Economy in Brief

Canadian housing starts have been in a pattern of saw-tooth declines from their 2021 peak. However, starts, viewed broadly, in a longer-term framework, are still quite firm. Starts are higher than their August 2023 level in only twenty-three of the last thirty-seven months, on data back to August 2020. Yet, the August 2023 reading is higher than nearly all monthly results prior to August 2020 (only seven exceptions on data back to January 1990 - 367 observations before August 2020). As a result, I view weakness in housing as limited and recent.

In Canada, housing is not weak and is holding up well. This is despite a 5-year mortgage rate of 5.99% in July, up from rates at or below 3.3% from January 2021 through September 2021. On data from January 2021, Canadian 5-year mortgage rates average 4.12% Their current 5.99% level in July is significantly higher. But interest rates and inflation rates move together and inflation rates are now moderating.

Canada’s 5-year mortgage rate is at 5.99%; historically it has been even higher from May 2006 through December 2008, more or less consistently. From January 1990 through December 2003, it also was above 5.99%. The current mortgage rate is high relative most recent historic experiences but not so much in a broad historic context. Still, mortgage rates moved up above their average since January 2012 (4.12%) as of April 2022 and rates have been elevated ever since. The five-year mortgage rate is currently on its cycle high, but it is only higher by 11 basis points from its level of eight months ago. The momentum for rising rates has dissipated.

The period of interest rate shock would seem to be over for the housing market. Canadian house prices have fallen year-over-year for only four-months in a row (April 2023- July 2023). On data back to 2000, housing prices in Canada rose by double digits only from June 2006 to January 2007… until during the Covid period, when prices rose by double digits from April 2021 through May 2022. House prices in July 2023 in Canada are still stronger than April, May and July of 2023 and are lower only than a string of months from April 2022 to March 2023.

Japan's tertiary index (service sector index) recovered in July, rising to 101.8 from 100.9 in June after it had reached 101.6 in May. The July recovery brings the index of tertiary sector activity up above its May level and leaves it with a relatively high year-over-year ranking of its growth rate’s top 10 percentile standing on data since 2011. In contrast, industry stepped back to an index reading of 103.8 in July from 105.7 in June. The July value is still above its May value, but the sector’s growth ranking has it in its 20.5 percentile, approximately the lower one-fifth of its historic level by ranking. The industry index is 4.6% below its level in January 2020 before COVID struck; the tertiary index is higher by only 0.2% since COVID struck. These two sector indexes have been either weak or lethargic over this 3½ year period.

Economy watchers indexes deliver a more upbeat reading; these diffusion indexes in July are all above 50 indicating expansion for the overall index and for the individual sectors the Economy watches index assesses. In July, the headline improved and most components improved, except for eating & drinking places and the overall metric for the services sector slipped to 57.5 in July from 60.7 in June but this reading still registers sector expansion. The economy watchers indexes have a growth ranking, for the most part, in the 80th to 90th percentile, the exception being a weaker ranking for employment growth.

The Teikoku readings are also diffusion indexes; they indicate more weakness than the economy watchers survey. Manufacturing, retailing, wholesaling, and construction all have readings below the 50% mark indicating weakening growth. Services post a 51.7 diffusion reading, a reading that improves relative to June and indicates sector expansion. The growth ranking on the Teikoku indexes has manufacturing below its historic median for growth. Retailing and services have rankings above their respective 80th percentiles, marking them as relatively strong in terms of momentum.

It is not surprising to have these somewhat sensitive diffusion indexes giving us slightly different perspectives on what's going on in the various sectors. This month the good news from the METI sector indexes is for services improving and that's important because services are the employment generating sector; the employment growth ranking in the economy watchers framework is the relative weakest barometer among the various sector assessments in that survey.

The chart of the METI indexes for services and industry shows that not much has changed in the Japanese economy of late. The tertiary (services) index has continued to plug along somewhat sluggishly while the industry reading (mining and manufacturing) has been more volatile in a narrow range; it is currently riding a down cycle. But everything in the table for the month seems to be a reading in the normal flow of recent trends.