July 9, 2013

U.S. consumers become more spendthrift while Canadians turn miserly

U.S. retail sales in May were quite decent at +0.6% month-to-month and +4.3% year-over-year, according to the latest data from the Census Bureau.

In the motor vehicles and parts sub-category (nearly 20% of the total), the gains were even stronger, +1.8% month-to-month and +8.5% year-over-year.

More buoyant still were the receipts of shopkeepers selling building materials and garden equipment, with a 0.9% improvement month-to-month and a 10.1% gain year-over-year.

And finally, attention must be paid to the activity levels of non-store retailers, +0.7% month-to-month and +11.3% year-over-year.

These numbers aren’t the only signs of an improved consumer climate south of the border. U.S. personal consumption expenditures (PCE) within the national accounts in the first quarter were +3.4% quarter-to-quarter annualized. That compares with a slower overall output growth rate of 2.4%.

Within PCE, spending on durables was the pace-setter, +8.2%. The major sub-component of “durables” is motor vehicles.

In a report from Autodata Corporation, unit sales of light motor vehicles in the U.S. have been +7.3% so far this year versus the same January to May period of 2012.

In Canada, retail sales to date in 2013 have been trending at only +1.0% year-over-year, Motor vehicle sales have been performing a little better, at nearly +2.0% year-over-year in the latest month.

While Canada’s “real” (i.e., inflation-adjusted) gross domestic product (GDP) increase in this year’s first quarter was almost exactly the same as in the U.S., the role played by consumers was less prominent.

Almost all of Canada’s GDP increase in Q1 was thanks to better export shipments (especially of energy products) to the improving U.S. economy.

Canadian consumer spending in the latest quarter was only +1.2% annualized, with both durable goods (-0.4%) and non-durables (-0.8%) in decline, and only semi-durables (+4.5%) on an upswing.

DesRosiers Automotive Consultants has calculated that Canadian light motor vehicle sales (in units) have been +2.4% year-to-date.

How do we explain the difference between the U.S. and Canadian retail scenes? Does it have to do with employment? The latest statistics don’t support such a conclusion.

The U.S. economy added a healthy 175,000 net jobs in May, but on a proportional basis, Canada’s month-to-month gain was an even more impressive 95,000. The population of the U.S. is nine times higher than Canada’s.

How about a comparison of incomes? The latest U.S. labour market report from the Bureau of Labor Statistics records that average hourly earnings in America were +1.9% year-over-year in May and average weekly earnings were +2.2%.

In an environment of foreclosures and exceptionally tight credit, U.S. consumers have spent the past several years paying down debt and straightening out their finances.

Now, their residential real estate sector is roaring back to life, with home prices rising briskly out of a smelly swampy crater.

As a result, the U.S. Conference Board’s measure of consumer confidence rose to its highest level in more than five years in May. The last time there was a higher index value than today’s 76.2 occurred in February 2008, at 76.4.

In Canada, there are several conflicting indicators on incomes.

In the latest Labour Force Information report from Statistics Canada, average hourly wages for permanent employees in May were calculated to be +2.0% year-over-year and average weekly wages +1.9%.

Both percentage changes almost match the U.S. numbers.

The Payroll Employment, Earnings and Hours report, also from Statistics Canada, records a 3.1% year-over-year gain in average weekly earnings (including overtime) for all employees.

Some sectors, such as “forestry and logging and support services” and “management of companies and enterprises” (+11.3% in both cases) have been recording outsized increases.

The Major Wage Settlements, First Quarter 2013 report from Human Resources and Skills Development Canada (HRSDC) sets out different results, at least for workers covered under union wage agreements.

Major collective bargaining settlements in Q1 of this year provided for annual increases of only 0.5% over the next two years, the lowest rate of change since the first quarter of 1996.

When the same parties previously negotiated, the average annual hike was +2.3%.

The majority of union agreements are now in the public sector and Q1’s national percent change was biased downwards by the two-year wage freeze in Ontario’s public service. What can we expect beyond the freeze’s expiry date? The Elementary Teachers Federation of Ontario (ETFO) has just won a contract stipulating a 2.0% climb in wages beginning in September 2014.

In the individual month of March, according to the most recent Workplace Bulletin issued by HRSDC, wage adjustments Canada-wide in the public sector averaged +1.6% and ranged from +1.0 to +3.6%.

March’s private-sector union wage agreements averaged +2.3% annually, influenced heavily by the contract (also +2.3%) signed between electricians and the Electrical Contractors Association of Ontario.

Manufacturers have cut half a million production line workers over the past decade. As a consequence, a number of recent agreements in that sector have been in the +1.5% to +2.0% range.

On balance, however, it would seem Canadian incomes have been climbing at a rate comparable to what has been occurring south of the border. Nevertheless, Canadians have become more cautious in their approach to spending.

Given the exceptional strength in the nation’s residential real estate market both before and fairly soon after the 2008-2009 economic downturn, Canadians have been waiting for the hammer to fall on new home starts and prices.

In April, residential groundbreakings retreated to 176,000 units SAAR, but in May they bounced back to 200,000 units.

Defying the apparent odds, the latest (April 2013) New Housing Price Index from Statistics Canada continued to show steady improvement, +0.2% month-to-month and +2.0% year-over-year.

Many Canadian have been squirreling away their wallets and purses. Maybe it’s time to retrieve them from their hiding places.

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.

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