For Canada, any sign that the U.S. economy is getting stronger is a good sign. So an upwardly-revised estimate of fourth-quarter economic growth should be received positively. Yet the latest snapshot of U.S. gross domestic product also shows why North America's central bankers are doing their utmost to erase any notion that the immediate future will mirror the pre-crisis past.
The U.S. economy advanced at an annual rate of 2.6 per cent over the final three months of 2013, slightly better than the previous estimate of 2.4 per cent and roughly what Wall Street was expecting.
GDP grew at an annual rate of 4.1 per cent in the third quarter, a figure that was exaggerated by abnormally aggressive stockpiling. The U.S. economy had strong forward momentum at the end of last year. Exports jumped 9.5 per cent in the quarter and personal consumption increased 3.3 per cent – both the biggest gains in three years. Non-residential fixed investment and corporate profits also were strong. If not for a 12.8-per-cent plunge in federal government spending, GDP growth easily would have surpassed an annual rate of 3 per cent in the fourth quarter.
Evidence of strong private demand in the United States is a great leading indicator for Canada. Traditionally, Americans buy a lot of what we're selling. But that rule seems to have lost some of its punch, probably because Americans simply aren't buying as much as they used to.
Thursday's GDP report prompted Bloomberg News columnist Matthew Klein to chart the U.S. trade balance going back to 1995. It showed that for the first time in a couple of decades, the U.S. trade deficit narrowed even as the economy grew. In other words, for the first time since 1995, exports are growing consistently faster than imports, allowing trade to become a positive contributor to growth. (Exports add to GDP because they bring money into the country, while imports subtract from GDP for the opposite reason.)
This is good news for the U.S. and bad news for all those countries that had come to rely on America's masses of credit junkies to buy all their excess production. Canada, of course, is at the top of that list. American imports grew a mere 1.4 per cent in 2013, the weakest since the global economy collapsed in 2008-09. There was little sign the trend was improving in the fourth quarter, as imports advanced only at a 1.5-per-cent rate.
In time, U.S. imports should get stronger. Economists at Deutsche Bank were enthusiastic about the profit numbers the Commerce Department released with its GDP report Thursday. Corporate profits, they said, correlate strongly with business fixed investment; the former generally led the latter by four quarters. And business investment has a 93-per-cent correlation with private sector hiring dating back 25 years, the Deutsche report said.
Corporate profits from current production increased $47.1-billion in the fourth quarter, compared with a gain of $39.2-billion in the third quarter. On the year, profits increased 4.6 per cent, following a 7.2-per-cent surge in 2012. "The profit data are sending an important signal with regard to key private sector trends in 2014," Deutsche's Carl Riccadonna said.
If Mr. Riccadonna is right, the U.S. economy will get steadily stronger, and eventually demand for imports will increase. But that's not happening yet, at least to a significant degree.
Earlier this month, I visited Highlands Diversified Services, a smallish manufacturer in eastern Kentucky that makes components for customers such as DIRECTV and various automobile and aerospace companies with assembly plants in the southern United States.
Highlands took a beating during the recession. According to Ron Roy, the director of sales and marketing, annual revenue was on track to reach $50-million (U.S.), and then orders just vanished, cutting the company's earnings by more than half.
In a desperate search for customers, Highlands started thinking about exporting for the first time. Mr. Roy visited Canada and considered making a move into Latin America. The company still may expand into these markets, but the pressure now is off. Annual revenue is at $60-million and Mr. Roy says the company is hopeful it can get to $100-million within a couple of years.
All of these gains are from domestic sales. "We're seeing a tremendous amount of growth in the U.S.," Mr. Roy said.
That's great news. But unfortunately for Canada, the U.S. for now has more than enough capacity to handle that demand on its own.