Alberta economic snapshot for January 19, 2013

Alberta's Business

January 19, 2013

CALGARY, AB, Jan. 19, 2013/ Troy Media/ – Alberta factories, refineries, and meat packing plants are the economic engines for many communities throughout Alberta. But in November, they were running a bit slower – a trend that has been developing over the past year or so.

Shipments of manufactured goods totalled $6.14 billion in November, down about 1.8 per cent from the previous month, and the second lowest total to date in 2012. Over the first 11 months of last year, manufacturing shipments are still about 6.4 per cent higher than the same period in 2011, but the trend has been decidedly slower since peaking near the end of 2011.

Canadian manufacturing, on the other hand, is moving in the opposite direction. Across the country, manufacturing sales increased 1.7 per cent in November to $49.9 billion, the highest level since May 2012. The largest gains were in the transportation equipment, primary metal and chemical industries.

Alberta’s softer manufacturing shipments are due to a few factors.

First of all, meat packing shipments fell off in October and November with the closure of the XL plant in Brooks. With the ability to handle some 4,000 head of cattle per day, the plant is a major producer of packaged meat products, and its closure was noticed in the overall provincial manufacturing numbers.

But another factor is perhaps a bit of hesitancy within the energy sector. Much of Alberta’s manufacturing is directly or indirectly related to oil and gas extraction (be it steel pipe, specialized machinery, or refining).

Oil prices for Western Canadian select weakened towards the end of 2012, which may have delayed or postponed some orders for manufactured items related to drilling. While most Alberta extraction companies are sticking with their capital programs, they may be holding off a bit in purchase of newly manufactured equipment – at least until prices are a bit stronger.

Housing

The headline grabbing news on real estate has been the dramatic decline in home sales activity across Canada, down 13 per cent relative to last year – and there’s a fear out there that prices will soon follow. Alberta is a major outlier, however, despite being faced with the same tighter mortgage insurance restrictions as the rest of Canada, with sales across the province up 1 per cent.

According to the Canadian Real Estate Association, activity in Calgary is the primary reason Alberta is bucking the national trend. Seasonally-adjusted activity went up 11.9 per cent compared to last year and average prices pushed up 7.3 per cent. Activity in Fort McMurray appears to have been the most negatively impacted by the mortgage insurance changes, with activity down 42 per cent (because we’re dealing with far smaller numbers the percentage change appears exaggerated relative to Calgary), but home prices have held firm. The tightening of mortgage insurance will have an exaggerated effect on Fort McMurray, despite the higher wages earned in the boomtown, because of the very high cost of living in the city.

Foreigners LOVE Canadian debt

Since the sovereign debt crisis erupted, Government of Canada debt has become very popular, given its triple-A credit rating and our stable political system. Statistics Canada released its most recent tabulation of transactions in foreign securities earlier this week and it was pretty clear that desire of international investors for security hasn’t been satiated yet.

Between January and November 2012, foreigners gobbled up $85 billion worth of Canadian debt. Of that figure federal government bonds accounted for $31 billion, but if we include provinces and government-backed entities the figure jumps north of $50 billion. What’s left is corporate debt and equity, instruments that are considered riskier.

On the other hand, Canadians seem to be looking for more risk, as $20 billion out of the $29 billion invested abroad wound up in equity and investment fund shares.

The love affair foreigners have for Canadian debt is having a clear influence on the exchange rate. Canadian dollars have to be bought and sold to transact purchases for debt securities, just as they have to be purchased for trade in merchandise goods like crude oil, consumer goods or even royalty payments. Often finance related transactions are far larger than trade for goods and services. This explains why the dollar keeps appreciating despite consistent and large trade deficits.

Weekend reading

Philip Cross, former chief economic analyst at Statistics Canada and now with the McDonald-Laurier Institute, took a look at the issue of Dutch Disease in a recently released paper. There’s been a lot of talk about how high commodity prices have caused the loonie to increase and, in turn, hurt manufacturing. This is overblown according to Mr. Cross who believes manufacturers have actually adapted well to the new high dollar environment. To read his reasoning why, please click here.

Not long ago Bank of Canada head Mark Carney instigated a bit of a furor in the business community by stating that corporations were sitting on too much cash in Canada and keeping the economy from expanding at its optimal pace. Finn Poschmann of the CD Howe Institute looked at the issue a little closer, finding that while cash balances are increasing this is nothing to be alarmed about. To read what he has to say on the topic, click here.

U.S.

Despite the best efforts of some American legislators, data continues to point to a steadily improving American economy. The Commerce Department reported this week that housing starts are expanding very healthily, hitting 954,000 on a seasonally-adjusted basis in December. This is 45 per cent higher than in 2011 and is approaching what would be considered ‘normal’ levels, as demographics typically mean housing stock needs to increase by about 1.25 million annually.

Meanwhile, with the Fiscal Cliff negotiations coming to a head at the end of the year, economists worried that households would pull back in retail spending. Apparently they didn’t. Seasonally-adjusted sales were 0.5 per cent higher in December over November; on a year-over-year basis, retail sales increased 4.7 per cent. That said, the Michigan Consumer Sentiments Index for January, also released this week, was at its lowest level since December 2011, indicating that political fighting might still weigh on economic growth. With respect to inflation figures, the Consumer Price Index increased tepidly in December, increasing by only 1.7 per cent relative to December of 2011. This gives the Federal Reserve cover to continue with their economic stimulation policies.

| ATB Financial

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