The Pace of Decline Is Slowing

At least as far as Statistics Canada’s composite leading indicator is concerned, the good economic news is still found in the second derivative, or the change in the change.

Canada’s official data agency reported Wednesday that the pace of decline in its broad measure of economic activity slowed in May to 0.1 percent, the smallest in a series of nine consecutive declines. And the shift from a 0.9 percent drop in April is the largest month-to-month change in either direction since December 1965.

The leading index aggregates 10 indicators--housing, employment, the stock market, money supply, the US Conference Board’s Leading Economic Index, average workweek hours, new durable goods orders, shipments and inventories of finished goods, furniture and appliance sales, and other durable goods sales--that together represent all of the major categories of gross domestic product. The composite leading indicator is used to forecast economic conditions in the months ahead. Stock markets, for example, usually begin to decline before the economy declines and usually begin to improve before the economy starts to recover.

The May change reflects a 2.6 percent increase in the unsmoothed index (meaning the data hasn’t been averaged or otherwise manipulated so the curves on a graph, for example, are smooth and free of irregularities), the largest such gain in 30 years. This follows an initial 0.8 percent unsmoothed upturn in April. Eight of the 10 unsmoothed components rose in May, led by double-digit increases for housing, the stock market and orders for durable goods.

Source: Statistics Canada, Bloomberg

The housing component of the composite index, which includes both starts and sales, moved from a decline in April to a 1 percent gain in May as existing home sales continued to recover. The Canadian housing market has been written off by many observers as a delayed version of the US market. But in May existing home sales rose 8 percent on a month-over-month basis, bringing the total rebound in sales since January to 43 percent. Home prices are now up 0.4 percent year-over-year. Low borrowing costs, more affordable prices in many markets and some pent-up demand after the post-Lehman Brothers credit/sales freeze have provided some heavy duty support for housing. This could be an early sign that the correction in Canadian housing may be nearing an end.

The stock market component--the S&P/Toronto Stock Exchange Composite Index--rose by 3.2 percent on a rebound in commodity prices and a rally for the financials services sector.

While there were few positive advances in May, that the composite indicator showed such a dramatic improvement (although only dramatic slowing) is encouraging.

Although the housing index was among those factors driving the big turn, consumers remain cautious; furniture and appliance sales declined, as did other durable goods. And manufacturing continues to slide. “Despite steep cuts in output, shipments continued to fall faster than inventories of finished goods,” Statistics Canada noted. “New orders remained weak, especially for exports and capital goods.

StatsCan’s leading indicator is well correlated to gross domestic product for the same month, suggesting the “official recession” Canada entered into in the three months ended March 31 could already be nearing an end. StatsCan reported that GDP contracted by 1.4 percent in the first quarter, the worst result since 1991. This, though it actually bested consensus expectations of a 1.7 percent decline, means Canada has entered into the conventional media’s definition of recession as it’s the second consecutive quarterly GDP decline.

Canada is still among the strongest, if not the strongest, of the world’s developed economies. The government hasn’t had to bail out its banks, it has a strong balance sheet, and the country is blessed with significant resources to export once the global economy returns to more normal growth. These factors make “The Canada Trade” highly attractive from a US investor’s perspective.

In its early June GDP report, StatsCan placed much of the blame for the torpor on “lower spending in Canada and the United States, particular business investment in plant and equipment.” This led to a sharp decline in Canada’s exports and imports. StatsCan added that real GDP contracted at an annualized rate of 5.4 percent in the first quarter, compared with a 5.7 percent decline in the US economy. The Bank of Canada (BoC) had forecast a 7.3 percent annualized rate.

The market actually reacted positively to the Monday announcement, seeing the expectations-beating GDP number as yet another “green shoot.” It certainly is another instance of “better but not necessarily good.”

Another positive note for Canada in today’s leading economic indicator story: The US leading indicator held steady after more than a year of consistent declines.

Meet the New Boss, Same as the Old Boss

After two hastily arranged meetings on Tuesday, Prime Minister Stephen Harper and Liberal Party Leader Michael Ignatieff seem to have put a lid on a simmering conflict that, logically or not, threatened to boil over into a summer election nobody wants.

Doing his best Stephane Dion, Mr. Ignatieff demanded to see the minority Conservative government’s plan to reform Employment Insurance, specifics about how infrastructure funds allocated in Canada’s stimulus package have been spent and will be spent over the next several months, and a plan to return to fiscal balance. Mr. Dion’s successor as Liberal leader hasn’t made any specific EI recommendations, other than to tacitly endorse the Bloc Quebecois’ and the New Democrats’ non-starter proposal to make released workers eligible for benefits if they’ve put in 365 hours; this is a budget buster that Mr. Harper simply won’t consider. And toppling the government at this point would only delay efforts to help Canadians and the economy.

According to recent polling the Liberals have overtaken the Conservatives in terms of national support, but not by a margin that suggests they can win anything more than a weak minority government. Fundraising under Mr. Ignatieff has improved, but the party still lags the Conservatives as far as money in the bank and overall campaign preparedness are concerned. And Canadians don’t want a fourth federal election in five years.

Mr. Ignatieff has his own strengths, reflected in his party’s rising fortunes. This makes his mimicry of Mr. Dion’s idle threats and prompt back-downs particularly quizzical.

A former academic prone to dramatic, illogical, and fallow threats to bring down what is already, since June 2008, the longest-standing minority government in Canada since 1867: This would be Mr. Ignatieff’s Dion-ysian road to ruin.

In the words of Canadian political observer Tom Clark, host of CTV Newsnet’s Power Play, “I think Michael Ignatieff took a big stick and drew a line in the sand. And then he took that stick and erased parts of the line big enough that you could drive a prime-ministerial limousine through. Look, there’s not going to be an election over this.”

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