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Canada’s GDP Advanced a Timid 0.1% in May but Support Will Come from Better U.S. Home Prices

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Alex Carrick

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Alex Carrick is Chief Economist for Reed Construction Data. He specializes in economic forecasting and statistical services.

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Canada/'s gross domestic product (GDP) advanced only 0.1% in May. In large measure – with Europe so weak, China struggling (relative to its recent past) and many commodity prices in retreat – the economic outlook for Canada continues to hinge on how well the American economy performs.Two recent indicators suggest movement in the right direction.

On the heels of a 0.3% increase in April, gross domestic product (GDP) advanced a timid 0.1% in May, according to Statistics Canada. Services (+0.1% month to month) provided the forward momentum while goods production stayed flat (0.0%). The service sector makes up 71% of industry-based GDP, with goods production accounting for the other 29%. The percentage changes are in “real” (i.e., inflation-adjusted) dollars, also commonly referred to as “constant” dollars. (The base year for prices is 2002 set equal to 100.0.) Growth in the first five months of this year has been lukewarm, averaging less than 1.0%. The latest three-month moving average percent change has been +0.2% thanks to April’s bump in the curve. Within services, the major contributors to growth in the latest month were retail trade (+0.7%) and accommodation and food services (+0.6%). Arts, entertainment and recreation (-1.7%) took it on the chin more than any other sector. With respect to goods production, mining and oil and gas extraction (+0.6%) advanced nicely, but manufacturing suffered a setback (-0.5%). The year-over-year GDP change in May (+2.4%) was acceptable if unspectacular. The gain derived more from goods production (+3.7%) than services (+1.8%). The present increase of +2.4% is likely to moderate to about +2.0% for the year as a whole, with growth continuing to be sluggish at best. In large measure – with Europe so weak, China struggling (relative to its recent past) and many commodity prices in retreat – the economic outlook for Canada continues to hinge on how well the American economy performs. Two recent indicators suggest movement in the right direction. The U.S. economy may not be roaring ahead, but it is making headway. And the small forward motion will provide a foundation to build on over time. The S&P Case-Shiller existing-homes price indices, both the 10- and 20-city composites, rose 2.2% in May over April. The year-over-year change was -1.0% for the 10-city composite and -0.7% for the 20-city composite. The year-over-year declines notwithstanding, resale home prices have been edging higher since February-March. For example, among the 20 major cities that are monitored by S&P Case-Shiller, there were no month-to-month declines in May. The smallest increase was recorded by Detroit, only +0.4%. There were a number of sizable gains, led by Chicago (+4.5% month over month), Atlanta (+4.0%) and San Francisco (+3.9%). On an annual basis, Atlanta continued to have the only price level that was down by a double-digit percentage rate in the latest period. But the extent of the decline in May at -14.5% was an improvement over April’s -17.0%. The largest percentage increase year-over-year was chalked up by Phoenix. Phoenix is beginning a long trek back from a very depressed price level initiated by the recession and maintained long afterwards. Resale home prices in that city are still only about half what they were at their previous peak. But that’s still better than Las Vegas where the peak-to-trough drop remains 60%. Next to Phoenix, other large annual percentage increases in May were recorded by Minneapolis (+4.7%), Dallas (+3.8%), Denver (+3.7%) and Miami (+3.4%). Home prices that are returning to firmer ground will play a key role in healing the confidence of consumers. The value of one’s home is the bedrock for assessing one’s sense of financial well-being. The U.S. Conference Board’s latest consumer confidence index ticked slightly upward in July, to 65.9 from 62.7 in June. The “expectations index” also improved, from 79.1 to 73.4, while the “present situation index” stayed essentially flat, moving minimally to 46.2 from 46.6. In the latest survey, consumers were generally more optimistic that both business conditions and employment prospects will improve over the next six months. Given the strong trading relationship we have with the U.S., this is good news for Canada as well. I mentioned earlier that weaker-than-desirable commodity prices are hobbling output in many raw materials sectors. But it’s not across the board. There is one notable exception. Due to drought conditions not only in the U.S. Midwest but in many other parts of the world, agricultural prices are on a tear. Wheat and corn prices are up nearly 50% from late spring and soybeans by one-third. Canola, which has become the nation’s largest crop, is trading at a record high. So far – keeping our fingers crossed and being thankful for the rain that has blessedly fallen – Canadian farmers haven’t been negatively affected to anything like the same degree as their brethren in some other countries. Speaking of which, there is currently a thunderous deluge outside my window as I’m finishing this article. Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.

by Alex Carrick

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