Mediocre Economic News from Canada but a More Upbeat Tone Elsewhere

03/15/2013 by Alex Carrick

The nation’s most recent (Q4 2012) “total industry” capacity utilization rate was 80.7%, according to Statistics Canada. While a figure above 80% is still good, the direction of change was disappointing, down 0.4 percentage points from the third quarter’s 81.1%.

Versus the fourth quarter of 2011 (80.6%), the usage rate was almost the same.

Canada’s manufacturing sector slipped more than total industry.  In Q4, the operating rate for manufacturing versus “normal” capacity was 80.2%, a decline of 2.1 percentage points from Q3’s 82.3%. Also, it was a drop of 1.1 percentage points from Q4 2011’s 81.3%. 

Perhaps most disappointing was the decline in the transportation equipment sector, which is mainly comprised of auto-related firms. Its usage rate fell 3.5 percentage points to 88.9%, which was still exceptionally high. But it did drag down plastic products (-5.0 percentage points quarter over quarter to 73.0%) and primary metal industries (-6.3 percentage points year over year to 81.l%).

There was some better news mixed in with the mediocre. The usage rate in forestry and logging climbed 1.4 percentage points quarter to quarter to reach 87.8%. Oil and gas extraction rose 2.2 percentage points to 85.7%. Both sectors are benefitting from a stronger U.S. economy.

The industry sub-sector with the highest utilization rate in Q4 2012 was electric power generation, transmission and distribution, at 89.8%. That was higher than both the previous quarter (88.9%) and the same quarter of the year before (87.9%).

A figure above 85.0% and rising is often an advance indicator that there will be imminent investment to facilitate more through-put, although a short-term solution in manufacturing can also be to add shifts. 

South of the border, utilization rates are calculated monthly by the Federal Reserve. They appear in a data set that places more emphasis on industrial production. At least, that’s the figure the media usually highlights. In February, industry output in the U.S. climbed 0.7% month to month after lying flat in January.

The year-over-year change was +2.5%, a little faster rate of increase than for “real” (i.e., inflation-adjusted) gross domestic product (GDP), which in 2012 was +2.2% versus 2011.

The U.S. total industry utilization rate moved up to 79.6% in February from 79.2% the month before and manufacturing shifter higher to 78.3% from 77.8%.

In other U.S. economic news, the initial jobless claims figure for the latest week (ending March 9) was 332,000, a decline of 10,000 from the week before. The number has been lower only one other time (330,000 for the week ending January 19, 2013) in the past five years.

From early 2005 through mid-2008, the level of first-time unemployment insurance seekers hovered around 300,000. Those were the best of times, when economic growth was strong.

During the recession, initial jobless claims soared, maxing out at 667,000 for the week ending March 28, 2009. The latest number (332,000) has cut that former high in half and is very positive news for the economy.

The flip side of fewer jobless claims is a pick-up in employment. The February U.S. labor market report showed a gain of 236,000 net new jobs and a drop in the unemployment rate from 7.9% to 7.7%.

The improvement in the U.S. new homes sector has been widely touted. Housing starts were 890,000 units SAAR in February of this year, after climbing to a many-years high of 973,000 the month before in January. Their most recent low point was 478,000 in April, 2009.

But what about non-residential construction activity? Reed Construction Data’s February starts statistics show a year-to-date advance of 19.0% versus the first two months of last year, with heavy engineering work (+26.6%) outpacing non-residential building (+15.4%).

While threats to the world economy certainly remain, a heftier proportion of the daily news appears to be turning upbeat.

I like to keep an eye on Australia. There are several similarities between our two countries. Both are developed nations with low population bases – 35 million here versus 23 million in “the land down under”. Also, Australia has a largely resource-based economy similar to our own.

Plus, there’s another incentive. Due to its close trade ties with China, Australia’s raw material export sales provide considerable insight into how well the dragon nation’s is performing.

The Reserve Bank of Australia (RBA) is currently sitting with the highest policy-setting interest rate (3.00%) among all developed nations. Coincident with a slowdown in China over the past couple of years, 175 basis points were pruned (in stages) from the RBA’s benchmark rate.

In February, however, Australia recorded its largest month-to-month increase in employment (+71,500) in nearly 13 years, dating back to July 2000. At its latest policy-setting meeting on March 19, the RBA opted to leave interest rates alone, rather than lower them another notch. The bias for Australian interest rates is now flat to possibly upwards.

The 10-year bond yield in Australia is 3.62% compared with around 2.00% in both Canada and the U.S. The spate of encouraging news has lifted the value of the Australian dollar (known as the Aussie) to $1.04 U.S.

Meanwhile in Japan, the local currency has moved in the other direction. The value of the yen has dropped nearly 30% since its most recent peak in October 2011. Furthermore, the appointment of Haruhiko Kuroda as Governor of the Bank of Japan, along with some new deputies, is expected to lower the value of the yen even further.

The BOJ under its new leadership is expected to become more aggressive in extending debt maturities and making additions to the money supply through bond purchases.

In Europe, with the passage of time and under the spotlight of excessive unemployment rates (50% among the youth of the hardest-hit nations), austerity is losing its luster. Even Germany is recognizing some relaxation of strict financial guidelines is warranted.

An agreement has been reached allowing nations such as France, Spain and Portugal to extend their deadlines for reaching deficit targets.

In other cheerier news overseas, Ireland recently held its first successful 10-year bond auction since the nation required a bail-out in 2010.

Canadian Capacity Utilization Rates by Industry Groups
Total Canadian Industry    

The thick red horizontal line in each of the charts shows the 85% level. This is the benchmark level of capacity utilization above which firms in an industry will look seriously at investing in an expansion.

The benchmark 85% level has generally been raised somewhat by “just-in-time” inventory. However, in many instances, border crossing delays with the U.S. are making instant inventory adjustments harder to make. There is also concern across most industrial sectors about the volatility in value of the Canadian dollar relative to the U.S. dollar. Many companies have adopted a “wait and see” attitude towards investment in physical plant.

Once one firm in an industry makes the decision to expand, often its competitors will also jump on the bandwagon (i.e. a copycat effect) in order to keep up.

Forestry and Logging   Mining
Oil and Gas Extraction   Electric Power
Construction   Manufacturing

An industry’s capacity utilization rate is the ratio of its actual output to its estimated potential output.
Industry classifications are as according to NAICS (North American Industry Classification System).

Data source: Statistics Canada/Chart: Reed Construction Data – CanaData.