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Canada’s drop in building permits is nothing to worry about

Construction sites in downtown Toronto.

Fred Lum/The Globe and Mail

Canada's dramatic decline in building permits in June is a reminder that just because you have a bad number, it doesn't mean you have a problem.

First, let's consider this measure itself. This is one volatile economic indicator. As the first chart in Statistics Canada's building-permits report from Wednesday shows, big swings from month to month are commonplace. It also shows that the general trend in permits this year is upward; indeed, July's decline was the first in six months. Given the tepidness of the broader Canadian economy in recent months, permits were overdue for a step backward.

Now, let's consider where the weakness came from. Quebec's permits plunged 31 per cent in the month compared with May – a $468-million drop which was more than enough to produce June's national decline all by itself. Anyone remember what was going on in Quebec in June? A massive strike in the province's construction sector. It's not much of stretch to think that a construction strike would put builders' plans on hold.

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Quebec's construction strike, together with Alberta's floods, were expected to result in some weird economic numbers through June and July, and we're seeing that now. The Ivey Purchasing Managers' Index, which also came out Wednesday, tumbled to 48.4 for July, its lowest reading since last November. Given that anything below 50 in this measure of manufacturing activity implies economic contraction, this would normally be cause for some concern, although the Ivey PMI is also a notoriously swingy indicator. But as Deutsche Bank economist John Clinkard pointed out, the Ivey is derived from a relatively tiny survey sample (about 175) – which leaves it prone to a pretty large margin of error, statistically speaking. It also doesn't break out its findings by region, so there's no way of knowing how much the aftermath of the Alberta flooding, especially, weighed on activity.

Granted, neither number is particularly welcome, and the building-permits decline does speak to the expectation that housing starts will slow from their unsustainably high level of recent months. (Canada Mortgage and Housing Corp. releases July housing-starts numbers Friday morning; analysts' consensus estimate is for an annualized rate of about 190,000 for the month, down from 200,000 in June.) But given the context of the potential distortions from Alberta and Quebec rippling through the data, both should raise more questions than alarm bells. By themselves, they are neither particularly meaningful nor worrisome.

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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