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Latest Canadian retail sales and U.S. new home sales remained earthbound

07/26/2012 by Alex Carrick, RCD Canadian Chief Economist

Retail sales bounced back in May, rising 0.3% versus the month before, according to Statistics Canada. In April, they had declined 0.6%.

The performances in the other months of this year were: March, +0.4%; February, -0.2%; and January +0.7%.

The net effect, after taking into account the various month-to-month fluctuations, has been to leave the total current-dollar value of retail sales flat since the end of last year.

Retail sales are reported in current dollars as opposed to “constant” or inflation-adjusted dollars.

The year-over-year change in total retail sales in May was +3.1%. As recently as January, the figure was +4.9%. That’s significant because a key benchmark figure for retail sales is +5.0% year over year.

When retail sales are increasing by 5.0% and inflation is on target at +2.0% – the current pace for the “core” Consumer Price Index (CPI) – then personal consumption expenditures will lay down a good base for gross domestic product (GDP) growth.

(Core CPI omits eight of the most volatile and uncontrollable components within the CPI.)

Retail spending has been faltering of late and this does not augur well for output growth.

In the important motor vehicle and parts-making sub-sector of retail (22% of the total), sales have been trending down over the past two months, although they still remain higher (+6.6%) than for the retail category as a whole year over year (+3.1%).

The capacity utilization rate for the transportation equipment sector in the first quarter of this year was a fulsome 89.5%. It was the result of a 2.2 percentage point increase quarter to quarter and an 8.6 percentage point gain year over year.

The auto sector is the major component of transportation equipment, with airplane manufacturing and shipbuilding playing back-up roles.

The high usage rate in transportation equipment came from strong customer demand, which in turn is acting as a spur to major investments by the automakers.

Toyota plans to increase motor vehicle production levels in both Woodstock and in Cambridge. The latter project, costing $100 million, will lead to 400 more jobs by 2014.

Another factor that’s motivating Japanese carmakers to invest here is the high value of the yen. Locating production in North America eliminates that problem.

General Motors has announced planned spending of $750 million on research and development in Canada over the next five years. The automotive sector is giving every indication of being a driver of the economy going forward.

U.S. retail sales numbers are reported by the Census Bureau up to six weeks ahead of Canadian results. The latest U.S. numbers are for June. Even with the timing discrepancy, Canada is being outperformed by at least one percentage point in both total retail sales and motor vehicles. The respective percent changes south of the border in June were +4.7% and 8.2% year over year.

It appears Canadians are now taking the steps Americans have been embracing for the past several years. U.S. consumers, rudely smacked in the face by mortgage foreclosures, faced up to their debt problems and took action to clean up their finances.

Canadians, on the other hand, with backing from a still vibrant housing sector – both in terms of demand and prices – have been tardy in relinquishing their spendthrift ways.

However, the message of restraint may finally be sinking in. Plus, all the resale and new home purchase activity may have drained many families of their surplus cash.

In the U.S., the housing sector appears to be awakening. Prices have stopped plummeting and in many regions are up slightly year over year. Given the duration of the hibernation, however, some stumbling around at the bottom by a number of residential market indicators is inevitable.

For example, June new homes sales in the U.S. fell again (-8.4% month to month) after improving in seven of the preceding nine months.

The number of unsold new houses stayed the same. The net effect was to push the number-of-months inventory of unsold new home up to 4.9 from 4.5 in May.   

That’s too bad, since 4.5 was an excellent number, the lowest since October 2005.

Total retail sales in Canada
Total retail sales in Canada
Data source: Statistics Canada.
Chart: Reed Construction Data - CanaData.
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.
U.S. new home inventory – May 2012
U.S. new home inventory – May 2012
Based on seasonally adjusted data (single-family housing).
Data source: U.S. Census Bureau and U.S. Department of Housing and Urban Development.
Chart: Reed Construction Data - CanaData.

U.S. new homes sold – May 2012
U.S. new homes sold – May 2012
Based on seasonally adjusted data (single-family housing).
Data source: U.S. Census Bureau and U.S. Department of Housing and Urban Development.
Chart: Reed Construction Data - CanaData.

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