Canada’s capacity utilization jumps

Canada’s capacity utilization number for the 2010 third quarter was up rather smartly at 78.1% versus a revised second quarter’s 76.9%, up from 76%. Although the rate of change is softer than previous quarters, it bested the street median forecast at 76.5% by a wide margin, as well as our own slightly more optimistic 76.6%.

The bulk of the pick-up can be accounted for by the steep rise in manufacturing utilization rates from 78.7% to 81.2%. Of particular note, higher rates in the primary and fabricated metals businesses, machinery, transportation equipment, and computer and electronic products all contributed significantly to the improved picture. This fact was not overly surprising given improved picture on auto sales, interest in commodities and the general recapitalization taking place amongst Canadian businesses.

Additionally, it is interesting to note that the surprise pick up in utilization rates came on the back of a soft quarter for growth. The Canadian economy put in a disappointing quarter, growing by a paltry 1.0%. These numbers suggest that the measures on capacity utilization may have been slow to remove obsolete capacity given the accelerated pace of technological change.

Overall, from a monetary policy standpoint there is room to suggest that the output gap may be closing faster than the Bank of Canada estimated in its economic update from October. At the time, the BoC felt that by the end of 2012, the output gap could be closed. In today’s report there is room to be optimistic and cheat that forward.

Also out today were the national balance sheet accounts, which reflected a sharp rise in the ratio of household credit to personal disposable income, up 5% from the second quarter to 148.1%. It must be consideredm however, that in the second quarter, disposable income was driven higher by government HST rebate cheques being issued in BC and Ontario.

Regardless, rising levels of household debt have become quite literally front-page news in Canada. While the Federal government is looking at potentially raising minimum down payments for the purchase of a home, along with reducing amortization periods, it will take changes in the cost of funding debt to materially curb consumer behavior. At the end of the day, consumer behavior is a response to the pricing signals for money that is encouraging consumer leverage.

Despite the fact that we are still well back of the pre crisis trend at around 85%, with capacity utilization running at 78.1% we are well ahead of the cyclical low of 68.7% experienced in the second quarter.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.