Shooting for a GDP Growth Range of +2.0% to +3.0% in the U.S. and Canada

02/05/2013 by Alex Carrick


Canada’s “real” (i.e., inflation-adjusted) industry-based gross domestic product (GDP) increased 0.3% in November 2012 versus October 2012, according to Statistics Canada. That was the second fastest month-to-month gain in the first 11 months of last year, trailing only April’s +0.4%.

It was a relief to see the +0.3% figure in November after weak numbers in the three preceding periods, with October at a low +0.1%, September even at 0.0% and August down, -0.1%.

It also offers hope that the fourth quarter percentage-change result will be better than Q3’s. In Q3, the quarter-to-quarter annualized increase in Canada’s real GDP was only +0.6%, after rising 1.7% in both Q2 and Q1.

Canada should count itself fortunate if 2012 full-year GDP growth ends up close to +2.0% versus full-year 2011.

The latest three-month moving average gain in Canada’s GDP in November was +0.13%, which translates to an annualized rate of +1.6%. (It’s the three-month moving average change that is shown in the accompanying graph.)  

The year-over-year gain in Canada’s industry-based GDP in November was +1.3%. Goods-producing industries were +0.6% month to month and +1.1% year over year. The comparable figures for services-producing industries were +0.1% and +1.5%.

Goods accounted for 30% of total output, with services making up a much larger 70% share.

Most analysts believe Canada is headed for real growth in 2013 that will closely mirror 2012, about +2.0%. New homebuilding will moderate this year versus last year and in the resources sector, we’re still looking for an improvement in world commodity prices.

What’s the outlook for our closest trading partner, the U.S.? According to the Bureau of Economic Analysis (BEA), national output south of the border in the fourth quarter of last year was flat (-0.1% annualized) compared with the third quarter.

The U.S. Q4 results were held back by two exceptional circumstances. Worry over the fiscal cliff dropped federal defense spending by the most in 40 years, while inventory accumulation took a blow from Hurricane Sandy.

The forecasts for U.S. economic growth in 2013 are slightly more optimistic than for Canada, ranging from +2.0% to +3.0%.

There are still risks for the U.S. economy – primarily tied to politics and budget cutting in Washington – but there are also plenty of positives. 

The U.S. has added 200,000 jobs per month on average over the last three months.

U.S. motor vehicle sales this January were 15.3 million units seasonally adjusted and annualized, an increase of 9.4% versus the same month a year ago.

Housing starts have marched a long way along their recovery path and may reach as high as a million units (annualized) in at least one of the months of this year.

The U.S. energy sector is booming. Over the past five years, the volume of oil production in the U.S. has risen by 20%. For natural gas, it’s an even higher +30%.

The Purchasing Managers’ Index (PMI) of the Institute of Supply Management (ISM) was 53.1% in January, versus 50.2% in December 2012. Its current level is the highest since April 2012’s 54.1%.

A figure below 42.2% indicates both manufacturing and the overall economy are in decline. Between 42.2% and 50.0%, the economy is growing but manufacturing continues to stagnate. Above 50.0%, the economy and manufacturing are both forging ahead.

The PMI has been above 42.2% for the past 44 months. The current reading of 53.1% has historically corresponded with a real GDP growth rate of 3.4%.

The major stock markets indices are reacting positively to the better economic news. Dow Jones Industrials and the S&P 500 have both risen near all-time records.

The Federal Reserve has kept its policy-setting interest rate near 0.00% while also buying $85 billion in bonds monthly – $45 billion in Treasury bills and $40 billion in mortgage-backed notes.

Some of the regional governors of the Fed who meet with Chairman Ben Bernanke to debate policy are now asking when would be a good time to start removing monetary stimulus. It shouldn’t be done all at once.

The Fed might begin easing back on its asset purchases as early as the middle of this year, although most bets are still on early next year.  

The Fed’s stated policy is to keep interest rates at zero percent until the unemployment rate drops to 6.5%, with the “caveat” that inflation must not exceed 2.5%.

January’s U.S. jobless rate was 7.9% and December’s Consumer Price Index (CPI) was +1.7% year over year.

Canada's industry-based gross domestic product (GDP) - November 2012
(based on seasonally adjusted constant dollars)
U.S. month-to-month total job creation
Three-month moving averages of month-to-month per cent changes, placed in latest period.
Data source: Statistics Canada.
Chart: Reed Construction Data - CanaData.

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