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-April Economic Nuggets
April 15th, 2016 by Alex Carrick, Chief Economist at ConstructConnect
Article source: CMDGroup
It may just be the calm before another storm, but the economic news seems to have quietened down quite a bit over the last little while. As for the political news, as both the Democrats and Republicans race towards their leadership conventions in a few months, that’s another story.
The pain in the oil sector on account of the deeply depressed price of crude is finally leading to some self-correcting courses of action. In the U.S. and Canada, capital spending plans have been slashed and production levels in the fracking sector significantly reduced. Internationally, Iran isn’t expected to ramp up export sales as quickly as once thought. And other OPEC members, including Saudi Arabia, appear intent on re-imposing a degree of control over their output levels.
The global price of oil may have found a floor near $40 USD per barrel. That’s a lot better than when it was nosediving towards $20. Furthermore, it will still provide car drivers, when they fill up, with gasoline charges that are pleasing bargains. Freeing up money so that it can be spent in other areas will prove especially important as the summer vacation season quickly arrives.
Against this backdrop, there are the following additional ‘nuggets’ to be gleaned from the latest government agency and private sector data releases. The ‘soil’ is rich and the ‘crop’ abundant.
(1) Let’s begin with CMD’s own construction starts statistics. Perhaps the most informative way to look at the numbers is to compare the year so far (i.e., through the first quarter, 2016) with the same time frame in 2015. On such a basis, grand total starts, in ‘current’ (i.e., not adjusted for inflation) dollars, were +7.4%, with major type-of-structure sub-categories performing as follows: residential, +3.7%; non-residential building, +11.8%; and heavy engineering, +5.8%.
(2) Diving further into CMD’s statistics pool, there were some outstanding year-over-year percentage changes at the even more disaggregated level. Comparing Q1 2016 with Q1 2015, hotel/motel starts were +36%; private office buildings, +53%; government office buildings, +68%; hospitals/clinics, +34%; schools/colleges, +7%; roads/highways, +12%; bridges, +18%; and water/sewage work, +10%. The usually smaller-volume category of ‘military’ rose fourfold.
(3) If the U.S. economy is truly to shine, however, it will need full-on support from consumer spending, which makes up 70% of gross domestic product (GDP). Consumer spending consists of retail sales, plus purchases of services, the latter probably being at least as big as the former.
The Census Bureau’s retail sales report for March was somewhat disappointing. It recorded a current dollar decline month to month of -0.3%, but an increase year over year of +1.7%.
(4) In truth, there were quite a number of retail sub-categories that displayed strong year-over-year sales growth in March: ‘building material and garden equipment suppliers’, +10.8%; ‘non-store retailers’ (i.e., virtual shopkeepers on the Internet), +6.5%; ‘health and personal care stores’, +6.3%; and ‘food services and drinking places’, +5.5%. The grand total was weighed down by gas station sales, -15.6%, which resulted from the severe price drop for petrol. Motor vehicle and parts dealers also had their worst month in a long time, with sales falling -2.1% month over month, but still up +1.4% year over year. Motor vehicles and parts account for an outsized 20% of total American retail sales. Setting aside for the moment March’s minor misfire, U.S. auto sector sales on the whole, of late, have been as high as they have ever been.
(5) After five months of sitting in a range between 48.0% and 49.5%, the Purchasing Managers’ Index (PMI) of the Institute of Supply Management (ISM) delighted manufacturers by climbing to 51.8% in March. A PMI value above 43.2% indicates the overall economy is expanding, but assembly-line firms won’t be sharing in the good times until it reaches and exceeds 50.0%. History has shown that a reading of 51.8% corresponds with a ‘real’ (i.e., inflation-adjusted) year-over-year GDP increase of 2.7%, a respectably rapid pace of economic improvement.
(6) The capacity utilization rate for American manufacturing, though, remains stubbornly low. In February 2016, as measured by the Federal Reserve, it was 76.1%, up a meager 1.2 percentage points from 75.7% twelve months earlier. There is a generally-accepted benchmark figure, 80%, for the usage rate above which firms in a sub-sector will begin to consider more seriously their need to expand plant. There are currently five sub-sectors living in that neighborhood: ‘electrical equipment and appliances’ (89.5%); ‘petroleum and coal products’ (85.8%); ‘paper products’ (82.5%) ‘plastics and rubber products’ (82.0%); and ‘furniture and related products’ (81.7%).
(7) The extraordinary strengthening in value of the U.S. dollar versus almost all other international currencies has begun to ease a bit. Exports are still being inhibited, however, and imports encouraged by the shift in the exchange rate. Consequently, the trade deficit in February worsened to a level approaching -$600 billion USD. More than half (51.6%) of the trade shortfall was with China. The other largest imbalances were with the Euro area (14.8%), Japan (9.8%) and Mexico (9.1%). Trade with Canada (1.9%) was almost even. Almost unthinkable not so long ago, the U.S. ran a surplus with OPEC nations as well as with Saudi Arabia on its own.
(8) In Canada, the only province with a large foreign trade win in February was Ontario, home to the nation’s auto assemblers and parts makers. Ontario’s exports soared 21% year to date versus the opening two months of 2015. For Newfoundland and Labrador, Saskatchewan and Alberta, the revealing tale lay in energy products, which were -31%, -62% and -29% year to date respectively. B.C.’s loss in energy products (-14%) was made up in its forestry sector (+14%).
(9) Canada’s housing starts in March were 204,000 units annualized, which brought the year-to-date average to 199,000 units, +14% when compared with the 175,000-unit-mean during Q1 2015. That’s the big picture. Interesting tidbits lie in the details. New home starts in both of Alberta’s principal cities fell by more than half, with Calgary -51% and Edmonton -62%. In B.C., next door to Alberta, Vancouver’s Q1-2016 versus Q1-2015 home groundbreakings moved in the opposite direction, to a similar degree, +65%. Montreal’s new home starts so far this year have been +30%. Toronto’s have also been up, but to a relatively quiet extent, +14%.
(10) Canada’s big jump in total employment in March, +41,000 jobs, has provided the Bank of Canada with justification for expressing more optimism concerning the country’s economic prospects. Additionally, Ottawa’s highly-touted infrastructure spending program will provide an extra shot in the arm. ‘Real’ (i.e., inflation-adjusted) GDP will, according to the BoC, advance +1.7% year over year in 2016, +2.3% in 2017 and +2.0% in 2018, after a +1.4% gain in 2015.
(11) Meanwhile, in the U.S., estimates of recent growth are putting an emphasis on weakness, with Q1 expected to be reported as above 0.0% but not more than +0.5%. Moving further into 2016, though, the U.S. jobs numbers simply do not support pessimism. Initial jobless claims have been less than 300,000 for 58 weeks in a row, or more than a year. The latest number, for the week ending April 9, was 253,000, matching March 5 2016’s level, but also equaling the lowest figure on record going all the way back to 1973. The Bureau of Labor Statistic’s month-to-month employment change of +240,000 jobs that has been maintained on average for the past two years implies nothing but good things for confidence, earnings and wealth generation.
(12) The BoC has silenced speculation about a downward adjustment in its key policy-setting interest rate. What about the Federal Reserve? Its bias, since initiating a 25-basis point increase last fall (where 100 basis points = 1.00%), has clearly been upward. Despite a soft Q1, anticipation of an accelerating pick-up in the U.S. economy from Q2 on leaves the intention of the Federal Reserve, as to the timing of its next rate hike, up in the air. As soon as the U.S. economy sings an annual GDP growth tune of +2.5% or better once again, the already noisy cacophony generated by analysts arguing about when the trigger might be pulled will crescendo.
Category: CMD Group