Canada’s GDP Growth Matches U.S. but TSX Share Prices Lack Sparkle

06/03/2013 by Alex Carrick

Two of North America’s four major stock market indices reached new all-time highs in May with the Dow Jones Industrials (DJI) climbing to 15,542 and the S&P 500 to 1,687.

NASDAQ reached 3,532, its best level in more than a decade. While it’s still considerably below the all-time peak of 4,696 achieved in the dot.com boom of early-2000, a return to that pinnacle, which once seemed unattainable, is now back within striking distance.

At May’s closing, the S&P 500 (+24.5%), NASDAQ (+22.2%) and DJI (+22.0%) were up one-fifth to one-quarter on a year-over-year basis. Versus their recessionary lows, which occurred in February 2009, NASDAQ was +151%, the S&P 500 +122% and the DJI, +114%.

By comparison with its American cousins, the Toronto Stock Exchange (TSX) has been a laggard. Its year-over-year performance is a relatively modest +10%. And where the other three indices have more than doubled since early 2009, the TSX has increased only 56%.

The poor performance of the TSX is due in large measure to one global phenomenon, a dimming of the spotlight on global demand for commodities.  

The U.S. economy is taking a turn shining at centre stage. In doing so, there’s a positive spillover effect for Canada that may be going unrecognized and undervalued.

The first quarter gross domestic product (GDP) growth rate in the U.S. was recently revised down in the “second” estimate to +2.4% from +2.5% in the “preliminary” version. The Bureau of Economic Analysis (BEA) releases three estimates, staggered in a monthly progression, for each quarter’s GDP. There will be a “final” estimate for Q1 at the end of June.

The U.S. consumer confidence index (76.2) as calculated by the Conference Board, now stands at its highest level in five years, dating back to February 2008 (76.4). A year later, in February 2009, the figure touched bottom in the recession at 25.3.

But here’s the surprising news. Canada’s growth rate in 2013’s first quarter exceeded the U.S., if only by the smallest of margins.

Canada’s “real” (i.e., adjusted for inflation) first quarter 2013 GDP growth rate was recently reported by Statistics Canada as +2.5% seasonally adjusted and annualized (SAAR).

The strength in Canada was almost entirely in the external sector. Final domestic demand rose only 0.4% quarter to quarter annualized.

Consumer spending was weaker than usual, +0.8%, the slowest rate of advance since the first quarter of 2009 (-1.2%) when the recession caused nearly everyone to shun spending.

There was a decent increase in semi-durables expenditures (+4.5) in Q1 and a modest rise in the consumption of services (+1.6%), but both durables (-0.4%) and non-durables (-0.8%) retreated.
The most important sub-category within durables is motor vehicle sales.

Private sector investment in residential structures declined 4.7%, the worst performance for this category since the third quarter of 2010 (-5.9%). Housing starts have eased to only 175,000 units (SAAR) in the latest month from a figure of 215,000 units for all of 2012.

Investment in non-residential structures rose modestly, +1.6%, while purchases of machinery and equipment fell slightly, -0.8%. The latter are often imported. The Canadian dollar has been in modest decline, now sitting near 97 cents U.S. This raises the cost of cross-border purchases.

On the plus side, the business sector returned to stockpiling inventory (+$2.2 billion) after allowing them to decline by $10 billion in the final quarter of last year.

The generally lackluster domestic figures give way to more exciting numbers when the GDP analysis is widened to include foreign trade.

The growth rate for goods exports in the latest quarter was +7.4%, the highest rate of increase in five quarters. Goods imports rose at a slower 2.8% pace. When exports are growing faster than imports, overall output in the economy is receiving a boost.

Sales of Canadian energy products, both oil and natural gas, were particularly buoyant in Q1, surging by 22% (SAAR). Canada’s share of U.S. energy imports – questions about pipeline reversals and expansions notwithstanding – is climbing steadily.

While services (i.e., as opposed to goods) exports contribute a much smaller proportion to Canada’s overall trade numbers, nearly stand-pat sales (+0.8%) made a contribution to overall growth, since services imports declined at a rapid rate (-6.2%).

Services imports were also down in the fourth quarter of last year (-8.1% SAAR), marking two consecutive quarters of decline. One has to look back to the recession to find another six months in a row during which there was negative change.

The ongoing improvement in the U.S. economy – with employment continuing to increase, housing starts climbing, new and resale home prices on the mend, domestic energy reserves on the rise and consumers becoming chummy with cash registers again – has had a positive spillover effect on Canadian activity levels.

At the same time as the first quarter GDP numbers were released, Statistics Canada also made available the latest (March) industry-based national output estimate. The direction of change in the monthly GDP numbers often provides some insight into where the economy is heading.

Industry-based GDP growth in each of the first three months of this year was either strong or moderate – +0.3% month over month in January; again +0.3% in February; and +0.2% in March.

Keep in mind, that from August through December of last year, average monthly GDP growth was less than +0.1%, with December being -0.2%. Therefore, the results so far in 2013 have been positively glowing in the context of what was being experienced last fall.

Many economists will be revising upward their GDP forecasts for full year 2013 versus 2012 from +1.5% to a figure of +2.0% or higher.

If our foreign trade is performing better than expected, our share prices should receive a pick-me-up as well. But there’s another factor that might prove to be an obstacle.

Logically, one question dominates when considering how stock market indices are performing. What’s happening with corporate profits?

Statistics Canada’s press release entitled Quarterly Financial Statistics for Enterprises records that total operating profits (expressed in current dollars and seasonally adjusted) in this year’s first three months were -3.3% year over year and -1.2% quarter over quarter.

For oil and gas extraction, the percentage changes were -46.1% year over year (y/y), but +28.3% quarter to quarter (q/q).

For mining and quarrying, the respective changes were -17.4% y/y and -3.2% q/q; for retail trade, +4.6% y/y and +1.7% q/q; real estate, +4.9% y/y and +0.3% q/q; accommodation and food services, -17.5% y/y, but +0.4% q/q; and manufacturing, -8.4% y/y and -1.0% q/q.

For the construction industry, the operating profit level in Q1 2013 was $4.3 billion seasonally adjusted, an increase of 5.7% versus Q1 2012, but a decline of 2.5% compared with Q4 2012.
Stock exchanges - performances of key indices - May 31, 2013
INDEX 52-WEEK LOW 52-WEEK HIGH YEAR AGO
(MAY 31, 2012)
MONTH AGO
(APR 30, 2013)
Latest Month-end Closing Prices
(MAY 31, 2013
  PER CENT CHANGE,
LATEST VERSUS
52-WEEK LOW 52-WEEK HIGH YEAR AGO MONTH AGO
Dow Jones Industrials
NYSE (^dji)
Jun 4 12 12,035 May 22 13 15,542 12,393 14,840 15,116 25.6% -2.7% 22.0% 1.9%

S & P 500
NYSE (^gspc)

Jun 4 12
1,267
May 22 13 1,687 1,310 1,598 1,631 28.7% -3.3% 24.5% 2.1%
NASDAQ
(^ixic)
Jun 4 12
2,727
May 22 13 3,532 2,827 3,329 3,456 26.7% -2.2% 22.2% 3.8%
S & P/TSX Composite
TSX (^gsptse)
May 18 12 11,281 Mar 12 13 12,905 11,513 12,457 12,650 12.1% -2.0% 9.9% 1.5%
Sources: New York Stock Exchange (NYSE), Standard and Poor’ s (S & P), National Association of
Securities Dealers Automated Quotations (NASDAQ), Toronto Stock Exchange (TSE) and Reuters.
Table: Reed Construction Data – CanaData.
Latest-year performances of key stock market indices
Latest-year performances of key stock market indices
*Each month's closing figure versus the March 30, 2012 closing figure for the index.
The Key Stock Market Indices are:
1) New York Stock Exchange - Dow-Jones Industrials (30);
2) New York Stock Exchange - Standard and Poor's (S & P) (500);
3) National Association of Securities Dealers Automated Quotations - NASDAQ Composite Index;
4) Toronto Stock Exchange - S & P/TSX Composite.
Data sources: New York Stock Exchange (NYSE), Standard and Poor’ s (S & P), National Association of
Securities Dealers Automated Quotations (NASDAQ), Toronto Stock Exchange (TSE) and Reuters.
Chart: Reed Construction Data – CanaData.
Performances of key stock market indices since most recent trough
Performances of key stock market indices since most recent trough
*Each month's closing figure versus the February, 2009 closing figure for the index. February 2009 was the most recent trough for all 4 indices.
The Key Stock Market Indices are:
1) New York Stock Exchange - Dow-Jones Industrials (30);
2) New York Stock Exchange - Standard and Poor's (S & P) (500);
3) National Association of Securities Dealers Automated Quotations - NASDAQ Composite Index;
4) Toronto Stock Exchange - S & P/TSX Composite.
Data sources: New York Stock Exchange (NYSE), Standard and Poor’ s (S & P), National Association of
Securities Dealers Automated Quotations (NASDAQ), Toronto Stock Exchange (TSE) and Reuters.
Chart: Reed Construction Data – CanaData.
S & P/TSX Composite
Toronto Stock Exchange
S & P/TSX Composite
New York Stock Exchange - Dow-Jones Industrials (30)
New York Stock Exchange - Dow-Jones Industrials (30)
New York Stock Exchange - Standard and Poor's (30)
New York Stock Exchange - Standard and Poor's (30)
NASDAQ Composite
(National Association of Securities Dealers Automated Quotations)
NASDAQ Composite
The charts show month-end closing figures.
Data sources: New York Stock Exchange (NYSE), Standard and Poor’ s (S & P), National Association of
Securities Dealers Automated Quotations (NASDAQ), Toronto Stock Exchange (TSE) and Reuters.
Charts: Reed Construction Data – CanaData.