Unleashing Investment May be Tied to Structural Change in Labor Markets

09/28/2012 by Alex Carrick

Canada’s monthly change in “real” (i.e., inflation-adjusted) industry-based gross domestic product (GDP) in July was +0.2%, according to Statistics Canada.

The annualized rate of change was +2.4% which would be a little faster than most analysts’ expectations for 2012. The year-over-year change in July’s real GDP was +1.9%, almost spot on with the consensus forecast for the year as a whole (+2.0%).

In June, the month-to-month GDP change was +0.1%, revised down from +0.2%. February was the weakest month so far this year, at -0.2%. April’s +0.4% gain was the strongest.

In the latest month, goods-producing industries advanced at the same rate as services, +0.2%.

Services output makes up about 70% of total industry-based GDP, leaving the remaining 30% to goods production.

Another positive indicator for the Canadian economy in July arrived by way of diesel locomotive. In the latest month (July), Canadian railways carried 6.2% more tonnes of freight than in the same month a year ago.

Domestic traffic was up 4.7% year over year. Rail traffic from the U.S. was +16.6%.

It was also recently reported by Statistics Canada that tourism spending in the nation, between April and June, increased for the 12th quarter in a row (+0.4% period to period).  

In the U.S., the leisure and hospitality industry has been a standout among sub-sectors for employment. The number of jobs is higher now than before the recession.

Resort owners in many locations, including Las Vegas, are investing more money in entertainment venues to attract visitors.

An echo of the same pattern seems to be appearing in Canada. There is a long list of upcoming hotel projects nationally. The most prominent site is Niagara Falls, arguably our closest equivalent to the “Vegas scene”.

One two-tower project of 60 and 61 storeys will be the tallest accommodation complex in the country when it is completed.

In the U.S., the second quarter GDP growth number has just been revised down, from +1.7% to +1.3% annualized. That’s not encouraging, but it’s also not the whole story.

The number of first-time applicants for unemployment insurance dropped dramatically in the latest reporting period.

The initial jobless claims figure for the week ending September 22 was 359,000. That’s a substantial decline of 26,000 from the previous week’s level of 385,000.

If this kind of improvement can be maintained, it will herald a significantly better U.S. jobs market.

An initial jobless claims figure in the range of 350,000 to 370,000 is consistent with a month-over-month net jobs increase of between 150,000 and 200,000. That’s good progress.

It’s not clear what’s in store for the U.S. labor market over the longer term. Some cyclical pluses are bound to kick in, but structural change is probably here to stay as well.

The cyclical pick-up in the house-building sector that has finally begun will provide a big boost to construction.

And it won’t just be on-site workers. There will be secondary employment boosts in real estate, the legal profession, design services and in building product manufacturing.

The gains don’t stop there. Much of retail activity centers on buying “things” for the home. When new houses are built, there are accompanying purchases of appliances and furniture, entertainment equipment, dinnerware, cleaning supplies and so on.

Structural change needs to be acknowledged, as well, however. Companies have been making huge profits without hiring back workers. They’ve managed this through the use of computer-aided high-tech processes.

This may have been taken about as far as it can go for now. More output will require the hiring of more workers. At the same time, however, with such a large overhang in labour markets (i.e., an unemployment rate of 8.3%), many are willing to work for less than in the past.

In many cases, most famously in the auto sector, new hires are receiving hourly compensation rates that are considerably lower than for those already doing the same job. This is reducing average pay levels.  

The corporate sectors in both the U.S. and Canada are sitting on large stockpiles of cash. They’re still gun-shy, clinging to the fear there might be another rainy day.

This is reminiscent of the generation raised in the Great Depression. Many who lived through those tough times developed mindsets that embraced frugality and hording. There are those in my generation who saw such behavior exhibited by our parents or grandparents.

All angst to the contrary, economic conditions are no longer as severe as they were a couple of years ago. In one clear demonstration, capacity utilization rates are dramatically higher. The usage rate for total industry in Canada in Q2 of this year was 81.0% and in manufacturing, 81.6%.

In the U.S., the comparable figures in August were 78.2% and 77.0%. (The Federal Reserve calculates utilization rates monthly.) Usage rates are either back to normal or not far removed from traditional levels in both nations. 

What’s the primary implication? It’s relatively simple. There is the potential for unleashing a great deal of investment capital onto the North America construction scene.

That would set both the general economy and employment onto much stronger growth paths.