Canadian small business sentiment falls in October

Canada’s small business sentiment dropped in the month of October for the second straight month. The CFIB Business Barometer dropped 0.9 points to 60.5; however, the index is still above its year-ago levels and puts it in line with recent trends. However, the index continues to be lower than its pre-oil-shock averages, and below the 65-70 range cited by CFIB as the gauge for small business sentiment in an economy operating at its potential.

Region wise, indicators came in mixed. Quebec and Prince Edward Island stayed the most positive in spite of recording steep falls in the month. Weak sentiment in resource-heavy provinces continued, with optimism in Alberta, Saskatchewan and Newfoundland & Labrador declining. In the meantime, four provinces recorded gains including British Columbia and Ontario.

The falls were mainly seen on a sectoral basis, with sentiment falling in only four of the 13 sectors. The most declines were seen in hospitality and personal services. Decent gains were seen in retail, natural resources and information, arts, and recreation services. The discrepancy between the overall drop in the index and the generally widespread sectoral improvement is likely because of the fact that most sectors’ sub-indexes are seen as moving averages, noted TD Economics in a research report.

Wages rose as the most cited input cost causing difficulties for companies, surpassing taxes. Expected average wage and price changes in the next year dropped 10 basis points on the month, falling to 2 percent and 2.2 percent, respectively.

The proportion of companies citing shortages of skilled and un/semi-skilled labor as factors restricting sales and production rises spiked to record highs on the month. In the meantime, hiring plans eased, with the proportion of businesses expecting rises to full-time employment falling a bit on the month.

Small business sentiment has been moving sideways throughout the year, with the index mostly hovering at decent levels above 60.

“The subdued performance trend of resource-heavy provinces throughout the year, however, is likely a factor contributing to the index not recovering to its pre-oil-shock levels”, stated TD Economics.

Capacity constraints continue to be the most important theme, with shortages of labor denting companies’ hiring plans and production rises. This has been a consistent message throughout the year and echoes indicators in last week’s Business Outlook Survey.

“With both CFIB and the Business Outlook Survey indicating tightening labour markets throughout the year – and with the impacts seen in the evolution of wage and price plans this year, this is consistent with an economy operating at full capacity”, added TD Economics.

Assuming economic data continues to underpin the Bank of Canada’s positive outlook, this narrative should add credence to expectations of further rate hikes by the data-driven Bank of Canada.

At 16:00 GMT the FxWirePro's Hourly Strength Index of Canadian Dollar was slightly bullish at 67.9287, while the FxWirePro's Hourly Strength Index of US Dollar was highly bullish at 101.776. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex