Q2 GDP Numbers in U.S. a Hearty Broth; in Canada, a Watery Stew

Sep 02, 2015

Second Quarter 2015 ‘real’ (i.e., inflation-adjusted) gross domestic product (GDP) results are now available for both the U.S. and Canada, from the Bureau of Economic Analysis (BEA) and Statistics Canada respectively.

2015 09 02 US and Canada GDP Graphic

The U.S. economy roared ahead in Q2, with a first estimate of +2.3% growth (quarter to quarter annualized) being revised to +3.7%. Q1 has also been adjusted upward, from a slight decline to +0.6%.

Canada’s economy has slipped into a ‘technical recession’, defined as at least two quarters of negative GDP change. Q4 2014 was +2.4%, but Q1 of this year deteriorated to -0.8%, which was followed in Q2 by -0.4%.

Both nations achieved annual GDP growth rates of 2.4% in 2014 versus 2013. For 2015 compared with 2014, the U.S. will likely record a similar figure. Canada will need good fortune during the remainder of this year to reach much above +1.0%.

The argument that Canada’s second half result will be an improvement over the first half is based mainly on the nation’s usual fortuitous positioning as a prime beneficiary of stronger U.S. growth. This may already be showing up in the monthly industry-based GDP results.

Prior to June, month-to-month industry-based GDP change in Canada was consistently negative, -0.2% in each of January, March and May and -0.1% in February and again in April. But in June, the sun burst through the clouds with an illuminating +0.5%. 

It’s been taking a while for Canada’s lower-valued currency (a.k.a., the ‘loonie’), relative to the U.S. dollar, to kick in as a source of better export sales from north to south. The hope, for Canadians, is that this effect will be more prominent in coming months.

U.S. buyers (e.g., consumers and business firms) are becoming more aware of the savings to be realized through shopping north of the border.

On the subject of consumer spending, households have been doing their part for the economy in both the U.S. and Canada of late. Personal consumption expenditures in the U.S. in Q2 were +3.1% annualized; but that’s not the best news. Durable goods spending was +8.2%.

The latter result is a reflection of U.S. motor vehicle sales returning to an annual level near 17 million units, just about equaling their peak at any time during the past several decades.

Canada’s household expenditures in Q2 were +2.4%, with durable goods at +6.6%. Passenger car and light truck sales (e.g., vans, SUVs, etc.) are setting all-time highs, with 1.9 million units likely to be exceeded in 2015’s annual tally. (The light truck market is surging ahead, while the traditional passenger car segment is in a stall.)

Spending on services in the U.S. in Q2 was a so-so +2.0%. Canada’s services component did better, at +3.2%. In Canada, it was non-durable goods that fell behind, -2.4% annualized.

Neither country has been seeing stellar investment in non-residential structures so far this year. The U.S. retreated in Q1, -7.4%, then reclaimed less than half that decline in Q2, +3.1%.

After a brutal Q1 drop in Canada’s non-residential structures investment in Q1, -23.6%, Q2 also fell, but not to the same degree, -8.9%. The energy sector has taken a big capital spending hit.

Residential structures investment has been better in both countries, although more so in America than in the home of Mounties and Timbits: +10.1% in Q1 and +7.8% in Q2 in the U.S.; +3.6% in Q1 and +1.2% in Q2 in Canada.

Investment in productivity-enhancing equipment in the U.S. was essentially flat, -0.4%, in Q2, after a tepid +2.3% in Q1. But that appears rosy-cheeked beside Canada’s -17.2% in Q2, on the heels of -6.2% in Q1.

Canada traditionally places many of its M&E purchase orders with foreign suppliers, especially ones based in the U.S., and the weak-valued loonie has markedly raised the price of such assets.

The same might be said for Canadian investment in intellectual property products, -17.2% in Q2 after -18.5% in Q1.  

The inverse of Canada’s sagging loonie is America’s muscle-flexing greenback. One might suppose this would play havoc with the U.S. GDP trade figures.

Nope, not so you’d notice.

U.S. exports of goods and services in Q2 were a rapid +5.2%, while imports were a slower +2.8%. Much of the exchange rate shock for the U.S. (i.e., hurting exports; helping imports) is being offset by the more than 50% decline in the global price of oil over the past year.

Furthermore, thanks to a ramping up of domestic hydraulic fracturing production, the oil-imports proportion of total U.S. fossil fuel consumption is on the decline.

Within U.S. total exports in Q2, goods were +6.5% while services were only +2.5%. As for total imports, goods were +2.7%, not quite keeping up with services, +3.2%.

In Canada, ‘goods’ foreign trade (e.g., a vast variety of raw materials) is much more important than ‘services’. Canada’s goods exports advance in Q2 was anemic, at just +0.8%. But at least that was better than in Q1, -2.0%.

And it outperformed goods imports, -1.2% in Q2 after -0.8% in Q1.

Enthusiasm concerning U.S. future GDP growth is tempered by two caveats. Q2 featured a substantial build-up of non-farm inventories. Should producers choose to relax their output efforts in favor of drawing down stocks in coming months, GDP’s bottom line will feel the impact.

Also federal government spending remained neutral in the latest quarter, 0.0%. The state and local contribution, though, at +4.3%, brought the total public sector to an acceptable, yet not outstanding, +2.6%.

Monetary policy, rather than fiscal, is continuing to provide most of the forward momentum for the U.S. economy – speaking of which, we’ll soon learn whether the Federal Reserve considers the latest U.S. GDP numbers buoyant enough to warrant an increase in its key policy-setting interest rate. (Other factors, such as an inflation rate now biased downward by falling import prices, will also play important roles in the decision-making.)   

Across the border, the Bank of Canada has to decide whether the latest signs of a pickup in economic output, after months of stagnation or slight decline, are substantial enough to warrant shelving another rate cut.

With the further dampening effect this might have on the value of a loonie that’s already under $0.80 USD, my guess would be ‘yes’.

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