Category Archives: O Canada … uh oh!

The Fallacy of the Value of a Low Loonie

 

Conventional wisdom has it that a low dollar is a competitive advantage for Canadian manufacturers. It is easy to show that this is not the case. It does provide an advantage for natural resource industries whose primary resource values are not directly related to currency values, but that is a sector largely eschewed by our government.

To understand why there is no currency advantage to manufacturers, consider the case of Acme Widget Company. Acme Widget makes widgets in Ontario and Michigan. It wants to double its production capacity at one of its plants and has to decide which one.

A widget has three components, one made in Canada, one made in the US and one made in Indonesia. Let’s assume the Canadian dollar (CDN) is trading at 0.75 to the US dollar (USD). The Michigan plant pays $1.00 USD for the part from Indonesia. The part costs the Ontario plant $1.33 CDN because the trade is in USD. The Michigan plant buys the US part for $1.00 USD while the Canadian plant has to pay $1.33 CDN. The Ontario plant pays $1.00 CDN for the part made in Canada but the Michigan plant only pays $0.75 USD.

The total cost for materials for the US plant is $2.75 USD and for the Canadian plant, $3.67 CDN which is $2.75 in USD. In other words, the relative value of the two currencies offers no competitive advantage to either plant on a materials basis.

But there are other costs associated with production. Suppose the employees are paid the minimum wage. In Michigan, that is $8.50 / hour USD while in Ontario it is $11.40 / hour CDN or $8.55 USD. On wages alone, it is a toss-up. However, one must also include the cost of statutory benefits such as health insurance, EI, and pension plan premiums which in Ontario, are all costs to the employer.

Further, electricity costs are important. Time of day use, purchase contracts, and unbundled charges for distribution and other services are complex and require a case by case analysis based on projected usage characteristics. One might need to consider other utilities such as water and sewer rates also.

Finally, there are municipal, state or provincial, and federal taxes to consider. The regulatory framework may be important in terms of adding additional operating costs. With NAFTA coming under review, tariffs and border taxes may be a consideration.

In conclusion, the relative value of the Loonie has no impact in the long run, on the material cost of manufacturing. The costs that will affect a decision to build a new plant or extend an existing one are all soft costs associated with the local jurisdiction being considered, and what incentives might be negotiated with governments.

Tracking Canadian House Prices: July 2016

This article uses data on Canadian house prices taken from: Teranet – National Bank National Composite House Price Index ™ unless otherwise noted. The index is published monthly on or slightly after the 12th of each month at www.housepriceindex.ca. The 6-city index includes Vancouver, Calgary, Toronto, Ottawa-Gatineau, Montréal, and Halifax, while the 11-city index adds Victoria, Edmonton, Winnipeg, Hamilton, and Québec City.

As the August 12, 2016 Teranet newsletter (Communiqués tab) summarizes (note that this link is for the current issue only) (emphasis added):

In July, the Teranet–National Bank National Composite House Price Index™ was up 2.0% from the previous month, the second largest July increase since the Index series began in 1999. The advance was not very broad-based; prices were up in only seven of the 11 metropolitan markets surveyed. Gains exceeded that of the countrywide index in the four markets that have been driving it in recent months: Victoria (3.8%), Toronto (3.1%), Hamilton (2.4%) and Vancouver (2.3%). Gains were also noteworthy in Ottawa-Gatineau (1.7%), Winnipeg (1.6%) and Montreal (0.6%). Prices were flat in Edmonton and down from the month before in Calgary (-0.1%), Halifax (-0.4%) and Quebec City (-1.6%). The Quebec City drop cancelled the 1.7% advance of the previous month. For Vancouver it was the 18th consecutive month without a decline, with a new record set in each month. For Toronto it was the 14th rise in 15 months, with new records in each of the last six months. Prices have set records in each of the last five months in Hamilton, in each of the last three months in Victoria and in the last two months in Winnipeg, after seven consecutive monthly rises in that market. In Montreal, five consecutive monthly rises have taken prices above their previous peak of July 2014.

With the good transit link between Toronto and Hamilton and the high house prices in Toronto we are not surprised to see explosive growth in the Hamilton market.

The Ontario Jobs Picture in March: Treading Water – Sharks Nibbling

This month we change our reporting format to more of a streamlined summary. For data we use the Ontario labour market component  from Statistics Canada: CANSIM Table 282-0087, Labour force survey estimates (LFS), by sex and age group, seasonally adjusted and unadjusted monthly, and CANSIM Table 282-0088, Labour force survey estimates (LFS), employment by North American Industry Classification System (NAICS), seasonally adjusted and unadjusted.

The Ontario Jobs Picture in February: Not Good Under the Hood

With the media and the politicos largely silent on the February Labour Market Survey jobs report, we were anxious to get a look at the data. First we did a literature search. Reuters reported a Canada-wide loss of 2,300 jobs in total with a loss of 51,800 full-time jobs (offset by an unreported rise in part-time jobs), and a rise in the unemployment rate to 7.3%. The Financial Post and the Globe and Mail both reported similar numbers. Are these numbers accurate and what do they mean? Let’s take a look.

The Lies My Mommy Told Me, Part III

We review employment in Ontario periodically. When we saw the Toronto Star article Ontario leads Canada with 19,800 new jobs in January, we decided to see if the headline was true considering that several macro events have occurred: Canada is in recession, the oil market has collapsed and so has the Loonie. We might expect the first two events to decrease employment while the third event should reflect an increase in manufacturing jobs for the export market in particular. Let’s take a look.

In this report we present our analysis of the Ontario labour market component of the total Canadian market using two sources of data from Statistics Canada: CANSIM Table 282-0087, Labour force survey estimates (LFS), by sex and age group, seasonally adjusted and unadjusted monthly, and CANSIM Table 282-0088, Labour force survey estimates (LFS), employment by North American Industry Classification System (NAICS), seasonally adjusted and unadjusted. Data selection methodology is in the Appendix. The data we use is not seasonally adjusted* (also read our view of seasonal adjustment in The Lies My Mommy Told Me, Part II). All terms are explained in the CANSIM table footnotes and are not reproduced here.

It’s Worse Than You Think

The Fraser Institute came out with a new report today titled Ontario vs. the US Rust Belt: Coping With a Changing Economic World. The report challenges the political narrative that a high dollar and deindutrialization due to global forces are the main factors driving the deficit in Ontario. It does so by comparing the economies of the US “Rust Belt” states to Ontario’s.

In terms of the Canadian dollar vs. the US dollar, the repot notes that:

… the appreciation of the Canadian dollar versus the USD of the 2000s was a reversal of the unusual weakness of the 1990s.

and

… the exchange rate is currently near its long-term average,
so Ontario policymakers cannot continue to cite this as an excuse for
chronic budget deficits.

In other words, exchange rates are not a major factor in Ontario’s deteriorating fiscal position and industrial decline. So let’s look at the issue of the deindustrialization of Ontario.

Flash Point: The False Flag for WWIII

World War III will be fought with the US and NATO on one side against an axis of Russia, China, and Iran on the other. None of these countries are particularly aggressive at this point, being interested in maintaining the current detente on their borders while perusing their outstanding territorial claims.

The US on the other hand views them as emerging regional hegemonic powers and a threat to the American Empire. The US is ready to use its superiority in weapons and naval strength to beat the threat back, using NATO as a pawn in the game.

The Ontario Employment Picture: March, 2015 – Continuing Deterioration

The last time we reviewed employment in Ontario was the December report: The Ontario Employment Picture: December, 2014 – Deteriorating. We have heard nothing from the province about jobs created so we suspect the numbers are not good. Let’s dig into them.

In this report we present our analysis of the Ontario labour market component of the total Canadian market using two sources of data from Statistics Canada: CANSIM Table 282-0087, Labour force survey estimates (LFS), by sex and age group, seasonally adjusted and unadjusted monthly, and CANSIM Table 282-0088, Labour force survey estimates (LFS), employment by North American Industry Classification System (NAICS), seasonally adjusted and unadjusted. Data selection methodology is in the Appendix. The data we use is not seasonally adjusted*. All terms are explained in the CANSIM table footnotes and are not reproduced here. Presentation and discussion of the data follows.

Harper’s Days Are Numbered

If you are anything other than a conservative, your heart probably leapt at the title. Even the odd conservative might suddenly have awakened  from his centrist-induced stupor. However, this is not a prognostication about Conservative prospects in the next election. Rather, it is about the increasing risk of another major foreign policy misadventure by Harper and his government.

Is Ontario’s Economy Growing?

An op-ed piece in today’s Ottawa Sun by Candice Malcolm of the Canadian Taxpayers federation finally motivated us to tackle an issue we’ve been nibbling at for a while. Candice states: There’s no denying the current strength of Ontario’s economy … And this kicked our contrarian nature into high gear: ‘how does she know that and can it be denied?’ Until we see better data, our take on it based on employment data is that it is not growing. Let’s find out if we’re right.

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