Table of Contents Week in review · 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 0 20 40 60 80 100 120 140 160 180 200 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 U.S.:

July 28, 2017

Table of Contents What we’ll be watching ............. p. 4 Calendar of upcoming releases .... p. 5 Annex – Economic tables ............ A1

Week in review CANADA: Real GDP surged a stunning 0.6% in May. Goods producing industries saw a 1.6% jump in output as gains in manufacturing, oil and gas, agriculture and utilities more than offset decreases for construction and mining. Industrial production surged 2.5% as a result. The services sector's output was up 0.2% (a 21st consecutive month of expansion), as gains in most categories including wholesaling, retailing and finance/insurance dwarfed declines in arts/recreation and accommodation/food services. All in all, 14 of the 20 industrial sectors saw an increase in output in May. The consensus-topping monthly results prompt us to raise our Q2 GDP growth forecast to 3.5% annualized, i.e. above the Bank of Canada’s 3.0% estimate. Remember, this is on top of Q1’s +3.7% print. Accordingly, we have revised up our 2017 GDP growth forecast to 2.9%.

In May, nominal wholesale trade rose for the eighth consecutive month, climbing 0.9% m/m (+10.1% y/y) in seasonally adjusted terms to a record high C$61.6 billion. The streak of monthly increases, the longest of its kind since January 1990, has seen sales expand 9.3% from October to May, the best performance for a similar time period in more than 10 years. Sales advanced in May in six of the seven main subsectors, including farm products (+4.3%), food/beverages

(+1.0%), motor vehicles/parts (+1.4%) and miscellaneous (+2.6%), which comprises paper products, chemicals and agricultural supplies. Alternatively, sales retreated in the machinery segment (-0.3%). Moreover, 8 of the 10 provinces registered monthly gains, led by Alberta (+4.5%), Manitoba (+1.2%) and British Columbia (+1.1%). In volume terms, sales progressed 0.8% m/m (+8.1% y/y).

According to the Survey of Employment, Payrolls and Hours (SEPH), in May, average weekly hours worked were up 0.7% from April but down 0.7% from May 2016. Average weekly earnings, for their part, expanded 0.2% m/m and 2.0% y/y, their fastest 12-month pace since March 2015. Wage growth has shown signs of accelerating lately. Indeed, the 6-month moving average of year-on-year weekly earnings change has shot up from a lowly 0.3% in September to 1.5% in May, its highest mark since August 2015.

UNITED STATES: The Bureau of Economic Analysis’ advance estimate of Q2 GDP growth came in at 2.6%

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Canada: Real GDP growth tracking close to 3.5% in Q2Real gross domestic product

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* Assuming zero growth in June and no revisions to prior data NBF Economics and Strategy (data via Statistics Canada)

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Canada: Wholesale sales reached an all-time high in MayNominal and real wholesale trade sales

NBF Economics and Strategy (data via Statistics Canada)

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Canada: Average weekly earnings on the uptrend Year-on-year change in average weekly earnings according to the SEPH, 6-month moving average

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NBF Economics and Strategy (data via Statistics Canada)

Weekly Economic Watch

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annualized, following a downwardly-revised 1.2% print in Q1. The acceleration from the tepid pace set in the first quarter was partly due to consumption growth, which expanded thanks to a solid labour market, better disposable incomes and a lower savings rate (3.8% in Q2). Government and business investment also contributed, offsetting drag from residential investment. Trade contributed to growth thanks to exports rising faster than imports. With inventories not contributing or subtracting from growth, real final sales expanded at the same rhythm as GDP, i.e. 2.6%. In nominal terms, GDP rose 3.6% during the second quarter, a positive development for government finances.

In June, new orders of durable goods spiked 6.5% m/m (14.6% y/y), their sharpest jump since July 2014, after staying roughly flat in May (-0.1% m/m). Bookings were up a massive 19.0% in the transportation category, where a slight pullback for autos (-0.6% m/m) was more than offset by a colossal gain for civilian aircrafts (+131.2% m/m). Excluding transportation, total orders advanced just 0.2% m/m as gains for machinery (+0.2%), primary metals (+0.1%) and fabricated metals (+0.7%) were partially offset by declines for computer/electronics (-0.3%) and electrical equipment (-1.7%). For Q2 as a whole, total orders progressed an annualized 13.9%, their best quarterly figure since 2013Q4. The report also indicated that shipments of non-defence capital goods ex-aircraft, a proxy for business investment spending, increased 0.2% m/m for a fifth consecutive positive print. This constitutes the indicator’s longest streak of gains in six years.

Sales of existing homes slid 1.8% m/m in June to an annualized 5,520K after rising 1.1% in May. Sales decreased in the single-family segment (-2.0% to 4,880K) and stagnated in the multi-unit category (640K). Compared with June 2016, sales were up a paltry 0.7%. Still, the median sale price rose 6.5% to $263,800 over the period owing to tight supply. Indeed, the inventory of homes on the market in June was equivalent to only 4.3 months of sales, way below its long-

term average of 7.0. The shortage of dwellings for sale explains why it took only 28 days on average to sell an existing home in June, down from 50 days in January. For Q2, existing-home sales retreated 3.7% on an annualized quarterly basis after advancing 5.4% in Q1.

Still in June, sales of newly built homes rose 0.8% to an annualized 610K from a downwardly revised 605K in May. The supply of new homes on the market edged up one tick to the equivalent of 5.4 months of sales. Meanwhile, the median sale price for a new home sagged to $310,800, down 3.4% from its level a year earlier. From Q1 to Q2, new-home sales decreased an annualized 12.3%. This is not overly concerning given that the drop came after an impressive 39.5% surge in Q1. What’s more, sales averaged 607K in the first half of 2017, up substantially from 544K in the same period in 2016.

According to the S&P CoreLogic Case-Shiller 20-city index, home prices in May inched up 0.1% m/m in seasonally adjusted terms after slipping 0.2% in April. Of the 20 cities covered by the index, 14 registered higher prices, led by Seattle (+0.9%), Las Vegas (+0.6%) and Portland (+0.5%). In unadjusted terms, the index was up 5.7% y/y, with prices rising at a particularly brisk pace in west-coast cities, especially Seattle (+13.3%) and Portland (+8.9%). Price hikes over 12 months were more subdued in Chicago (+3.3%), Cleveland (+3.6%) and Washington, D.C. (+3.6%).

In July, the Conference Board’s Consumer Confidence Index climbed to 121.1 from 117.3 in June. This is well above its 12-month moving average of 113.1 and within range of its cyclical high of 124.9 struck in March. The details of the report showed the present situation tracker jumping 3.9 points to a 16-year high of 147.8. Similarly, the expectations sub-index, which tracks consumer expectations for the next 6 months, rose 3.7 points to 103.3. Adding to the good news, the labour differential (i.e., the percentage of survey respondents indicating jobs are plentiful minus the percentage indicating they are hard to come by) hit a 16-year high of 16.1, a level indicative of a tight labour market.

Contributions to

real GDP growth

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first est.Q1

GDP 2.6 1.2

Consumption 1.93 1.32

Business Investm. Equip./Intell. 0.50 0.47

Business Investm. Struct. 0.14 0.39

Residential Investm. -0.27 0.41

Government 0.12 -0.11

Domestic Demand 2.4 2.5

Exports 0.48 0.85

Imports -0.31 -0.63

Trade 0.2 0.2

Final Sales 2.6 2.7

Inventories 0.0 -1.5

NBF Economics and Strategy (data via Datastream)

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U.S.: Consumer confidence boosted by tight labour market

NBF Economics and Strategy (data via Bloomberg)

Labour differentialConference Board‘s measures of consumer confidence

Overall

Present situation

Index

Expectations

16-year high

Consumer confidence is hovering near its cyclical high…

…in part because jobs are plentiful


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Markit’s flash Composite PMI crawled up 0.3 point to a six-month high of 54.2 in July. The increase was driven by the manufacturing index, which went from 52.0 to 53.2 on stronger output and new-order growth. Meanwhile, the services tracker indicated that overall expansion in the sector was unchanged in July (54.2) even though jobs were reportedly added at their fastest pace since December.

As widely expected, the Federal Reserve left the fed funds rate unchanged at 1.00-1.25%. In its statement, the FOMC highlighted “solid” job gains since the start of the year and continued expansion of household spending and business investment. However, policymakers bemoaned the fact that inflation was “running below 2 percent”, a formulation changed slightly from the prior statement’s “somewhat below 2 percent”. Still, they expected inflation to stabilize around the 2% objective “over the medium term”. In our opinion, the lack of inflation is likely to push back the next rate hike to December. At the meeting, the Fed also decided to maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities but it said it expected to begin implementing a balance sheet normalization program (i.e., reduce the amount it reinvests) “relatively soon” if the economy evolved as anticipated. In other words, the Fed could in September or October start to limit the amount it reinvests in bonds.

WORLD: In the Eurozone, Markit’s flash Composite PMI fell 0.5 point to a six-month low of 55.8 in July. Despite the decline, the index remained well above its level of a year earlier (53.2) and continued to show one of the strongest paces of expansion of the past six years. The manufacturing sub-index slipped from 57.4 to 56.8 as new orders and output expanded at a more moderate pace than in the prior month. On a positive note, factories reported the second highest employment gain on record (data keeping began in the late 1990s). The services gauge stayed put at 55.4.

In Japan, the unemployment rate decreased from 3.1% in May to 2.8% in June, its lowest level in 20 years. Meanwhile, the labour force participation rate continued to expand, edging up to 61.0% from 60.8% prior. Despite the rise in the participation rate, the job-to-applicants ratio climbed from 1.49 to 1.51 as a stagnation in the number of applicant (+0.0% m/m) coincided with a rise in job offers (+1.5% m/m). These developments meant that there were more job offers per applicant in the country than at any time since the mid-1970s. In the past 12 months alone, job offers surged 6.5% while the number of applicants dropped 4.0%.

Also in Japan, the headline consumer price index (CPI) rose 0.4% y/y in June, the same pace as in May. Furthermore, 12-month CPI excluding fresh food and energy was flat. Both of these measures are still far below the Bank of Japan’s 2% objective which, according to the central bank’s latest forecasts published last week, will only be reached in fiscal year 2019. In this context, we do not expect the BoJ’s stimulus program to end anytime soon.

The Nikkei flash Manufacturing PMI for Japan edged down 0.2 point to 52.2 in July, its lowest level since November 2016. Both the output and new-orders sub-indices evidenced slower expansion compared with the prior month. On the other hand, job creation in the sector accelerated. July marks the 11th consecutive month in which Japan’s manufacturing sector has stood in expansionary territory (>50).

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Japan: The labour market is getting tighter and tighterUnemployment rate vs. job-to-applicants ratio

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NBF Economics and Strategy (data via Bloomberg)

Unemployment rate (R)

Job-to-applicants ratio (L)

Unemployment is at its lowest level in 20 years…

…and the job-to-applicants ratio has hit levels unseen since the mid 1970s

Weekly Economic Watch What We’ll Be Watching

4

In the U.S., the publication of non-farm payrolls for July will attract the most attention. Jobless claims in the month remained near the four-decade low reached in February and May (240K), suggesting a low rate of layoffs. As for hiring, Markit’s composite PMI reported the fastest pace of

job creation in the private sector this year in July. Based on these indicators, payrolls may have risen by about 195K. As for the household survey, which tends to be more volatile, it could show another decent employment reading after a strong June. As a result, the employment rate likely fell one tick to 4.3%. In other news, both personal income and personal spending could have risen in June, stimulated by strong wage growth. Meanwhile the annual core inflation rate, as defined by the core PCE deflator, may have gained one tick to 1.5%, still well below the Fed’s 2% target. The ISM manufacturing index, for its part, may have retreated to 54.5 in July, following the trend set by regional indices (Empire and Philly). The week will also see the release of June data on factory orders, pending homes sales and trade balance.

In Canada, the highlight of the week will be the Labour Force Survey for the month of July. The labour market has been on a tear lately, adding a massive 186K jobs on a year-to date basis, the best performance in 7 years. This has driven the unemployment rate down to its lowest level in

the current cycle (6.5%). In these conditions we believe the recent outsized gains are unsustainable. Consequently, we’re expecting a 10K decline for employment in July, a first monthly drop in 8 months. Even if our scenario was to prevail, the job tally in the twelve months ending in July would still total 367K. That would represent the best year on year increase since February 2013. June’s merchandise trade balance will also be available. If, as we expect, imports fell for the first time in 7 months, the trade deficit may have improved to C$0.40 billion.

Elsewhere in the world, several economic indicators will be released in the Eurozone including June’s unemployment rate, July’s CPI, and the first estimate of Q2 GDP. In Japan, we’ll keep an eye on industrial production for June. Finally, July’s iteration of China’s

manufacturing PMI will be released.

Previous NBF forecasts

Non farm payrolls (July m/m chg.) 222K 195K

Unemployment rate (July) 4.4% 4.3%

PCE deflator (June y/y chg.) 1.4% 1.4%

Core PCE deflator (June y/y chg.) 1.4% 1.5%

ISM manufacturing (July) 57.8 54.5

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U.S.: The unemployment rate may fall back to a 16-year low in JulyChange in non-farm payrolls vs. unemployment rate

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Unemployment rate (R)

Employment (L)

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LFS employment (July m/m chg.) 45.3K -10.0K

Unemployment rate (July) 6.5% 6.5%

Merchandise trade balance (June) -C$1.09 B -C$0.40 B

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Canada: Employment is set to post its first negative print in 8 months in JulyEmployment and jobless rate

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Weekly Economic Watch Economic Calendar – Canada & U.S.

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Weekly Economic Watch Annex – Economic Tables

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Economics and Strategy

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Documents

Table of Contents Week in review · 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 0 20 40 60 80 100 120 140 160 180 200 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 U.S.: