NEWS / Foreign Exchange

Retail Sales ??“ Weak for Second Straight Month

Retail sales fell 0.2% in April, following an upwardly revised 1.0% increase in March. Gasoline sales accounted for large gains in retail sales during both March (+3.2%) and April (+1.7%) reflecting higher prices for gasoline. Sales of autos dropped 1.0% in April after a 0.4% increase in March. Unit auto sales are a better indicator of what is used in the computation of consumer spending in the GDP report. Unit auto sales were nearly steady in April. Also, sales of building materials dropped 2.3% in April vs. a 1.0% gain in March. The purchase of building materials is reflected in the residential investment expenditure component of GDP. Therefore, excluding the autos, gasoline, and building materials components (which are not pertinent for reasons listed above), retail sales held steady in April after a 0.8% increase in March. Total retail sales adjusted for inflation declined in March and April. Effectively, consumer spending has stalled following a robust performance in the fourth quarter of 2006 and the first quarter of 2007 when it rose at annualized rates of 4.2% and 3.8%, respectively. The weak reading of April retail sales sets the tone for a weak showing of consumer spending in the second quarter. We are predicting only a 2.0% increase in real consumer spending in the second quarter. The main message is that retail sales are weak with a year-to-year increase of 3.08%, the lowest since August 2004. The large upward revision to March retail sales (+0.7% was previous estimate) is a partial offset to the downward revision implied by the trade deficit reported for March. The net impact on GDP is a downward revision to about a 1.0% increase from the advance estimate of 1.3% gain.

Sales of furniture (+1.2%) and food (+0.5%) advanced in April, while purchases of apparel (-2.0%), general merchandise (-1.2%) and building materials (-2.3%) fell. In the second quarter, retail sales are likely to show a third of the increase seen in the fourth quarter (+6.3%).

Food and Energy Prices Drive Wholesale Price Index

Higher prices for food and energy helped to lift the wholesale price index in April. The 0.7% increase in the Producer Price Index (PPI) for Finished Goods follows a 1.3% increase in February and a 1.0% gain in March. Food and energy prices have been responsible for the large increases in wholesale prices in the past three months but the good news is that a deceleration of these prices is now visible. In April, the energy price index moved up 3.4%, following slightly gains in the prior two months. The food price index increased 0.4% in April vs. a 1.4% gain n March.

The core PPI excluding food and energy has now held steady for two straight months. Lower prices for passenger cars (-1.0%), light trucks (-0.5%), household appliances, pet food, and mobile offset higher prices for heavy trucks (+3.8%) and a 0.1% increase in the capital equipment price index. Year-to-date, the core PPI is up 1.9%, close to the 2.0% increase posted in 2006.

The intermediate goods price index increased 0.9% in April, reflecting a broad-based increase in prices of intermediate goods. The core intermediate goods price index moved up 0.8% in April vs. a 0.2% increase in each of the three prior months. The year-to-year trend of this price index (see chart 4) is not as alarming as the monthly gain but bears watching.

Canada: Employment Survey Records First Decline in Eight Months

The Canadian labor market unexpectedly shed 5,200 jobs in April, following record gains in March and seven-straight monthly increases. The modest decline was a result of the large drop in full-time positions (-14,900), particularly in manufacturing (-18,600) and financial-services (-17,200), that was only partially offset by part-time gains (+9,700) and an influx of workers into the natural resources sector (+11,000). A coincident drop in labor force participation, however, held the unemployment rate steady at its three-decade low of 6.1%, and annual wage growth accelerated to 2.9%, its highest monthly reading year-to-date.

Today??™s Labor Force Survey comes on the heels of a relatively weak data week for Canada that showed additional evidence of a cooling housing market and a deteriorating trade surplus. Robust job growth (Canada has added approximately 1.9 million jobs since 2001) has spurred economic activity in the US??™s largest trading partner over the past several years, as rising earnings stoked homebuilding and consumer spending. If job growth falters in coming months, the US economy continues its ???growth recession??™ and the loonie holds above 90 US cents, it??™s possible the Bank of Canada (BOC, the central bank) will need to adjust its outlook forecast at the upcoming May 29th monetary policy committee meeting. The April Monetary Policy Report showed a forecast of 2.2% growth for 2007 and judged inflation risks to be roughly balanced, with a slight tilt to the upside. We expect the BOC to hold the overnight lending rate steady at 4.25% at the upcoming meeting for the eighth consecutive time, but maintain our view that when the BOC gets off the bench it will be to cut rates, not raise them.