Construction Forecasts

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Supply chain disruptions and U.S. fiscal problems put temporary chill on outlook

06/24/2011 by John Clinkard

The recent, larger-than-expected drop in the U.S. Institute for Supply Management’s (ISM) Purchasing Managers' Index (PMI), plus the news that the U.S. economy added far fewer (54,000) jobs in May than had been projected (165,000), has clearly sent shivers through North American financial markets.

These statistics have economists in both Canada and the United States taking a hard look at their crystal balls with a view to scaling back their forecasts of growth.

While these weak indicators definitely reflect subpar economic activity in the United States in the second quarter, in part due to the supply chain problems caused by the Japanese tsunami in March, a number of more forward looking economic indicators both within the United States and outside it suggest that global economic activity will pick up some steam during the second half of the year.

The decline in the U.S. manufacturing PMI, together with the drop in U.S. manufacturing orders, indicates that U.S. goods production is suffering. However, the increase in the U.S. Non-manufacturing ISM index, and positive growth of employment in services suggests that service producing industries are continuing to make headway.

Further according to the U.S. Conference Board, online advertised job vacancies rose by 148,000 to a pre-recession high of 4.47 million in May. This suggests the employment growth in the U.S. should strengthen over the near term.

Outside the U.S., while the leading economic indicators do not appear to be as bright as they were late in 2010, they are still flashing green. For example, after a 0.5% decline in March the US Conference Board’s Leading Economic Index for the Euro Area increased by 0.4% in April.

In Canada, following a sharp drop to 58.8 in April, the Ivey Purchasing Manager’s Index (PMI) exhibited a healthy gain in May. Meanwhile the Statistics Canada Composite Leading Index rose by 0.8% to its highest level ever. This was its second strongest gain since September 2010 and followed a 0.6% rise in March.

Looking forward, it appears that the uncertainty surrounding the ongoing sovereign debt crisis in Europe and the U.S. fiscal situation will continue to overshadow the near term outlook.

However, as the effects of supply chain disruptions are resolved and given the exceptionally stimulative financial conditions in both Canada and in the U.S., growth in both countries should strengthen in the second half of the year.

Canada and U.S. Purchasing Managers’ Index
Canada and U.S. Purchasing Managers’ Index
Data Sources: PMA of Canada, Richard Ivey School of Business, and US Institute of Supply Management/Chart: Reed Construction Data, CanaData.

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