Canada: Real GDP fell 0.2%

Week in review

Canada – Real GDP fell 0.2% in May for a fifth decline in a row. Goods producing industries saw a 0.6% drop in output as declines for mining, oil & gas, manufacturing and utilities dwarfed increases for construction and agriculture. Industrial production fell 1.2% as a result. The services sector's output also fell 0.1 % as declines in wholesaling, finance/insurance, information/culture, education and health more than offset gains in retailing, accommodation/food services and real estate. All told, growth came in much weaker than the flat print expected by consensus. While there were the expected declines from manufacturing, energy and wholesale, the breadth of the declines in services came a bit as a surprise. It will now take more than 1% growth in June to prevent second quarter GDP from falling. So, odds are that Canada’s economy contracted for the second straight quarter in Q2.

The Survey of Employment, Payrolls and Hours (SEPH), a survey of establishments (unlike the Labour Force Survey which surveys households), showed that Canada gained 16K jobs in May. The SEPH has averaged 16K jobs/month this year, matching the LFS’s paid component. While employment has shown resilience, that hasn’t been the case for wages. Weekly earnings fell in May, taking the year-on-year wage growth down to just 1.4%, the lowest since October 2013. Annual wage growth topped the national average in management (up almost 15% year-on-year) followed by transportation/warehousing (+3.8%), retail and manufacturing. The worst wage performances were not surprisingly in mining/oil/gas (-4.4% year-on-year), although there were also sharp declines in arts/entertainment and construction.

United States – The Bureau of Economic Analysis’ advance estimate of Q2 GDP growth came in at +2.3% annualized. Domestic demand was supported by consumption spending, residential investment, and government spending (not federal). Trade also contributed to growth for the first time in three quarters. Inventories were a drag on growth, meaning that final sales, i.e. GDP excluding inventories, grew slightly faster than GDP, i.e. 2.4%. Nominal GDP grew 4.4% annualized, the fastest pace in three quarters. As is the case once a year, there were revisions going back three years. The most notable change was the massive downgrade to 2013, although that’s old news now.

The Fed will be interested in the 2015 outlook which is looking much better than first thought thanks to upward revisions to the first quarter (partly due to improvements to the BEA’s seasonal-adjustment methods) and Q2’s decent performance. If, as we expect, second half growth averages 3-3.5% ― not a stretch by any means considering sound fundamentals for consumption in particular ― the US economy should grow around 2.5% this year, half a percentage point above the upper range of the Fed’s central tendency forecasts for 2015.

The durable goods report showed new orders rising a consensus-topping 3.4% in June. However, the prior month was revised down to -2.1% (from -1.8%). In June, transportation orders jumped 8.9% thanks to sharp gains for civilian aircrafts and small gains for autos/parts. Excluding transportation, orders rose a consensus-topping 0.8%, although here too there was a downward revision to the prior month to -0.1% (initially reported as +0.5%). Orders of nondefense capital goods excluding aircrafts were up a healthy 0.9% in June. That bodes well for Q3 shipments.

The 20-city Case-Shiller home price index fell 0.2% on a seasonally-adjusted basis in May, the second drop in a row (April was revised down from +0.3% to -0.03%). That caused the 20-city annual home price inflation rate to fall slightly to 4.9%.

The Conference Board’s consumer confidence index fell to 90.9 in July from a downwardly revised print of 99.8 in the prior month. The drop in confidence to the lowest since September last year was due to perceptions about both the present situation (sub-index falling to 107.4, a two-month low), and economic prospects (sub-index sinking to 79.9, a multi-month low). Consumers were less optimistic than in the prior month about prospects for business conditions, employment and income. They were, however, more enthusiastic than in the prior month about buying homes and major appliances.

Markit’s flash/preliminary estimate of the services purchasing managers index rose to 55.2 in July (from 54.8 in the prior month). A reading above 50 implies expansion in the services sector. The increase was attributed to an improving economy and better spending by clients. Growth in new work rose to a three-month high, while employment remained strong.

Weekly jobless claims data showed initial claims rising 12K to 267K in the week of July 25th. The more reliable 4-week moving average fell to 275K. Continuing claims for the prior week rose 46K to 2.26 million.

As expected, the Federal Reserve left monetary policy unchanged at its July meeting. Although the statement was little changed, the Fed recognised that the underutilization of labour resources continues to diminish thanks to “solid” job gains and declining unemployment. The Fed also acknowledged “additional improvement” in the housing market and “moderate” growth in household spending, although business investment and exports remained soft. Risks to the outlook remained “nearly balanced”. The Fed anticipates annual inflation rate will remain low over the near term but it still expects it to rise gradually towards 2% over the medium term. For the fifth straight meeting, the decision to hold rates steady was unanimous.

The FOMC again said it anticipates raising the fed funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term. By highlighting the continued improvement in the labour market, i.e. the “solid” job gains, and also shrugging off the further slump in energy prices in recent weeks ― it still anticipates inflation will rise gradually towards it 2% target over the medium term ― the Fed opened the door a bit wider for a rate hike this year.

While soft wages, low inflation and downside risks to the global economy all call for more patience on rates, strong employment creation and financial stability concerns argue for the Fed to start its tightening cycle sooner rather than later. Markets are currently pricing in a small probability of a September hike, although that would rise if there are upside surprises on employment reports for July and August.

World – Japanese data for June showed a healthy increase for industrial production and housing starts but a small drop in retail sales. The jobless rate edged up to 3.4% while the annual inflation rate fell one tick from 0.5% to 0.4%. In the Eurozone, the jobless rate rose one tick to 11.1% in June, while the preliminary estimate of CPI for July showed the annual inflation rate creeping up to 1%. In the UK, GDP grew 2.6% annualized in the second quarter (or 0.7% unannualized).