January 17, 2013

Retail sales in Canada and the U.S. tell an interesting story


Chief Economist, CanaData

Retail sales in Canada in October 2012 were +0.7% month to month — a strong performance — but only +1.8% year-over-year, according to the latest report from Statistics Canada.

In the U.S., where the numbers are a little more current, the November sales results from the Census Bureau were +0.3% month to month and +3.7% year over year.

The retail sales series are somewhat volatile and it is usually more informative to look at “smoothed” or three-month moving average figures. On a smoothed basis, Canada’s October retail sales were +2.3% and in the U.S., they were +4.3%.

In both countries, the trend of year-over-year retail sales moderated throughout 2012. Canada started the year at +3.9%, almost double October’s level, and the U.S. January figure was +6.4%.

Economic growth in 2012 fell short of early expectations, mainly due to the European debt crisis that created unwelcome uncertainty and a slowdown in world business activity.

For both Canada and the U.S, the consensus estimates are that “real” (i.e., inflation-adjusted) GDP growth this year will be similar to last year, hovering around +2.0%.

Europe may still experience some blips in its recovery path and the U.S. is likely to be embroiled in more debilitating budget wrangles — both over spending cuts and raising the debt ceiling.

This view of the outlook may be too pessimistic. I suspect the improvement in the U.S. housing sector will provide a huge boost to overall confidence, as will the ongoing increases in U.S. domestic energy reserves (i.e., the energy sector investment boom that is underway south of the border thanks to new hydraulic fracturing technology).

Nevertheless, there will be a couple of factors working against retail sales in both the United States and Canada in 2013.

In the U.S., the increase in the tax rate (from 35.0% to 39.6%) for the 2% of wealthiest Americans will be an inhibiting factor. But that won’t be the biggest deterrent.

As part of the bipartisan “fiscal cliff-avoidance deal”, the tax rate for the other 98% of the working-age population has been left the same. However, there has been one significant change with respect to deductions. A previously introduced decrease in payroll charges to fund Social Security has been allowed to expire. Tax experts estimate this will increase average household remittances to Washington by $700 per year.

In Canada, the problem is the household-debt-to-disposable-income ratio. At over 160%, it’s risen to an all-time high. U.S. families have achieved commendable success in reining in their debt obligations over the last couple of years, spurred on by their housing crisis. Canadians are beginning to take their financial shortcomings more seriously as well.

Counterbalancing the foregoing negatives are improvements in employment and incomes. In Canada, 300,000 net new jobs were created last year. That’s a very strong record of employment increase.

In the U.S., the change in total employment in 2013 was +1.8 million new positions, also a substantial advance. Plus average weekly hours and earnings have been on the rise.

Retail spending patterns can often be skewed by changes in other economic indicators. For example, when gasoline prices are rising rapidly, purchases from earnings have to be diverted from other more-optional items to ensure that workers can reach their place of employment.

Thankfully, that’s not the case at present. In Canada, the year-over-year change in gas prices in December was a very modest +0.4%. In the U.S., the price at the pump moved up a little faster, +1.9%, but that was still quite modest.

By comparison, the year-over-year gasoline price in the U.S. at the mid-point of 2011 was +35.6% and in Canada, it was +28.5%.

It’s the respective housing markets in the two countries that might have the most influence on retail sales. A large proportion of retail spending is on items for the home — entertainment systems, carpeting, appliances, furniture and so on. These expenditures become even more compelling when a new home is purchased.

Housing starts in the U.S. are moving higher. They’re likely to approach 900,000 units per month on average, seasonally adjusted and annualized, this year after falling below 500,000 units at the bottom of the housing recession. Out to 2016, they will return to a “normal” level of approximately 1.5 million units.

Canadian housing starts will more likely move in the opposite direction, easing from above 200,000 units in 2012 to a figure close to 180,000 in 2013.

In Canada, it’s worth noting that the strongest advances in year-over-year retail sales regionally in October occurred in Alberta (+6.1%), Newfoundland and Labrador (+5.7%) and Saskatchewan (+5.4%).

Ontario (+1.3%) and Quebec (+1.2%) performed about the same.

Two provinces were in the negative column, British Columbia (-1.1%) and New Brunswick (-2.4%).

As for upcoming retail construction in Canada, the outlook remains upbeat. A major contributing factor will be the arrival on our shores of more U.S. retailing giants. The latest wave is being led by Target Corporation. It’s been reported in the media that Bloomingdale’s, J Crew and Nordstrom have aggressive plans in the works as well.

The square footage of retail space per shopper in Canada is much less than in the U.S. Therefore, dollar sales per square foot are higher. With the two currencies nearly a match, no wonder U.S. firms are now more eager to look north.

For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog. His lifestyle blog is at www.alexcarrick.com

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