Daily Economic Updates

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	Recent economic updates

U.S. initial jobless claims fell in the week ending February 4, 2012
February 9, 2012

• Initial claims dropped 15,000 to 358,000 in the week ending February 4, 2012, which was below market expectations for a 370,000 reading, and building on a 6,000 drop to an albeit upwardly revised 373,000 level (was 367,000) the previous week.
• Continuing claims rose 64,000 to 3,515,000 in the week ending January 28, 2012 partially reversing a 116,000 drop the previous week.
• The four-week moving average of initial claims, which better controls for weekly volatility, fell to its lowest level since April 2008, dropping to 366,250 from a revised 377,250 (was 375,750) the previous week.
• Part of the improvement in jobs growth in recent months, particularly the solid 52,000 gain in construction employment in January 2012 and December 2011 combined, may reflect the effect of an unusually warm winter resulting in fewer seasonal layoffs. With that said, while we do not expect job growth to be sustained at quite the solid 243,000 pace in January 2012, the broadly downward trend in initial claims since the summer remains consistent with our view that the underlying trend in labour markets continues to improve.

US initial unemployment insurance claims declined 15,000 to 358,000 in the week ending February 4, 2012, thereby building on a 6,000 drop to an upwardly revised 373,000 level (initially reported as 367,000) the previous week. The level of claims in the latest week was below market expectations for a 370,000 reading. The four-week moving average of initial claims, which better controls for weekly volatility, declined for a fourth consecutive week, falling to 366,250 from 377,250 (was 375,750) the previous week. Continuing claims rose 64,000 in the week ending January 28, 2012, thereby partially retracing the previous week’s 116,000 decline.

The downward drift in the four-week moving average of initial claims from a recent 422,000 peak in August has been reflected in stronger job growth in recent months with solid 243,000 and 203,000 gains in January 2012 and December 2011 payroll employment that were both well above the previous six-month average of 123,000. Part of the improvement in both the claims and jobs data in recent months, particularly the sizeable 52,000 gain in construction jobs in January 2012 and December 2011 combined, may reflect the effect of an unusually warm winter resulting in fewer seasonal layoffs. With that said, while we do not expect job growth to be sustained quite at the pace of the last two months, the encouraging improvement in the initial claims data continues to suggest that the underlying trend in labour markets is improving.

Nathan Janzen, Economist, RBC Economics

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Recent Economic Updates

Canadian housing starts decline by less than expected in January
February 8, 2012

• Housing starts decreased by 1.0% in January 2012 to an annualized pace of 197,900 versus expectation of a larger drop to 194,000.
• The overall decline was due to a 7.8% decrease in the urban single-unit start component. Urban multiple-unit starts edged up by 0.4% while rural starts jumped 16.4%.
• Sharp declines were seen in Atlantic Canada (-35.4%) and Quebec (-34.4%). British Columbia (28.0%) and Ontario (11.1%) posted strong gains while the Prairies saw a more modest increase (2.3%).
• The modest decline in housing starts in January leaves a slightly firmer pace of new home construction than expected to start the new year. We anticipate that residential construction activity will ease at a fairly gradual rate during the forecast horizon.

Canadian housing starts decreased by 1.0% in January 2012 to an annualized pace of 197,900 units from the unrevised 199,900 pace reported in December 2011. Market expectations had been for a slightly larger decline in the pace of new home construction to 194,000 annualized units. The overall decline in housing starts was due to a 7.8% decrease in the urban singles component (to 64,900 annualized units), which completely reversed the gains seen in the previous two months. Urban multiple-unit starts followed December’s outsized 13.9% surge with a more modest 0.4% increase to 111,700 annualized units, while rural starts jumped 16.4% in the month to 21,300.

Urban starts plunged in Atlantic Canada (-35.4%) and Quebec (-34.4%) as sharp declines in the multiples components (-54.0% and -42.4%, respectively) weighed on activity. In contrast, continued strength in multiple-unit starts drove solid overall gains in British Columbia (28.0%), Ontario (11.1%), and also supported increased activity in the Prairies (2.3%).

The pace of new home construction in Canada continues along at a fairly robust clip, led by surprisingly persistent strength within the urban multiples component. While the better than expected showing in the starts data in the recent months likely partly reflects the generally milder than usual temperatures that have been prevalent across the country, the growth highlights the continued strength of activity within the Canadian housing market. With that said, today’s report indicated a modest slowing in the pace of activity, with January’s reading down from the 199,000 average seen in the fourth quarter of 2011. We anticipate that residential construction activity will continue to ease at a fairly gradual rate during the forecast horizon, reaching an annual pace of 183,000 in 2013.

David Onyett-Jeffries, Economist, RBC Economics

Canada's labour market disappointed in January 2012
February 3, 2012

• Canada's economy generated a meagre 2,300 jobs in January 2012, which was much less than expectations for a 22,000 rise.
• The unemployment rate rose to 7.6%.
• Data have been running hot and cold, with today's employment report showing little change in employment after declines in two of the previous three months. On net, the labour market generated 20,000 new jobs since September 2011. Canada's labour market is showing signs of fatigue after very strong growth in 2010 and early 2011 although we expect hiring to ramp up again in the months ahead. The Bank of Canada is monitoring both domestic and external developments, and today's report supports the case for accommodative policy to be maintained.

Employment increased by a meagre 2,300 in January 2012 thereby marking the second monthly rise and working to offset declines in November and October 2011 of 5,500 and 52,700, respectively; however, January's increase was much smaller than the 22,000 rise expected by forecasters. The unemployment rate inched up to 7.6% from 7.5% in December 2011 as the labour force increased by 23,700. Statistics Canada, in January, made benchmark revisions to the labour data, resulting in a net increase in employment in 2011 of 190,000, which was slightly less than the 199,000 increase in the preliminary estimate for the year. The unemployment rate's recent low in September 2011 was revised to 7.2% from 7.1% although the end of year rate was unchanged at 7.5%.

The details of the report showed that both public and private-sector jobs were created in January although these gains were almost offset by a slump in self-employment. In January, jobs were created in the goods-producing sector of the economy while the services sector cut 7,000 positions. Gains in manufacturing and primary industries were supplemented by hiring in retail and wholesale trade, education, information, culture, and other services. These gains, however, were largely offset by declines in construction, finance, insurance and real estate, food and accommodation services, and professional services. In total, there were 9,300 goods-sector positions added. Manufacturers added another 10,100 to their workforce, marking the second consecutive month of gains for a total of 36,100.

It was full-time positions that were cut in January with a loss of 3,600 reported while part-time jobs increased by 5,900. In 2011, employers added 205,000 full-time workers to their payrolls with 15,000 part-time jobs lost. The public sector added 19,600 workers in January while private-sector employment rose by an equal amount. The number of self-employed individuals fell by 37,000 in January, which may explain some of the sharp declines in finance, insurance, and real estate (-23,200) and professional services (-44,800).

Quebec's unemployment rate dipped by 0.3 percentage points to 8.4% as 9,500 jobs were created in January, thereby tempering the decline during the past 12 months to 45,000. Saskatchewan's unemployment rate posted a 0.2 percentage points decline to 5.0%. Ontario lost 7,500 jobs in January, and the unemployment rate rose 0.4 percentage points to 8.1%.

Average hourly wages for permanent workers in January were up 2.2% relative to a year earlier.

The small increase in employment in January was disappointing and runs contrary to recent years when there were big gains at the start of the year. The gyrations in the labour market mirror the slowing in activity evident in the final quarter of 2011 with recent data reports consistent with growth at a 1.5% annualized rate and a significant slowing from the third quarter's 3.5% gain. We expect that the economy will post stronger gains in the first quarter of 2012 as temporary factors that reduced activity in the fourth quarter of last year are reversed. Our assumption is that the economy will pick-up pace over the course of the year aided by stimulative monetary policy, stronger US growth, and, in our view, that disruptions from Europe will diminish as the problems are contained within the region. In order to ensure that the economy does not stall, the Bank is likely to maintain a very stimulative policy stance throughout 2012.

Dawn Desjardins, Assistant Chief Economist, RBC Economics

U.S. service sector growth surged in January

• The ISM non-manufacturing index jumped to 56.8 from 53.0 in December 2011resenting its highest level since last February.
• The “business activity” and “new orders” components each surged to 10-month highs of 59.5 from 59.4, respectively.
• After contracting in December 2011, the “employment” index vaulted to its highest level in almost six years at 57.4.

The ISM non-manufacturing index showed that the service sector expanded in January 2012 and that the pace of growth accelerated sharply as indicated by the gauge rising to 56.8 from 53.0 in December 2011 (a reading above 50 indicates that the sector is generally expanding; higher readings indicate a faster pace of growth). This represented the highest level for the index since last February and was well above market expectations for a modest increase in the January measure to 53.2.

The details of the report mirrored the solid headline. “Business activity” and “new orders” each jumped to a 10-month high in January at 59.5 and 59.4, respectively (up from 55.9 and 54.6, respectively in the previous month). Perhaps most encouraging, the “employment” component surged by 7.6 points to 57.4, which is its highest level since February 2006 and a stark turnaround from last month’s reading that indicated service-sector employment contracted. Rounding out the main components of the report, the “supplier delivery” measure declined to 51.0 from 51.5 in December to indicate that delivery times from suppliers were modestly faster than in the previous month, although still slow (supplier delivery times tend to lengthen when capacity is being constrained).

January’s ISM manufacturing and non-manufacturing surveys indicate that the US economy picked up speed at the start of the new year as the composite index touched a 10-month high of 56.5. Moreover, the gains within the “new orders” components of each measure suggest that this upward growth momentum may well be sustained during the coming months. The reported surge in service-sector employment corroborates the non-farm payroll report released earlier this morning that showed solid broad-based gains. On the whole, today’s reports are encouraging and provide indications that the recovery of the US economy may finally be picking up its pace; however, despite the improvement in labour market conditions, the unemployment rate remains well above the Fed’s ‘target’ range of 5.2% to 6.0%, thereby making it likely that the current highly accommodative policy stance will remain in place for the foreseeable future.

David Onyett-Jeffries, Economist, RBC Economics

U.S. payroll employment surges in January

• January 2012 non-farm payroll employment gained a robust 243,000 following gains in December and November 2011 of 203,000 and 157,000, respectively.
• The unemployment rate unexpectedly dropped to 8.3% from 8.5% in December.
  Government jobs fell 14,000 with private payrolls up 257,000.
• Today’s report provided the encouraging news that both employment gains strengthened going into 2012 and the unemployment rate moved lower. Despite this improvement, however, the unemployment rate remains historically high. To assure further improvement in labour market conditions, the Fed will continue to keep monetary conditions highly accommodative. Our forecast assumes that the current Fed funds rate will remain at its current range of 0% to 0.25% going into 2014.

Payroll employment in January 2012 rose a robust 243,000 and clearly outpaced market expectations of a more moderate 144,000 increase. Also encouraging was cumulative upward revisions of 60,000 for the previous two months resulting in gains in December 2011 of 203,000 (200,000 previously) and in November of 157,000 (100,000 previously). Strengthening labour markets going into 2012 were also conveyed by the unemployment rate dropping to 8.3% from 8.5% in December and 8.7% in November.

Expectations were for some slowing in job gains in large part due to the view that the December gain had been buoyed by the transportation and warehousing component jumping 50,200 in the month. This strength was largely due to a 42,200 surge in the couriers and messengers component that reflected increased Christmas purchases over the internet. This has been a growing trend in the past two years where strong December gains were followed by almost equal-sized declines in January that weighed on the overall monthly gain in payroll employment. The BLS, which compiles the employment report, has estimated new seasonal factors that have essentially eliminated this effect. The December gain in the transportation and warehousing component was cut to only 6,700. In January, this component managed to rise modestly by 13,100. This change did not prevent an overall, albeit minimal, upward revision to December payrolls, as it was largely offset by greater strength in professional and business services.

The overall payroll gain continues to be weighed down by declining government employment, which dropped 14,000 in January. Thus private-sector employment gained a stronger 257,000 following solid gains in December and November of 220,000 and 178,000, respectively. Goods-producing industries saw an 81,000 surge in the month that was helped by manufacturing employment showing another solid monthly increase of 50,000. Service-producing jobs were up 176,000 and were led by a 70,000 increase in the professional and business-services components.

The hours worked component of the report indicated that the overall workweek held steady at 34.5 hours although for manufacturing it jumped to 40.9 hours from 40.6 hours in December. The gain in overall employment was thus the main factor sending the index of aggregate weekly hours up 0.2% in the month. The level of this index is already up an annualized 2.6% relative to the fourth quarter of 2011. Such results provide little indication of any marked slowing in economic growth going into 2012. The index for manufacturing was up an impressive 1.2% in the month benefitting from both employment gains and a longer workweek.

The index of average hourly earnings, the principal wage measure in the report, rose 0.2% in the month and 1.9% during the past year. The annual rate is down from 2.1% in December.

The employment report provided encouraging signs that labour markets and economic activity have strengthened going into 2012. Despite the improvement, however, the unemployment rate remains historically high and above the Fed’s view of a so called equilibrium rate of 5.2% to 6.0%. Thus, policy is expected to remain highly accommodative to encourage a further closing of this labour market gap. Our forecast assumes the Fed funds at its current highly accommodative level of 0% to 0.25% going into 2014.

Paul Ferley, Assistant Chief Economist, RBC Economics

U.S. initial jobless claims fell in the week ending January 28
February 2, 2012

• Initial claims fell 12,000 to 367,000 in the week ending January 28, 2012 reversing half of the 24,000 jump to a revised 379,000 (was 377,000) level the previous week. Market expectations were for a decline to a 371,000 level in the latest week.
• The four-week moving average of initial claims, which better controls for weekly volatility, dipped for a third consecutive week, falling to 375,750 from a revised 377,750 (was 377,500) the previous week.
• While the initial claims data continued to point to an ongoing underlying improvement in labour markets, employment growth in December 2011 was boosted by an outsized, and likely temporary, jump in hiring of couriers that reportedly reflected rising Christmas sales over the internet. A retracement of this gain in January 2012 is expected to be the main factor contributing to a lower 110,000 gain in overall payroll employment in the month, which would be down from the 200,000 December gain.

US initial unemployment insurance claims fell 12,000 to 367,000 in the week ending January 28, 2012 retracing half of a 24,000 rise to 379,000 reading (initially reported as 377,000) the previous week. The level of claims was slightly below market expectations for a decline to 371,000. At least part of the volatility in claims over the last two weeks could be a result of difficulties seasonally adjusting the data around Martin Luther King Jr. Day. The four-week moving average of initial claims, which better controls for weekly volatility, declined for a third consecutive week, falling to 375,750 from 377,750 (was 377,500) the previous week. Continuing claims fell 130,000 to 3,437,000 in the week ending January 21, 2012 from 3,567,000 the previous week.

While the downward drift in claims in recent months continues to point to an underlying improvement in labour markets, the effect of today’s report on expectations for tomorrow’s January payroll employment report will likely be limited given that the payroll employment survey was conducted earlier in the month (the payroll survey is conducted in the week containing the twelfth day of the month). The four-week moving average of initial claims was little changed in the January payroll survey week at 379,750 compared to a corresponding reading of 380,750 in December. This would, normally, point to a solid pace of employment growth being maintained in January following a 200,000 gain in December; however, employment in December was boosted by a temporary 42,200 jump in hiring of couriers and messengers reportedly reflecting rising Christmas sales over the internet. A similar-sized decline in hiring in this sector, now that the Christmas shopping period is finished (similar to the hiring pattern in both 2010 and 2009), is expected to be the main factor limiting overall employment growth to a smaller 110,000 gain in January 2012.

Nathan Janzen, Economist, RBC Economics

Canadian RBC January PMI indicates markedly less improvement in business conditions
February 1, 2012

• The overall RBC Purchasing Managers’ Index (PMI) for January 2012 indicted that business conditions in the manufacturing sector continued to improve, albeit barely so, with the diffusion measure dropping sharply to 50.6 from 54.0 in December 2011.
• The less robust improvement in business conditions mainly reflected lower readings for new orders, output, and employment.
• The diffusion measure dropped in all four regions of the country surveyed with improving conditions only being maintained in two.
• With the marked lessening in the pace of improvement in manufacturing business conditions, the Bank of Canada has additional reason to maintain its highly accommodative stance of policy.

The RBC Canadian Manufacturing Purchasing Managers’ Index (PMI) for January indicated that, although conditions in the manufacturing sector continued to improve, the rate of improvement slowed sharply. Specifically, the overall diffusion measure dropped to 50.6 in January 2012 from 54.0 in December 2011. Any reading above 50 indicates improving conditions with the wider the gap above the breakeven level, the greater the extent of the improvement.

The overall PMI index is compiled as a weighted sum of five individual components. In January, the marked lessening in the pace of improvement in business conditions reflected the significant deterioration in three of the components: new orders, output, and employment. It was the case that Canadian manufacturers saw further increases in new orders with a January index reading for this component of 50.9. This, however, compared to a much higher level of 56.1 in December. In part, this reflected a deterioration in the export orders index, which is not included in the compilation of the overall index, which dropped to 47.5 in January from 51.4 in December. This indicates that firms saw a decline in new work from abroad after seeing an increase in December. The trend in new orders was mirrored in the production index, which still indicated rising output with an index reading of 51.1 but at a slower pace than that suggested by a higher 55.4 reading in December. More disconcerting is that the employment index now indicates a shift from job creation to job reductions with the measure falling to 49.4 from 53.2. This represented the first month of net job reductions since the series was first compiled starting in October 2010.

The fourth sub-component, supplier delivery times, implied a more modest deterioration relative to the previous three sub-components. This index, which enters inversely into the overall measure, rose to 46.9 from 46.6. This indicates that delivery times continued to lengthen in January although less so relative to December. The fifth component, stock of purchases, tempered the overall weakening, with the sub-index rising slightly to 47.4 in January from 47.1 in December. Although this indicated that input inventories continued to be depleted, the pace did ease in January.

In terms of the other component of the survey, most indicated weakening conditions. The backlog of work index dropped to 46.5 in January from 48.0 in December and represented the fastest depletion of backlogged orders for the 16 months that the series has been compiled. Similarly, the stocks of finished goods index dropped to 46.6 in January from 47.5 in December and was once again the fastest pace of depletion in the past 16 months. The respondents, however, indicated that in part, this was attributable to company policies requiring leaner inventories. The quantities of purchases index indicated that companies continued to buy inputs with the index remaining above 50 at 50.5; however, this represented a much slower pace of purchases relative to the December index reading of 53.7.

The survey also provided some insights in terms of inflation pressures faced by firms (although these components are not used to compile the overall PMI). The input price index indicated that firms faced an acceleration in prices with the index rising to 57.7 from 52.3 in December. This represented the first acceleration in input prices since April 2011. Respondents indicated noteworthy increases for raw materials such as metals, resins, and food products. Output prices accelerated as well although less so compared to input prices with the index measure for these prices rising to only 52.2 in January from 50.9 in December.

The RBC PMI is also calculated on a regional basis for Ontario, Quebec, Alberta and British Columbia, and the Rest of Canada. The January data indicated that the diffusion measure moved lower for all four regions. The measure for Alberta and British Columbia managed to remain above 50 and indicated the strongest improvement in business conditions with an index reading of 54.0 in January; nevertheless, this was down from 57.0 in December. The Ontario reading showed some improvement in business conditions although barely so with a reading of only 50.2. This result was down sharply from the 55.4 reading in December. The Rest of Canada measure showed business conditions switching to deteriorating in January from improving in December with the index dropping to 48.8 from 51.0 between these two months. It was a similar situation in Quebec, where confidence in January weakened the most among all four regions by dropping to 46.9 from 50.0 in December.

The RBC PMI indicates that business conditions in Canadian manufacturing continue to improve in January although at a much slower rate relative to December. As well, it reflected a relatively precipitous slide in confidence that potentially runs the risk of initiating a negative feedback loop. To counter such, the Bank of Canada will find further reason to keep monetary conditions highly accommodative. Indications of falling export orders reinforce the central bank’s concern about a weakening external environment providing the greatest downside risks to growth in Canada.

Paul Ferley, Assistant Chief Economist, RBC Economics

U.S. growth in manufacturing sector strengthened in January 2012; Construction spending beat expectations in December 2011

• The ISM manufacturing index rose to 54.1 in January 2012. This is its highest level since June 2011, although it was slightly below market expectations for an increase to 54.5.
• The “new orders”, “supplier deliveries”, and “inventories” components all rose, while the “production” and “employment” components fell; however, all components except inventories remained in expansion territory.
• In a separate report, construction spending rose a stronger than expected 1.5% in December 2011.

The US manufacturing sector expanded for the thirtieth consecutive month in January 2012, and the pace of growth accelerated as indicated by the ISM manufacturing index rising to 54.1 from 53.1 in December 2011 (initially reported as 53.9). This leaves the index at its highest level in seven months. The Market expected a slightly larger increase to 54.5.

Gains in the ISM index in January were due to increases in the “new orders”, “supplier deliveries”, and “inventories” components. The new orders index increased by 2.8 points to 57.6, which is its highest level since April 2011. The supplier deliveries component rose to 53.6 in January from 51.5 in December, indicating that manufacturers are seeing a slower pace of delivery (when the economy is growing, delivery times tend to become slower due to increasing demand). Inventories continued to fall in the month, although at a much slower pace than in December: the inventories index was 49.5 in January compared to 45.5 last month. Although this weighs on the overall index, it could imply that strong demand is being supplied to inventories rather than new production. The “production” and “employment” indices both fell but remained in expansion territory, indicating that these components continued to grow but at a slower pace than previously. The production index fell to 55.7 from 58.9 last month, while the employment component fell only slightly to 54.3 from 54.8. Inflationary pressures appear to be picking up, with the “prices paid” component rising to 55.5 from 47.5, its first reading over 50 since September 2011.

The Institute for Supply Management (ISM) also released its annual revisions to historical data this week. Based on a recommendation from the Department of Commerce, this year’s revisions cover a period of seven years instead of the usual four. The revisions show only minor changes, with the overall pattern of the index remaining essentially unchanged. Details of the revisions are available on the ISM website.

Today’s ISM manufacturing report indicated that the manufacturing industry continued to expand in the first month of 2012. The details of the report were encouraging, showing that all components expect inventories remained in expansion territory. This sets the stage for the fourth-quarter 2011’s solid increase in goods production to continue into this year and bodes well for overall GDP growth to rise an annualized 2.8% in the first quarter of 2012. This would be unchanged from the current estimate for the previous quarter, although the construction data imply a possible 0.1 percentage point upward revision to the fourth-quarter 2011 rate.

In a separate release this morning, construction spending in the US rose 1.5% in December 2011, beating market expectations for a 0.5% increase. This represents an acceleration from November’s 0.4% pace of growth (initially reported as 1.2%). The strength in December was seen in both the private and public sectors with construction spending up 2.1% and 0.5%, respectively in the month. Spending on non-residential construction showed a particularly rapid increase up 1.9% in the month. This leaves non-residential construction at its highest level since December 2009. Residential construction rose by a slower 0.8% after posting a -0.3% contraction in November (initially reported as 1.8%).

Kirsten Cornelson, Economist, RBC Economics

Canadian November 2011 GDP unexpectedly declines
January 31, 2012

• GDP activity in November 2011 unexpectedly fell 0.1% following unchanged activity in October.
• The decrease was led by the mining and oil and gas extraction component falling 2.2% in the month along with declines in utilities (0.6%) and construction (0.3%).
• Activity among service-producing industries managed to show an increase in rising by a minimal 0.1%.
• The drop in November output suggests a more pronounced slowing in fourth-quarter 2011 GDP growth than previously expected with the annualized rate being more than halved to 1.5% from the 3.5% recorded in the third quarter of 2011. Some of this slowing reflects temporary factors that will reverse in subsequent months. To provide further assurance of a rebound in the pace of activity in 2012 to a rate that puts greater downward pressure on the unemployment rate, monetary policy is expected to remain highly accommodative.

November 2011 GDP was disappointingly weak dropping 0.1% in the month following unchanged activity in October. During the third quarter of 2011, monthly activity rose 0.3% on average. Expectations were for a monthly gain of 0.2%. The weakness in November was concentrated on the goods-producing side of the economy, which fell 0.6%. A large component of this decline reflected further maintenance shutdowns in the petroleum sector although natural gas extraction was down as well in the month. Output among service-producing industries rose a minimal 0.1% in the month.

Expectations of an increase in overall GDP in November were largely based on earlier indications of a sharp 1.7% rise in the volume of manufacturing sales in the month. Today’s report confirmed an increase albeit at a relatively modest 0.6% gain. Most other components within the goods-producing sector, however, showed declines in the month. Along with the 2.2% drop in oil and gas extraction, there was a 0.6% drop in utilities and a 0.3% decline in construction. The weakness in the former was attributed to unseasonably warm weather that contributed to a drop in electricity demand. The decline in construction was consistent with housing starts dropping in November although activity subsequently partially recovered in December.

The gain in service-producing industries was limited by a 0.6% decline in wholesale trade that had been flagged by an earlier-released monthly wholesale trade report. All other component within the service-producing sector either held steady or showed gains in the month.

The decline in output in November is in part the result of transitory factors that will eventually be reversed for December 2011 and January 2012; however, with output flat in October, fourth-quarter 2011 GDP growth looks as if it will slow. Earlier monthly gains will result in positive growth being maintained in the fourth quarter of 2011 although with the annualized rate likely being more than halved in dropping to 1.5% from the 3.5% that was recorded in the third quarter. This is down from our previous projected fourth-quarter 2011 growth rate of 2.0%. This revised rate represents a pace of growth that, if sustained, is unlikely to put any downward pressure on the unemployment rate. Thus, to help return growth to a rate that generates jobs at a faster pace than those entering the labour market going into 2012, the Bank of Canada is expected to keep policy highly accommodative in the near term. This will also help offset stiff headwinds related to the ongoing financial market pressures related to concerns about high debt levels among a number European countries.

Paul Ferley, Assistant Chief Economist, RBC Economics

U.S. consumer confidence unexpectedly declined in January 2012; existing home prices continued to fall in November 2011

• Consumer confidence declined to 61.1 in January 2012 from the eight-month high of 64.8 seen in December 2011.
  The present situation index fell 8.1 points to 38.4, while the expectations component edged down 0.8 points to 76.2.
• The current employment differential reversed the previous month’s improvement, decreasing to -37.4 from -35.0 in December.
• In another release, the S&P/Case-Shiller 20-City Composite home price index fell by 3.7% on a year-over-year basis in November compared to the 3.4% annual decline seen in the previous month.

The Conference Board’s measure of US consumer confidence fell to 61.1 in January 2012 from the upwardly revised 64.8 reading seen in December 2011 (initially reported as 64.5) that had represented the measure’s highest level since April. The deterioration in consumer sentiment in January comes as a surprise as market expectations were for an increase to 68.0.

The decline in the month reflected deterioration in both in the “expectations” and the “present situation” components, although most of the damage was seen in the former. The present situation index fell to 38.4 from 46.5 in December as consumers’ appraisals of business conditions and the job market were more pessimistic than last month. In terms of the latter, the “jobs hard to get” index rose 1.9 points to 43.5, while the “jobs plentiful” index decreased to 6.1 from 6.6, which had represented its best reading since January 2009. These combined to decrease the employment differential (those saying jobs are “plentiful” minus respondents saying jobs are “hard to get”) to -37.4 from the -35.0 reported in December. The expectations component fell by a more modest 0.8 points to 76.2 as increased pessimism in the outlooks for business conditions was partially offset by improved expectations for the labour market.

While today’s reported decline provides a somewhat discouraging starting point for 2012, the headline measure remains elevated compared to recent troughs seen in the summer and fall, and solace can be taken in the fact that the key expectations component remained relatively buoyant. We assume that the strengthening labour market conditions seen at the end of 2011 will continue into 2012, which should lead to an improvement in consumers’ viewpoints and should provide a modest boost to consumer spending with the growth maintaining an upward trajectory during 2012.

In a separate release this morning, the S&P/Case-Shiller 20-City Composite measure of US house prices declined in November 2011, with the seasonally-adjusted index down 0.7% on a month-over-month basis. The decline was larger than market expectations for a 0.5% decrease and follows a downwardly revised 0.7% drop in October (previously reported as -0.6%). The unadjusted index fell by 3.7% on a year-over-year basis in the month compared to the unrevised 3.4% annual decline seen in October.

David Onyett-Jeffries, Economist, RBC Economics

RBC Economics Research contacts:
Paul Ferley, Assistant Chief Economist
Dawn Desjardins, Assistant Chief Economist
Kirsten Cornelson, Economist
Nathan Janzen, Economist
David Onyett-Jeffries, Economist

Go to Financial Markets Daily (pdf) for a daily summary of North American interest rates and foreign exchange rates.

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