November GDP on FIRE!
After recording a surprisingly weak 0.1% increase in October, the November GDP reading roared back to life to the tune of a 0.4% increase. The gains were driven largely by the FIRE group (Finance, insurance, Real Estate) which recorded their strongest showing since the Spring when the housing market was firing on all cylinders.
It may be worth remembering that November resale data was surprisingly strong, but December data told a very different story. How this will manifest itself in the GDP data in the coming months is worth watching, though I’d suggest the bounce in the FIRE group will likely prove short-lived.
“Signs of strength emanated from the service sector (+0.5%), with strong gains in retail trade (+1.4%), and finance insurance, and real estate (0.6%). Both have come roaring back, following a 9-month breather following the robust strength seen in late 2009, and early 2010.”
Though December’s readings should be lower, I’d expect to see this jump and stay high until March once all the 5/35 lemmings have taken the plunge and the demand gap hits. What happens past that point will be the big Canadian economic story of 2011, but if demand can be miraculously sustained through the rest of the year with a reduction in available credit and a noticeably shallower buyer pool, I will eat my left foot!
This hasn’t entirely been lost on the TD report:
“We anticipate that the strength in the service sector may be short-lived. The service sectors continued to benefit from strong domestic demand, and extremely low-interest rates, led by the Canadian existing housing market. Since, we have seen signs of cooling on that front, and going forward we expect housing activity to be moderate at best. In addition, the most recent changes to mortgage insurance rules should work to dampen demand in the existing home market. A cooling housing market, coupled with high household debt levels is likely to slow growth in the service sector and construction output through 2011.”
Consumer spending also helped boost GDP readings`with retail activity up 1.4%. With credit creation still significantly outpacing income gains, one can’t help but wonder how long this can continue. Indeed if house prices fall as expected by even the bank-employed economists, we should see the main driver of consumer spending, personal lines of credit, face significant head winds.
It wasn’t all good news:
Manufacturing and construction both declined in November. The manufacturing sector continued its broad decline that started in the summer, while the construction sector posted its second straight monthly decline. Given the recent weakness in housing starts, I would be surprised to see any increase over the next few months.
“Looking beyond temporary factors, on a year-over-year basis, real GDP growth cooled to 3.0%, from 3.4% in the prior month, continuing a 9-month moderating trend.”
To be fair we were in the midst of a stimulus induced spending spree in the economy. I’m not shocked that year-over-year comparisons show a deceleration.
CIBC’s analysis summarized the data succinctly:
“Given the leveraged state of the Canadian household, once the Bank of Canada starts to hike rates in May, we can expect to see a deceleration in not only consumption activity, but the FIRE category as well.”
Perhaps the most telling quote on the state of the economy. As long as credit can still be extended to those who are already drowning in it, and as long as interest rates never rise, things look great. In my mind, the only increase in GDP that matters is the one that occurs once consumers and governments actually begin decreasing their debt loads and savings and interest rates normalize. Until then, any GDP reading can be made to look great if we only pump more debt into the system.