Colour the U.S. and Canadian Economies Beige

04/29/2013 by Alex Carrick

The advance estimate for U.S. economic growth in the first quarter of this year is +2.5%, seasonally adjusted and annualized (SAAR), according to the Bureau of Economic Analysis (BEA).

The figure will be revised twice more, at monthly intervals, before it is finalized.

In the fourth quarter of last year, the change in gross domestic product (GDP) was almost undetectable at +0.4%. Therefore, Q1 2013 is welcome news. Just the same, most analysts were hoping for more.

In the other quarters of last year, the percentage increases were +3.1% in Q3, +1.3% in Q2 and +2.0% in Q1.

For 2012 as a whole, the year-over-year “real” (i.e., inflation-adjusted) GDP rise was 2.2%. If the economy was living up to its potential, output would be expanding by at least +3.0% to +3.5%.

Therefore, the present level of performance is only so-so. If it were a colour, it wouldn’t be yellow or red for warm or hot. Nor would it be grey or black for cooling or stormy.

Rather, it would be beige. The fact the world is also trying to become more “green” is a different story, one that’s undergoing a rewrite every day. 

In the latest quarter, U.S. consumers spent at a faster pace (+3.2%) than overall economic growth. Purchases of durable goods, such as motor vehicles, were especially strong, +8.1% quarter to quarter annualized.

The personal consumption expenditures (PCE) line item in the U.S. national accounts is just over 70% of total GDP. (In Canada, because foreign trade is relatively more important, PCE is 55% of the nation’s total output.)

The strength in U.S. consumer spending was particularly noteworthy since most Americans have become more familiar with the tax man this year. I almost wrote “chummier”, but that conveys the wrong impression. 

As part of Washington’s debt-busting efforts, two former special tax breaks were allowed to expire. The wealthy are now being dinged at a higher income tax rate and Joe-average income earners are seeing larger payroll tax deductions on their employee revenue stubs.

U.S. disposable (i.e., after tax) personal income in Q1 was -5.3% quarter to quarter annualized, the severest rate of decline since Q3 2009’s -6.1%. The latter was near the tail-end of the recession.

Investment in residential structures made another significant advance in Q1, +12.6%, although the rate of increase was somewhat slower than in the two previous quarters, +17.6% in Q4 and +13.5 in Q3 2012.

Homebuilders spoke emphatically in March when they raised housing starts above one million units for the first time since June 2008.

Investment in non-residential structures flat-lined (-0.3%) in the latest quarter after a 16.7% advance in Q4 of last year.

Looking back a little further, though, the change in spending in this category was about on a par with both Q3 (0.0%) and Q2 (+0.6%) of last year.

Domestic demand was held back by belt-tightening in the public sector.

A small portion of the $85 billion in spending cuts this fiscal year (i.e., “sequestration” began on March 1), on top of other deficit reduction measures, showed up in the federal government’s account, -8.4%. Moreover, this was cumulative, since Q4 2012 was also negative, -14.8%.

Within sub-sectors, national defense took a further hit (-11.5%) beyond what was chopped in the final three months of 2012 (-22.1%).

What about foreign trade? The pick-up in U.S. import purchases, at +5.4% in Q1, was considerably faster than the gain in export sales, +2.9%. The shortfall drained momentum from the total GDP figure.

GDP data from Statistics Canada lags what is available from the BEA. The first quarter national output numbers for north of the border won’t be released until May 31. But industry-based GDP results for 2012 versus 2011 were published on April 26.

Canada’s growth rate last year was 1.8%, a smaller figure than in the U.S., and similarly “pale” relative to our hopes and wishes. A weak global trading environment is holding back commodity prices and reducing product demand for our raw materials suppliers.

The 2011 rate of GDP change in Canada was +2.6% year over year and in 2010, it was a robust +3.4%. Of course, 2009 was another matter. In that year, the recession brought most forms of economic activity to a halt and output declined by a nerve-wracking 3.0%.

Some of the provincial highlights were as follows. Alberta recorded the largest year-over-year GDP advance in 2012 versus 2011, at +3.9%, but it was a come-down from +5.3% in 2011 over 2010.

Saskatchewan’s 2012 GDP rose 2.2%, as oil and gas production increased more than non-metallic mineral mining (e.g., potash) declined. But once again, growth was slower than the year before (+5.0%). A rapid population advance has been a relatively recent highlight in the region.

In British Columbia (+1.7% in 2012 versus +2.6% in 2011), an overheating housing market moved off the burner, reducing the activity levels of real estate brokers and agents.

In Ontario (+1.4% in 2012 versus +1.8% in 2011), export sales of motor vehicles to the U.S. helped lift manufacturing activity. In neighbouring Quebec (+1.0% in 2012 compared with +1.7% the year before), the aerospace products and parts sector achieved only minimal output improvement. 

Newfoundland and Labrador was the one province to record a large drop in GDP in 2012, -4.8% (versus +2.8% in 2011). It suffered through a decline in both oil and gas extraction, brought on by maintenance work at offshore sites, and metal ore mining. 

Let me conclude this article by returning to the headline.

For a host of reasons, many of them based in the District of Columbia, the U.S. economy is still struggling to regain its former brilliance.

Canada, like a faithful sidekick, is walking a step behind.

For both nations, the sun is hiding behind the clouds and the daylight is suffused with a muted hue.