Key Economic Indicators

• Employment dropped abruptly by 70,600 in November after a net increase of 117,000 jobs during the past two months. The unemployment rate edged up to 6.3% from 6.2% in October marking a two-year high.
• This was the sharpest monthly employment decline since June 1982 and it is hard to explain away most of it except the 27,000 drop in public administration jobs tied to October's federal election.
• Job losses were about evenly split between the private sector (-38,000) and the public sector (-36,000). Full-time jobs dropped 32,400 (goods-producing sectors -32,800 and service-producing sectors -37,800) and part-time employment dropped 38,000.
• There were large job losses in agriculture (-10,100) and manufacturing (-38,300) on the goods side with trade (-8,900), transportation and warehousing (-26,000) and educational services (-15,600) supplementing the job cuts in public administration on the services side of the economy. Tempering these declines somewhat were increases in the scientific services, health care, food and accommodation services and cultural industries.
• Ontario bore the brunt of job losses in the month, with 66,000 workers cut from payrolls, 42,000 of which were in manufacturing positions. Ontario's unemployment rate jumped to 7.1% from 6.5% in October.
• The key wage measure, average hourly wages for permanent workers, rose 0.5% in November with the year-over-year rate picking up pace to 4.7% from 4.2% in October.
• The sharper-than-expected cut to November payrolls and the steady increase in the unemployment rate from its recent low of 5.8% in February are consistent with an economy that is gearing down after a modest acceleration in growth in the third quarter. Our forecast is that the unemployment rate will continue to drift higher into next year as weak demand for Canadian exports and slower consumer and business spending lead to more job losses.

Retail sales...
Retail sales soften
Latest month available: October

• Retail sales fell 0.9% in October paartly due to faltering auto sales. However, even excluding this component, sales activity dropped a sizeable 1.1%.
• Excluding the impact of price changes, the volume of retail sales eked out a 0.1% gain following a 0.7% rise in September. Car sales dropped a modest 0.6%, while gasoline service station receipts fell by a more sizeable 4%. Greater-than-expected weakness was evident in sales at furniture and electronic stores (-2.1%) and clothing stores (-1.5%). A significant part of the weakness in these components reflected price declines.
• Looking ahead, weak retail sales numbers, the decline in Canadian employment in November and the likely sharp drop in economic activity in the United States support our view that the Canadian economy will likely decline 2.5% in the fourth quarter. This is expected to mark the entry point into recession for the Canadian economy that will continue into the first quarter of next year.

Housing starts...
Housing starts pull back a bit
Latest month available: October

• Housing starts resumed a downward trend in October, dropping 3.1% in the month to an annualized 211,800. So far this year, housing starts have averaged 220,700, which is down a modest 4.7% from the same period last year. This is in stark contrast to the United States where starts are down 29.8% in the first nine months of this year compared to year-ago levels.
• The decline in overall starts in October largely reflected a 6% drop in the urban multiples component to an annualized 115,300. Starts of urban single-detached units fell as well, but by a more modest 1.1% to 69,300. Some offset was provided by starts in rural areas, which rose 5% to 27,200 units.
• Declines were generally recorded in Ontario and the West with some offset coming from Quebec (up 4.6%) and the Atlantic region (up 1%). Starts in Ontario fell 2.5% and by 7.2% and 17.5% in the Prairie region and British Columbia, respectively. Earlier price increases out West are starting to have a dampening impact on activity. The October level of starts in British Columbia of 27,900 represents the lowest level since May 2006.
• The resumption of declining housing starts is not surprising given deteriorating housing affordability that commenced last year, although the pace of decline still remains surprisingly muted. However, the current tight credit conditions are expected to put further downward pressure on new construction through next year, with starts expected to average close to 180,000 in 2009.
• The risks to this area of domestic spending are largely on the downside in the face of financial market turmoil and a from a knock-on effect of more pronounced weakening in the U.S. economy.

Merchandise trade...
Export and import volumes both fall
Latest month available: October

• Canada merchandise trade surplus came in at C$3.8 billion in October and September's surplus was revised to C$4.3 billion from an initially estimated C$4.5 billion. The narrowing in the October current dollar surplus reflected increases in both exports and imports, which rose 2.5% and 4.1%, respectively. In constant dollar terms, which measures the volumes of exports and imports after removing the effect of price changes, both fell in the month.
• Current dollar imports rose for all major industry categories except the automotive sector, which saw a 1.7% decline on the back of a sharp slowing in demand for passenger autos. Similarly, exports increased in most industry groups and again it was the auto industry that saw a decline in activity in the month.
• A sharp drop in constant dollar imports (3.6%) in October outpaced the decline in export volumes (1.6%), thus reducing the size of Canada's real trade deficit. The sharp drop in the value of the Canadian dollar in October (it lost 10.7% against the U.S. dollar) boosted import prices from the United States in the month.
• Import prices rose 8% in October. Commodity prices also recorded a sharp drop in October and, with most commodity prices denominated in U.S. dollars, Canadian export prices rose by a smaller 4.2%.
• However, after unexpectedly lending minimal support to the economy in the third quarter, we expect that net exports will act as a mild drag on the pace of growth in the fourth quarter as the weakening in U.S. demand exerts stronger downward pressure on exports in the final months of the quarter. Still, with Canada's economy coming under fire on the back of the recent weakening in the labour market and the sharp erosion in both consumer and business confidence, import growth will remain lacklustre.
  

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Consumer price index...
Decline in headline inflation reflects sharply lower energy prices
Latest month available: November

• Consumer prices fell by 0.3% in November with the year-over-year rate slipping to 2% from 2.6% in October, reflecting sharply lower energy prices. However, a sharp 7.2% increase in the price to purchase or lease passenger vehicles and a 20% rise in the price of vegetables blunted the blow. The Bank of Canada’s core measure, which eliminates the impact of eight volatile series plus indirect taxes, unexpectedly rose by 0.7% (not seasonally adjusted basis and 0.6% seasonally adjusted) in November pushing the year-over-year core rate up to 2.4%, the fastest pace of increase since June 2007.
• While this upside surprise to the core measure would normally significantly dampen expectations of further rate cuts, the pressure is very narrowly based and is not representative of the underlying inflation trend. As well, with Canada's economy showing increasing signs of having dipped into recession in late 2008, worries about inflation will take a backseat.
• The downward movement in the topline inflation rate has been more rapid than most had expected. It has fallen to 2% from the recent high of 3.5% recorded in August due to tumbling energy prices. With the economy slipping into recession and the amount of economic slack growing, we expect the downward pressure on prices to fan out, although rising prices for imported goods, following the sharp depreciation in the Canadian dollar, will mitigate some of the decline. The Bank's aggressive move to lower the policy rate to 1.5% earlier this month was aimed at shoring up the economy and stabilizing credit markets. Given the weakening tone in the global economy and sure-fire evidence that Canada is slipping alongside, another rate cut in January still looks likely.

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Economy at a glance

% change from
		Lastest month	Previous month	Year ago		3-month trend
Real GDP		Oct.	-0.1	0.2		Down
Industrial production		Oct.	-0.01	-3.4		Up
Employment		Nov.	-0.4	0.8		Down
Unemployment rate (%)*		Nov.	6.3	6.3		Up
Manufacturing
Production		Oct.	-0.7	-5.0		Flat
Employment		Nov.	-1.9	-3.4		Up
Shipments		Oct.	-0.5	3.4		Up
New orders		Ocr.	8.8	14.4		Up
Inventories		Oct.	1.3	5.9		Up
Retail sales		Oct.	-0.9	4.1		Down
Car sales		Oct.	-0.9	1.4		Down
Housing starts (000s)*		Oct.	211.8	226.0		Down
Exports		Oct.	2.5	13.4		Up
Imports		Oct.	4.1	9.3		Up
Trade balance ($billlions)*		Oct.	3.8	2.7		Down
Consumer prices		Nov.	-0.4	2.0		Down
* Levels are shown for the latest period and the same period a year earlier.

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