 225K expected by consensus. However, there was a 31K upward revision to the prior months to reflect more complete data. In October, the private sector added 209K jobs, the 9th straight month of 200K+ gains. Goods sector employment rose 28K thanks to gains in manufacturing, mining and construction. In the services sector, the private sector created a net 181K jobs, while government added 5K jobs despite another net cut at the federal level. Average hourly earnings rose 0.1%, while aggregate hours worked increased 0.5%. Released at the same time, the household survey, which surveys households as opposed to establishments, showed a gain of 683K jobs. The participation rate rose one tick to 62.8%. But the solid job gains were enough to push the unemployment rate down one tick to 5.8%, the lowest since July 2008. Full-time employment rose another 345K on top of the 671K gain in the prior month. The employment to population ratio is now 59.2, the highest since mid-2009.

All told, considering the upward revisions to the prior months, October’s nonfarm payrolls were better than expected. The private sector gains are encouraging, i.e. 9th straight month of 200K+ gains. The household employment report was much better than expected not just because of the size of the gains (the biggest monthly increase this year), but also because of full-time employment which has now risen by over a million in the last two months. That bodes well for consumption spending and home ownership. Both hours worked and wages are on track to grow at a decent pace in the last quarter of the year, consistent with our view that the U.S. economy will grow at a pace of over 2% annualized in Q4, after two unsustainably hot quarters.

The ADP employment report, a gauge of the private sector component of the non-farm payrolls (NFP), showed a 230K increase in October. September was revised up to 225K (from 213K), putting it closer to the first estimate of private sector non-farm payrolls. The ADP’s job gains in October were mostly in medium-sized firms which added 122K, while small firms, i.e. those employing less than 50 employees, added 102K to payrolls. Large firms increased payrolls by just 5K.

Weekly jobless claims data for the week of November 1st showed initial claims falling to 278K (from an upwardly revised 288K in the prior week). That was better than the 285K expected by consensus. The more reliable 4-week moving average fell to 279K, the lowest in over 8 years. Continuing claims for the prior week fell 39K to 2.35 million.

The ISM manufacturing index jumped to 59.0 in October (from 56.6 in the prior month). The new orders sub-index surged to 65.8 (from 60.0), although new export orders fell to 51.5 (from 53.5). The employment sub-index increased to 55.5 (from 54.6). The production sub-index was also up slightly to 64.8 (from 64.6), the highest since 2004. The ISM nonmanufacturing index fell to 57.1 in October (from 58.6 in the prior month). A reading above 50 implies the services sector is expanding. The business activity index dropped to 60, and the new orders sub-index fell to 59.1, albeit both well in expansion territory. The employment sub-index rose further to 59.6, the highest in months. All told, the U.S. services sector continues to expand according to the ISM, which bodes well for GDP growth in the final quarter of the year.

Construction spending fell 0.4% in September, a second consecutive monthly drop. However, August’s drop was less severe than previously estimated at -0.5% (revised from - 0.8%). September’s decline was mostly due to the nonresidential sector (-1.0%), which more than offset the 0.4% increase in the residential sector.

The trade deficit widened to $43 bn in September, from a $40 bn deficit in the prior month (revised from $40.1 bn deficit). The deterioration in the trade balance was due falling exports (- 1.5%), while imports were flat in nominal terms. In real terms, exports fell 1.8%, while real imports increased 0.2%.

The factory report showed a 0.6% drop in orders in September, after a little revised 10% slump in the prior month. Transportation orders fell 3.5%, while orders were flat excluding that category. Total factory shipments rose 0.1%, despite non-durables shipments remaining unchanged.

Business non-farm productivity rose 2% annualized in the third quarter of the year, better than the 1.5% expansion expected by consensus. That came after an upwardly revised Q2 productivity expansion of 2.9% (previously reported as 2.3%). The increase in Q3 productivity was a result of output (+4.4%) growing faster than hours worked (+2.3%). Unit labour costs rose just 0.3% in the quarter. The increase in productivity is good news in that it provides another element of support to the already strengthening U.S. labour market.

World – The European Central Bank and the Bank of England both left monetary policy unchanged this week. The ECB reiterated its pledge to take the balance sheet “towards the dimensions it had at the beginning of 2012”. To achieve that, the ECB will continue with its asset purchase program (purchases of covered bonds and asset-backed securities which will last at least two years), and the TLTRO program, (i.e. the cheap ECB loans to commercial banks, which will continue until June 2016). ECB President Draghi restated that the central bank remains open to additional stimulus if deemed necessary.