Economic indicators in Canada and the U.S. are pointing in the same direction

07/26/2013 by John Clinkard

With 2014 less than six months away, it appears that the majority of the leading indicators of economic activity in Canada and in the U.S. are pointing in a positive direction.

Given that the U.S. is the market for 74% of Canada’s merchandise exports it is useful, no essential, to take the economic pulse of the U.S. in order to gauge how much external support our southern neighbour is likely provide over the near term.

Turning first to the frequently cited PMI, according to the Institute of Supply Management, after dipping to 49.0% in May, below the critical 50.0% level (indicating that manufacturing was contracting) , the Manufacturing ISM Report moved solidly into expansionary territory in June.

Driven by stronger new orders and higher production, the PMI registered 50.9%, making it the fifth time in the past six months that the PMI correctly signaled stronger growth ahead.

The positive note sounded by the PMI was reinforced by the latest Conference Board Leading Economic Index which, following a very solid 0.8% gain in April increased by a rather modest 0.1% in May.

Despite this rather subdued gain in May, the Index reached its highest level since June of 2008 and based on widespread gains in the leading indicators over the past six months, it suggests that there is some upside potential to U.S. economic activity.

Let’s turn to the key indicators of Canadian economic activity. First, driven by gains in seven of its nine components, the Macdonald Laurier Institute (MLI) Leading Indicator increased by 0.2% in June, following gains of 0.2% and 0.3% in April and May respectively.

According to MLI, the turnaround in housing activity in May, reflected by an increase in home sales and a concomitant rebound in housing starts, made the most significant contribution to the recent gains in their leading indicator in April and May.

Second, the RBC Canadian Manufacturing PMI registered 52.4% in June. Although this level for the index was down from the 53.2% it posted in May, it is the second highest value for RBC’s PMI since September of 2012.

Major contributors to the strength of the RBC PMI in June included a stronger volume of new orders plus an increase in the number of firms reporting that they planned to increase production in order to rebuild depleted stocks of finished goods.

As the old saying goes, there is “many a slip twixt the cup and the lip” when it comes to predicting future economic activity. This saying appears particularly appropriate in light of the significant uncertainty about the economic prospects for Europe and Asia as well as the political situation in the Middle East.

Having said this, given the steady uptrend in the leading indicators in both the U.S. and Canada over the past six months, the prospects for growth in both countries appear brighter than they have for several years.

Leading economic indicators for Canada and the U.S.

Leading economic indicators for Canada and the U.S.
Data Source: Macdonald Laurier Institute, US Conference Board/Chart: Reed Construction Data, CanaData.