U.S. Economy

US real GDP grew at a very healthy 3.5 per cent annual rate in the third quarter, following even more robust growth of 4.6 per cent in the second quarter.  Growth was led higher by strong consumer spending, exports, fixed investment and government spending.

Growth in the US economy has been sharply higher over the past six months, averaging over 4 per cent at an annual rate.  While inflation remains muted, the US labour market is picking-up and  job growth has been trending higher. The US Federal Reserve announced the end of its quantitative easing program yesterday, and while it noted that interest rates would not rise for a considerable time, a continuation of strong growth likely means the Fed will act on rates as early as mid-2015. If so, long-term rates in both the US and Canada should rise from current lows, bringing mortgage rates with them.

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Bank of Canada Interest Rate Decision

The Bank of Canada once again chose to maintain it's target for the overnight rate at 1 per cent this morning. In the statement accompanying the decision, the Bank noted that core inflation, which excludes volatile prices such as energy and food, has risen more rapidly than expected due to unexpected sector-specific factors while CPI inflation has evolved largely as expected.

While the Bank’s preferred measure of core inflation has trended above its 2 per cent target in recent  months, financial market volatility and fresh concerns over stagnant European economic growth provide some cover to maintain the status quo. Our forecast for the Canadian economy matches that of the Bank for economic growth to average 2.5 per cent for the second half of 2014 and for all of 2015. That rate of growth should eliminate much of the estimated slack in the Canadian economy by the middle of 2016. That forecast, and traditional lags in how monetary policy impacts inflation, suggests the Bank will embark on tightening monetary policy sometime toward the end of next year.

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Home Sales Continue on Upward Trend in September

The British Columbia Real Estate Association (BCREA) reports that a total of 7,636 residential sales were recorded by the Multiple Listing Service® (MLS®) in September, up 17.5 per cent from September 2013. Total sales dollar volume was $4.4 billion, an increase of 25.8 per cent compared to a year ago. The average MLS® residential price in the province rose to $574,641, up 7.1 per cent from the same month last year.

“Consumer demand remains robust in most BC regions,” said Cameron Muir, BCREA Chief Economist. “More homes traded hands last month in BC than any September since 2009, while the Okanagan had its most robust September in nine years."

“Population growth, low interest rates and strengthening economic conditions continue to be supportive of housing demand,” added Muir.

Year-to-date, BC residential sales dollar volume was up 23.2 per cent to $37 billion, compared to the same period last year. Residential unit sales were up 16 per cent to 65,353 units, while the average MLS® residential price was up 6.2 per cent at $565,655.

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Canadian employment

The Canadian labour market broke out of its summer slumber, adding 74,000 jobs in September,  nearly all of which were in full-time employment. Total hours worked, which is closely associated with economic growth, rose 0.3 per cent and the national unemployment rate fell 0.2 points to a 6 year low of 6.8 per cent.

The BC economy saw employment grow by 9,600 jobs in September. Moreover, recent losses in full-time work were overturned as full-time employment grew by 20,600 while part-time employment declined by 11,000. The provincial unemployment rate remained unchanged at 6.1 per cent. Year-to-date, employment in BC is up just 0.6 per cent.

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Canadian Housing Starts

New home construction in Canada held relatively steady in September, rising a slight 0.5 per cent to 197,343 units at a seasonally adjusted annual rate (SAAR).  The six-month trend in Canadian housing starts of 197,747 units SAAR sits slightly in excess of Canadian household growth. 

Housing starts in BC urban centers moderated from a high mark in August, falling 19 per cent to 27,570 units SAAR in September.  On a year-over-year basis, housing starts were down 7 per cent compared to September 2013. Single-detached starts,  were up 14 per cent while multiple units were down 14 per cent compared to this time last year. Year-to-date, total BC housing starts are 6 per cent higher than 2013. 

Looking at census metropolitan areas (CMA) in BC, total starts in the Vancouver CMA fell 5 per cent in September as an 11 per cent decline in multiple starts offset a 16 per cent rise in singles. Year-to-date, Vancouver housing starts are up 5 per cent. In the Victoria CMA, new home construction fell 32 per cent year-over-year due to low levels of construction in the multiples sector. Year-to-date, housing starts in Victoria are down 19 per cent. New home construction in the Kelowna CMA continued its robust pace in September, rising 46 per cent year-over-year. Year-to-date, housing starts in the Kelowna CMA are up 45 per cent . Housing starts in the Abbotsford-Mission CMA tumbled 62 per cent on a year-over-year basis due to the relative absence of new multiple unit developments in September.  Year-to-date, new home construction in the Abbotsford-Mission CMA is down 29 per cent. 

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U.S. Employment

The US economy added 248,000 jobs in September while previous months job growth was revised higher by 69,000 jobs. Over the past 3 month, US payroll growth has averaged 223,000 jobs.  The US unemployment rate fell to 5.9 per cent, the lowest reading in six  years. 

While inflation remains muted and considerable slack remains in other measures of employment, today's overwhelmingly positive jobs report should add further fuel to the case for the US Federal Reserve to move interest rates higher in 2015.  Moreover, if job growth continues at the current pace, long-term interest rates in both the US and Canada may begin to rise in anticipation of tighter monetary policy. 

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Canadian Building Permits

The value of Canadian building permits fell 27.3 per cent in August. Prior to Augusts's decline, building permits had posted double-digit increases for three straight months.  Lower construction intentions were primarily the result of declines in Quebec and Ontario. 

New building permits in BC tumbled almost 28 per cent on a monthly basis and 11.1 per cent year-over-year. Both non-residential and residential permits were lower in August. On a unit basis, permits fell 22.6 per cent but were above the monthly average for 2014. The outsized monthly decline in August reflects a moderation of activity following robust construction intentions in July. 

Building permit activity was mixed in BC's four census metropolitan areas (CMA). Permits in the Abbotsford-Mission CMA fell 30.3 per cent on a monthly basis, but were 33.8 per cent higher than August 2013.  Construction intentions in the Kelowna CMA jumped 38 per cent from July but were 37.2 per cent below August 2013 levels.  In the Victoria CMA, permit activity increased 3.1 per cent on a monthly basis and was up 6.2 per cent year-over-year. Finally, in the Vancouver CMA, permits were down 32.9 per cent on a monthly basis and were 16.9 per cent lower year-over-year.

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Canadian Monthly GDP

Growth in Canadian economy was essentially flat in July following six consecutive monthly increases. Contributions to growth at the industry level were made from manufacturing, government, and construction while notable declines were recorded in mining and oil and gas extraction.

Based on the first month of GDP data for the third quarter, we would estimate that the Canadian economy grew a modest 2 to 2.5 per cent from July to September. That would mark a significant slowdown from the second quarter mark of 3.2 per cent and provides cover for the Bank of Canada to keep rates unchanged for quite some time.

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