Week in review: US and Canadian GDP disappoints

Week in review

Canada – Real GDP contracted 0.2% in November, after rising 0.35% in the prior month. That was worse than the flat print expected by consensus. Goods producing industries saw a 0.8% drop in output, due to losses in manufacturing, oil & gas, and mining, which dwarfed increases for agriculture and utilities. Industrial production fell 1.2% as a result, the biggest decline since February 2012. The services sector's output was flat as gains in retailing, education, and arts/entertainment, offset declines in health care, wholesaling, finance/insurance among others. All told, November’s GDP results were much weaker than expected. It must be said, however, that the contraction in GDP in November came after two very strong months ― on a 3-month annualized basis growth was running at a decent 2.2%. November’s disappointing results will put a dent in Q4 GDP growth, the latter likely to come in around 2% annualized, roughly half a percentage point lower than the Bank of Canada’s estimates in the recent Monetary Policy Report.

Statistics Canada revised the Labour Force Survey data using its latest population estimates. The revisions were significant, with total employment created in the last 14 years trimmed by 102K to 2.9 million (versus 3.03 million before revisions). A big chunk of the downward revision was during the recession and last year. The new data shows that last year, Canada created just 121K net new jobs (versus 186K before revision), the worst performance since the recession of 2009. Much of the 2014 downgrade came from Ontario and BC where employment creation was chopped in half versus what was previously reported. All told, the revisions significantly change the overall employment picture in Canada. Not only was employment weaker, but the dependence on Western Canada was even greater than previously thought. In fact, 84% of the jobs created last year came from the four westernmost provinces (versus 71% before revisions). That’s bad news for the 2015 employment outlook because Western provinces are unlikely to repeat the feat considering the collapse in energy prices.

The Survey of Employment, Payrolls and Hours (SEPH), a survey of establishments (unlike the Labour Force Survey which surveys households), showed that Canada lost 33K jobs in November. For the first 11 months of 2014, an average of 11K jobs/month were created according to the SEPH, slightly higher than the Labour Force Survey’s 8K for paid employment over the same period. The manufacturing sector added 1278 jobs, although employment is down roughly 6K in that sector since the beginning of the year. The SEPH’s year-on-year earnings growth fell to 2.2% in November, the lowest in a year. Annual wage growth topped the national average in sectors like utilities, mining/oil/gas, manufacturing, transportation and warehousing, information and culture, management, public admin, finance/insurance and accommodation and food services. Sectors including real estate, health care, construction, arts and entertainment, and education had annual wage growth below the national average in November.

United States – The Bureau of Economic Analysis’ advance estimate of Q4 GDP growth came in at +2.6% annualized. Consensus was looking for a +3.0% print. The disappointment was largely due to trade which was expected to contribute to growth but ended up acting as a drag on the economy in Q4. But domestic demand remained strong thanks to solid contributions from consumption spending, business investment, residential investment, which offset the drag generated by government spending. Inventories contributed to growth. So, final sales, i.e. GDP excluding inventories, grew just 1.8%. Nominal GDP grew at an annualized pace of 2.5% after a 6.4% advance in the prior quarter. All told, the GDP results were softer than expected due to the surprising drag from trade. Still, the lower-than-expected GDP growth has to be looked at in context. The 2.6% growth print is arguably still impressive given that it comes after two very strong quarters. The strength of consumers (nearly 70% of GDP) is also encouraging. All in all, the U.S. economy grew a decent 2.4% last year. The outlook for the world’s largest economy remains quite good. The net stimulus provided by lower oil prices should give a further boost to a private sector that is already benefitting from low interest rates and high confidence. Adding to the good news, low inflation will cap the Fed’s ability to significantly tighten monetary policy. We expect U.S. GDP growth to accelerate to 3.3% this year.

Durable goods orders surprised on the downside with a large drop of 3.4% in December which followed yet another big decline of 2.1% in November. For nondefense capital goods excluding the volatile aircraft industry, orders were still down 0.6%. The final quarter of 2014 ended with a 11.4% annualized drop, the worst showing since Q3 2012.

The Case-Shiller home price index rose a robust 0.7% in November, sending home prices to their highest level since mid-2008. Other news related to housing was also good with new home sales surging 11.6% in December to a new multiyear high of 481K units.

The Markit service PMI index was a tad stronger than expected in January with a reading of 54, the first improvement since June 2014.

The Conference Board’s measure of consumer confidence surged more than 10 points in January to 102.9, the highest level since August 2007. Both the expectations and present situation components of the index were up strongly on the month.

Weekly jobless claims data for the week of January 24th showed initial claims falling to 265K from an upwardly revised 308K in the prior week. That was much better than expected by consensus which was looking for 300K. The more reliable 4-week moving average fell to 299K. Continuing claims for the prior week dropped 71K to 2.39 million.

The Fed left interest rates unchanged (0-0.25% target range) at its meeting. The forward guidance was also left unchanged, i.e.: “the Committee judges that it can be patient in beginning to normalize the stance of monetary policy”. Among the changes from the last statement was the view on growth and inflation. The Fed now uses the word “solid” to describe the pace of growth and says that the drop in energy prices has boosted the purchasing power of consumers. Those represent a more upbeat assessment of the economic situation than last December. The Fed anticipates inflation to decline further in the near term, although it expects it to rise gradually toward 2% over the medium term as the labor market improves further and the transitory effects of lower energy prices dissipate. The Fed reiterated that in determining how long to maintain the target range for the fed funds rate, it will assess progress toward its objectives of maximum employment and 2% inflation. But in addition to looking at a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and financial developments, the Fed also decided to include “international developments” as something it will watch.

World – In the Eurozone, the first estimate of January CPI put the annual inflation rate at -0.6%, the lowest since July 2009. While the annual core inflation rate remained positive, the 0.6% print was nonetheless the lowest on records. The zone’s unemployment rate fell one tick to 11.4% in December as declines in most member countries including Germany and Italy, more than offset the increase in the Netherlands. In Japan, industrial production jumped 1% in December, while the unemployment rate in the same month fell one tick to just 3.4%, the lowest since the 1990’s. Retail sales, however, fell 0.3% in December. The annual inflation rate was unchanged at 2.4% in December, although inflation excluding fresh food dropped to 2.5%, or just 0.5% excluding the effects of last April’s sales tax increase.