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Canadian retail sales were solid in September but U.S. politics still a sore spot

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The total value of retail sales in Canada increased 1.0% between August and September, according to Statistics Canada. That was the fifth increase in the past six months.

The total value of retail sales in Canada increased 1.0% between August and September, according to Statistics Canada. That was the fifth increase in the past six months.

Total retail spending in September was $38.2 billion, a new all-time high. It was 5% higher than its peak before the recession in September 2008 and 14% higher than when it reached its low-point in the recession in December 2008.

In the latest month, motor vehicle sales were strong (+2.8% period to period), as were electronics and appliance store sales. In the former category, new car dealerships (+3.7%) recorded about the same level of increase as did used car dealers (+3.5%).

Year over year, however, used car sales (+5.7%) have outperformed the new car market (+4.5%). It should be kept in mind that there is a huge disparity between the dollar volume sales of new cars ($6.8 billion in the month, seasonally adjusted) versus used cars ($500 million).

Year-over-year total Canadian retail sales were +4.2%, a decent-enough performance. But it does pale next to the U.S. experience. October retail sales south of the border were +7.6% compared with the same month a year ago.

Speaking of electronic and appliance store sales, U.S. spending in that category was aided in October by the introduction of Apple’s upgraded iPhone. That was a welcome shot in the arm.

There are other forces at work that may serve to rein in U.S. consumer spending in the year ahead.

Specifically, gridlock in Washington may spill over from the government sector to affect the ability of consumers to maintain spending. This threat has been brought on by failure of the so-called bipartisan “super-committee” to come up with a credible deficit reduction plan.

The debt-limit impasse in August was overcome by establishment of a 12-person bipartisan committee (six Democrats and six Republicans) to find $1.2 trillion in accumulated deficit cuts over the next 10 years.

During the past several months, some among government and the media have been calling for the super-committee to “go big” and reduce debt accumulation by $4 trillion. It hardly needs saying how unrealistic that goal has turned out to be.

Should the super-committee fail to reach an agreement – an event which has transpired – an automatic “trigger” mechanism would take effect. This would see across-the-board spending cuts beginning in 2013.

Note the timing. That’s after the next Presidential election. Such cuts would be applied in equal measure to both domestic and defense programs.

Partisan politics is being blamed for the failure to reach an accord. The Republicans won’t tolerate tax increases in any guise and the Democrats are staunchly defending social security while insisting the rich contribute more to government revenue.

A decision on which way to move – spending cuts or tax increases – has been shifted beyond the next election. The problem is being offloaded onto voters.

This sets a remarkable precedent. Effective governance in the U.S. now lasts about two-and-a-half years. In the final year-and-a-half of a Presidential term, the campaign for the next election brushes aside all other concerns.

(In practical terms, as has just been demonstrated and depending on the swing in a mid-term election, effective governance can last as short as two years.)

There are several incentive tax breaks that are set to expire upon the turn of the year. Chief among these is the payroll tax cut, which is of benefit to millions of middle and low-income American wage-earners.

The question of whether or not unemployment insurance benefits will be extended is also of crucial importance for many people.

Should these measures fail to survive, the overall ability of consumers to finance purchases from income will be reduced.

The optics may look especially bad, with a tax break for the nation’s wealthiest citizens being granted a reprieve as part of the earlier budget negotiations.

With respect to defense spending, there are many Republicans and Democrats who don’t want further steep spending cuts at the Pentagon. The nation’s military leaders have already been assigned the task of trimming nearly half a billion dollars in expenditures as part of earlier initiatives.

President Obama has said he will veto any efforts to alter the legislation authorizing the automatic cuts as required under the “trigger” provisions. Who knows if he’ll stay the course?

This has a number of important implications for Canada. There are the potential cuts to U.S. consumer spending that will be felt across the border through weaker export sales.

There is also a Canadian government financing issue. Economies of scale will play a role in the cost to Ottawa of acquiring F-35 fighter jets.

It’s generally conceded that Washington needs to move full steam ahead on production of the F-35 for the unit cost to be lowered below $100 million per plane.

Ottawa has so far refused to say what it has been budgeting to acquire its proposed full complement of F-35s, but it’s believed the figure is somewhere around $65 million a “pop”.

A big jump in the per-unit price may jeopardize the purchasing program. Or at least make it much more expensive, thereby weakening the long-term outlook for Canada’s savings account.  

Canadian retail sales – three months smoothed
Canadian retail sales – three months smoothed
*"Year over year" is each month versus the same month of the previous year.
Based on latest three-month averages of current dollar adjusted data (and placed in latest month).
Data source: Statistics Canada.
Chart: Reed Construction Data - CanaData.
Total retail sales in Canada
Total retail sales in Canada
Data source: Statistics Canada.
Chart: Reed Construction Data - CanaData.
Canada vs. U.S. retail sales – total
Canada vs. U.S. retail sales – total
*"Year over year" is each month versus the same month of the previous year.
Based on latest three-month averages of current dollar adjusted data (and placed in latest month).
Data source: Statistics Canada and U.S. Census Bureau (Department of Commerce).
Chart: Reed Construction Data - CanaData.

by Alex Carrick

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