weekly economic watch - march 29, 2018 · in canada, march’s will attract the most attention....

March 29, 2018

Table of Contents What we’ll be watching ............. p. 3 Calendar of upcoming releases .... p. 4 Annex – Economic tables ............ A1

Week in review CANADA: was down 0.1% in January, below consensus expectations calling for a 0.1% increase. Of the 20 industrial sectors, 9 saw lower output during the month. Services-producing industries were flat as declines in real estate, management and arts among others more than offset rises in administrative support and wholesale trade. Goods sector output declined 0.4% due to losses in mining/oil & gas, agriculture and utilities which dwarfed increases in construction and manufacturing. As a result, industrial production was down 0.7%. Overall, the report showed a first deterioration in output in five months. That being said, the decline is not overly worrisome as temporary factors impacted growth. Oil & gas extraction plunged 3.6%, its largest decline in 13 months, due to unscheduled maintenance shutdowns at some facilities. The pullback in real estate sector could also be temporary as the implementation of B-20 measures had caused front-loaded sales in December. Despite those temporary factors affecting growth early in 2018, we still expect GDP to come out around potential in Q1 (1.5%). For 2018 as a whole we are still confident about our 2.5% forecast. Indeed, in light of the large increase in spending, both Ontario and Quebec budgets will provide a lot of support to the Canadian economy. This assumes of course a favourable outcome of NAFTA negotiations in the coming weeks.

According to the , in January, average weekly hours worked were down

0.3% m/m and flat from a year earlier. Average weekly earnings advanced 0.2% m/m and 3.2% y/y (vs. 2.5% y/y in December).

UNITED STATES: The third estimate of exceeded consensus expectations by coming in at 2.9%, four ticks above the second estimate. There were upgrades to consumption and business investment, which translated into growth in real final sales (i.e., GDP excluding inventories) of 3.4% annualized (vs. 3.2% in the second estimate). Inventories saw a slight upgrade in their contribution as well but nevertheless remained a net drag on Q4 activity.

Here is how the major components contributed to Q4 growth:

The U.S. economy ended 2017 like a tiger, though the upwardly revised Q4 GDP growth results did not alter the 2.3% growth print for the year as a whole. Particularly encouraging was the upgrade to real final sales, which reflects continued strength in demand. Though January and February data suggest growth will cool to under 2% annualized in 2018Q1, this is no reason to fear the worst for the U.S. economy. For one, a slowdown was to be expected after a strong second half of 2017 where annualized growth averaged 3.0%, which is well above potential. Second, after consumers drew on savings the prior quarter (the savings rate fell to 2.6% in Q4, its lowest level since 2005), it was not surprising that they should take a breather in Q1. Third, residual seasonality cannot be ignored: In the past 30 years, Q1 has

-.8

-.6

-.4

-.2

.0

.2

.4

.6

.8

-4

-3

-2

-1

0

1

2

3

4

5

6

2016q1 2016q2 2016q3 2016q4 2017q1 2017q2 2017q3 2017q4 2018q1

%

Canada: A first decline in five monthsReal GDP by industry

NBF Economics and Strategy (data via Statistics Canada)

Monthly change (L)

3-month annualized (R)

%

3rd est. 2nd est. Adv. Est.

GDP 2.9 2.5 2.6

Consumption 2.8 2.6 2.6

Business Investm. Equip./Intell. 0.7 0.7 0.8

Business Investm. Struct. 0.2 0.1 0.0

Residential Investm. 0.5 0.5 0.4

Government 0.5 0.5 0.5

Domestic Demand 4.6 4.4 4.3

Exports 0.8 0.8 0.8

Imports -2.0 -2.0 -2.0

Trade -1.2 -1.1 -1.1

Final Sales 3.4 3.2 3.2

Inventories -0.5 -0.7 -0.7

NBF Economics and Strategy (data via Datastream)

Contributions to 2017Q4 real GDP growth

Weekly Economic Watch

2

generally been the weakest quarter of the year. In sum, the U.S. economy is probably in better shape than monthly reports would suggest so far in the first quarter of 2018.

According to the , home prices rose 0.75% in January in seasonally adjusted terms after climbing 0.67% the prior month. The monthly gain lifted the index above its pre-recession peak for the first time (207.4 vs. 206.7 in April 2006). For the second month running, all 20 cities covered by the index recorded higher prices, led by Seattle (+1.6%) and Atlanta (+1.4%). On a 12-month unadjusted basis, the 20-city index was up 6.4%, its sharpest increase since July 2014. In the 12 months to January, prices rose at a particularly brisk pace in Seattle (+12.9%), Las Vegas (11.1%), and San Francisco (10.2%). Alternatively, y/y price hikes were more modest in Chicago (+2.4%) and Washington, D.C. (+2.4%). Home prices have been supported lately by tight supply on the resale market. In February, the inventory of existing homes on sale was equivalent to only 3.7 months of sales in seasonally adjusted terms, which is just one tick shy of the all-time low of 3.6 attained last November.

The fell 2.3 points in March from a 17-year high of 130.0. The decrease was driven in part by the present situation sub-index, which dropped 1.3 points to 159.9. Consumer assessment of current economic conditions was perhaps dampened by the bluster out of Washington regarding tougher trade tariffs. This notwithstanding, households remained upbeat about employment as evidenced by the fact that respondents that deemed jobs plentiful exceeded by 25.0 percentage points those that found jobs hard to come by. This was the widest differential since May 2001. The expectations sub-index, which gauges consumer outlook over the next six months, retreated 3.0 points to 106.2. All in all, consumer confidence remained robust and should be a driver for household consumption in the first quarter of 2018. It is worth recalling that consumption expanded 4.0% in annualized terms in 2017Q4, its best showing in four years.

rose 3.1% m/m in seasonally adjusted terms in February after slumping 5.0% in January. Year on year, contract signings were down 4.4% on an unadjusted basis.

For the third month in a row, nominal increased 0.4% m/m in February. The wage/salary component of income sprang 0.5%, while disposable income spiked 0.4. Nominal

, for its part, advanced 0.2% after progressing 0.2% in January. Adjusted for inflation, disposable income grew 0.2% thanks to recently enacted tax cuts. Meanwhile, spending was flat. As a result the rose to 3.4%, a welcome development that should enable consumers to repay some of their debt (the latest FDIC data showed overdue credit card debt was at a seven-year high.)

Still in February, the headline rose 0.2% m/ allowing the year-on-year rate to rise one tick to 1.8% (from 1.7%). Concurrently, the core PCE measure advanced 0.2% m/m. This movement also allowed the 12-month figure to rise one tick to 1.6%, below but approaching the Fed’s 2% target. This indicator’s recent momentum is encouraging On a 3 month annualized basis it was up 2.8% in February.

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9

10

11

12

100

110

120

130

140

150

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170

180

190

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210

220

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Home prices in U.S. cities top their pre-recession peak S&P CoreLogic Case-Shiller 20-City Index vs. seasonally adjusted inventory-to-sales ratio of existing homes

Index


Case-Shiller 20-City Index (R)

Inventory-to-sales ratio on resale market (L)

The 20-City Home Price Index cleared its pre-recession peak in January…

…thanks in part to tight supply on the resale market

Ratio

-50

-40

-30

-20

-10

0

10

20

30

40

50

2002 2004 2006 2008 2010 2012 2014 2016 2018

Households remain upbeat about employment opportunitiesConference Board labour market differential

%


At highest level in over 16 years

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

2014 2015 2016 2017 2018

Inflation pressures are mounting in the U.S.PCE Core measure 3 month annualized change

% 3m chg. ann.


Weekly Economic Watch What We’ll Be Watching

3

In Canada, March’s will attract the most attention. After wild gyrations between November and January, job creation returned to a more normal path in February with 15.4K jobs added in the month. Such a performance is roughly in line with what we expect to be the

monthly average for the rest of the year. Considering that hiring intentions remained high among Canadian businesses in March, there is no reason to expect a sharp drop in employment. Consequently, we are calling for a 20K increase in the month, a development that should leave the unemployment rate unchanged at 5.8%. We’ll also get data on January’s . Energy exports may have shrunk in the month in light of falling prices. The resulting negative impact on the overall trade balance may have been compounded by an increase in nominal imports after the largest monthly drop in six months in January (-4.3%). All in all, the trade deficit may have widened to C$2.50 billion. for March will also be released this week.

In the U.S, the publication of for March will be watched closely. We expect a moderation in the pace of job creation following a stellar result in February (+313K). That said, initial jobless claims continued to hover around historical lows in March, suggesting that the pace of layoffs

remained subdued. What’s more, Markit’s composite PMI report showed employment expanding at the fastest pace since early 2015 in March, hinting at a good month for hiring. All in all, our call is for a 195K print. Meanwhile the unemployment rate may drop one tick to 4.0% if, as we believe, the shows moderate positive employment gains in March. Also in March, the

could have continued its increase if Markit’s manufacturing PMI is any guide. We’ll also keep an eye on the publication of several indicators for February, including , ,

and .

Elsewhere in the world, February’s and numbers will

be published in the Eurozone alongside March’s . In Japan, the will be released for the first quarter. Finally, China’s

will be available for March.

Previous NBF forecasts

LFS employment (March m/m chg.) 15.4K 20.0K

Unemployment rate (March) 5.8% 5.8%

Merchandise trade balance (February) -C$1.91B -C$2.50B

-100

-80

-60

-40

-20

0

20

40

60

80

100

5.7

5.8

5.9

6.0

6.1

6.2

6.3

6.4

6.5

6.6

2017M05 2017M07 2017M09 2017M11 2018M01 2018M03

Canada: Another decent month for job creation in MarchEmployment and jobless rate

m/m chg. thousands

NBF Economics and Strategy (Source: Statistics Canada via Datastream)

Unemployment rate (R)

Employment (L)

NBF Forecast

%

20K

5.8%

Previous NBF forecasts

Non farm payrolls (March m/m chg.) 313K 195K

Unemployment rate (March) 4.1% 4.0%

ISM manufacturing (March) 60.8 61.0

0

40

80

120

160

200

240

280

320

3.9

4.0

4.1

4.2

4.3

4.4

4.5

4.6

4.7

4.8

2017M03 2017M06 2017M09 2017M12 2018M03

U.S.: Employment may have strengthened further in MarchNon farm payrolls vs. unemployment rate

m/m chg. thousands


Unemployment rate (R)

Employment (L)

NBF Forecast

%

195K

4.0%

Weekly Economic Watch Economic Calendar – Canada & U.S.

4

Weekly Economic Watch Annex – Economic Tables

A1


A2


A3


A4


A5


A6


A7


A8


Economics and Strategy

Montreal Office Toronto Office

514-879-2529 416-869-8598

Stéfane Marion Marc Pinsonneault Kyle Dahms Warren Lovely Chief Economist and Strategist Senior Economist Economist MD & Head of Public Sector Strategy [email protected] [email protected] [email protected] [email protected]

Paul-André Pinsonnault Matthieu Arseneau Jocelyn Paquet Senior Fixed Income Economist Senior Economist Economist [email protected] [email protected] [email protected]

Krishen Rangasamy Angelo Katsoras Senior Economist Geopolitical Analyst [email protected] [email protected]

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weekly economic watch - march 29, 2018 · in canada, march’s will attract the most attention....

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