Alberta economy snapshot for August 25, 2012

Markham Hislop | August 25, 2012 | 0 Comments

Alberta economy doing ok despite global downturn

Alberta still a bright spot in a softening economy, but that could change in coming months.

Troy Media – by ATB Financial

Global economic news hasn’t been good in 2012, but the Alberta economy keeps chugging along.

For years, Alberta’s beef ranching sector accounted for nearly two-thirds of total agriculture receipts in the province. That balance has shifted lately, and now grain and oilseeds make up the majority. But the decline in cattle ranching may be about to stop.

Alberta’s total cattle herd reached a high point of 6.7 million in 2005 – which at the time outnumbered humans by more than 2-to-1! Since that time, the cattle herd has fallen by more than 1.3 million: on July 1, 2012 there were 5.41 million cattle in the province.

The long-term trend towards smaller herd size since 2005 has been driven entirely by one factor: low price. With an overabundance of cattle in the U.S., world beef prices started to plunge. On top of that, difficult economic times shifted American consumers away from beef and towards lower-priced substitutes like pork and chicken.

In Canada, prices also fell while input costs (especially feed prices) continued to climb. The result was squeezed profit margins for cattle ranchers in Alberta, and a gradual reduction in herd size.

The decline may be about to stop, however. Herd size continued to shrink in 2012, but the drop from the previous year was minimal.

Prices have recovered somewhat and cattle ranchers are once again able to make some money (although input costs are still very high).

At the same time, humans are making a comeback! With a total population of 3.85 million on July 1, 2012, it’s possible that people in Alberta could actually outnumber their bovine counterparts in a few years!

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Chinese indicators soften

The earliest monthly indicator on manufacturing activity in China is the HSBC Flash Purchasing Managers’ Index. An index score of 50 indicates that manufacturing orders are relatively equal to the prior month – and the indicator has been below 50 for most of past year and a half. Worse, the index for August was sharply lower than in July.

Given weakness in Europe, one of China’s most important export markets, the slowdown is not entirely unexpected. Chinese authorities are fully aware of how exposed their export-oriented economy is to a global slowdown and have been pushing to develop their domestic market. Thanks to softer inflation numbers, more economic stimulus might be on the way.

U.S. housing turning the corner

With each passing month, data come in that indicates the worst of the American housing crisis is over and some recovery is in sight. This week a number of housing market indicators were released.

The price of homes insured by the various Federal Housing Finance Authorities, such as Fannie Mae or Freddie Mac, rose 0.7 per cent in June over May, but on a year-over-year basis prices rose 3.6 per cent.

A more mixed signal came from the Commerce Department which reported that while new home sales rose 3.6 per cent, the average price fell 2.5 per cent on a year over year basis.

Household debt

Trans Union, the credit reporting company, issued a release this week indicating that Canadians were once again pilling on debt. According to the company, the average Canadian non-mortgage debt hit $26,221 in the second quarter of 2012, 0.7 per cent higher than in the first quarter and 2.4 per cent higher on a year-over- year basis. Non-mortgage debt, however, is smaller than mortgage debt, debt which the Finance Department is actively trying to curtail through changes to mortgage insurance underwriting requirements. Unfortunately, there are far fewer indirect levers available to curtail non-mortgage debt other than influencing interest rates directly.

Pension reform

The closer the bulge of the baby boomer generation moves towards retirement, the more important government policy on retirement savings becomes. As a result, the federal government approved the Pooled Registered Pension Plan (PRPP) last year, the regulations for which were adopted in June of 2012. The plan was to increase pension coverage of workers in small- and medium-sized companies by allowing them to pool programs with a third party administrator, lowering the cost of offering such benefits. The new regime won’t see widespread adoption, however, until provinces take steps to adopt similar legislation.

But a recent paper by the C.D. Howe Institute takes on the new savings regime. According to the authors, low income individuals are actually further behind if they participate in the program because of the tax treatment and the claw-back of other benefits. The paper also encourages changes to the regulations to allow individuals to save the same effective amount as individuals who are covered by defined benefit plans.

Housing

One of the most important drivers of Alberta’s economy is new home investment. Relative to last year, investment over the past couple of months has really picked up.

According to Statistics Canada, developers have recently been spending an average of $708 million per month in the second quarter of 2012, up from $542 million per month in the second quarter of 2007.

There’s been a big shift in where the investment dollars have been going in the residential real estate market. During the boom years of 2006-07 there was a big run-up in the spending on multi-family type buildings (i.e. condos), rising from about $100 million monthly to over $200 million. Subsequent years saw that figure collapse to under $50 million, only recently moving over $100 million.

By far the most important segment for developers is detached single-family homes and, while there was a sharp drop off initially during the recession, it came back smartly in 2010 and is currently at near boom time levels of about $500 million monthly.

The U.S.

The minutes from the U.S. Federal Reserve’s last meeting were released this week in which a number of members had indicated that they believed further action by the Fed should be taken to encourage economic growth.

A big question before the next meeting will be whether or not the outlook has improved sufficiently and whether or not the risks outweigh the reward. Most of the American economic data through August surprised to the upside, but not hugely so.

One of the tools still available to the Fed is yet another round of quantitative easing, in which the Fed purchases bonds in order to influence interest rates lower. The Fed has already engaged in two rounds of such asset purchases.

But it’s questionable as to how much more good a possible third round of quantitative easing could do since turmoil in Europe has already pushed long-term U.S. interest rates to record lows.