U.S. outperforming Canada where it matters most—capital formation

President Trump’s State of the Union Address this week highlighted the recent strong economic performance of the U.S. economy, noting that the United States over the last two years has created millions of new jobs along with many new manufacturing jobs.

More interesting was his comments on the current low unemployment rate in the U.S. and his assertion that the “United States is now the number-one producer of oil and natural gas anywhere in the world—and now, for the first time in 65 years, we are a net exporter of energy.” The contrast with Canada is important as Canada’s economic performance has lagged behind the U.S.

Despite America’s boom, there has not been as much positive spillover via our trade integration, in part because of recent trade restrictions. Moreover, while the U.S. has increased energy exports, we have failed to construct the pipeline capacity needed to bring our output to world markets.

The indicators for 2018 suggest that the U.S. has indeed outperformed Canada.

First, according to Federal Reserve Economic Data (FRED), annualized quarterly real GDP growth in Canada for 2018 averaged 2.1 per cent compared to 2.8 per cent in the U.S.

Second, according to seasonally adjusted FRED data, between the last quarter of 2017 and the fourth quarter of 2018, Canada added 196,000 jobs for an increase in employment of 1.1 per cent while the U.S. added 2.1 million jobs for an increase of 1.5 per cent.

On the manufacturing employment front, since January 2017, seasonally-adjusted FRED data show the U.S. has added 454,000 manufacturing jobs to its economy—an increase over two years in manufacturing employment of 3.7 per cent compared to 33,000 manufacturing jobs and a 2 per cent increase in Canada.

However, the greatest failure of the Canadian economy relative to the U.S. over the last two years comes is our relatively poor performance in business investment. Since the first quarter of 2017, FRED data show that real seasonally-adjusted gross fixed capital formation in the U.S. has grown by 6.6 percent compared to about 5 per cent in Canada.

While some might argue this is respectable, a longer view shows this recent increase comes after a decline of more than 6 per cent in real seasonally-adjusted gross fixed capital formation from first quarter 2014 to first quarter 2016. The U.S., in contrast, saw no such decline. Indeed, from first quarter 2014, real gross fixed capital formation in the U.S. has grown by an astonishing 18 per cent. Over the same period, Canada’s declined by 0.5 percent.

In other words, since the decline from the peak in 2014, Canada’s real gross fixed capital formation has still not recovered.

So while Canadians may think our economy is doing well, we are not doing as well as our most important trading partner. More seriously, our future output and productivity is in jeopardy given the recent collapse in capital formation rates, driven in part by the dearth of investment in our energy sector. As budget season approaches, the Trudeau government may want to seriously think about how to address our poor performance in new productivity-enhancing business investment.