NEW YORK -- Canadian GDP output in May grew moderately weaker than anticipated rising 0.1 percent compared to market expectations of a 0.2 percent rise, several reports revealed today.
"This result represents a modest improvement from the no change in April although down markedly from the 0.6 percent surge recorded in March," said Paul Ferley, assistant chief economist with RBC Economics Research. "The strength emanated from the goods-producing side of the economy where activity rose 0.6 percent, which more than offset the -0.1 percent decline in the larger service-producing component of the economy."
The strength in goods-producing industries largely reflected a 3.4 percent surge in mining, and oil and gas extraction, reflecting the third consecutive significant gain in this component and representing widespread strength in both energy and base metal production. The latter reflected increased output from copper, nickel, lead and zinc mining operations in the month, more than offsetting a -1.6 percent drop in construction activity, which was concentrated in the residential component that dropped -3.8 percent.
Non-residential construction activity managed to rise 0.8 percent. Utilities output dropped -0.5 percent while manufacturing was generally flat rising just 0.1 percent.
The weakness in service-producing industries was led by a -1.8 percent drop in the wholesale trade component. Weakness was also evident in real estate commission reflecting a weakening in home sales. Some offset was provided by the retail sales component, which rose 0.3 percent in the month.
"Looking ahead to June, we assume further strengthening. In part, this assumption reflects the expectation that the outsized drop in wholesale trade will likely be partly retraced in June," said Ferley. "As well, given the significant job gains recorded during the second quarter of 2010 (i.e., employment grew an annualized 4.2 percent), we assume more strength in the retail sales component. GDP may also receive a boost from warmer than usual weather in June thereby sending utilities output higher. Finally, the G8-G20 summit may have provided a lift to growth late in the month."
"The limited gain in May GDP implies some downside risk to our current second-quarter growth rate of 3.0 percent although the magnitude of any undershoot will be limited by the extent of any bounce back in growth in June," said Ferley. "Although second-quarter growth will almost certainly be down from the 6.1 percent increase recorded in the first quarter, it will likely remain strong enough to put modest downward pressure on the unemployment rate.
"As well, growth in the second quarter is likely be strong enough to move the Canadian economy above its pre-recession peak recorded in the fourth quarter of 2007," he added. "With the slack built up during the recession being absorbed further, the Bank of Canada is expected to continue to tighten policy; nevertheless, the absence of inflation pressures will help keep the pace of interest rate hikes gradual. This sentiment is reflected in our forecast that assumes two more 25-basis point hikes before the end of 2010 -- one in September and one in the final quarter of 2010 -- yet still leaving the overnight rate at a still very stimulative 1.25 percent."
U.S. second-quarter GDP expanded at a 2.4 percent annualized pace
The first estimate of second-quarter 2010 GDP growth showed a 2.4 percent annualized gain, just short of expectations for a 2.6 percent annualized increase.
Revisions to the data going back to 2007 showed a generally softer economic performance with 2007 growth at 1.9 percent (compared to 2.1 percent), 2008 flat (compared to previously reported gain of 0.4 percent) and a -2.6 percent drop in 2009 from -2.4 percent.
The data revisions confirmed that the peak-to-trough decline in real GDP output was -4.1 percent, larger than the previously reported -3.8 percent. Conversely, growth in the first quarter of 2010 was revised up to 3.7 percent from 2.7 percent.
The details of the report showed that personal consumption increased at a 1.6 percent annualized pace, slower than revised 1.9 percent pace in the first quarter. Estimates of consumer spending on a quarterly basis were revised lower during the recovery period largely due to weaker spending on services.
In the second quarter, spending on both goods and services rose, and consumption expenditures were responsible for about half the quarterly growth rate. The report confirmed that spending picked up for the fourth consecutive quarter. Still, the saving rate jumped to 6.2 percent in the quarter, and previous quarterly rates were revised higher.
Residential investment rose at a 27.9 percent annualized pace in the quarter. Non-residential investment rose at a 17.0 percent annualized pace, a marked pick up from previous quarters. Spending on equipment and software posted another healthy gain, rising at a 21.9 percent pace, and non-residential structures investment posted the first gain since the second quarter of 2008, rising 5.2 percent.
Exports rose by 10.3 percent, which was solidly outpaced by a 28.8 percent rise in imports, resulting in the trade sector acting as a significant drag on quarterly growth of 2.8 percentage points. Inventories provided some offset to trade drag, with the contribution to growth from this component of 1.1 percentage points, much less than the support provided in the previous two quarters. Government spending increased by 4.4 percent and was responsible for 0.9 percentage points of the quarterly growth rate. On balance, final domestic demand increased at a 4.1 percent annualized pace, the fastest since the first quarter of 2006.
Annualized growth in the second-quarter core PCE deflator, the key inflation measure in the GDP report, was 1.1 percent, little changed from the 1.2 percent increase in the first quarter.
"The bright news in this report is that domestic demand picked up its pace backed by rising business investment and another increase in consumer spending," said Dawn Desjardins, assistant chief economist with RBC Economics Research. "Inventory rebuilding also kicked in, but support was much more limited than in the prior six-month period. The improvement in domestic demand is essential if the recovery is going to having staying power given that the bulk of fiscal support has already been implemented.
"Our forecast assumes that the economy will continue to grow with the increase in 2010 pegged at 2.9 percent on a fourth-quarter over fourth-quarter basis," she explained. "The Fed's updated forecasts look for the economy to grow in a range of 3.0-3.5 percent. Even with the economy growing at this pace, however, the amount of economic slack generated during the recession will slowly be reduced, inflation pressures will stay muted and the unemployment rate will gradually decline.
"For monetary policy, this is consistent with conditions staying extremely accommodative especially given that risks to the outlook have increased due to the European sovereign-debt crisis," said Desjardins.
"There is good news and bad news is this report. The bad news is that the recession was deeper than was previously estimated," said Desjardins. "The good news is that domestic demand is starting to kick in. As yet, it has not been enough to generate a significant narrowing in the output gap or a substantial decline in the unemployment rate; however, the seeds for a sustainable recovery are present.
"The Fed will likely view this report as a step in the right direction, but given the wide (and wider than was previously thought) output gap, low inflation and high unemployment rate, the Fed will maintain its current stance of providing the economy with extraordinary policy stimulus," she predicted.
In a separate statement, the Conference Board declared the U.S. rebound to be over.
"“The post-recession rebound is history. We don’t foresee a double-dip, but we do expect growth to slow even more markedly, to a 1.6-percent annualized rate in the second half of the year," said Bart van Ark, chief economist at the Conference Board. "The expected drop in government spending will be compounded by continued weakness among consumers and business – signaled by both Leading Economic Index for the United States and the Consumer Confidence Index. Such a slower pace is unlikely to sustain strong profit growth, and would also weigh on employment and wages.”
SOURCE: RBC Economics Research press release