2015 Canadian Construction Overview Graphic


Fourteen Mid-March Economic Nuggets

0 71 Economic

by Alex Carrick

For the U.S. economy, it now seems that best expectations for 2016 annual 'real' (i.e., inflation-adjusted) gross domestic product (GDP) growth lie between +2.0% and +2.5%. For Canada, +1.5% or anything more would be a blessing. Ongoing sluggishness in China and Europe, as well as a huge buildup of oil and gas reserves in storage facilities, are acting as formidable drags.
Fourteen Mid-March Economic Nuggets

The construction sector in the U.S. is adding jobs at a +4.0% annual rate. In Canada, the percentage change is a disappointing -0.4%, although housing starts in February once again soared above 200,000 units annualized. U.S. new home starts have been trending upwards towards a likely final resting place close to 1.5 million units, but there have been more than a few missteps along the way. Their most recent peak was 1.211 million units in June of last year.

Against this backdrop, there are the following additional 'nuggets' to be gleaned from the latest government agency and private sector data releases.

(1) The headline figures on the U.S. jobs market have continued to be quite strong. The weekly initial jobless claims number just passed the one-year mark under the benchmark 300,000 level. The total national employment increase in February was barely shy of one-quarter million. And the unemployment rate stayed at a tight 4.9% in the latest month, the same as in January.

(2) There's a great deal more information on the economy, however, in the subset data. Most interesting and informative is to compare year-over-year jobs levels in key labor categories with the grand total increase of 1.9%. First, the bad news. Employment in legal services has flat-lined, at +0.3%. And forget about working in a video tape or disc rental store, where the number of jobs is -17.8% compared with last year. Positions in oil and gas extraction have also tanked, -8.8%.

(3) On balance, though, there's far more good news. Jobs in the motor vehicle and parts sector are +3.0% year over year. There's the same healthy percentage increase (+3.0%) for payrolls in architectural and engineering services. And the number of workers in amusement, gambling and recreation is also up 3.0%. Still, +3.0% is only preamble to some even better results.

(4) The number of jobs in hospitals is +3.7%. In accounting and bookkeeping, it is +4.8%. In the development of computer systems and the provision of design services, +4.9%. In home health care services, +5.8%. And, little surprise here, in Internet shopping and electronic auctions, +10.5%.

(5) The Purchasing Managers' Index (PMI) of the Institute of Supply Management (ISM), in January, was below 50% for the 5th month in a row. On a cheerier note, it was also above 43.2% for the 81st month in a row. History has shown that as long as the PMI is 43.2% or higher, the overall economy is expanding. But until the PMI is 50.0% or more, the manufacturing sub-sector will be in the doldrums. A PMI level of 49.5% usually corresponds with "real" (i.e., inflation-adjusted) gross domestic product (GDP) growth of 2.0%.

(6) One individual company response elicited and then set out in the most recent PMI survey report appears to capture much of what is happening overall. It reads as follows: "U.S. business demand is solid; international demand is soft." Also, an important question asked of respondents was, "What commodities are in short supply?" For the fourth consecutive month, the attention-grabbing answer was "None."

(7) All three major consumer measures compiled by Nielsen for the U.S. Conference Board retreated in February versus January. The Consumer Confidence Index (1985 = 100.0) stepped back from 97.8 to 92.2; the Present Situation Index fell from 116.6 to 112.1; and the Expectations Index slipped from 85.3 to 78.9. The press release setting out the latest results offered the following explanation for the lackluster results: "Continued turmoil in the financial markets may be rattling consumers."

(8) U.S. existing home prices continued to record decent year-over-year increases in the latest month for which data is available, December 2015. The S&P Case Shiller 10-city composite index was +5.1% compared with December 2014. The 20-city version of the index was +5.7%. The three cities with the sharpest gains, which were also double-digit percentage increases, were: Portland (+11.4%); San Francisco (+10.3%); and Denver (+10.2%). The three weakest have been: Chicago (+2.4%); Cleveland (+2.8%); and Washington (1.7%). The 10- and 20-city composite indices presently sit between 11% and 13% below their June-July 2006 summits.

(9) Okay, let's leave the U.S. residential real estate market and fly up to Canada, where some recent city resale price performances have proven shocking to the max. Vancouver's average listing price has climbed above one million dollars, to $1,083,000. That's far above second-place Toronto's $631,000. Those levels are only sidebars, though. Vancouver's most recent year-over-year resale price jump was +30.9%, or a climb of nearly one-third in only 12 months. Other outsized year-over-year leaps have occurred in: Toronto, +14.2%; Saint John, New Brunswick, +13.0%; and Victoria, +11.4%.

(10) Thanks largely to the heavy weighting of results from Vancouver and Toronto, the Canada-wide year-over-year average resale price increase in January, according to the Canadian Real Estate Association (CREA), was +17.0%. That's not to say that the price change in every city north of the border has been stellar. Several urban centers where the local economies have stalled on account of poor global trade and low resource prices have experienced significant setbacks. Edmonton (-6.3%) and St. John's (-11.3%) in the energy-rich provinces of Alberta and Newfoundland/Labrador are the primary examples.

(11) The Federal Open Market Committee (FOMC) of the Federal Reserve, as it ponders whether or not a further hike in interest rates is warranted, is on the lookout for signs of supply strain in the economy. Earnings, both hourly and weekly, have been creeping a little higher into the +2.0% to +3.0% range, which is a smidge faster than the current 'core' inflation rate of +2.2%. But another key measuring stick, the capacity utilization rate data set, remains loose. In January of this year, total U.S. industry was operating at 77.1% of capacity, down from 78.7% a year ago. For the manufacturing sector, the current capacity utilization rate is the same as in January 2015, 76.1%.

(12) There is a 43 year history of the capacity utilization rate numbers published by the Federal Reserve. For total industry, the average during that span of time, from 1972 to 2015, is 80.0%. For manufacturing, it is 78.5%. In the 2008-2009 Great Recession, the low level marks were 66.9% for total industry and 63.9% for manufacturing in the U.S. Obviously, much progress has been made since then, but there's a journey of at least a few steps still to complete.

(13) U.S. manufacturing sub-sectors with January 2016 capacity utilization rates of 80% or higher – i.e., that level at which firms in an industry first entertain the notion of expanding facilities – are as follows: food, beverage and tobacco products, 80.1%; fabricated metal products, 80.6%; furniture and related products, 80.8%; plastics and rubber, 81.2%; paper, 81.3%; and petroleum and coal products, 83.4%.

(14) Upstairs from America, and perhaps aided by the low-valued loonie, the capacity utilization rate figures calculated by Statistics Canada are more vibrant. The latest results are for Q4 2015 and they show total industry at a semi-robust 81.1%. Furthermore, manufacturing's 83.3% is close to its peak. Four sub-sectors have even managed to climb above 90% and they are: forestry and logging, 90.9%; paper, 98.2%; transportation equipment (i.e., cars, boats and planes), 97.8%; and wood products, 99.3%. The latter near-as-can-be-to-100.0% figure has resulted not only from production increases, but also a lack of new investment since 2008, according to the federal government's statistical reporting agency. 'Mining and quarrying', however, is operating at only 70.5% of capacity in the land of maple leaves and Mounties and oil and gas extraction languishes at 78.3%.

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