Week in review: Canadian Q4 GDP matches consensus, US NFP shines

Week in review

Canada – GDP grew a consensus-topping 2.4% annualized in the fourth quarter of 2014, not far from the Bank of Canada’s 2.5% estimate. There were also upward revisions to the prior quarter which lifted Q3 growth to 3.2%. Those allowed Canada to grow 2.5% in 2014. In Q4, trade acted as a drag on the economy due to declining exports and rising imports. Domestic demand also softened from the prior quarter largely due softer business investment spending. Consumption grew at a slower pace than in the prior quarter despite decent income gains (real disposable income grew 2% annualized for the second straight quarter) and a drop in the savings rate to 3.6%, the lowest since 2010. The upward surprise in Q4 came from residential construction which contributed to growth despite disappointing housing starts in the quarter. Inventories also contributed significantly to growth, which left final sales, i.e. GDP excluding inventories, growing at the slowest pace since 2012. Nominal GDP grew just 0.1% annualized in Q4, and 4.4% for 2014 as a whole. The monthly GDP data for December showed a 0.3% increase in output with gains in both the goods (+0.6%) and services (+0.2%) sectors, all in unannualized terms.

In sum, the Q4 GDP results aren’t as good as they look. While production rose faster than expected, much of that extra output went into inventories because sales were so weak― final sales grew at the slowest pace in over two years. The inventory build doesn’t bode well for production and hence growth in early 2015. Nominal GDP was not surprisingly weak and likely remained soft in Q1 considering the further slump in commodity prices in the quarter. That will put pressure on budgets at both the federal and provincial levels. The decline in the savings rate to the lowest since 2010 is also not good news for consumption growth this year. So, the Q4 results point to soft growth in the first half of 2015.

The current account, the broadest measure of trade, showed the deficit widening in 2014Q4 to C$13.9 bn (from a revised C$9.6 bn deficit in the prior quarter). The C$4.3 bn deteriorarion was entirely due to goods (which moved from a surplus to a deficit in Q4), which more than offset improvements in the deficits for services and investment income accounts. The deterioration of the current account deficit in Q4 shouldn’t be surprising given how slumping oil prices wrecked the goods trade balance in the quarter. The surprise, however, is how the deficit was financed. The preferred source of financing, i.e. FDI (because it is stable and long term), went negative for the first time in five quarters, as net direct investment by foreigners were more than offset by massive outflows ― direct investment abroad by Canadian corporations was nearly C$32 bn in Q4, the highest since 2008. Ditto for portfolio flows, whose tiny foreign inflows into Canadian securities (the smallest since 2008) were dwarfed by outflows relating to investment by Canadians in foreign securities. Instead, the external deficit in Q4 was financed by “other” flows, such as loans, currency and deposits. Those relatively unstable flows ― which have potential to quickly reverse ― largely explain the Canadian dollar’s slump over the last few months.

Labour productivity fell 0.1% in Q4 in unannualized terms as hours worked grew a bit faster than real GDP. Hourly compensation fell 0.1%, while unit labour costs were flat.

Building permits fell 12.9% in dollar terms in January. There was a 22.8% decrease in the value of non-residential permits, while the residential sector saw a 7% drop in the value of permits (due to the 21% slump for multis). In real terms, residential permits fell 7.5% due to a 12.9% drop for multis, which dwarfed the 0.9% increase for singles. All told, the sinking building permits do not bode well for construction in the first half of 2015. The residential sector, particularly the condo market, seems vulnerable given the plunge of real permits for multis.

The merchandise trade deficit widened to C$2.45 bn in January, from a C$1.2 bn deficit in the prior month (was revised from a C$0.65 bn deficit). That’s the largest trade deficit since July 2012. The deterioration in January was due to nominal exports falling 2.8%, while nominal imports were roughly flat. The decrease in exports was largely due to the energy slump (-14.7% entirely due to prices because volumes actually rose 1.7%) which offset increases in most of the other categories. Energy imports fell 19.2%. The energy trade surplus fell to C$4.3 bn, the lowest since July 2012. The nonenergy trade deficit widened to C$6.8 bn, the largest deficit in three months. In real terms, Canada’s exports fell 1.4%, while imports fell 0.1%. In sum, the trade results were disappointing, particularly the widening non-energy trade balance. But bad weather may have been a factor in delaying shipments and as such we expect a rebound sooner rather than later.

The Bank of Canada left the overnight rate unchanged at 0.75%. The central bank explained the pause by saying that “the risks around the inflation profile are now more balanced and financial stability risks are evolving as expected”. The central bank also gave itself a pat on the back for January’s rate cut by saying “Financial conditions have eased materially since January, in response to the Bank’s recent monetary policy action and to global financial developments. This easing is reflected across the yield curve and in a wide range of asset prices, including the Canadian dollar.” The BoC still believes the negative impact from lower oil prices will appear in the first half this year, but it now thinks it may be even more frontloaded than projected back in January.

United States – Non farm payrolls rose 295K in February, blowing past consensus which was expecting just a 235K increase. The private sector added 288K jobs with gains in both the goods (+29K) and services (+259K) sectors. Goods sector employment was supported by gains in manufacturing and construction, which offset declines in mining. The private services sector’s employment gains were broad based. Government added 7K jobs. Average hourly earnings rose 0.1% while aggregate hours worked increased 0.2%. Released at the same time, the household survey (similar in methodology to Canada's LFS) showed a gain of 96K jobs in February, with a solid +123K print for full time employment more than offsetting declines for part-timers. That together with the drop in the participation rate to 62.8%, allowed the jobless rate to fall two ticks to 5.5%, the lowest since May 2008.

The ADP employment report, a gauge of the private sector component of the non-farm payrolls, showed a 212K increase in February. The ADP’s job gains in February were mostly in small firms i.e. those employing less than 50 employees, which added 94K jobs. Medium-sized firms added 63K to payrolls, while large firms (500+ employees) increased payrolls by 56K. There were upward revisions to the prior months which put the ADP closer in line with the private component of the non farm payrolls ― the ADP now shows 2.9 million private sector jobs were created last year (versus 2.6 million before revision).

Weekly jobless claims data for the week of February 28th showed initial claims rising to 320K (from an unrevised 313K in the prior week). That was worse than the 295K expected by consensus. The more reliable 4-week moving average rose to 305K, the highest in six weeks. Continuing claims for the prior week rose 17K to 2.42 million.

The trade deficit narrowed to $41.7 bn in January from the prior month’s deficit of $45.6 bn. The improvement in the trade balance was due to imports (-3.9%) falling faster than exports (-2.9%) in nominal terms. In real terms, exports fell 2%, while imports dropped 1.6%.

Personal income rose 0.3% while personal spending fell 0.2% in January. With income rising and spending falling, the savings rate rose to 5.5%, the highest since December 2012. In real terms, disposable income jumped 0.9% while spending rose 0.3%. The PCE deflator fell 0.5% in January, allowing the year-on-year rate to fall to just 0.2%, the lowest since 2009. The core PCE deflator rose 0.1%, leaving the annual core rate unchanged at 1.3%.

Construction spending fell 1.1% in January, the worst drop since mid-2014. That was entirely due to the 1.6% decline in the non-residential sector, which more than offset the 0.6% gains in residential construction.

The ISM manufacturing index fell to 52.9 in February from an unrevised 53.5 in the prior month. That was the lowest ISM since January 2014. The production, new orders and employment indices all fell a bit but, more importantly, all those major sub-indices remained comfortably above 50, i.e. in expansion territory. The ISM non-manufacturing index rose to 56.9 in February, a three-month high. The employment subindex soared to a four-month high of 56.4, while the business activity and new orders sub-indices fell a bit, albeit remaining in expansion.

World – The Bank of England and the European Central Bank both left interest rates unchanged. The ECB confirmed that it will start its QE program on March 9th by purchasing euro-denominated public sector securities in the secondary market. It will also continue its earlier program of purchasing asset-backed securities and covered bonds. As announced earlier, the combined purchases will amount to €60 billion/month. ECB staff macroeconomic projections for the euro area have been revised upwards, with real GDP growth now expected to be 1.5% in 2015 and 1.9% in 2016. Those projections are conditional on the full implementation of all policy measures.

Still in the Eurozone, the annual inflation rate was -0.3% in February. Excluding energy, food, alcohol and tobacco, the annual inflation rate was 0.6%. In January, the year-on-year change in the producer price index rate was -0.9%, or -0.2% excluding energy. Retail volumes for the same month were up 1.1% as gains in Germany, Portugal, and Slovenia more than offset declines in Ireland.