The Weekly Bottom Line

HIGHLIGHTS

• Canadian employment ho-hum in April
• Canadian housing starts ease off recent highs

After a flood of U.S. economic data releases last week, our attention was turned mostly towards Canadian data this week, with Friday's labour force survey for the month of April serving as centerpiece. Quickly recovering from mourning the elimination of the last Canadian team from the NHL playoffs, the nation's focus also turned to its fate in the IIHF World Hockey Championship – so far, so good. Canada has grown accustomed to prevailing in these competitions and touting its competitive advantage, but its blasé attitude should not be carried over into the economic realm to quickly in comparing itself to its southern neighbor.

First, any comparison to a slumping economy naturally shines a brighter light than it typically would otherwise. The U.S. data released this week was also on balance better than expected. We think this is mostly a respite before weaker data starts showing up again, but it was welcome nonetheless. The ISM non-manufacturing index broke through the 50 point contraction/expansion threshold for the first time in four months to reach 52. Most categories (business activity, new orders, and employment) are sitting just slightly above 50. However, stronger-than-expected data should not be confused with strong data. The ISM non-manufacturing has only dipped below 50 on a sustained basis once since its inception in 1997, and that was during the 2001 recession. By most measures, the U.S. is either in or on the verge of a recession. The Federal Reserve's Senior Loan Officer Survey for Q2 revealed worsening credit conditions and further tightening in standards. Meanwhile, the U.S. trade deficit narrowed in March as a result of a dip in imports, further evidence of a challenged U.S. consumer. The only unambiguously positive bit of data for the U.S. was provided by decent Q1 nonfarm productivity figures (+2.2% Q/Q annualized) which might help ease inflationary pressures.

Mirror image

Turning to Canada, markets did not overreact to Friday morning's better-than-expected employment report for April. The trade numbers for March didn't seem to be misinterpreted on the bright side either. Canada's headline figure for the trade surplus (current $ value) increased, but export volumes fell by 1.9% in March for an overall 4.0% (annualized) drop in Q1.

Nothing shocking was revealed in this latest data iteration of the Canadian employment landscape. The Canadian economy managed to create a net 19,200 jobs in April. While this headline number is encouraging, especially in comparison to the job losses suffered by the U.S. economy – numbered at 260,000 year-to-date – the details of the labour force survey reveal a weaker picture. Self-employment led gains with 18,300 net new jobs created and the public sector added 9,100 workers to the tally, but private-sector employment fell by 8,100. The unemployment rate edged up 0.1 percentage points to 6.1% as new entrants into the labour force (23,800) outsized job creation. Wage gains for permanent employees (+4.2%) were still far greater than CPI inflation recorded a month prior (+1.4%), but have been easing since January, a sign that the labour market is slacking a bit.

As a whole, private sector jobs have not been shrinking on a year-over-year basis, but growth has been soft, averaging 0.9% over the last 12 months. We continue to be concerned with this particular mix of employment where softness in private sector employment – a bellwether of healthy economies – has been masked by outsized strength in public sector employment (+4.4%) and self-employment (+4.8%). What's more, year-over-year growth trends in these last two segments are not encouraging. Self-employment growth has dropped off significantly since peaking in June 2007. While public sector employment growth remains robust, it has come off its all-time high of 6.6% of February and is finally showing signs of strain, as public purses tighten up a bit.

Will private sector employment take the baton to keep Canadian employment running once public and self-employment move to the sidelines? While we do not expect the private sector to shed jobs on aggregate on a sustained basis over the next 12-18 months, Canadian firms – Walmart aside – are also unlikely to venture on a hiring spree in the current context. In other words, the current pace of private sector job creation is just about the best we can expect for Canada before the U.S. economy seriously gears up again, which isn't likely to happen (outside of a blip in spending from the fiscal stimulus) for another 16 months or so. The composition of private sector job growth also suggests further weakness could be in the cards. Over the last 12 months, construction employment (+113,000) has been able to more than offset the job losses suffered in Canadian manufacturing (-112,000). For an industry that has employed at most about 60% as many people as manufacturing does, the contribution of construction to overall employment has been nothing short of stellar. Non-residential construction activity should remain robust in the months ahead, so employment in that sector should hold up. As for residential construction, we expect it to slow and are not inclined to think it can keep adding workers at the same pace. Canadian housing starts dropped by 12% to a seasonally-adjusted annual rate of 241,000 units in April, but this comes after back-to-back strength in February and March (243,000 units). As new home and condo construction was easing in Ontario since 2003 and in Québec since 2004, the national level of housing starts has still held up well, in large part due to continued strength in Alberta and B.C. Alberta is no longer lending a hand to national figures in this regard, and cannot reasonably be expected to do so in the near term either. After playing catch-up with a large population inflow into the province, it is now adjusting to a lower, more sustainable level of housing starts. April's housing starts figures bring the year-to-date average to 229,200 units which is closer to what fundamentals suggest is an appropriate level. Our view going forward is that starts will continue to edge down on a trend basis to average 210,000-220,000 units this year. After providing a solid boost to real GDP growth in the first quarter, residential construction activity will likely take a breather, in line with many other components of the Canadian economy. Employment gains will most likely be negligible on balance for the remainder of this year.

Luckily, year-to-date Canadian dollar values of investor positions in Canadian and U.S. equities have been sheltered from stock market declines experienced in most other markets. When compared to other economies, Canada's benign inflation is another measure by which Canadians have been relatively lucky so far this year. Assuming Canada can make the best of its home ice advantage and once again claim victory in the world hockey championship, let us hope – but not expect – that the Canadian economy can replicate such a performance. Just don't be surprised if the Canadian men's hockey team falters – they are human after all – or if the Canadian economy sits this one out and pouts in the penalty box.

UPCOMING KEY ECONOMIC RELEASES

U.S. Retail Sales - April

Release Date: May13/08
March Result: total +0.2%; ex-autos +0.1%
TD Forecast: total -0.4%; ex-autos 0.0%
Consensus: total -0.2%; ex-autos +0.2%

We're expecting to see U.S. retail sales weaken further in April, with a 0.4% decline. There are several reasons to expect weaker sales. Both wage growth and the level of employment have slipped over the last few months, giving consumers less money to spend. Furthermore, we know that same store sales fell by 1.0% M/M in April, and that auto sales were down about 5%. Ex-autos sales should be a little stronger, and we're expecting them to come in flat. However, after stripping out the inflationary effect of food and gasoline prices, it will be clear that Q2 consumer spending got off to an extremely weak start.

U.S. Consumer Price Index - April

Release Date: May 14/08
March Result: core +0.2% M/M, 2.4% Y/Y; all-items +0.3% M/M, 4.0% Y/Y
TD Forecast: core +0.2% M/M, 2.3% Y/Y; all-items +0.4% M/M, 4.0% Y/Y
Consensus: core +0.2% M/M, 2.4% Y/Y; all-items +0.3% M/M, 4.0% Y/Y

We're not expecting to see any major changes in U.S. inflation trends in April. We're forecasting core CPI to gain another 0.2% on a monthly basis, but for the Y/Y pace of inflation to soften a bit to 2.3%. However, food and energy prices will likely keep all-items inflation extremely elevated. With food prices still high and moving higher, and with energy prices continuing to soar, we're expecting to see total inflation rise by 0.4% on the month. The Y/Y pace of all-items inflation will likely remain unchanged at 4.0%.

Canadian Manufacturing Shipments - March

Release Date: May 15/08
February Result: +1.6%
TD Forecast: 0.0%
Consensus: -0.5%

We're expecting to see Canadian manufacturing shipments come in flat in March, after increasing in January and February. However, the number will likely be much worse in real terms, since increasing prices in March will have given the nominal figures a significant boost. Although auto exports fell in March, we think that the declines in that sector will be made up for by increases in the nondurables categories, which make up nearly 50% of manufacturing shipments. We'll likely see significant gains in sectors like food, chemicals, and petroleum and coal products, largely due to higher prices, and that should help to keep manufacturing shipments afloat in March. And, as the auto sector continues to struggle, the growth in nondurables and the decline in durables will likely be a recurring theme going forward.

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TD Bank Financial Group

The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.