We learned earlier this month that The Conference Board of Canada's composite leading index for April rose a modest 0.4% in April. That's after a 0.2% turn in the opposite direction the previous month. As has often been the case in recent years, export demand for our commodities is largely responsible for the good news. We're still seeing soft spots in manufacturing, housing and the labour market.
The report's author, Philip Cross writes that the index's "leading indicator points to a continuing shift from domestic spending to exports as the sources of growth but does not suggest that there will be much change in the overall rate of growth."
Which is to say that there isn't much here to celebrate.
Cross spent 36 years with Statistics Canada, including a stint as chief economic analyst. He really is one of the country's more dependable economy watchers. It was a treat for me to speak with him about the findings.
Question: The study points to the outsized impact the global commodities market still has on the Canadian economy. How significant a role does it continue to play?
Answer: It's a source of almost all of the growth. It's not just the commodity price increase, which was 2.4% in the month. That's driving the stock market increase of 1.8%. There's probably even some spillover into a couple of components such as new orders and consumer confidence. It's been like this for several months now, basically since the devaluation of the dollar began. We have a remarkable split — the export-related components are doing well and almost all the components related to domestic demand have fallen flat on their faces. The end result is an economy perpetually stuck in the slow-growth lane.
Q: This is leaving us vulnerable to external factors.
A: Very much so. That's probably the most worrisome thing in this index over the last six months: the deceleration of the U.S. leading indicator. It was chugging along last November at .7% growth, which really gave you hope that the U.S. was finally starting to break out of this slow-growth syndrome that it's been trapped in for several years now. But the U.S. leading indicator is now slowed back to .4%, matching the Canadian increase. So I have a real concern that the U.S. isn't about to have its breakout. There seems to be a funny, residual seasonal pattern in a lot of the data for the U.S. over the last two or three years. It seems like every winter we get our hopes up that the U.S. economy is about to break out, and then every spring there's a big bucket of cold water dashed on us. It's very hard to interpret the U.S. numbers right now because of the harsh winter. We're getting some bounce-back in the spring because of that. But I'm a little concerned that the U.S. maybe isn't breaking out. And without a breakout in the U.S., there isn't a lot to support the hope that the Canadian economy will break out. As I say, domestic demand seems to be going nowhere. So if the U.S. economy doesn't pick up, it's hard to see how the outlook for the Canadian economy is about to change.
Q: The discussion immediately following the financial crisis was about a 10-plus year process of deleveraging in which we'd see slow economic growth. Is that what is happening?
A: That's one of the reasons that I think everybody was so hopeful; that the pickup in the U.S. leading indicator late last fall was signalling that maybe we were starting to put this behind us. You know, it's now been seven or eight years of recovery. You would think that around this point, you might start to see some signs of breaking out from it. But one of the real soft spots in the U.S. economy these days is the housing sector. That is very much the sector you would have thought that — after almost a decade of recession — at some point pent-up demand alone would lead to a recovery. But that sector in particular seems to have softened significantly in the spring.
Q: What do you make of the uptick in consumer confidence?
A: It's hard to read too much into that. Given how sluggish the employment numbers have been and continue to be into May, it's hard to see the consumer sector leading a breakout in the Canadian economy. Until we get a significant upturn in employment, I don't know that consumers are going to be overly happy. And related to that, there are three components that are down in the month – one of them is employment insurance claims which jumped 1.8%. That's not a good sign for the labour market. If we don't see sustained job growth, it's hard to see consumer confidence doing much.
Q: Is it possible to forecast when this slow growth environment starts to turn around?
A: That's what this index is designed to do, to pick up signs that this is turning up significantly. And it's just not in the numbers yet. It's hard to see how it's going to turn around, given some of the softness we're seeing in the U.S. numbers. The big hope in this index over the winter was that even though the Canadian numbers weren't performing well, the U.S. economy seemed to be breaking out. As the U.S. economy starts to slip back, it's hard to be optimistic that we're going to see a significant pickup in the other components. The Bank of Canada has been waiting for two things to lead the Canadian economy out of its doldrums. One was exports, which we've discussed at length. Apart from higher commodity prices, there aren't a lot of encouraging signs from the U.S. The other was business investment, which frankly is just going nowhere.
Q: Business leaders continue to make conservative spending decisions.
A: It's an interesting variable. You look at the breakdown of the data. In some sectors — in particular anything related to energy — there's a huge boom. There are a lot of megaprojects going forward in western Canada and Newfoundland. But in Ontario and Quebec, there's just nothing happening.
Cross has written a new report for the C.D. Howe Institute on government and business spending that explores this regional split further.