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-February Economic Nuggets
February 12th, 2016 by Alex Carrick, Chief Economist at ConstructConnect
Article source: CMDGroup
Spending time in U.S. stock markets lately has not been a walk in the park. Drooping equity prices are a symptom of assorted maladies. The three that stand out most prominently are as follows. First, a great many people are worried about China’s economy and especially the state of its banking sector. There are thought to be way too many shaky loans in danger of crumbling if growth continues to decelerate. The subsequent drop in value of the yuan won’t be pretty.
Second, on account of a shockingly low international price for oil, investment in the U.S. energy sector has gone into a tailspin, affecting certain regions of the country more severely than others.
And third, the uplift in value of the U.S. dollar is limiting the ability of American manufacturers to win export sales. Some of the nation’s biggest firms are being negatively affected the most.
Canada’s problems are of a different nature. While the slide in value of the ‘loonie’ offers hope of better export sales, eventually, by manufacturers based in the center of the country, resource-dependent regions to the east and west are being hobbled by reduced world-wide demand for their commodities, rock-bottom prices for their extracted goods and slashed capital spending.
Against the foregoing backdrop, there are the following additional ‘nuggets’ gleaned from the latest government and private-agency statistical releases, both south and north of the border.
(1) January’s Employment Situation report from the Bureau of Labor Statistics set out a month-to-month increase of 151,000 jobs. This caused more hiccups in stock trading. The net jobs gain, because it fell short of the +200,000 benchmark that has become almost normal, was judged by many analysts and investors to be ‘disappointing’. The unemployment rate tightened to 4.9%.
(2) Some of the frenzied analysis these days is verging on the silly. A monthly gain of 150,000 jobs extended over a whole year would be 1.8 million annually, not bad at all. Also, if the monthly climb had been much higher, there would have been a great gnashing of teeth over how the Fed would surely feel the need for another rate hike. That would not have been welcomed either. Message to economy: sometimes one can’t win no matter how one performs.
(3) The weekly initial jobless claims report, which recorded a most-recent low of 255,000 in mid-July of last year, provides an advance indication of what to expect in the monthly BLS job creation report. The lower the number in the former, the more positive for the latter. Since December of last year, the figure in the former appeared to be trending higher again, testing the 300,000 benchmark level. For the week ending January 16, it barely stayed under the 300,000-yardstick, at 294,000. For the latest week ending February 6, though, it fell again to 269,000.
(4) Speaking of manufacturing, January’s Purchasing Managers’ Index (PMI) from the Institute of Supply Management (ISM) failed to reach 50.0% for the fourth month in a row. At 48.2%, it was slightly better than December’s 48.0%, but below November’s 48.4% and October’s 49.4%.
Historical records have shown that as long as the PMI is above 43.2%, the overall economy is expanding. But until it reaches 50.0%, manufacturers will be experiencing a contraction in their activity levels. According to the ISM, the current PMI level of 48.2% corresponds with a ‘real’ (i.e., inflation-adjusted) gross domestic product (GDP) growth rate, annualized, of only 1.6%.
(5) The Bureau of Economic Analysis (BEA) has corroborated that U.S. constant-dollar GDP growth hit a rough patch in the fourth quarter of last year. After a strong advance in Q1 (+3.9% annualized) and a decent uptick in Q3 (+2.0%), Q3 was tepid at best (+0.7%). It was almost an exact copy of Q1 (+0.6%). The GDP gain for 2015 as a whole was +2.4%, the same as in 2014.
(6) Included in the latest national output figures from the BEA are disappointing results for private investment in non-residential structures. For the entirety of 2015, Q2 (+6.2% annualized) was the only period to manage an increase. Q1 (-7.4%), Q3 (-7.2%) and Q4 (-5.3%) all saw pull-backs. Non-residential construction still lags the overall economy’s improvement. Residential work fared much better: +10.1% in Q1; +9.3% in Q2; +8.2% in Q3; and +8.1% in Q4. For the year as a whole, residential construction/investment, as a line item in GDP, rose 8.7%.
(7) Enough with the gloomy faces. CMD’s January 2016 U.S. starts statistics were optimistic. The non-residential total, at $24.7 billion (current dollars) was +9.8% versus December, which was all the more remarkable given that there’s usually a decline between those two winter months, due to seasonality, of 8.5%. January’s volume this year compared with the average for the kick-off month during the preceding five years, 2011 to 2015, was +18.6%.
(8) On a month-to-month basis, January relative to December, CMD’s institutional construction starts (+21.3%) led the way, followed by heavy engineering (+13.6%) and commercial (+3.8%). Year over year, engineering/civil was out front (+20.1%), with commercial (+13.2%) next, then institutional (+2.6%). Industrial, which almost always has a smaller dollar volume, − unless there is a mega project groundbreaking − was -49.1% month to month but +10.3% year over year.
(9) Canada’s housing starts in January, at 165,900 units seasonally adjusted and annualized (SAAR), slipped far below the 200,000-unit threshold that they tested or beat on numerous occasions in 2015. Canada Mortgage and Housing Corporation (CMHC)’s official 2015 home starts figure is 195,500 units, a 3.3% step up on 2014’s 189,300 units. Comparing residential foundation work in January of this year with its counterpart month last year, there was a diversity of performances among the nation’s six most populous cities. Vancouver (+34%) and Ottawa-Gatineau (+31%) were up, Montreal (0%) was flat, and Calgary (-24%) and Edmonton (-67%) were down. So far, the multi-unit market (-25%) is suffering while singles (+1%) hold their own.
(10) The great political debate over how well the U.S. economy is doing reduces to conflicting views concerning the labor force participation rate. Between 1998 and 2000, the participation rate maxed out at 67%. In the halcyon days from 2004 to 2008, prior to the Great Recession, it eased back to 66%. Currently, it sits at 62.7%. The 4.3 percentage point difference between today’s level and 1998-2000 represents 7.0 million potential workers. The 3.3 percentage point drop from ten years ago suggests 5.5 million more people who might be gainfully employed. Both numbers are large. Opponents of the Obama administration argue this proves how bad the economy remains – that hordes of individuals have looked around, been discouraged by their prospects and given up the fight to find a job. The counter-proposal is that the falling participation rate is the natural consequence of an aging population and that many baby boomers are retiring early. Watch as the Republican and Democratic candidates vying to lead their Parties in November’s presidential election lace on the gloves and climb into the ring to settle this brawl.
(11) There’s no way Saudi Arabia isn’t second guessing itself for opening the spigots on oil production. The price of crude once peaked near $150 USD per barrel. Then it settled in around $100 for an extended period of time. It has most recently sunk close to $25. The math is fairly straightforward. If the price of the product one is selling drops to only one-quarter of what was once taken for granted, the volume of sales must increase fourfold to maintain the total revenue needed for essential government spending programs, plus military action in Yemen. That’s not possible. The number of barrels of oil Saudi Arabia is shipping to the U.S. is actually declining. At least two other OPEC members, Venezuela and Nigeria, have become desperate for cash. And how about Iran’s timing? Looking forward to re-entering the world oil market, it negotiates a removal of sanctions, only to be met with a fire-sale price for its chief export asset.
(12) Add to the craziness in global oil markets the fact that several major central banks are experimenting with negative interest rates. Janet Yellen has testified that even the Federal Reserve has been contemplating dropping rates below zero, should more stimulus be required for America. No wonder investors are mopping their brows. We’re all sailing uncharted waters.