The durable goods report showed new orders jumping 4.4% in July

Week in review

Canada – Operating profits of corporations totalled $72.9 billion in the second quarter, down 15.3% compared to the same quarter last year. That’s the worst year-on-year performance since the 2009 recession. Financial industries saw operating profits plummet almost 29% on a year-on-year basis in part due to Alberta’s wildfires which increased insurance claims, while operating profits of non-financial industries were down 7.6%.

Wholesale sales jumped 0.7% in June as gains for sellers of autos, building materials, personal/household goods, and machinery and equipment, more than offset declines for wholesalers of food/beverage, farm and miscellaneous items. In real terms, wholesale sales were up 0.6%, a fourth monthly increase in a row. The volume increases coupled with earlierreported gains in factory shipments should help boost June GDP.

The Survey of Employment, Payrolls and Hours (SEPH), a survey of establishments (unlike the Labour Force Survey which surveys households), showed an increase of 53K jobs in June. That’s the biggest monthly increase in two years. In the first half of the year, the SEPH averaged +13K jobs/month, matching the LFS’s paid component. Weekly earnings rose 0.4% in June although that was not sufficient in preventing the year-on-year wage growth from falling to just 0.5%.

United States – The durable goods report showed new orders jumping 4.4% in July, erasing the prior month’s 4.2% drop. Transportation orders surged 10.5% thanks to sharp increases for civilian aircrafts (+90%) while orders of autos/parts were flat. Excluding transportation, orders were up 1.5%. Total shipments of durable goods rose 0.2%, but those of nondefense capital goods ex-aircraft fell 0.4%, a third decline in a row.

Existing home sales fell 3.2% in July to a four-month low of 5.39 million units. The decrease was largely due to multi-family units (-12.3%), although singles also saw declines (-2% to 4.82 million units). The months supply of homes at current sales rate rose to 4.7 as a result of the poor sales. The median resale price declined to $244,000, but remains 5.3% higher than year-ago levels (+5.4% for singles and +4.1% for multis). Only 21% of sales were made to cash buyers (a multi-month low), while the share of distressed homes in total sales was just 5%, the lowest in years.

New home sales of single family homes surged 12.4% to 654K in July, the highest since October 2007. The months supply of homes at current sales rate fell from 4.9 to a three-year low of 4.3 as a result. However, the median sale price fell to $294,600 (down 5% in the month or -0.5% on a year-on-year basis).

Markit’s flash/preliminary estimate of the manufacturing purchasing managers index ended up at 52.1 in August, down from up from 52.9 the prior month. A reading above 50 implies expansion in manufacturing activity. The new orders and employment sub-indices expanded at a slower rate than the prior month, while output growth accelerated to a nine-month high. Employment growth decelerated to its weakest pace in four months with firms mentioning that “efforts to raise efficiency had weighed on overall jobs growth”.

Markit’s flash estimate of the services purchasing managers index was 50.9 in August, down from 51.4 the prior month. The decrease is attributed to a slower increase in new business. As Markit puts it: “This contributed to a renewed slowdown in job creation during August, with payroll numbers rising at the least marked rate since December 2014. Some firms reported that subdued demand conditions and the need to cut costs had led to more cautious staff hiring plans and the non-replacement of leavers.”

The Bureau of Economic Analysis’ second estimate of Q2 GDP growth came in at a consensus-matching 1.1% annualized, down from the advance estimate of 1.2%. The major sources of the downgrade were exports, residential investment, government spending and inventories which more than offset upgrades to consumption and business investment. While GDP growth was revised down one tick in Q2, leaving first half growth at 0.9%, i.e. the worst semester since 2012, we’d argue that the composition of this report is better than the advance one presented about a month ago. For one, domestic demand grew in Q2 at a faster pace than what was initially reported. Secondly, the downgrade was largely due to inventories. In other words, destocking was even more brutal than first thought in Q2, and hence that raises the odds of a big jump in future production to rebuild inventories. We continue to expect Q3 GDP growth to be north of 3.5% annualized.

World – Flash manufacturing purchasing managers indices for the month of August were released by Markit for a range of countries. Japan’s PMI rose to 49.6 (from 49.3 the prior month). While new orders and employment contracted, output moved into expansion mode for the first time since February. The eurozone’s PMI fell to a three-month low of 51.8 as gains in France more than offset declines in Germany (although both countries are in expansion mode). Markit also released services purchasing managers indices for August, with the eurozone’s measure jumping to a three-month high of 53.1.

July data in Japan showed the CPI annual inflation rate remaining unchanged at -0.4%. The annual core CPI (excluding alcohol, food and energy) fell to just 0.3%, the lowest since 2013.

Global trade volumes contracted for the second consecutive quarter in Q2, highlighting weak overall demand. Industrial production grew last quarter as higher output in emerging markets more than offset declines in advanced economies. But because sales remained soft, much of that extra output went into inventories. So much so that the ratio of industrial production to exports in emerging economies surged to its highest level since the 2009 global recession. That does not bode well for production and hence economic growth in emerging markets in the second half of the year, particularly if exports remain weak.

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