A Summer’s Drive Around Economy Land

07/16/2013 by Alex Carrick

Economy-watchers have just seen an example of that old headline-grabbing adage, “Tail Wags Dog”. The former is the stock market and the latter, the Federal Reserve.

The Fed recently indicated it might begin “tapering” bond purchases as early as this fall. The anticipated dip in demand for U.S. government debt notes caused the yield on 10-year Treasury Bills to shoot up near 2.70%.

Since other national governments must compete with the U.S. to attract investment funds, their long-term rates rose as well.

Stock market investors expressed dismay about the implications for the economic outlook by selling shares.

In short order, Chairman Ben Bernanke felt compelled to reassure markets that the Fed wouldn’t act too quickly to remove its quantitative easing and that the key trend-setting federal funds rate would remain at a record low, between 0.00% and 0.25%, for a great deal longer.

Investors breathed a sigh of relief. Their frowns turned upside down. Smiling once again, they drove the DJI and S&P 500 indices to new all-time highs in mid-July.

Embracing another well-worn cliché phrase, the squeaky wheel got the grease.

U.S. monetary stimulus remains intact for the moment and the nature of the recovery is still officially being presented as fragile 

But how are the U.S. and Canadian economies really doing? There’s only one good way to find out. Let’s take a summer’s drive around Economy Land and explore the sights.

The sun’s rising higher in the sky, there’s a warming breeze in the air and the days are stretching out nicely.

A good place to start is auto sales. Private sector assessments are positive in both countries, although more so in the U.S. than in Canada.

According to Autodata Corporation, unit sales of light vehicles in the U.S. were +7.7% through the first half of this year versus the same January to June period of last year. Light trucks (+11.2%) outperformed passenger cars (+4.5%).

All three North American-based automakers scored gains above the industry average: Ford, +13.1%; Chrysler LLC, +8.9%; and General Motors, +8.0%.

Ranked by unit sales, GM at 1.420 million was in first place ahead of Ford’s 1.290 million. Third spot belonged to Toyota with 1.109 million units. Chrysler was fourth with 908,000 units.

In Canada, DesRosiers Consultants has calculated that light vehicle sales so far this year have been +2.2% compared with the first six months of last year. Light truck sales have been up significantly, +5.9%, while passenger car sales have struggled, -2.2%.

North of the border, Ford is number one in unit sales (147,000 units and +3.2% year to date), followed closely by Chrysler/Fiat (139,000 units and +7.0%). GM sits third (121,000 units and +3.6%), with Toyota (90,000 units and -1.1%) next in line.

If Canada’s economic health deteriorates this year, a possible infection site is supposed to be housing starts. After faltering badly at the beginning of this year (only 161,000 units seasonally adjusted and annualized), they crossed back above 200,000 units in May and were still elevated in June at 199,600 units.

The annual figure for new home groundbreakings in 2012 was 215,000 units.

As set out in Canada Mortgage and Housing Corporation (CMHC)’s latest press release, nation-wide year-to-date single-detached unit starts were -7% in June versus 2012’s first half, while multiples were -22%.

The year-to-date total average so far this year has been -15.4%, with most of the decline being front-end loaded.

The final results for the year will depend largely on whether or not multi-unit starts in Toronto “land softly”. In the latest June, they were -17.4% versus May; -23.0% versus June of last year; and -42.8% year to date compared with the first six months of 2012.

It seems clear that the city’s condominium developers are scaling back their building intentions.

Among the nation’s major urban centres, another notable set of statistics is the 46% year-to-date increase in Edmonton’s housing starts compared with Calgary’s 21% decline. Recent devastating flood damage in the latter city will diminish some of that discrepancy.

There will soon be an uptick in Calgary residential starts to restore living quarters for families driven out of their accommodations by the downpour. The extent of the harm is in the billions of dollars ‒ maybe as high as $5 billion, according to some estimates.

Insurance companies may baulk at paying for restitution caused by “overland flooding”, which is excluded in most homeowner policies. But Alberta’s Premier, Alison Redford, has promised public money to pick up the tab for repair and replacement costs.

A serious weakening in demand for residential real estate is likely to show up quickly in home prices. So far, there has been little to worry about.

Statistics Canada’s New Housing Price Index (NHPI) in May was +0.1% month to month and +1.8% year over year. The leaders among the cities were Winnipeg (+5.8%) and Calgary (+5.3%). The only declines were recorded in Vancouver (-0.9%) and Victoria (-0.7%).

As for sales of existing homes, tighter mortgage lending rules introduced by the Minister of Finance and an upward shift in mortgage rates have caused their actual number to be -6.9% in the first half of this year versus the first half of last year, according to the Canadian Real Estate Association (CREA).

But prices have continued to find support. The national average sales price this June was +4.8% versus a year ago and a more restrictive measure that omits untoward upward variation from especially-high priced homes in some markets (e.g., Vancouver) was +2.3%.

Another source of concern about the Canadian economy has been the manufacturing sector. Most analysts expected sales to decline in May, exacerbating April’s woes (-2.4% month to month). Instead, they rose 0.7%.

The text in Statistics Canada’s press release on manufacturing highlights strong fertilizer sales by the chemical sector, +5.1% month to month and +4.2% year over year. It’s noted that on account of unusually wet and cold weather earlier this year, spring planting commenced later than usual.

It’s also informative that wood product sales this May were 26.5% higher than in 2012’s same month. The long-awaited revival in U.S. housing starts is having a beneficial spillover effect in Canada.

The overall strength in the U.S. economy, combined with some easing in the value of the Canadian dollar versus the greenback, is helping manufacturers with their export sales.

Statistics Canada also makes special mention of a strong advance in unfilled orders by the aerospace products and parts industry. At $39.0 billion, they were at their highest level ever. Quebec accounts for two-thirds of Canada’s aircraft export sales.

We’ve been driving along for a while now and the view, if not spectacular, has been quite pleasant. Good memories have been accumulating. Let’s end our road tour with another upbeat side-trip.

U.S. total retail sales in June were +0.4% month over month and +5.7% year over year. The underlying SAAR data is in current (i.e., not adjusted for inflation) dollars.

A year-over-year retail sales gain of 5.0% or higher is a noteworthy positive benchmark. It means consumers are fully engaged and confidently setting out to improve their lifestyles.

Some of the sub-sector leaders show product areas of particular interest to shoppers at this time.

Sales by motor vehicle and parts dealers this June were +11.4% year over year.

Building material and garden equipment suppliers saw revenue climb 9.4% versus a year ago.

And non-store retailers (i.e., the Internet and catalogues) recorded a gain in year-over-year purchases that was in double digits, +13.8%.