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U.S. Leading Economic Indicators Increase Again
Last Week the Conference Board Announced that the U.S. leading index increased 0.4 percent, and the coincident and lagging indexes held steady in August. The leading index increased again in August and is now up by 2.5 percent from its low in March (more than a 6.0 percent annual rate). In addition, the strength in the leading index has been widespread over this period.
The coincident index was unchanged in August, but has been rising gradually from its recent low in April. The growth rate of the coincident index has picked up to about 1.2 percent (annual rate) over the last four months, and this growth has also been widespread–only employment has continued declining.
The upturn in the leading index since March has already been followed by stronger real gross domestic product growth in the second quarter and by the recent increases in the coincident index. In addition, the recent strength in the leading index suggests a further strengthening of economic growth in the second half of the year.
Four of the ten indicators that make up the leading index increased in August. The positive contributors– beginning with the largest positive contributor–were interest rate spread, vendor performance, real money supply and building permits. The negative contributors- -beginning with the largest negative contributor–were average weekly initial claims for unemployment insurance (inverted), index of consumer expectations, manufacturers’ new orders for consumer goods and materials, manufacturers’ new orders for nondefense capital goods and stock prices. Average weekly manufacturing hours held steady in August.
The leading index now stands at 113.3 (1996=100). Based on revised data, this index increased 0.6 percent in July and 0.4 percent in June. During the six-month span through August, the leading index increased 2.4 percent, with eight of the 10 components advancing (diffusion index, six-month span equals 85 percent).
Three of the four indicators that make up the coincident index increased in August. The positive contributors to the index-beginning with the largest positive contributor-were personal income less transfer payments, manufacturing and trade sales and industrial production. Employees on nonagricultural payrolls declined in August. The coincident index now stands at 115.4 (1996=100). This index increased 0.2 percent in July and 0.1 percent in June. During the six-month period through August, the coincident index increased 0.3 percent.
RBC sees U.S. Recovery Driving Canadian Economy
The Royal Bank of Canada on Tuesday joined the ranks of economic forecasters calling for the nation’s economy to ride a U.S. recovery early next year.
In its latest forecast, RBC pegged economic growth this year at 2.1 per cent as Canada shrugs off the impact of the SARS virus, the mad cow scare, a surging loonie and forest fires in B.C.
Provided a long overdue recovery in the U.S. materializes as expected, that rate of growth should accelerate to 3.5 per cent in 2004, the bank said. At 3.5 per cent, Canada’s economy would be humming along at a far better rate than its economic potential. The Bank of Canada considers the nation’s annual economic growth potential to be three per cent.
The U.S., by far Canada’s largest trading partner, is expected to achieve economic growth of 2.7 per cent this year and 3.5 per cent in 2004.
“The rise of the Canadian dollar and a weak U.S. economy earlier this year have hurt Canada’s trade balance, but a reprieve will come alongside strengthening U.S. domestic demand,” RBC chief economist Craig Wright wrote in the report.
As corporate profits increase and excess economic capacity is absorbed, business investment should increase, RBC said. The biggest drag on growth will be excess inventories of goods. Canada’s inventory-to- sales ratio is at its highest level since 1999. As for interest rates, RBC said it expects the Bank of Canada to hold steady until sometime in mid 2004.
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