The AEC Lens
Alex Carrick, Chief Economist at ConstructConnect
Alex Carrick is Chief Economist for ConstructConnect. He is a frequent contributor to the Daily Commercial News and the Journal of Commerce. He has delivered presentations throughout North America on the Canadian, United States and world construction outlooks. A trusted and often-quoted source for … More »
A Dozen Mid-August Economic Nuggets
August 17th, 2015 by Alex Carrick, Chief Economist at ConstructConnect
Article source: CMDGroup
Who can doubt that there’s an exchange-rate war underway? Almost all the world’s currencies have fallen to one degree or another versus the U.S. ‘greenback’. One of the few hold-outs, until recently, was China. Now, even Beijing has stepped back from parity.
The cries of alarm, though, have been overblown. If the yuan’s reduction doesn’t stray significantly from -2%, it won’t play a huge role in promoting China’s exports. To site an example from the retail sector, nobody ever holds a sale announcing that prices have been ‘slashed’ by 2%. If the slide continues and reaches -10%, that’ll be another story.
Since most commodities are priced in U.S. dollars, they will become slightly more expensive for Chinese buyers. This is another knock against owning the shares of companies engaged in supplying raw materials at this time. A deeper concern, though is what this says about the state of China’s economy. An output growth rate that was once 10% to 12% has slowed to a range of 6% to 7%. And that’s if China’s ‘official’ statistics are to be believed.
Once again, as was the case before the 00s, everyone is looking to the U.S. to lead world growth. A key implication is that the Federal Reserve must be more cautious about raising interest rates.
As for other political and economic news items ‘hot of the press’, there are the following dozen:
(1) July’s Purchasing Managers’ Index (PMI) as calculated by the Institute of Supply Management (ISM) pulled back a ‘smidge’ to 52.7% from 53.5% in June. History has shown that a figure of 43.1% or higher indicates an expansion in ‘real’ (i.e., inflation-adjusted) gross domestic product (GDP). The PMI has met this criterion for 74 months in a row, or a period of time exceeding six years. A level of 50.0% or more corresponds with growing sales by the manufacturing sector. That yardstick has been bested during the past 31 consecutive months.
(2) July’s PMI reading of 52.7% is almost exactly the same as the average for the first seven months of this year, 52.6%. The long-term correlation between the PMI and GDP growth suggests U.S. economic output is currently advancing at a rate of about 3.0%. The strength in the PMI is especially noteworthy given the appreciation in value of the U.S. dollar versus virtually every other major internationally-traded currency. The greenback on steroids is an obstacle for American manufacturers to overcome if they want to maintain or increase export sales.
(3) The U.S. Conference Board’s Leading Economic Index continued to move assertively higher in June, 0.6% month over month, after an even better gain of 0.8% in May and an equally upbeat 0.6% in April. But the Board’s survey result for consumer confidence took a hit in July, falling to an index level of 90.9 after reaching 99.8 in June (1985 = 100.0). The expectations index was subjected to an even greater drubbing, plummeting to 79.9 from 92.8 the month before. China lately (on top of Greece earlier) has been disseminating ‘bad economic vibes’, but even more worrisome is what happens when the Federal Reserve gets around to raising interest rates.
(4) There sure hasn’t been any reason to find fault with the U.S. initial jobless claims statistical series of late. I feel like a magician who reveals the secret to his conjuring. As long as the number of first-time unemployment insurance seekers sits below 300,000, jobs are being created at a brisk 200,000-plus per month pace and the economy is in more than decent shape. Let’s go back a month. For the week ending July 18, initial jobless claims were only 255,000, their lowest level in more than 40 years, dating back to 1973. During the three weeks since then, they’ve averaged a still nearly-minimal 270,000. Their latest four-week average, at 266,500, is the best since April 2000 (also 266,500). They’ve been below 300,000 for 23 weeks straight.
(5) Most of the foregoing suggests U.S. GDP growth should be pretty good, right? Yes, that’s what the Bureau of Economic Analysis (BEA) is now saying. The BEA’s original Q1 GDP estimate of -0.2% (annualized) has been revised to +0.6% and Q2 has been assessed at +2.3%. That reversal is nothing like as dramatic as last year, however, when -0.9% in Q1 swung to +4.6% in Q2. Q3 2014 growth was also large, +4.3%, before Q4 saw a settling down, +2.1%.
(6) For all that the overall economy is marching forward, investment in non-residential structures in the national accounts is still struggling. The annualized quarter-to-quarter percentage changes for this figure have been negative in four of the last five periods. Q2 2015 was -1.6% after Q1’s -7.4%. In the final three quarters of last year, -0.2% in Q2 dipped lower in Q3 to -1.9%, before Q4 turned positive, +4.3%. Q1 2014’s performance is what we’re all waiting for again, +19.1%.
(7) The Census Bureau’s numbers on put-in-place construction investment have become more encouraging. In essence, this series is meant to capture progress payments as projects proceed. Total ‘current’ dollar (i.e., not adjusted for inflation) spending has finally climbed back above $1 trillion for the past four months. In June, they were $1.065 trillion. Prior to March of this year, the last time it was as high as $1 trillion occurred in November 2008, nearly seven years ago.
(8) Year-to-date through June, total put-in-place construction investment in the first half of 2015 was +6.9% versus the first six months of last year, according to the BEA. The private sector component was +7.6%. The public sector improvement wasn’t as robust, +4.9%. Construction spending by manufacturers leapt forward, at +55.6%. Power sector spending was weak, -26.4%.
(9) President Obama has launched a Clean Power initiative, establishing a requirement that carbon emissions by coal-burning electricity generating stations be reduced by 32% in 2030 relative to 2005. This will have greater impacts on states in the middle of the country – which are more dependent of coal-burning plants for their power needs – than on ones along the ocean coastlines. One might suppose this legislation will spur the building of new power generating capacity, with an emphasis on renewable sources and natural gas. While the Census Bureau may not be showing such a result yet, CMD’s ‘power sector’ starts are +188% year to date.
(10) The Canadian economy is taking a beating from world-wide soft commodity demand and prices, most notably among fossil fuels. Another potential fault line is housing starts, which have stayed elevated while many analysts have been expecting a correction. Canada Mortgage and Housing Corporation (CMHC) has reported a not-bad July level of 193,000 units annualized. A figure hovering near 200,000 is quite respectable. Only February so far this year was weak, at 151,000 units. Among 2015’s months so far, June has been the leader, at 202, 338 units.
(11) Among Canada’s six most populous cities, Edmonton (+49% year to date) is in top spot on a housing starts percentage-change basis, followed by Vancouver (+14%) and Toronto (+12%). Calgary (-31%) is experiencing the sharpest decline, with Montreal (-16%) and Ottawa-Gatineau (-15%) also in reverse. In the multi-family market, the traditional condo-kings, Toronto (+15%) and Vancouver (also +15%), are being elbowed out of the spotlight by Edmonton (+99%).
(12) The ‘beneficial’ aspects of the big drop in value of the Canadian dollar relative to its U.S. counterpart may be kicking in, finally. Sales by manufacturers north of the border were +1.2% month-over-month in June, although they were still down year to date, -1.5%. Out of 21 sub-sectors, 18 reported healthier results. Not only does a cheaper ‘loonie’ (Canada’s currency) promote export sales, it also helps ward off foreign competition in the domestic marketplace. Canadian motor vehicle sales in June were +4.3% month-over-month and +5.6% year to date.
Category: CMD Group