Midway through the year there are signs that the green economic shoots which were sprouting in the United States and elsewhere in the first quarter are starting to droop.
This observation is based in large part on the most recent Organisation for Economic Co-operation and Development’s (OECD) composite leading indicators which point to a downshifting in the overall pace of economic activity heading into the second half of the year.
Turning first to the outlook for the U.S., while most of the forward-looking indicators are in positive territory, the much followed Institute of Supply Management’s (ISM) Purchasing Managers Index (PMI) slipped below the critical 50 level in June, indicating that the manufacturing sector contracted in the month.
Having said this, a slightly more sanguine outlook was indicated by the Conference Board’s Leading Economic Indicator which increased by 0.3% in May following a 0.1% decline in April. According to the Board’s economist, Ken Goldstein, this increase in the Board’s index and other recent economic data suggest that the U.S. economy is growing modestly.
Finally, the Markit Global Business Outlook reported that despite an easing in both manufacturing and services, its U.S. Indicator of Business Confidence was one of the highest globally and it suggests that despite uncertainty in advance of the U.S. election and the persisting crisis in Europe, the U.S. will continue to underpin global economic growth over the near term.
Given the very strong economic links between Canada and the U.S., it is not surprising that leading indicators of economic activity in Canada, like those in the U.S., are also sending mixed signals. This observation is reinforced by the latest Ivey Purchasing Managers Index, which unexpectedly dropped from 60.5 in May to an 11-month low of 49 in June. However, despite this precipitous fall in the headline Ivey Purchasing Managers Index, the net percentage of firms planning to add staff increased from 46.3 to a six-month high of 59.3.
A similar picture was painted by results of the Bank of Canada’s latest Business Outlook Survey (BoS). Like the Ivey survey, the BoC reported that the percentage of firms expecting higher sales fell from 35 to 15 in the second quarter.
However, the net percentage of firms planning to add staff jumped from a relatively strong 43 in Q1 to 53 in Q2. This was equal to the record high level the series first reached in the second quarter of 2011.
Finally, according to the RBC Canadian Manufacturing PMI, manufacturing business conditions strengthened in June to a nine-month high due to increases in both output and in new orders.
Although uncertainty regarding the potential impact of the European sovereign debt crisis and concerns about the failure to extend the Bush tax cuts in the U.S. will weigh on consumer and investor confidence over the near term, for now, most of the key leading economic indicators suggest that economic activity in the U.S. and Canada will continue to expand at a moderate pace through the remainder of this year and into 2013.
OECD Composite Leading Indicator vs Canada Gross Domestic Product
