Leading economic indicators are sending stronger signals

12/06/2012 by John Clinkard

Approaching the end of 2012, the outlook for the Canadian economy in 2013 is heavily dependent on several exogenous external factors.

First, there is a significant risk that the combined effect of a sharp rise in taxes, triggered by the expiration of across the board tax cuts introduced by President George Bush in 2003, together with a significant cut in government spending will effectively push the U.S. economy into recession. In addition, there is a persisting risk that recessionary conditions in Europe could ultimately lead to a sovereign debt/currency crisis that affects the global economy.

Finally, the economic health of the major Asian economies, particularly China, remains very fragile.

Although these risks continue to be a serious threat to Canada’s near term economic health, a number of forward looking economic indicators are beginning to point in a more positive direction.

First, the Organization for Economic Co-operation recently reported that while composite leading indicators continue to point to weak growth in many major economies, there are signs of stabilization in Canada, China and the United States.

Turning first to China, according to the National Bureau of Statistics, manufacturing in the “middle kingdom” expanded in October for the first time in three months while a separate survey by the HSBC and Markit Economics hit an eight month high.

With regard to the U.S. economy, on November 1, the Conference Board in the U.S. reported that its Leading Economic Index for the U.S. increased by a very solid 0.6% in September following a 0.4% decline in August and a 0.4% increase in July.

Coincident with this uptick in its leading indicator, the Conference Board reported that its Index of Consumer Confidence increased from 68.4 to 72.2 in October, its highest level since February 2008.

Furthermore, the Conference Board reported that, based on its annual survey of holiday gift spending intentions, 10% of U.S. households plan to spend more on holiday gifts this year up from 7% in 2011. At the same time, the percentage of households planning to spend less declined from 40% to 31%.

With respect to Canada, it appears that with one notable exception, the most recent leading economic indicators are sending more muted signals regarding the near term outlook.

Specifically, according to the most recent (Autumn 2012) Bank of Canada Business Outlook Survey, on balance, firms expect their sales to remain essentially unchanged over the next twelve months compared to a net percentage of 15 who expected stronger sales in the previous (Summer 2012) Outlook Survey.

This rather somber outlook was echoed by the Royal Bank of Canadian Purchasing Managers’ Index. While it remains above 50, signaling expanding manufacturing activity, the index has steadily retreated from a high of 54.8 in June to 51.4 in October, its lowest value since January of this year.

While both of these indicators are essentially pointing sideways, the Macdonald Laurier Institute’s Canadian Leading Indicator improved for the second consecutive month in October driven by increases in four of its nine component series.

Given these positive forward looking signals and assuming that both consumer and investor confidence strengthen on both sides of the border following an agreement on the U.S. budget, the economic outlook for North America should significantly improve.

Canada GDP vs Canada Leading Indicator & U.S. Purchasing Managers’ Index (PMI)

Canada GDP vs Canada Leading Indicator & U.S. Purchasing Managers’ Index (PMI
Data Source: Statistics Canada, Macdonald Laurier Institute, U.S. Institute of Supply Management/Chart: Reed Construction Data, CanaData.