Week in review

Canada – Real GDP rose 0.3% in July, better than the 0.2% increase expected by consensus. However, the prior month was revised down from +0.5% to +0.4%. In July, goods producing industries saw a 0.8% increase in output (on top of the prior month’s 0.7% increase), as gains for oil & gas (+4.4% is the biggest increase since September last year), mining, and manufacturing dwarfed decreases for mining support activities (read drilling/exploration), construction, utilities and agriculture. Industrial production rose 1.2% as a result. The services sector's output rose 0.2% as gains in retail, finance/insurance, education and accommodation/food services, more than offset declines for arts/recreation, wholesaling, management and professional services.

The increase in oil and gas output is encouraging, although the continuing decline in support activities (i.e. drilling/exploration activities) puts a cap on production further out. Gains in manufacturing reflect the fact that some auto plants had a shorter seasonal shutdown due to strong demand for vehicles and parts stateside. But considering the subsequent decline in activity at US auto assemblies, factory gains may not extend to August. The services sector remains strong with a sixth consecutive increase in output, which explains the resilience in employment in that sector. All told, after GDP contracted in the first half of the year, it’s clear that Canada returned to growth in the third quarter. Even assuming zero growth in August and September, Q3 GDP should grow above 2% annualized thanks to an excellent handoff from June and a good start to the quarter.

United States – Non farm payrolls rose 142K in September, much lower than consensus which was expecting a 201K increase. Adding to the bad news were downward revisions to the prior months to reflect more complete data, which took out 59K jobs. In September, the private sector added 118K as gains in services (+131K) more than offset declines in the goods sector (-13K). The decline in goods sector employment was largely due to manufacturing (-9K) and mining (ninth consecutive drop) which offset increases in construction (+8K). The private services sector job gains were driven by retailing, business services, health care and education, leisure/hospitality. Government created 24K net new jobs, all at the state/muni levels. Average hourly earnings were flat. The employment diffusion index fell to just 52.9, the lowest since 2010. The household survey showed a 236K decrease in employment. Full-time employment fell almost 200K after the surge in earlier months. Despite the job losses, the unemployment rate managed to stay unchanged at 5.1% (lowest since 2008) thanks to a decline in the participation rate to just 62.4%, the lowest since 1977. The weak September results and downward revisions to the prior months mean that private non farm payrolls have grown at an average pace of just 138K/month since July, the worst 3-month average in three years. Wage inflation also remains very weak. Those will give the Fed food for thought as it ponders raising interest rates for the first time in almost a decade.

The ADP employment report, a gauge of the private sector component of non-farm payrolls, showed a 200K increase in September. The ADP’s job gains in September were mostly in large firms (500+ employees) which added 106K new positions. Medium sized firms increased headcount by 56K, while small firms i.e. those employing less than 50 employees, added 37K to payrolls.

The weekly jobless claims report showed initial claims rising by 10K to 277K in the week of September 26th. The more reliable 4-week moving average dropped further to reach 270.75K. Continuing claims for the prior week fell 53K to 2.19 million, the lowest since November 2000.

The ISM manufacturing index fell to just 50.2 in September, the lowest since May 2013. The major sub-indices, namely production, new orders and employment all fell but remained in expansion territory, i.e. above 50. In contrast, export orders and prices paid both remain in contraction mode.

The Conference Board’s consumer confidence index soared to 103 in September, from 101.3 in the prior month. That’s the highest confidence index since January, and the second highest since 2007. The increase in confidence was entirely due to perceptions about the present situation (sub-index jumping to 121.1, highest since 2007), which more than offset a decline in the index relating to economic prospects (subindex falling slightly to 91). Consumers were more optimistic than in the prior month about prospects for income. They were also more enthusiastic than in the prior month about buying homes (especially new ones) and autos.

Personal income rose 0.3% in August while personal spending grew 0.4%. With spending rising faster than income, the savings rate dropped from 4.7% to 4.6%. In real terms, disposable income was up 0.3% while spending increased 0.4%. The PCE deflator was flat in August, allowing the yearon- year rate to remain unchanged at 0.3%. The core PCE deflator edged up just 0.1%, causing a one-tick increase in the annual core rate to 1.3%.

Construction spending rose 0.7% in August after a downwardly revised 0.4% increase in the prior month (which was previously reported as +0.7%). The increase was driven largely by the residential sector (+1.3%) while non-res construction was up a milder 0.3%.

Factory orders fell 1.7% in August after a downwardly revised 0.2% increase in the prior month. Durable goods orders fell 2.3% due to the transportation component. Excluding transportation, factory orders were down 0.8% due to declines for both durable and non-durable goods. Factory shipments were down 0.7%, the second drop in a row.

The 20-city Case-Shiller home price index fell 0.2% on a seasonally-adjusted basis in July, the third drop in a row. The 20-city annual home price inflation rate was roughly unchanged at 5%.

World – After seeing a GDP contraction in Q2, Japan could have been in a technical recession with another decline in the third quarter. The Tankan survey indeed showed a decline in the index of large manufacturers in Q3 from 15 to just 12. The loss of momentum was confirmed by hard data for August such as declining industrial production, flat retail sales and a one-tick increase in the jobless rate to 3.4%. China’s government measures of the ISM for September confirmed factory activity is contracting (albeit at a slower pace than in the prior month), although the non-manufacturing sector continues to expand. In the Eurozone, the jobless rate was unchanged at 11% in August as declines in Germany (to just 4.5%), Italy and Spain, offset increases in France (to 10.8%), Portugal and Finland. The preliminary estimate of CPI for September showed the eurozone’s annual inflation rate falling to -0.1%. The annual core inflation rate was unchanged at 0.9%, but has been at 1% or below for two years now.

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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