North American markets came under pressure early Wednesday by weak economic data. The Markit U.S. services purchasing managers index of business activity was reported well below expectations in a development with significant ramifications for Canada's economic recovery. The Markit report is an estimate of business activity in February ahead of the widely followed official report on U.S. non-manufacturing PMI to be released on March 3.
When 2016 began, a strengthening U.S. economy combined with a weak loonie was expected to boost Canadian economic growth through rising non-commodity exports. The help was not expected to come through U.S. factory activity: U.S. manufacturing data finished 2015 in a terrible downward slide that saw the Institute of Supply Managers (ISM) survey of business activity fall from 53 in June (a reading above 50 indicates expansion) into contractionary territory at 48 by year end.
Rising employment and wage growth in the services sector – which makes up almost 70 per cent of U.S. gross domestic product – were forecasted to boost consumer spending and the economy overall. By extension, this consumption growth would create more demand for Canadian goods, notably lumber for new home construction. So far, it hasn't turned out that way.
The Markit report missed by a wide margin at 49.8, well below the consensus economist estimate of 53.5. Again, the sub-50 reading indicates a contraction in business activity in U.S. services sectors.
The weak numbers were only the latest indication that early-year U.S. economic growth expectations were overly optimistic, yet again. On Feb. 1, the all-important report on December U.S. personal consumption growth disappointed economist expectations with a flat reading when 0.1 per cent growth was forecast. The Citi Economic Surprise Index for the U.S. (not shown) – which measures economic data relative to consensus estimates – remains mired in negative territory at minus 38.6. This indicates that economic data reports are consistently being reported below expectations – a reading of zero in the Citi index would signal that consensus estimates were exactly correct for all released data.
The accompanying chart shows the importance of the recent economic signals for Canada's economic recovery chances. Using the U.S. government survey of business activity services industries (the Markit index has a much shorter data history), it's clear that domestic export growth closely follows the growth of the services economy south of the border. Unfortunately, this suggests domestic export growth is set to slip along with U.S. economic activity.
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