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A litany of weak data and problem areas in the North American economy

09/16/2011 by Alex Carrick, RCD Canadian Chief Economist

Canada’s “real” (i.e., after-inflation) gross domestic product (GDP) change in the second quarter was -0.4% (quarter to quarter seasonally-adjusted and annualized), according to Statistics Canada.

Therefore, it wasn’t surprising to learn industrial capacity utilization nation-wide pulled back slightly from 78.9% in Q1 to 78.4% in Q2. That brought to an end seven straight quarterly increases.

Plant usage rates fell in 15 of 21 major manufacturing industries between the first and second quarters of this year. Transportation equipment, which includes motor vehicles, had the biggest negative impact on the overall number.

July new motor vehicle sales in Canada, in units, fell 6.2% from the month before. That left them 1.5% below July 2010.

Passenger car sales have had a particularly bumpy ride. In the latest month, they declined 6.7% from the preceding period and were down 4.3% when compared with July of last year.

Van, truck and bus sales also recorded a drop in July versus June (-5.9%), but they remained slightly up (+0.7%) on a year-over-year basis.

Total motor vehicle sales have recovered less than half of their peak-to-trough decline during the fall-2008 to summer-2009 recession.

The timing of the recent recession now has to be specified since there is about an even chance Canada will slip into a second recession imminently. It’s likely to occur, in a technical sense, in the third quarter we’re presently living through.

At least two quarters in a row of negative real GDP change is what’s often adopted as the definition of a recession.

Canada needs some external economic help that does not appear to be forthcoming.

U.S. retail sales in August were flat month to month, although they did remain +7.2% year over year. Motor vehicle sales in the U.S., which make up 17% of the total, were -0.3% month to month but +6.4% year over year.

U.S. motor vehicle sales are important north of the border since they are often fulfilled by Canadian manufacturers.

The two biggest gainers among U.S. retailers so far this year have been gasoline stations (+21.9%) and non-store retailers (+11.6%).

The former can be explained by the hike in gasoline prices (+32.4% year over year in the latest inflation report).

The latter reflects the growth in transactions carried out over the Internet.

Backing up for a second, maybe the hike in the price of gas is a good explanation for the rise in web sales. People are doing more of their shopping from home.

On the subject of prices, the U.S. all-items Consumer Price Index (CPI) in August rose to a disconcerting +3.8%. There has been a steady upward progression in the inflation rate throughout this year.

A figure closer to +2.0% is desirable on a long-term basis.

The price of food served at home jumped 6.0% year over year. New vehicle prices were +3.8% year over year, the same as the all-items rate, and used cars and trucks were +5.4%.

The surge in prices does not induce confidence at a time when the economy is so weak and jobs, never mind income growth, are hard to come by.

In fact, the latest weekly initial jobless claims figure recorded an increase to 428,000 from 417,000 at the beginning of September.

The number of first-time unemployment insurance seekers needs to be below 400,000 on a consistent basis for the U.S. to make much progress in reducing the jobless rate from its current nose-bleed spot above 9.0%.

Looking back over this article, it sketches a litany of weak data and problem areas in the economy.

Canada is particularly affected by the extra slack in the U.S. economy. But it also won’t help this nation’s prospects if the slowing world economy takes more lustre off the price of commodities.

Emerging world growth has sustained demand for Canada’s raw materials at a time when other developed nations – the U.S., Japan and Europe - have struggled with their domestic scenes.

Furthermore, it’s been the nature of that domestic struggle that has been such a surprise and disappointment.

It’s now a toss-up whether industrialized nations are being worse served by structural economic problems or by electorates and politicians that are having trouble grasping the big issues.


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