Focus

July 17, 2020 | 13:33

Canadian Business Activity Index: Tracking the Recovery

Economist

Director and Senior Economist
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Erik Johnson

Economist
Economics

Erik conducts research on financial product market trends, emerging risks and macroeconomic trends for the Bank.... (Read more)

Robert Kavcic

Director and Senior Economist
Economics

Robert has been with the Bank of Montreal since 2006. He plays a key role in analyzing regional economic, fiscal... (Read more)

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Econom... (Read more)

Benjamin Reitzes

Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Sal Guatieri

Director and Senior Economist
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Erik Johnson

Economist
Economics

Erik conducts research on financial product market trends, emerging risks and macroeconomic trends for the Bank.... (Read more)

Robert Kavcic

Director and Senior Economist
Economics

Robert has been with the Bank of Montreal since 2006. He plays a key role in analyzing regional economic, fiscal... (Read more)

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Econom... (Read more)

Benjamin Reitzes

Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Feature

Canadian Business Activity Index: Tracking the Recovery

The Canadian economy has clearly entered the recovery phase, with strong gains already reported by various indicators including employment and home sales. But, the shape of the recovery remains in question, and there is an increased need for timely information. In that light, we've created the BMO Business Activity Index (BMO BAI) to track aggregate monthly activity in a more timely manner, including information on jobs, spending and sentiment. By incorporating some increasingly-available real-time data, as well as our own in-house forecasts, the index can be updated much sooner than traditional GDP data.

Motivation

Apart from the dated industry-based GDP report (latest official data are for April, though StatsCan has recently started publishing “flash” estimates for the following month), there is little timely data on aggregate business activity in Canada. And, given the unparalleled economic crisis caused by the pandemic, the need to track the recovery has never been greater. A tepid recovery would raise the sober prospect of numerous business insolvencies and permanent job losses. By contrast, a speedier expansion would quickly reduce the jobless rate from current double-digits while supporting incomes, government revenues, and profitability.

With this aim in mind, the BMO BAI was born. The index should help track an expected two-stage recovery, one that is initially rapid during the reopening phase, followed by a long and jagged return to pre-virus levels by late 2021. Much will depend on the course of the virus itself, not just in Canada but in other countries, notably the U.S.

Methodology

The BMO BAI is based on the Conference Board’s method for constructing composite indexes of business activity.[1] It is derived from monthly percentage changes in individual indicators. One exception is the CFIB business sentiment index, whose contribution is based on its deviation from neutral (50).

The contribution of each indicator is adjusted to equalize its volatility, so that no single component dominates the index.

The aggregate index includes ten indicators: hours worked, unemployment rate, home sales, housing starts, business credit, wholesale trade, retail sales, manufacturing shipments, small business sentiment, and the TSX stock price index. All indicators are available on at least a monthly basis.

In addition, data on retail mobility and internal credit card transactions are used to estimate retail sales prior to the release of official data. BMO Economics' view of the economy is also used to benchmark estimates of other indicators when necessary.

As shown in Chart 1, the BAI tracks real GDP growth reasonably well, with a 59% correlation from 2016 to early 2020 (i.e., pre-pandemic). Note that GDP includes government spending and trade, the latter of which is only partly reflected in some of the BAI’s components. Though not a perfect fit, the BAI should provide a timelier read on the direction and speed of the recovery than the official monthly GDP report.

Recent Performance

The BAI plunged faster than real GDP during the March/April recession, by 24% versus 18%, in part because the latter is insulated by a steadier government sector (Chart 2). Accordingly, it should see a quicker initial snapback than GDP during the reopening.

Official data are available for all indicators in May except retail sales, and for six indicators in June, along with real-time data on retail mobility and credit card transactions. Based on this information, we estimate that the BAI rose 6% in May and 9% in June. The former suggests some upside risk to StatsCan's advance estimate of a 3% rise in May GDP.

Business activity looks to have retraced about half of its contraction by June, a good start, but the second half of the year will be a much tougher grind. To that point, the mobility and card data suggest the recovery in retail spending lost some steam in June (Chart 3). Beyond the summer, we would expect the pace of increase in the BAI to moderate as pent-up demand wanes and consumer caution lingers.

Business confidence seems to have run ahead of the BAI, closing much more of the gap versus pre-virus levels (Chart 4). That’s either a positive omen or the makings of a big disappointment.

Bottom Line: BMO's Business Activity Index will provide a timelier look at how the recovery is progressing than monthly GDP; and, in this world of fast-changing conditions, timeliness is probably the key missing aspect of current available data. It’s clear that the initial, easy phase of the recovery is well underway. The index will inform how well the expansion is proceeding on what is sure to be a long and bumpy journey.

Focus

Canadian Business Activity Index: Tracking the Recovery

Canadian Business Activity Index: Tracking the Recovery

[1] Conference Board. Calculating the Composite Indexes. https://www.conference-board.org/data/bci/index.cfm?id=2154