Economists have at their disposal an amazing array of statistics on the economy production, sales, shipments, exports and imports, employment, and so on. Rarely do all these statistics offer the same story, and sometimes a single development can truly cloud things.
Consider two widely-held perceptions. First, the U.S. economy slowed dramatically in the early months of this year, but there are signs from manufacturing that things strengthened a little in the summer months. Second, the consensus view is that the Canadian economy has been humming overall, but manufacturing has been struggling. Yet, even in Canadian manufacturing the news appears to have improved in the summer months, as shipments have picked up.
Any economist can tell you that it is not possible to understand either economy without understanding the auto sector. Even though autos represent just 1.6% of Canadas GDP and 1% of total employment, the sector has a much broader influence than this on the rest of the manufacturing and service economy. Moreover, the decision to purchase a car tells us much about underlying consumer psychology, which can affect the entire consumer bundle.
U.S. vehicle sales have been weak so far this year, down approximately 1.6% compared to last year. This weakness has been concentrated in the Detroit-Three, whose sales are down about 4%. This weak picture is likely to persist, given the uncertainties that U.S. consumers face from the housing market. Canadas car sales have been solid, but they represent only about 10% of the North American market, and therefore are not the economic driver.
During the first few months of the year, despite weak auto sales, the Detroit-Three saw a big drop in inventories of unsold vehicles. Inventory levels, ideally around 60 days of sales, fell from 91 days last January to about 51 days in May. Thus, despite a weak sales outlook, the Detroit-Three have been ramping up production, on both sides of the border. Contributing to this desire to restore inventories is the fact that all three companies are negotiating new contracts with their workers this summer. The negotiations are expected to be tough-going, and could result in strike action, which would further limit the companies ability to meet customer demand.
A consequence of this mini-cycle in auto production is that manufacturing activity in both countries is getting a boost that is almost certain to prove temporary. Accordingly, the apparent recovery in U.S. GDP growth in the second quarter is an exaggerated one, as the underlying behavior of the U.S. consumer is what will determine growth through the rest of the year. Similarly, in Canada, the pickup in manufacturing shipments that has emerged is also likely to be temporary indeed, in the first five months of the year, Canadas manufacturing shipments are up 1.2% compared to the same period last year, but removing vehicles brings the figure to 0.2%.
The bottom line? The special circumstances in the auto business possibly replicated in other sectors as well are clouding the underlying trends in both the U.S. and Canadian economies. The U.S. economy is still losing momentum, and Canada is still likely to follow suit.
Stephen Poloz is Senior Vice-President, Corporate Affairs and Chief Economist, Export Development Canada. His column on trade-related issues appears weekly on www.ctl.ca
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