Daily Economic Updates

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Canadian consumer price inflation rate clocked in at 0.4% in April
May 17, 2013

• Canada's headline CPI fell 0.2% in April, contrary to forecasts for a steady reading
  
• On a year-over-year basis, the inflation rate fell to 0.4% from 1.0%
• Bank of Canada's core measure rose 0.1% in April, less than consensus expectations for a 0.2% rise and stood 1.1% higher than a year earlier
• Both the headline and core inflation rates have held below the mid-point over the Bank's 1% to 3% target range for the past nine months. While the increase in excess capacity following the slow economic growth that occurred in the second half of 2012 was in part responsible for the muted inflation performance, other factors were also at play. In its April Monetary Policy Report, the Bank acknowledged that the inflation rates were likely to remain below the 2% target until mid-2015 as the economy's excess slack is absorbed and the impact of one-off factors dissipate. The upcoming report on first quarter growth will be looked at to validate this expectation. RBC forecasts that the economy grew at a 2.3% annualized pace in the first quarter, slightly faster than the economy's potential rate which the Bank pegged at 2.1%. This will start the process toward eliminating the slack in the economy. Having said that given the low starting point for the inflation rates, it is unlikely that there will be sufficient upward pressure on prices to prompt the Bank to make any adjustments to monetary policy in the near term. The gradual strengthening in economic activity assumed in our forecast will, however, result in the inflation rates rising toward the 2% target in 2014. In order to ensure that inflation doesn't continue along this upward trajectory, we expect the Bank to start to gradually increase the overnight rate from today's exceptionally low level of 1.0% although no change is likely until the second half of 2014.
  

The unadjusted all-items Canadian CPI index fell 0.2% in April bringing the annual inflation rate down to 0.4% from 1.0% in March. On a seasonally adjusted basis, consumer prices fell 0.4%. The Bank of Canada's core measure posted a slightly less than expected 0.1% gain in April on an unadjusted basis with the seasonally-adjusted index held steady. Relative to a year earlier, the Bank's core rate slipped to 1.1% from 1.4% in March.

In the month of April, prices for gasoline fell by 2.8%; clothing dipped by 1.7%, with food from restaurants, furniture and mortgage interest costs also lower in the month. These declines were partially offset by rising prices for electricity, air transportation and footwear. Relative to a year earlier, gasoline prices were down 6.0% and mortgage interest costs and video equipment fell 4.3% and 10.9% respectively. Clothing prices stood 1.5% higher than the same period in 2012 as did food prices. Excluding gasoline, the CPI was 0.8% higher than in April 2012.

The elimination of the HST in BC in a return to the separate GST/PST tax regime that prevailed prior to its implementation in July 2010 was a factor in the provincial result in April, with the headline rate coming in at -0.8% versus a year earlier,. In PEI, the HST came into effective and the headline inflation rate rose to 1.8% from 1.2% in March.

In a separate report, wholesale trade rose 0.3% in March mildly disappointing expectations for a 0.4% gain. Motor vehicles sales rose in March as did sales of building materials and other miscellaneous goods. These gains were largely offset by lower household goods and machinery and equipment sales. On a volumes basis, wholesale sales inched up by 0.1% matching February's pace both of which were slower than January's 0.8% gain. This lacklustre increase combined with an earlier that report showed a slowing in manufacturing activity in the month sets up for GDP growth of 0.1% in March following gains of 0.3% in the prior two months. Wholesale inventories rose 0.1% in March and the inventory-to-sales ratio held steady at 1.26.

Both the headline and core inflation rates have held below the mid-point over the Bank's 1% to 3% target range for the past nine months. While the increase in excess capacity following the slow economic growth that occurred in the second half of 2012 was in part responsible for the muted inflation performance, other factors were also at play. In its April Monetary Policy Report, the Bank acknowledged that the inflation rates were likely to remain below the 2% target until mid-2015 as the economy's excess slack is absorbed and the impact of one-off factors dissipate. The upcoming report on first quarter growth will be looked at to validate this expectation. RBC forecasts that the economy grew at a 2.3% annualized pace in the first quarter, slightly faster than the economy's potential rate which the Bank pegged at 2.1%. This will start the process toward eliminating the slack in the economy. Having said that given the low starting point for the inflation rates, it is unlikely that there will be sufficient upward pressure on prices to prompt the Bank to make any adjustments to monetary policy in the near term. The gradual strengthening in economic activity assumed in our forecast will, however, result in the inflation rates rising toward the 2% target in 2014. In order to ensure that inflation doesn't continue along this upward trajectory, we expect the Bank to start to gradually increase the overnight rate from today's exceptionally low level of 1.0% although no change is likely until the second half of 2014.

Dawn Desjardins, Assistant Chief Economist, RBC Economics

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Recent Economic Updates

US consumer prices dip 0.4% in April as gasoline prices fall again
May 16, 2013

• US consumer prices dropped 0.4% in April, building on a 0.2% decline in March. Market expectations were for a slightly smaller 0.3% decline. The year-over-year rate of increase eased to 1.1% from 1.5% in March.
  
• The decline in the overall CPI largely reflected an outsized 4.3% drop in energy prices as gasoline prices fell sharply again in April. Food prices provided some offset, inching up 0.2% following an unchanged reading in March.
• Excluding the food and energy components, core CPI increased a modest 0.1%, slightly below market expectations for a 0.2% gain and matching the 0.1% increase in March. With the modest monthly gain, the year-over-year rate of increase in core prices dipped to 1.7% from 1.9% in March.
• The rate of growth in the overall CPI has been pushed lower by outsized weakness in gasoline prices in recent months; however, even excluding the energy component there is little evidence of price pressure in the system with the annual pace of core price growth slipping lower to a level further below the Federal Reserve’s 2% inflation target. The lack of underlying inflationary pressures continues to provide the Fed with flexibility to focus on the labour market half of its mandate. Our forecast assumes that this will result in the central bank continuing asset purchases through the end of this year and maintaining fed funds within the current range of 0% to 0.25% likely into 2015.
  

Consumer prices declined 0.4% in April. This marked a second consecutive monthly decline following a 0.2% dip in March and pushed the year-over-year rate of increase down to 1.1%, the lowest annual pace of price growth since November 2010, from 1.5% in March. The decline in the headline inflation rate largely resulted from an outsized 4.3% monthly decline in energy prices as gasoline prices plunged 8.1%, building on the already large 4.4% decline in March. This left gasoline prices 8.3% below their level last year at this time. Food prices provided some modest offset, rising 0.2%. Excluding both the energy and food components, core prices continued to rise, although by a modest 0.1% that matched the pace of increase in March. The modest monthly increase resulted in the year-over-year rate of growth in the core measure dipping to 1.7% from 1.9% in March.

The rate of growth in the overall CPI has been pushed lower in recent months by outsized weakness in gasoline prices. By freeing up household incomes for other purchases, this has likely provided some welcome support to consumer spending, offsetting in part the increase in payroll taxes that took effect in January. Gasoline prices appear to have stabilized to this point in May and may move somewhat higher in coming months; however, even excluding the energy component, there is little evidence of price pressure in the system with the annual pace of core price growth in April slipping to a level that is further modestly below the Federal Reserve’s stated 2% inflation target. The lack of underlying inflationary pressures continues to provide the Fed with flexibility to focus on the labour market half of its mandate. Our forecast assumes that this will result in the central bank continuing asset purchases through the end of this year and maintaining fed funds within the current range of 0% to 0.25% likely into 2015..

Nathan Janzen, Economist, RBC Economics

US housing starts fall sharply from five-year high in April; initial claims rise by more than expected in the latest week

• Housing starts fell 16.5% to 853,000 annualized units in April, significantly weaker than the 970,000 starts expected by markets going into the report.
• In sharp contrast, building permits jumped 14.3% in April to an annualized 1.017 million, much stronger than market expectations for a reading of 941,000.
• In a separate release, initial claims for unemployment insurance in the US rose by 32,000 to 360,000 in the week ending May 11, missing market expectations for a 330,000 reading. The increase in filings in the latest week built on the rise to a revised 328,000 (was 323,000) in the previous week and brings claims to their highest level since the end of March.
• While the larger-than-expected decline in new home construction in April is disappointing and provides a soft starting point for homebuilding activity in the second quarter (starts are an annualized 38.4% below the Q1/13 average), the significant pickup in building permits, combined with other indications of improving housing market conditions, such as yesterday’s reported improvement in homebuilders’ confidence in May, suggest that the pullback in activity is likely just a brief pause in the firmly established upward trend rather than a trend reversal.
  

Privately owned housing starts in the US fell 16.5% in April to a five-month low of 853,000 annualized units, missing market expectations for a reading of 970,000. The sharp monthly decline in homebuilding comes after activity hit a five-year high of 1.021 million annualized units (initially reported as 1.036 million) in the previous month.

The moderation in the pace of new home construction in April reflected weakness in both components. Multiple-unit starts plunged 38.9% to an eight-month low of 243,000 while single-unit construction recorded a more modest 2.1% decline to a five-month low of 610,000 annualized units.The significant pullback in the multiples component comes after hitting the highest level of starts since December 2006 in the previous month. On a regional basis, weakness was seen in the South (-27.9%), Northeast (-12.8%) and West (-6.2%) while a solid increase in the Midwest (+10.9%) provided some offset.

On a more encouraging note, the number of building permits issued surged in April, jumping 14.3% to 1.017 million annualized units, the highest level since June 2008. The strength in April reflected a 37.5% bounce in permits for multiple-unit residences (to 400,000 annualized units) while permits for single-unit homes rose by a more modest 3.0% (to 617,000).

While the larger-than-expected decline in new home construction in April is disappointing and provides a soft starting point for homebuilding activity in the second quarter (starts are an annualized 38.4% below the Q1/13 average), the significant pickup in building permits in the month, combined with other indications of improving housing market conditions, such as yesterday’s reported improvement in homebuilders’ confidence in May, suggest that the pullback in activity is likely just a brief pause in the firmly established upward trend rather than a trend reversal. We continue to anticipate that new home construction will increase throughout the remainder of this year and into 2014 as the residential real estate market continues to normalize and we expect starts to hit 1.3 million annualized units by the end of next year.

David Onyett-Jeffries, Economist, RBC Economics

Canadian manufacturing sales dipped in March
May 15, 2013

• Manufacturing sales dipped 0.3% in March 2013, which was below market expectations for a 0.5% gain, and followed a revised 2.8% (was 2.6%) increase in February and a 0.6% decline in January.
  
• Much of the weakness in overall sales was concentrated in a price-led drop in nominal petroleum and coal sales, reflecting lower energy prices and chemical sales in the month.
• Controlling for the effect of prices, the volume of manufacturing sales inched up 0.2% following a downwardly revised 1.8% (was 2.5%) gain in February. Inventories dipped 0.1% in March, which was down from 1.1% and 1.6% gains in February and January, respectively..
• The gain in the volume of manufacturing sales in March was relatively modest, and the details, including a slowing in inventory growth, point to a slightly smaller rise in manufacturing production in the month. This suggests the manufacturing component of GDP was likely little changed in March following two consecutive increases of 0.8% and 0.6% in February and January, respectively. Stronger wholesale sales and an expected modest gain in retail sales should still allow GDP to grow in March, albeit likely at a slower pace than the solid 0.3% increases in each of the two previous months. Even with the slower pace of growth in March, this remains consistent with our forecast that GDP growth in the first quarter of 2013 as a whole picked up to a 2.3% annualized pace from sub-1% growth in the second half of 2012.
  

Canadian manufacturing sales slipped 0.3% in March 2013, which was below market expectations for a 0.5% increase, and followed a 2.8% (previously reported as 2.6%) increase in February and a 0.6% dip in January. Much of the weakness in the month reflected a price-led 2.6% drop in petroleum and coal sales, resulting from lower energy prices in the month, as well as a 2.0% drop in chemical sales that Statistics Canada noted may have reflected colder than normal weather crimping normal March fertilizer sales. Excluding these two components, sales rose 0.3% and were supported in part by a 1.5% rise in auto sales.

Controlling for the effect of prices, the volume of manufacturing sales inched up 0.2%. This marked the second consecutive monthly gain following a revised 1.8% (was 2.5%) increase in February; however, following weak 0.6% and 2.3% declines in January 2013 and December 2012, respectively, the volume of sales still declined at an annualized 1.2% pace in the first quarter of 2013 following a 6.3% drop in the fourth quarter of 2012.

The gain in the volume of manufacturing sales in March was relatively modest, and the details, including a slowing in inventory growth, point to a slightly smaller rise in manufacturing production in the month. This suggests that the manufacturing component of GDP was likely little changed in March following two consecutive increases of 0.8% and 0.6% in February and January, respectively. Stronger wholesale sales and an expected modest gain in retail sales should still allow GDP to grow in March, although likely at a slower pace than the solid 0.3% increases in each of the two previous months. Even with the slower pace of growth in March, this still remains consistent with our forecast that GDP growth in the first quarter of 2013 as a whole picked up to a 2.3% annualized pace, which would still mark a notable improvement from the sub-1% growth rates in the second half of 2012 and would be above the Bank of Canada’s April forecast for a 1.5% first-quarter 2013 gain.

Nathan Janzen, Economist, RBC Economics

U.S. industrial production fell in April

• Industrial production fell 0.5% in April 2013 following downwardly revised gains of 0.3% (was 0.4%) and 0.9% (was 1.1%) in March and February, respectively. Market expectations were for a modest 0.2% decline.
• The capacity utilization rate fell to 77.8% from 78.3% in March.
• The greater than expected pullback in industrial production in April followed solid gains in the previous two months and brought the level of overall activity at the start of the second quarter of 2013 in line with the first-quarter 2013 average. Part of the weakness in April likely reflected business concerns about the effect of the government spending cuts that came into effect on March 1. Our expectation is that overall real GDP growth will see a moderation in the second quarter of 2013 relative to the first-quarter 2013 annualized gain of 2.5%. We anticipate that the economy will reaccelerate in the second half of 2013 as stronger underlying demand outweighs the drag from fiscal consolidation; however, the pace of growth is unlikely to be significant enough to bring the unemployment rate below the Fed’s 6.5% threshold, and we continue to expect that monetary conditions will be kept highly accommodative into 2015.
  

US industrial production fell 0.5% in April 2013 and missed market expectations for a modest 0.2% decline. The bulk of downward surprise in April came from the manufacturing sector where production contracted by 0.4% in the month against expectations for a modest increase. Motor vehicle and parts production led the declines and was down 1.3% despite early indications of that auto production increased for a third consecutive month in April. Utilities production fell 3.7% in the month partially to reverse the previous month’s outsized 6.4% increase as heating demand fell back to a more typical seasonal level as temperatures returned to normal after a cooler than usual March. The Mining sector provided a modest offset to the weakness seen in the other components, with output rebounding 0.9% in April following the 0.6% decline recorded in the previous month.

With the decline in overall production, the capacity utilization rate fell to 77.8% in April from 78.3% in March.

The greater than expected pullback in industrial production in April followed solid gains in the previous two months and brought the level of overall activity at the start of the second quarter of 2013 in line with the first-quarter 2013 average. Part of the weakness in April likely reflected business concerns about the effect of the government spending cuts that came into effect on March 1. Our expectation is that overall real GDP growth will see a moderation in the second quarter of 2013 relative to the first-quarter 2013 annualized gain of 2.5%. We anticipate that the economy will reaccelerate in the second half of 2013 as stronger underlying demand outweighs the drag from fiscal consolidation; however, the pace of growth is unlikely to be significant enough to bring the unemployment rate below the Fed’s 6.5% threshold, and we continue to expect that monetary conditions will be kept highly accommodative into 2015.

David Onyett-Jeffries, Economist, RBC Economics

U.S. producer prices fell in April, but core prices edged upward

• The US producer price index fell 0.7% in April 2013, which was slightly weaker than market expectations for a 0.6% decline in the month. With the large monthly decrease, the year-over-year rate declined to 0.6% from 1.1% in March.
• Excluding both the volatile food (-0.8% month over month in April) and energy (-2.5% month over month) components, the core producer price index eked out a 0.1% gain in April to meet market expectations. The year-over-year rate of increase in core prices held steady at the 1.7% growth rate that was seen in both March and February.
• While the highly subdued headline Producer Price Index (PPI) inflation reading reflected the recent weakness in the volatile energy component, the modest annual rate of increase in core prices at the producer level was consistent with the view that inflation in the US remains muted despite evidence of improving private domestic demand as the excess capacity in labour markets continues to keep a lid on underlying price pressures. The benign inflation backdrop provides the Federal Reserve with the scope to maintain its highly stimulative monetary stance to support a faster pace of economic growth so as to put sustained downward pressure on the unemployment rate.
  

Producer prices in the US fell 0.7% in April 2013 to follow the 0.6% month-over-month decline seen in March. The decrease in April largely reflected lower energy prices, which dropped 2.5%, and was driven by an outsized 6.0% plunge in gas prices. The sharp declines in producer prices in the latest two months come in contrast to muted changes at this time last year and resulted in a sharp moderation in annual inflation at the producer level, with PPI up an extremely modest 0.6% on a year-over-year basis in April following a 1.1% increase in March, which was already down sharply from 1.7% in February.

Excluding the volatile energy and food (which fell 0.8% in the month) components, core prices eked out a 0.1% increase in April following gains of 0.2% recorded in each of the previous four months. The rise in April was led by increases in the prices for pharmaceutical preparations. On a year-over-year basis, the increase in core prices held steady at the 1.7% growth rate seen in both March and February.

While the highly subdued headline PPI inflation reading reflected the recent weakness in the volatile energy component, the modest annual rate of increase in core prices at the producer level was consistent with the view that inflation in the US remains muted despite evidence of improving private domestic demand as the excess capacity in labour markets continues to keep a lid on underlying price pressures. The benign inflation backdrop provides the Federal Reserve with the scope to maintain its highly stimulative monetary stance to support a faster pace of economic growth so as to put sustained downward pressure on the unemployment rate.

David Onyett-Jeffries, Economist, RBC Economics

U.S. retail sales unexpectedly inched higher in April
May 13, 2013

• Retail spending inched up 0.1% in April 2013, which was stronger than market expectations for a 0.3% decline, following a revised 0.5% (was 0.4%) drop in March.
• Overall sales were constrained by a price-led 4.7% drop in nominal sales at gasoline stations. Auto sales unexpectedly rose 1.0%.
• The so called “control” retail sales, which exclude sales of gasoline, motor vehicles, and building materials and enter directly into the Bureau of Economic Analysis’ (BEA) consumer spending estimate, rose 0.5% and was above market expectations for a 0.3% gain, following upwardly revised 0.1% (was -0.2%) and 0.5% (was 0.3%) increases in March and February, respectively.
• The modest gain in retail sales in April occurred despite a sharp drop in gasoline station sales that had more to do with lower prices than fundamental weakness in consumer demand. The rebound in core sales, along with upward revisions to prior months, actually points to some modest upside risk to our forecast that consumer spending rose at a 2.0% rate in the second quarter of 2013 although the increase is still likely to be below the 3.2% surge in the first quarter. Even with some moderation in spending, it remains the case that consumers have to this point weathered higher payroll taxes implemented in January and uncertainty about the effect of government sequestration cuts implemented in March surprisingly well.
  

Retail sales inched up 0.1% in April 2013, which was stronger than market expectations for a 0.3% decline, following a downwardly revised 0.5% decline (was -0.4%) in March and an upwardly revised 1.1% (was 1.0%) increase in February. The overall increase in the month was constrained by an outsized 4.7% plunge in sales at gasoline stations resulting from a sharp drop in gasoline prices. Auto sales unexpectedly rose 1.0%, which was at odds with an earlier reported 2.2% drop in unit vehicle sales in the month. Building material sales jumped 1.5% to more than retrace a 1.0% drop in March. The pick up in sales at building material sales in part likely reflects a return to seasonal weather in April after a cooler than normal March delayed spring yard work, although improving housing markets likely played a role.

The so called “control” sales (excluding the motor vehicle, gasoline, and building materials components), which is the component of the report that enters directly into the BEA’s monthly and quarterly consumer spending estimates, jumped 0.5%, which was stronger than the 0.3% gain expected, following upwardly revised 0.1% (was -0.2%) and 0.5% (was 0.3%) increases in March and February, respectively. This left the level of control sales in April already an annualized 2.5% above its first-quarter 2013 average.

The modest gain in retail sales in April occurred despite a sharp drop in gasoline station sales that had more to do with lower prices than fundamental weakness in consumer demand. The rebound in core sales, along with upward revisions to prior months, points to some modest upside risk to our forecast that consumer spending rose at a 2.0% rate in the second quarter of 2013 although the increase is still likely to be below the 3.2% surge in the first quarter that marked the largest quarterly increase in more than two years. Even with some moderation in spending, it remains the case that consumers have to this point weathered higher payroll taxes implemented in January and uncertainty about the effect of government sequestration cuts implemented in March surprisingly well. Our forecast assumes that fiscal contraction will contribute to a near-term slowing in overall GDP growth to slightly below a 2% rate in the second quarter of 2013; however, signs that fiscal cuts have not yet been enough to derail private demand is in line with our expectation that stronger growth in the second half of the year will follow once the near-term fiscal drag has run its course.

Nathan Janzen, Economist, RBC Economics

Canada recorded employment gain of 12,500 in April
May 10, 2013

• Canadian employment increased by 12,500 in April 2013 and was just shy of market expectations for a 15,000 increase.
• The unemployment rate held steady at 7.2% with the labour force little changed.
• All gains were in goods-producing sector employment, which rose 24,500, while service-sector jobs were cut back by 12,000 in the month.
• After a weak first quarter of 2013 for hiring, April's gain started the process for the recovery of the 25,700 jobs lost in the quarter. Our monitoring of the economic data indicates a pick up in the pace of economic activity with real GDP on track to record a 2.3% annualized gain in the first quarter, which would be much quicker than the sub-1% growth rates recorded in the second half of 2012. This would also exceed the pace that the Bank of Canada projected in its April forecast. Additionally, the mild recovery in job growth in April sets the stage for the economy to continue to grow at close to its potential rate. Having said that, this pace of increase will not be sufficient to dent the excess capacity significantly in the economy; however, we expect that economic growth will accelerate further and be supported by low interest rates and a strengthening in the US economy. Given the benign inflation backdrop, the Bank is likely to maintain the overnight policy rate at 1.0% for the remainder of 2013 and into 2014 to support acceleration in growth and the gradual elimination of the output gap.

Volatility in employment continued in April with a mild 12,500 increase following the sharp 54,500 jobs lost in March and 50,700 rise in February. The unemployment rate held at 7.2% remaining in the range established since November. The sources of strength in the report were manufacturing, professional and technical services, finance, insurance, real estate, health care, and public administration. In total, private employment dropped by 20,000 while public-sector employment rose by 34,200 and self-employment was little changed. Year to date, private-sector payrolls have fallen by 95,000 while the public sector has expanded by 9,000. Encouragingly, the gains in April were concentrated in full-time employment, which increased by 36,000 and partially offset the sharp 54,000 drop recorded in March. Part-time employment conversely dipped by 23,600 in April.

Manufacturing employment posted its largest one-month gain since May 2012. The increase was the first since December. Construction employment was steady in April, and year to date, there have been 24,000 jobs created. Transportation and warehousing, and retail and wholesale trade recorded job losses of 20,700 and 15,800, respectively. The pace of increase in hourly earnings for permanent employees (the Bank of Canada's favoured measure) picked up to 2.8% from an average of 2.1% in the first quarter. Hours worked recovered and increased 0.3% in April, almost fully offsetting March's 0.4% decline.

The largest gain was recorded in Alberta while Manitoba and New Brunswick saw employment decline. Despite rising in April, Manitoba's unemployment rate was 5.8%, still well below the national average. Saskatchewan retained the title of having the lowest unemployment rate at 4.0% while Alberta's unemployment rate fell to 4.4%. In Ontario, employment rose by 3,800, and the unemployment rate held steady at 7.7%.

After a weak first quarter of 2013 for hiring, April's gain started the process for a recovery of the 25,700 jobs lost in the quarter. Our monitoring of the economic data indicates a pick up in the pace of economic activity with real GDP on track to record a 2.3% annualized gain in the first quarter, which would be much quicker than the sub-1% growth rates recorded in the second half of 2012. This would also exceed the pace that the Bank of Canada projected in its April forecast. Additionally, the mild recovery in job growth in April sets the stage for the economy to continue to grow at close to its potential rate. Having said that, this pace of increase will not be sufficient to dent the excess capacity significantly in the economy; however, we expect that economic growth will accelerate further and be supported by low interest rates and a strengthening in the US economy. Given the benign inflation backdrop, the Bank is likely to maintain the overnight policy rate at 1.0% for the remainder of 2013 and into 2014 to support acceleration in growth and the gradual elimination of the output gap.

Dawn Desjardins, Assistant Chief Economist, RBC Economics

U.S. initial claims decline in the week ending May 4
May 9, 2013

• Initial claims for unemployment insurance in the US fell by 4,000 to 323,000 in the week ending May 4, 2012, and beat market expectations for a 335,000 reading. The decline in filings in the latest week, which followed a 15,000 decline to an upwardly revised 327,000 (was 324,000) in the previous week, brought initial claims to its lowest level since January 2008.
• The four-week moving average of initial claims, which better controls for weekly volatility, continued to trend downward, falling to 336,800 from 343,000 the previous week. Continuing claims for the week ending April 27, 2013 declined by 27,000 to 3,005,000.
• The decline in initial claims brought the four-week moving average down to its lowest level since November 2007. The continued improvement in filings in recent weeks was reflected in fairly encouraging labour market data that saw payroll employment rise 165,000 in April while the unemployment rate fell to 7.5% in the month. With that said, we continue to expect that the pace of employment growth will moderate in the near term from the 208,000 average increase seen during the six months ended April 2013, as the effect of government expenditure cuts enacted March 1 continues to weigh on hiring.

Josh Nye, Economist, RBC Economics

Canadian housing starts dip in April
May 8, 2013

• Housing starts dipped by 3.5% to an annualized 174,900 in April 2013, which was in line with market expectations for a 175,000 reading.
• The monthly pullback in homebuilding activity reflected weakness in both urban multiple-units starts (-3.5%) and rural starts (-10.1%) while urban single-unit starts remained relatively unchanged (-0.9%).
• The slowing in starts activity was concentrated in Atlantic Canada (-40.8%), Ontario (–14.9%), and British Columbia (-5.6%), while gains in Quebec (14.8%) and the Prairies (9.3%) provided a partial offset.
• New home construction continued the decidedly downward trend in April as the six-month moving average of housing, which the Canada Mortgage and Housing Corporation (CMHC) refers to as the “trend” rate, fell to 182,800 annualized units, and was its lowest level since May 2011. This ongoing moderation in homebuilding activity is consistent with our viewpoint that the Canadian housing sector is undergoing a gradual cooling as housing market activity transitions to levels that are more sustainable in the longer run.

Canadian housing starts dipped by 3.5% to an annualized pace of 174,900 in April 2013 from the upwardly revised 181,100 in March (previously reported as 180,900). The monthly pullback in homebuilding activity in April, which was in line with market expectations for a decline to 175,000, reflected weakness in both urban multiple-units starts (down 3.5% to 93,500) and rural starts (down 10.1% to 21,300) while urban single-unit starts remained relatively unchanged (down 0.9% to 60,100).

The slowing in starts activity was concentrated in Atlantic Canada (-40.8%), Ontario (–14.9%), and British Columbia (-5.6%) mainly reflecting declines in multiple-unit starts in each region (-72.0%, -23.2 %, and –8.2%, respectively). In contrast, Quebec (14.8%) and the Prairies (9.3%) had solid increases led by jumps in multiple-unit construction.

New home construction continued its decidedly downward trend in April as the six-month moving average of housing starts (which the CMHC refers to as the “trend” rate) fell to 182,800 annualized units, its lowest level since May 2011. This ongoing moderation in homebuilding activity is consistent with our viewpoint that the Canadian housing sector is undergoing a gradual cooling as housing market activity transitions to levels that are more sustainable in the longer run.

Laura Cooper, Economist, RBC Economics

U.S. ISM non-manufacturing index falls to a nine-month low in April
May 3, 2013

• The Institute for Supply Management (ISM) non-manufacturing index fell to 53.1 in April 2013 from 54.4 in March. Market expectations had been for a smaller decline in the measure to 54.0 in the month.
• The moderation in the headline measure in April reflected broad-based declines in the component measures as each of the four main sub-indices fell in the month.
• The ISM non-manufacturing data for April combined with the somewhat downbeat comments from survey respondents in the accompanying report indicated that growth in the largest sector of the US economy is seeing some pullback in momentum after a fairly solid start to the year. As well, the composite ISM index (which incorporates the moderation in manufacturing activity in April reported earlier this week) fell to nine-month low in the month and is consistent with our expectation that overall real GDP growth will slow in the second quarter of 2013 relative to the first quarter’s annualized gain of 2.5%.

The US service sector continued to expand in April 2013, but the pace of growth decelerated as shown by a decline in the ISM non-manufacturing index to a nine-month low of 53.1 in the month from 54.4 in March. Markets expected a smaller moderation in the index to 54.0 in April.

The moderation in the headline index in April was due to broad-based declines in the measure’s sub-components. “Business activity” declined by 1.5 points to 55.0 in April, which is its lowest level since last June. “New orders” edged down to a three-month low of 54.5 from 54.6 in March. In contrast to the pick up in service-sector payrolls in April reported earlier this morning, the “employment” gauge slipped to a five-month low of 52.0. Rounding out the main components, the “supplier delivery” sub-index declined by 2.0 points to 51.0, indicating that suppliers’ delivery times were not as slow as they were in March (delivery times tend to lengthen when demand is increasing).

The ISM non-manufacturing data for April combined with the somewhat downbeat comments from survey respondents in the accompanying report indicated that growth in the largest sector of the US economy is seeing some pullback in momentum after a fairly solid start to the year. As well, the composite ISM index (which incorporates the moderation in manufacturing activity in April reported earlier this week) fell to nine-month low in the month and is consistent with our expectation that overall real GDP growth will slow in the second quarter of 2013 relative to the first quarter’s annualized gain of 2.5%. We anticipate that the economy will reaccelerate in the second half of 2013 as stronger underlying demand more than offsets the drag from fiscal consolidation; however, the pace of growth is unlikely to be significant enough to bring the unemployment rate below the Fed’s 6.5% threshold, and we continue to expect that monetary conditions will be kept highly accommodative into 2015.

David Onyett-Jeffries, Economist, RBC Economics

U.S. April payroll employment rises more than expected

• April 2013 non-farm payroll employment rose a moderately stronger than expected 165,000 following upwardly revised gains of 138,000 and 332,000 in March and February, respectively.
• The separate household survey indicated that the April unemployment rate unexpectedly fell to 7.5% from 7.6% in March.
• Government employment declined once again by 11,000 and resulted in private employment in April rising 176,000, which was up from the 154,000 gain in the previous month.
• The pace of hiring encouragingly picked up in April even with the sizeable upward revision to the gain in March; however, the April increase is down from an average monthly rise of 207,000 during the previous six months. This flags some increased caution by firms in terms of taking on new workers likely responding to the uncertainty surrounding the forced government expenditure cuts, i.e., sequestration, that kicked in March 1, 2013. Our expectation is that this factor will contribute to a slowing in second-quarter 2013 GDP growth relative to the first-quarter gain of 2.5%. Although this restraint is expected to ease in the second half of 2013, the Fed is expected to keep conditions highly accommodative to assure that any downward pressure proves to be short lived.

April 2013 payroll employment rose 165,000 in the month, which was moderately stronger than the 140,000 gain that had been expected. As well, the previous two months showed a cumulative upward revision of 114,000, which resulted in a March increase of 138,000 (88,000 previously) and a gain in February of a sizeable 332,000 (268,000). The separate household survey showed an even greater 293,000 increase in employment in April that sent the unemployment rate unexpectedly lower to 7.5% from 7.6% in March with the labour force rising by a smaller 210,000.

Government employment continued to decline in the face of fiscal restraint by falling 11,000 in April after a 16,000 drop in March. This resulted in an April private employment gain of 176,000 up from a 154,000 increase in March.

Within private-sector employment, all of the increase was in service-producing jobs, which jumped 185,000. This increase was led by gains in professional and business services (73,000), leisure and hospitality (43,000), and retail trade (29,000). In contrast, goods-producing jobs dropped 9,000 in the month that reflected flat employment in manufacturing and declines of 6,000 in construction and 3,000 in mining.

A more negative aspect of the report was a sharp drop in the overall workweek to 34.4 hours from 34.6 hours in March. This resulted in the index of aggregate weekly hours, which reflects the combined effect of both employment and hours worked, dropping 0.4% in the month. Earlier monthly increases resulted in the level of this index in April being up an annualized 0.6% relative to the first quarter of 2013 although it is flagging a slowing in activity in the second quarter relative to a first-quarter increase in this index of 2.8%.

The index of average hourly earnings, the principal wage measure in the report, rose an expected 0.2% in the month and 1.9% during the past year.

The pace of hiring encouragingly picked up in April even with the sizeable upward revision to the gain in March; however, the April increase is down from an average monthly rise of 207,000 during the previous six months. This flags some increased caution by firms in terms of taking on new workers likely responding to the uncertainty surrounding the forced government expenditure cuts, i.e., sequestration, that kicked in March 1, 2013. Our expectation is that this factor will contribute to a slowing in second-quarter 2013 GDP growth relative to the first-quarter gain of 2.5%. Although this restraint is expected to ease in the second half of 2013, the Fed is expected to keep conditions highly accommodative to assure that any downward pressure proves to be short lived.

Paul Ferley, Assistant Chief Economist, RBC Economics

RBC Economics Research contacts:
Paul Ferley, Assistant Chief Economist
Dawn Desjardins, Assistant Chief Economist
Nathan Janzen, Economist
David Onyett-Jeffries, Economist
Josh Nye, Economist
Laura Cooper, Economist

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

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