(June 7 – 12:10 ET) – This morning’s data releases aren’t typically market movers, but the higher-than-expected capacity utilitization results are sure to catch the attention of the central bank according to economists at BMO Nesbitt Burns Inc.
Markets got a mixed message in the data. April building permits dropped far faster than economists were expecting — 8.9% vs forecasts of 2.5%. However, industrial capacity utilization rates accelerated to 87.6%, its highest level since the mid-1960’s. The construction slowdown would seem to herald a slowing economy, while the high capacity utilization indicates the economy is running at full throttle.
BMO Nesbitt Burns’ chief economist Sherry Cooper points out that the permits may be affected by a concrete truck drivers strike in Ontario. However she notes the capacity utilization trend remains entirely unambiguous, “This indicates that production is still rising at a much faster pace than firms are able to put new capacity in place, despite soaring business investment.”
She suggests the numbers will at least catch the attention of the central bank. “While the Bank of Canada does not fully embrace the CAPU measure, the indicator does clearly suggest that the output gap has all but vanished.”
On balance Cooper expects the bank to see today’s report as a hawkish sign, “Despite the drop in permits, the underlying trend in the economy remains strong, and the spike in CAPU will jangle some nerves at the Bank of Canada.”