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Flagging retailers are canary in coal mine for Canada's economy – BNNBloomberg.ca

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Eileen Wilson says she’ll be spending less this year on holiday shopping compared with last year because money is tight and the cost of living has gone up.

The retired Canadian civil servant says she clips coupons to save money on basics and has been checking online every day to get the best deal on video games for her two grandchildren for Christmas.

“I’ve been doing pretty good so far,” Wilson, 76, said during an interview at an Ottawa shopping mall.

Wilson isn’t alone in paring back spending. Retail sales in Canada are on pace for one of their worst years on record for growth, raising red flags about the health of the nation’s consumer. Sluggish spending at malls may only be a sign of things to come for an economy awash in household debt and unable to find other drivers to replace consumption.

Retail receipts for the first nine months of 2019 are up just 1.6 per cent from a year earlier, the slowest pace outside of the last recession since at least 1992. In volume terms, the deceleration is even more pronounced, with real retail sales up just 0.7  per cent this year. Statistics Canada releases October retail sales data on Friday.

The slump has been across the board, from cars to food to clothing, highlighting the broad nature of the slowdown, “which could signal that things may get a bit worse before they get better,” said Jennifer Bartashus, a senior analyst at Bloomberg Intelligence, evident in slowing sales growth at companies such as Loblaw Cos., Canada’s largest grocery retailer and the parent of Joe Fresh clothing stores, and Empire Co., which owns supermarket chain Sobeys Inc.

The malaise in retail is only the most visible symptom of Canada’s strained households, which are showing signs of fatigue as high debt burdens take their toll. Excluding housing, annual growth in total household consumption — everything from the purchase of televisions to spending on health care — has averaged 1.1 per cent in real terms over the past four quarters, the slowest pace outside recession since at least 1962.

More than half of respondents in a recent Equifax Canada survey said they plan to spend less on gifts this holiday season, and 46 per cent said they would limit spending because they’re already carrying too much debt. Canadians owe $1.76 for every $1 of disposable income. They spend a record 15 per cent of disposable income to pay principal and interest on debt.

“We see a customer that is resilient but that is very value-oriented,” Michael LeBlanc, senior adviser at the Retail Council of Canada, said in a phone interview. “That’s nothing new particularly for Canada, but it seems to be more accentuated.”

The squeeze on discretionary income is making Canadians more careful, LeBlanc said, which has actually been good for discount merchants such as Dollarama Inc., whose stock has outperformed other retailers this year.

A tapped-out consumer is adding to broader structural changes, driven by technology, that pose additional challenges. Less money on the table means Canadians are changing the way they shop, driving online sales higher and leading to new trends such as the growth of the rental clothing market.

It could be worse, given the high debt levels. While slowing, consumption in Canada at the very least is still growing and is expected to remain a driver of the nation’s expansion even in its weakened state. Analysts are anticipated real household consumption to grow at about 1.7 per cent annually over the next two years, helped by a recent jump in employment that is fueling sharper-than-expected income gains. That should support spending and help households repair balance sheets. The household savings rate rose to 3.2 per cent in the third quarter, for example, the highest since 2015.

Still, pressure on sales is only increasing. For many retailers, “flat is the new up,” LeBlanc said.

–With assistance from Erik Hertzberg.

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Delta variant, shortages severely restrict U.S. economic growth in third quarter

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The U.S. economy grew at its slowest pace in more than a year in the third quarter as a resurgence in COVID-19 cases further stretched global supply chains, leading to shortages of goods like automobiles that slammed the brakes on consumer spending.

The weaker-than-expected growth reported by the Commerce Department on Thursday also reflected decreasing pandemic relief money from the government to businesses, state and local governments as well as households. Hurricane Ida, which devastated U.S. offshore energy production at the end of August also restrained economic growth.

But there are signs that economic activity is already regaining momentum amid declining coronavirus cases driven by the Delta variant. The number of Americans filing new claims for unemployment benefits dropped to a fresh 19-month low last week. Even with the third-quarter setback, the level of gross domestic product hit a record high and the economy is now 1.4% bigger than before the pandemic.

“The growth speed bump in the third quarter is an unwelcome surprise certainly, but it will not send the economy off into the ditch because it is partly based on supply disruptions in the auto industry that has cratered sales with inventories near record lows on dealer lots,” said Christopher Rupkey, chief economist at FWDBONDS in New York.

Gross domestic product increased at a 2.0% annualized rate last quarter, the government said in its advance GDP estimate. That was the slowest since the second quarter of 2020, when the economy suffered a historic contraction in the wake of stringent mandatory measures to contain the first wave of coronavirus cases. The economy grew at a 6.7% rate in the second quarter.

Economists polled by Reuters had forecast GDP rising at a 2.7% rate last quarter. The meager growth came mostly from a moderate pace of inventory drawdown. Business inventories decreased at a $77.7 billion pace compared to a $168.5 billion rate in the second quarter. As result, inventories contributed 2.07 percentage points to third-quarter GDP growth.

Inventory accumulation remains weak owing to shortages, especially of motor vehicles. Motor vehicle production fell at a 41.6% rate after declining at a 14.1% pace in the second quarter because of a global shortage of semiconductors.

Excluding inventories, the economy contracted at a 0.1% rate last quarter. The scarcity of motor vehicles hammered consumer spending, which grew at only a 1.6% rate after a robust 12% pace in the April-June quarter. Consumer spending accounts for more than two-thirds of U.S. economic activity.

 

(GRAPHIC: Consumer spending takes a breather – https://graphics.reuters.com/USA-ECONOMY/byvrjrwykve/chart_eikon.jpg)

 

Spending on long-lasting manufactured goods dropped at a 26.2% rate. Motor vehicles cut 2.39 percentage points from GDP growth, the biggest drag from autos since the second quarter of 1980. Excluding motor vehicle output, the economy grew at a 3.5% rate last quarter, a slowdown from the 7.4% pace in the prior quarter.

Spending on services was surprisingly strong, notching a 7.9% growth pace amid demand for air travel and car rentals. Demand for services at hospitals and restaurants rose, as did bookings for hotel, motel and university campus accommodation. Services spending accelerated at an 11.5% pace in the April-June quarter.

 

(GRAPHIC: The drag from Detroit – https://graphics.reuters.com/USA-ECONOMY/jnpwewdmepw/chart_eikon.jpg)

 

The government estimated that Hurricane Ida cost about $62 billion. Inflation remained hot, eroding spending power. The Federal Reserve’s preferred inflation gauge, the personal consumption expenditures (PCE) price index excluding food and energy, rose at a 4.5% rate. The core PCE price index increased at a 6.1% pace in the second quarter.

The combination of high inflation and slow growth could fan fears of stagflation, something that most economists do not believe is imminent as output is seen picking up through 2022.

“Stagflation will be the talk of the town, but we should not fall for this misleading narrative,” said Gregory Daco, chief U.S. economist at Oxford Economics in New York. “Inflation dynamics are definitely moderating expansion with sticky supply-driven inflation, but the economy isn’t stagnating.”

Stocks on Wall Street were trading higher on upbeat earnings from Caterpillar, Merck and Ford.

The dollar fell against a basket of currencies after the European Central Bank pushed back against market bets that high inflation would trigger an interest rate hike as soon as next year. U.S. Treasury yields rose.

REGAINING SPEED

Slower growth will have no impact on the Fed’s plans to start reducing as early as next month the amount of money it is pumping into the economy through monthly bond purchases.

With the summer wave of COVID-19 infections behind, cases declining significantly in recent weeks and vaccinations picking up economic activity is regaining steam. Consumer confidence rebounded this month and orders for capital goods excluding aircraft raced to a record high in September.

The labor market is tightening, though pandemic-related worker shortages could keep employment growth moderate this month. A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits dropped 10,000 to a seasonally adjusted 281,000 last week, the lowest level since mid-March 2020. It was the third straight week that claims remained below the 300,000 threshold.

The number of people continuing to receive benefits after an initial week of aid dropped 237,000 to 2.243 million in the week ended Oct. 16. That was also the lowest level in 19 months.

“Given the massive number of job openings, look for claims to continue declining for some time and look for the labor market to remain drum tight,” said Joel Naroff, chief economist at Naroff Economics in Holland, Pennsylvania.

Though wages are rising, inflation is reducing consumers’ purchasing power. Income at the disposal of households after adjusting for inflation decreased at a 5.6% rate last quarter. The saving rate fell to 8.9% from 10.5% in the second quarter.

High prices and lack of trucks as well as communication equipment cut into business spending on equipment, which fell at a 3.2% rate after three straight quarters of double-digit growth. Trade was a drag on GDP growth for a fifth straight quarter following a drop in exports.

Shortages and expensive building materials weighed on home building and remodeling, leading to residential investment contracting for a second straight quarter. Government spending rebounded on state and local government investment.

 

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)

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Canadian wage inflation looms as ‘perfect storm’ hits labor market

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Canadian workers are fast becoming hot commodities in a tight labor market and companies are increasingly forced to raise wages to fill jobs – and retain existing staff – a factor likely to complicate the Bank of Canada‘s efforts to tame inflation.

While fast rising wages have yet to filter through to official data, hiring intentions are far above pre-pandemic levels and staffing companies say it is a “sellers market” for skilled and unskilled job seekers across many industries.

Economists say wage growth could turn into a big problem for the Bank of Canada, which is already grappling with inflation that is near a two-decade high. On Wednesday the central bank surprised the market https://www.reuters.com/world/americas/bank-canada-signals-it-could-hike-rates-sooner-than-expected-2021-10-27 with its hawkish tone, nudging forward the chance of an interest rate hike as it warned inflation would go higher.

“I’m seeing increases in labor wage rates anywhere from 10% to 40%,” said Tanya Cerniuk, head of sales for Canada at global staffing firm Adecco Group.

“I saw one today … they were offering C$14 ($11.35) an hour and now they’re offering C$19.50 per hour,” she said. “Things are changing so quickly. Employers are having to be very agile.”

Digital marketing professional Riley Haas started looking for a new job in August and signed on with an internet marketing company within weeks, earning about 30% more than before, plus benefits.

“I was blown away by the number of opportunities that were out there, as well as some of the remuneration being offered,” Haas said. “I have never had a job-hunting experience like this in my life.”

While Canada’s employment has returned to pre-pandemic levels, wage growth was up 1.7% on the year in September, compared with 4.3% in February 2020, right before the onset of the pandemic, according to Statistics Canada.

“If you look at the various wage measures, they’re actually still somewhat below their pre-pandemic levels,” Bank of Canada Governor Tiff Macklem said on Wednesday.

The central bank is watching closely for signs of wage inflation as the headline Consumer Price Index is now expected to be above the 1%-3% control range until late 2022, he added.

MORE MONEY, MORE WORKERS

Some companies, hesitant to boost base wages amid ongoing pandemic-related uncertainty, are instead offering rich signing bonuses and hourly premiums based on attendance and retention, Adecco’s Cerniuk said, all of which may not register as wage increases.

Loosening of COVID-19 restrictions has prompted an early start to seasonal hiring for the holidays, pitting retailers and restaurants against manufacturers and warehousing firms to secure workers. Lower immigration during the pandemic has added to the pinch.

“I think it’s a perfect storm,” Cerniuk said.

A giant billboard outside an Ottawa liquor store offers seasonal jobs starting about 15% above minimum wage, which is C$14.35 an hour in the province of Ontario, while a placard in a nearby Whole Foods store promises hires a C$2-C$3 per hour bonus plus richer overtime if they stay on for the entire holiday season.

Derek Holt, head of capital market economics at Scotiabank, pointed to seasonally adjusted and annualized numbers that show a sharp three-month acceleration in wage growth, calling it hard to ignore.

“Wage growth is ripping in Canada,” he said in a recent note, adding that it is just the latest pressure point on the central bank.

Meloche Group, an aerospace components maker in the Montreal area, has boosted worker salaries this month and is planning another wage hike in February. The company has about 30 open positions – 10% of its workforce – and the staff shortage is making it difficult to complete deliveries on time, Chief Executive Officer Hugue Meloche said.

“We are expecting a lot of growth,” he told Reuters on the sidelines of the Aero Montreal global supply-chain summit this week. “We have to get prepared.”

 

(Reporting by Julie Gordon in Ottawa, additional reporting by Allison Lampert in Montreal and Fergal Smith in Toronto; Editing by Paul Simao)

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U.S. economy slows sharply in third quarter; weekly jobless claims at new 19-month low – Reuters

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FILE PHOTO: People line up at a coronavirus disease (COVID-19) testing at a mobile testing van in New York City, U.S., August 27, 2021. REUTERS/Brendan McDermid

WASHINGTON (Reuters) – The U.S. economy grew at its slowest pace in more than a year in the third quarter as COVID-19 infections flared up, further straining global supply chains and causing shortages of goods like automobiles that almost stifled consumer spending.

Gross domestic product increased at a 2.0% annualized rate last quarter, the Commerce Department said in its advance GDP estimate on Thursday. That was slowest since the second quarter of 2020, when the economy suffered a historic contraction in the wake of stringent mandatory measures to contain the first wave of coronavirus cases.

The economy grew at a 6.7% rate in the second quarter. The Delta variant of the coronavirus worsened labor shortages at factories, mines and ports, gumming up the supply chain. Economists polled by Reuters had forecast GDP rising at a 2.7% rate last quarter.

Strong inflation, fueled by the economy-wide shortages and pandemic relief money from the government over the course of the public health crisis, cut into growth. Ebbing fiscal stimulus and Hurricane Ida, which devastated U.S. offshore energy production in late August, also weighed on the economy.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 1.6% rate after a robust 12% growth pace in the April-June quarter. Though automobiles accounted for a chunk of the stagnation, the Delta variant also curbed spending on services like air travel and dining out.

But there are signs that economic activity picked up as the turbulent quarter ended. The summer wave of COVID-19 infections has subsided, with cases declining significantly in recent weeks. Vaccinations have also picked up. The improving public health situation helped to lift consumer confidence this month.

Fewer Americans are filing new claims for unemployment benefits. That improving trend in labor market conditions was confirmed by a separate report from the Labor Department on Thursday showing initial claims for state unemployment benefits dropped 10,000 to a seasonally adjusted 281,000 last week, the lowest level since mid-March 2020.

It was the third straight week that claims remained below the 300,000 threshold. Economists polled by Reuters had forecast 290,000 applications in the latest week.

Reporting by Lucia Mutikani; Editing by Chizu Nomiyama

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