Leading Indicators, Inflation, Retail Sales Again, Canada

Dan North | February 2023
The Conference Board’s Leading Economic Index (LEI) fell for the 10th straight month in January, while the y/y rate has been negative for seven straight months. It is currently well into negative territory at -5.9%, and it has never been that low without a subsequent recession. The LEI anticipates turning points in the business cycle with a lead of 6-9 months.

The Producer Price Index (PPI) continued to show stubborn inflation. The headline rose 0.7% m/m which was much higher than expectations of 0.4%, higher than last month’s -0.2%, and the highest in seven months. After stripping out volatile food and energy prices, the core rate rose 0.5% m/m which was higher than expectations of 0.3%, higher than last month’s 0.3% and the highest in eight months. The y/y headline rate did moderate from 6.5% to 6.0%, the lowest in two years, but it is still well below the long-term average of 1.7%. The y/y core rate also moderated from 5.8% to 5.4%, the lowest in 21 months, but it is still well below the long-term average of 1.8%. In other words, the fight is still on.


About that retail sales data

In my previous report, I said that I thought that there was a problem with the retail sales data. I spoke with people at the Census Bureau who produced the report, and they acknowledged that the January raw data set for Bars and Restaurants was in fact a statistical outlier. As such it was treated with a different seasonal adjustment than normal. The methodology to produce the final number is drearily technical, but I think it’s fair to say that this data, represented by the red column and the table below, is quite likely to be distorted. It’s unbelievably different than anything over the past 20 years. There may well be a mean reversion next month that February is likely to be smaller or even negative, bringing the averages of the surrounding months back down to a more typical level.


The Canadian employment report for January vaporized job growth expectations of 15k, instead adding ten times as many jobs – 150k. It was a smashing report with very few weaknesses. To get an idea of how big it was, a very rough rule of thumb for comparing Canadian and US economic data is to multiply the Canadian data by a factor of ten. That would imply a US job gain of 1.5 million jobs - which is far greater than the record high (ex-pandemic) of 1.1 million jobs. There were strong details as well. Of the 150k jobs gained, 121k were full-time. The unemployment rate held steady at 5.0%, just above the record low of 4.9% set in July 2022. The participation rate leaped 0.3% to 65.7%, within a hair’s breadth of the pre-pandemic level of 65.8%.

Wages grew 1.0% m/m, putting the y/y rate at 4.5% which was the lowest in seven months in a sign of easing inflationary pressures. However consumer price inflation is still high, and it shredded those wage gains, driving them down to -1.8%, the lowest in five months.
Speaking of inflation, the Canadian Consumer Price Index is running at a 6.3% y/y rate, which is now 1.8% below the peak of 8.1% set seven months ago. That’s certainly an improvement. But the core rate is stubbornly refusing to go along and has been floating in a range of 5.2% to 5.5% for eight months. It is currently lounging at a maddening 5.3% y/y rate.

The Bank of Canada (BoC) has been aggressively attacking the inflation beast, raising the overnight policy rate by 4.25% over eleven months. However, changes in monetary policy take 3-5 quarters to work their way through the economy. So all those rate hikes have not had a chance to attack inflation yet. That may be why the BoC is considering a “pause” on rate hikes. The BoC issued its inaugural Summary of Governing Council deliberations (or minutes) of its January 25th meeting. At the meeting, the BoC raised the overnight rate by 0.25% to 4.5%, but then deliberated over its next move. The minutes were rather very dovish. These outtakes, with my emphasis, seem to say it all:

“Members were in broad agreement that, going forward, it would be appropriate to pause any additional tightening to allow economic developments to unfold. The Bank had been forceful to date in tightening monetary policy, and the full impact was still to come. In addition, there were enough “green shoots” of progress. Allowing time for further progress to occur would recognize the lags in the transmission of monetary policy and balance the risk of over- versus under-tightening.”

  • “Council wanted to convey that the bar for additional rate increases was now higher. If the economy and inflation were to unfold broadly in line with the projection, they agreed they would probably not need to raise rates further.”

But there was some conditionality applied which leaves an escape route:

  • Council also wanted to give a clear sense that they would need an accumulation of evidence to determine whether further rate increases would be required to return inflation to the 2% target.
  • Members also felt it was important to be clear about the conditionality of any pause. Given inflation was still well above the target, Governing Council continued to be more concerned about upside risks. In its determination to return inflation to the 2% target, Governing Council would be prepared to raise the policy rate further if these upside risks materialized.”

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