- Consulting with Canadians -

Canadian Federation of Independent Business (CFIB) Submission in Response to Finance Canada's Large Bank Mergers in Canada:

2003 No.4

Quarterly Business Barometer

Ted Mallett, Chief Economist
December 2003

Related documents:

• The Canadian Federation of Independent Business (CFIB)
• Banking on Competition Results of CFIB Banking Survey

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CFIB's latest quarterly survey of small and mid-sized enterprise (SME) expectations shows that business confidence in December has made solid gains over its previous reading in September. The CFIB Quarterly Business Barometer Index (based on 1988=100), which reflects how well business owners expect their own firms to perform in the next 12 months, now stands at 109.9, up 2.2 points since September, its highest level since the middle of 2002 (see Figure 1). These results show that the economy has appeared to shake off the uncertainties of early 2003 and the shocks experienced in the summer months.

Figure 1: 
CFIB Quarterly Business Barometer 
(Index, 1988=100)

These latest findings are based on the responses of 2,556 business owners to a regular fax and web survey conducted among a random sample of CFIB members between November 25 and December 5, 2003.

The survey finds that the balance of opinion on business performance and expectations has continued to shift towards the positive side. About 39 per cent of owners say their firms are doing much or slightly better than one year ago, while 28 per cent say they are doing somewhat or much worse (see Figure 2). Short-term expectations over the next three months point to more steady business performance, but longer-term views are considerably more positive. More than half of business owners (53 per cent) expect an improvement, while another 35 per cent expect no change to their firms' performance. The remaining 12 per cent of respondents expect a weakening in their businesses during the next 12 months.

Figure 2: 
Current and Expected Business Performance 
(% response)

Index detail, by sector and region

The findings across industry sectors point to broad-based strengthening. Among the 10 major industry indicies, 7 registered growth, 1 remained steady, while only 2 experienced a decline. Wholesale trade, transportation and construction showed strong growth, along with the retail and hospitality sectors. Manufacturing stayed even—remaining roughly at the composite level—while the financial and social services sectors remained above average, but experienced corrections from their previous peak levels (see Figure 3).

Figure 3: 
Quarterly Index: Sector Summary 
(Index, 1988=100)

Within each sector, however, there are pockets of strength and weakness. The strongest subsectors include computer services, health practitioners, window and door manufacturing, and commercial printing (see Table 1). The weakest subsectors include Livestock and field crop farms, service stations and machine shops.

Table 1:
Detailed Industry Sector Perspectives

Most optimistic	Least optimistic
Computer & related services	Livestock farms
Health care practitioners	Gasoline service stations
Window, door & millwork mfg.	Machine shops
Commercial printing	Field crop farms
Household furnishings retailers	Architecture & engineering
Lumber & building supplies

Even business owners' expectations across provinces appear to be converging—but with one exception. Owners in British Columbia are leading the way in optimism at this point in the year, with an index level of 113.0 (see Figure 4).

Figure 4: 
Quarterly Index: Regional Summary 
(Index, 1988=100)

This score is followed closely by business sentiment in Alberta, Nova Scotia and New Brunswick. Ontario and Quebec businesses continue to exhibit near perfect synchronization—both with indicies right at the national average. Manitoba, however, is the only province where business expectations are steadily weakening. The December index level there stands at 99.9—about 13 basis points below its previous peak in early 2002.

Holiday Season Retail Performance

The holiday retail season in Canada appears to be shaping up quite well. Almost 40 per cent of retailers say their current performance is much stronger or somewhat stronger than 12 months ago (see Figure 5). Another 33 per cent say they are performing at the same level as last year, while the remaining 27 per cent of retailers say they are weaker.

Figure 5: 
Holiday Season Retail Performance: Comparison with same time last year 
(% response)

Although all regions show winners outnumbering the losers, the retail hot spots this year are in Saskatchewan, Prince Edward Island and Newfoundland/Labrador—each with performance well above last year's levels. Net retail performance is also above average in Quebec and British Columbia.

The High Dollar: Friend or foe?

The rapid rise in the value of the Canadian Dollar early in the year caught many businesses by surprise. In early December 2003 the C$ nudged US$0.77, up from US$0.64 at the same time last year. Most of the change, however, occurred in the first half of the year. The changes significantly affected the pricing of both inputs and outputs in the economy, and disrupted pricing plans for many businesses. Although public attention on the issue has been focused on the struggles of Canada's major export sector, there are clearly two sides to this Dollar coin.

The latest survey shows that even at current levels, almost as many businesses favour a high Dollar as favour a low Dollar. About 32 per cent of respondents say they favour a lower Dollar, while about 24 per cent favour a higher Dollar (see Table 1). More than a third of business owners say their businesses are not significantly affected by the currency's value, while the remaining 8 per cent are unsure. These findings have remained consistent throughout the past year, even as the currency changed value.

Table 1: 
Perspectives on the C$, by region and sector

	Lower $  helps firm	Higher $  helps firm	No impact	Don't know
	% response
Canada	32.2%	24.3%	35.3%	8.2%
British Columbia	35.2%	29.5%	28.5%	6.8%
Alberta	23.5%	27.9%	35.4%	13.2%
Saskatchewan	29.6%	33.3%	26.0%	11.1%
Manitoba	45.8%	25.0%	25.0%	4.2%
Ontario	35.7%	23.4%	33.8%	7.1%
Québec	30.8%	18.7%	39.3%	11.2%
New Brunswick	22.9%	20.0%	54.3%	2.9%
Nova Scotia	20.0%	27.5%	45.0%	7.5%
PEI	26.1%	21.7%	34.8%	17.4%
Nfld & Lab	35.3%	23.5%	41.2%	0.0%
Agriculture	32.4%	21.6%	37.9%	8.1%
Manufacturing	52.3%	22.7%	17.2%	7.8%
Construction	38.7%	12.9%	46.8%	1.6%
Transportation	60.0%	13.3%	23.4%	3.3%
Wholesale	34.9%	43.4%	15.7%	6.0%
Retail	21.1%	31.4%	35.5%	12.0%
Financial services	12.0%	4.0%	68.0%	16.0%
Business Services	26.1%	18.5%	50.0%	5.4%
Social Services	4.5%	31.8%	50.1%	13.6%
Hospitality	25.9%	17.3%	48.2%	8.6%

The sectors most harmed by a high C$ include export dependent transport, manufacturing industries—and to some degree, construction and agriculture. On the other hand, sectors such as wholesale, retail and social services (mainly education and health care) are more often helped by a high C$ because of the benefit it has in reducing import prices.

Employment plans

The future employment picture among SMEs also continues to improve from last September. Overall, 31 per cent of businesses surveyed plan to increase their full-time employment levels during the next 12 months, while only 7 per cent plan to lower full-time staffing (see Figure 6). Very little change in part-time employment is expected, with only 15 per cent of firms expecting to increase levels and 7 per cent expecting to reduce them.

Figure 6: 
Anticipated 12-month Employment Plans 
(% response)

 

The full-time hiring plans are an improvement from the 29 per cent and 9 per cent levels recorded in September. Businesses in some sectors, however, are very bullish on hiring. Almost 41 per cent of businesses in manufacturing expect to be adding to their workforces in the next 12 months, while almost 43 per cent of business services companies will be doing the same (see Figure 7). At the other end of the scale, only 19 per cent of agribusinesses and 23 per cent of retailers expect to add to their employee levels in the next year.

Figure 7: 
12-month Full-time Employment Plan Trends 
(% of respondents planning to increase)

Capital spending plans

Business spending plans on capital items such as vehicles, machinery, equipment, land and buildings appear to have finally turned the corner. After consecutive quarters of decline throughout 2003, 12-month spending expectations are sharply higher in December. For the first time in more than a year, more than 40 per cent of businesses expect to spend on additional machinery and equipment during the next 12 months. Similarly, about 44 per cent expect to spend on replacement M&E during the same period (see Figure 8).

More firms will also be spending on land and buildings—14 per cent on additional, and 9 per cent on new capacity. Plans for spending on vehicles, however, are mixed. Although more firms will be replacing vehicles during the next 12 months, there is no equivalent increase in spending on additional rolling stock.

Figure 8: 
Anticipated 12-month Capital Spending 
(% of respondents planning to spend)

Wages and prices

Pricing and wage-setting plans remained consistent throughout the year, with only 20 to 25 per cent of respondents expecting to increase them by more than basic 2 per cent inflation (see Figure 9). An easing of inflationary pressures can be noted among pricing expectations during the previous three quarters in 2003. The picture on wage growth, however, remains stable.

Figure 9: 
12-month Price and Wage Plans: 
(% response)

Conclusions

CFIB's Quarterly Barometer shows that business optimism in the Small and mid-sized business (SME) community has rebounded significantly from early summer, when the economy was experiencing multiple economic shocks. This optimism bodes well for Canada's GDP performance for the fourth quarter of 2003. Although there are a number of economic uncertainties and constraints—chiefly energy pricing and business insurance coverage issues—SMEs appear to be working through them. The rising value of the C$ has put pressure on some sectors, most notably manufacturing and transport, but the net effect is relatively neutral on the overall SME segment of the economy. There is also good news in the capital spending expectations, which finally turned around its year-long slide in December. With wages and prices still stable, the economy will be entering 2004 in good shape.

Research Notes:

Representing more than 100,000 small and mid-sized enterprises (SMEs) nationwide, the Canadian Federation of Independent Business has been tracking business conditions and expectations for the past 15 years. These measures have been shown to be extremely accurate coincident indicators of economic growth. Historical CFIB survey results, indexed to 1988=100, are almost identical to GDP growth. Although there is no formal measure of GDP according to firm size, estimates based on the distribution of income and profits suggest that SMEs account for roughly 45 per cent of total economic output.

CFIB's index is based on the five-point scale mean value of a question on the expected performance of their businesses in the next 12 months. The five response categories are: much stronger, somewhat stronger, about the same, somewhat weaker and much weaker. This question is common to all previous surveys back to 1988.

December 2003 Sample:

These data reflect the responses of 2,556 business owners from a selected random sample of over 20,000 CFIB members who received the survey by fax or email on November 25. The current group of respondents is completely independent from the groups surveyed in March, June and September.

Number of Respondents by Employment Size
0-4 employees:	993
5-19 employees	1118
20-49 employees	273
50+ employees	128