Labour productivity rose 1% unannualized in Q4

WEEK IN REVIEW

Canada – Employment fell 7K in February according to the Labour Force survey. The unemployment rate, however, held steady at 7%, helped by a one-tick drop in the participation rate to 66.2% (the lowest since December 2001). The weakness in February was due to job cuts in government (-50.7K), which more than offset gains in the private sector (+35K, the first increase in three months) and self-employment (+8.6K). Paid-employment (which excludes self-employeds) was down 15.5K. The goods sector added 19K jobs, with gains in agriculture, manufacturing and resources more than offsetting declines in utilities and construction. Services sector employment was down 26K as declines in health, education, finance/insurance/real estate, professional services more than offset gains in some other categories. Full-time jobs rose 19K, while part-time employment fell 26K. Overall, thanks to gains in full-time jobs, total hours worked rose 0.4%. In the last three months, Canada has lost 22K jobs, although -29K is in Quebec. In other words, there were job gains in the last 3 months in Canada outside of the province of Quebec.

The merchandise trade deficit narrowed to just C$0.2 bn in January from a deficit of C$0.9bn in the prior month. The improvement in the trade balance was due to nominal exports (+0.2%) rising and nominal imports falling sharply (-1.6%). There were increases in exports of energy, agriculture and forestry products which more than offset declines in most other categories including the massive 11% drop for autos/parts. The decrease in imports was mostly due to the 7.3% decline in purchases of energy. The latter helped the energy trade surplus to rise to C$7 bn, the highest since mid-2008. The non-energy trade deficit widened to C$7.1 bn. The trade surplus with the US rose to C$3.6 bn, the highest in 4 months. In real terms, Canada’s exports fell 3.8%, while imports dropped 3%.

Labour productivity rose 1% unannualized in Q4, as real GDP grew 0.7% while hours worked fell 0.2%. Hourly compensation was up 1.4% unannualized, the biggest quarterly increase in years. Labour productivity in the prior quarter was revised up one tick to +0.3% unannualized.

Building permits expanded 8.5% in dollar terms in January. The increase was driven by the residential sector (+26.3%) which dwarfed the 14.6% decrease in the nonresidential sector. In the residential sector, there were increases in permits for both multis (+42.8%) and single family homes (+15%). In real terms, residential permits rose 17.4% (which reversed the losses in the prior two months) with a 20.9% jump for multis and a 11.8% increase for singles.

The Bank of Canada maintained its stance in the March statement by keeping unchanged the overnight rate at 1.00%, and the vague language with regards to rates going forward, i.e. “the timing and direction of the next change to the policy rate will depend on how new information influences this balance of risks.” The central bank acknowledged that 2013 growth was stronger than it had expected although it stopped short of saying that the output gap will close sooner than what it estimated back in January. The BoC said that fundamental drivers of growth and inflation continue to strengthen gradually just as it had anticipated. It also acknowledged the “slightly higher than expected” recent readings on inflation but maintained that it was still expected to follow the path outlined last January (i.e. below the 2% target this year). The central bank again mentioned its concern about elevated household imbalances stating that “the risks associated with elevated household imbalances have not materially changed”. However, it continues to be concerned about inflation by mentioning again that “the downside risks to inflation remain important”.

United States – Non farm payrolls were up 175K in February, beating consensus expectations calling for a gain of 150K. The two previous months were also revised up a cumulative 25K. The private sector recorded a 162K gain in February, the best showing in three months on the back of a rebound in service-producing industries (+140K). Average hourly earnings were up 0.4%, the largest increase in seven months. However, total hours worked were down 0.1% on the month. The household survey showed only 42K jobs being created, causing the unemployment rate to rise to 6.7% (from 6.6%). Full-time employment rose 163K in February, the fourth increase in a row.

The ADP employment report showed a 139K increase in February. January was revised down sharply to 127K (from 175K), putting it more in line with the private nonfarm payrolls in that month. The ADP’s job gains in February were mostly in small firms, i.e. those employing less than 50 employees, which added 59K to payrolls. Medium-sized firms added 35K while large firms added 44K net new jobs.

The ISM manufacturing index rose roughly two points to a consensus-topping 53.2 in February (from 51.3 in the prior month). While the production sub-index fell to 48.2 (the lowest since the 2009 recession), the new orders index rose more than three points to 54.5. The employment sub-index was flat at 52.3. Markit’s purchasing managers’ index of US manufacturing showed an upwardly revised print of 57.1 for February (initially reported as 56.7), up from 53.7 in the prior month. That reading, as Markit puts it, reflects “the strongest improvement in business conditions for 45 months”.

The non-manufacturing ISM index fell to a 4-year low of 51.6 in February (from 54 in the prior month). The employment sub-index slumped to 47.5, the worst reading in four years. The business activity index fell roughly two points to 54.6, but remained well in expansion phase. The new orders sub-index rose to 51.3.

Construction spending rose a consensus-topping 0.1% in January, after a strong 1.5% increase in the prior month. The increase in January was entirely due to the residential sector (+0.9%), which more than offset the non-residential sector’s 0.3% decline. Overall, construction spending is up 9.3% compared to levels of January 2013 (+13.9% for residential and +6.5% for nonres).

Personal income rose 0.3% in January while personal spending grew a consensus-topping 0.4% buoyed by services. The savings rate was unchanged at 4.3%. In real terms, spending rose 0.3%. The PCE deflator was up 0.1% in January on both the headline and the core. On a year-on-year basis the core PCE deflator was unchanged at 1.1%, while the headline measure rose one tick to 1.2%, albeit remaining well below the Fed’s 2.5% threshold.

Factory orders fell 0.7% in January, but rose 0.2% excluding transportation. The weekly jobless claims data for the week of March 1st showed initial claims falling 26K to 323K (from an upwardly revised 349K). That was better than consensus which was expecting 336K. The more reliable 4-week moving average fell 2K to 336.5K. Continuing claims for the prior week fell 8K to 2.91 million.

The trade deficit widened to $39.1bn in January, from a $39 bn deficit in the prior month. Exports and imports both rose 0.6% in nominal terms. In real terms, exports were up 0.8%, while real imports grew just 0.1%.

The Fed’s Beige Book highlighted the weather’s negative impacts on the economy in Q1, with sectors like retail and agriculture taking a hit. But real estate continued to improve, with many districts reporting low inventories and continued home price appreciation. Energy output and demand were well supported by the unusually cold weather. Manufacturing activity continues to expand, particularly in the auto sector and contacts seemed optimistic about further increases in coming months. Employment improved in most districts, but wage pressures remained stable. Inflation pressures remained largely unchanged across most Districts.

World – The European Central Bank and the Bank of England maintained their monetary policy stance unchanged in March. The ECB refrained from injecting new liquidity into the system despite a weak economy and continued problems in the banking sector ― the central bank itself lamented that “it is essential that the fragmentation of euro area credit markets declines further and that the resilience of banks is strengthened”. The ECB supported its stance to do nothing by extending its forecasts to 2016, year when it expects inflation to return near its 2% target. Indeed, while it lowered its projections for inflation this year to just 1%, it expects a pick-up to 1.3% in 2015 and 1.5% in 2016 (the final quarter of that year is pegged at 1.7%). The inflation forecasts are based on the eurozone economy growing 1.2% this year, 1.5% in 2015 and 1.8% in 2016.

Still in the eurozone, the producer price index fell further into deflation territory as the year-on-year measure sank to -1.4% in January, the worst since 2009. Retail volumes jumped 1.6% in January, erasing the 1.3% slump in the prior month. Despite those gains, retail volumes in the zone remain below levels of February 2000.

In China, the Markit manufacturing PMI for February was left unrevised at 48.5 (from 49.5 in January). In contrast, the services PMI showed a three-tick increase to 51.0 in the month.