• The Canadian leading indicator rose 0.9% in May from the previous month.

• Three components of the index declined in the month: housing, other durable goods sales, and the business and personal services employment.

• The jump in the manufacturing component, specifically the 4.0% leap in new orders for durables, led the overall increase.

• The U.S. Conference Board leading indicator advanced 0.5% in the month.

• Despite the downturn in the housing index, sales of furniture and appliances advanced at a healthy 1.4% pace.

• The unsmoothed composite leading indicator increased by 0.7% in the month, about half the pace recorded in April.

• While the composite leading indicator is not a perfect predictor of real GDP growth, there are signs of some weakness ahead.

Outlook

The Canadian leading indicator increased by 0.9% (for the second consecutive month) in May. This advance is slower than the increases record earlier this year, but is still in line with a healthy outlook for the economy.

Among the 10 components, only three recorded declines. There was a definite shift in the positive contributors to the overall leading index this month. Over the previous 12 months, the housing index consistently contributed to the overall leading index and to overall economic growth. There was, however, a major shift in the latest results as the housing index declined for the first time in 13 months. The decline was a result of the 8.5% drop in the number of existing home sales and the 6.3% decline in housing starts for the month.

Manufacturing activity took the lead over the housing component. The jump in the manufacturing component, specifically the 4.0% leap in (real) new orders for durables, led the overall increase. This was the largest increase in three months.

Acting as another source of strength, the U.S. Conference Board leading indicator advanced 0.5% in the month. This component has been on the upswing for the past 12 months.

Although there was a definite cooling in the housing index, sales of furniture and appliances activity remained brisk, rising at a healthy 1.4% pace. This indicates that home renovations are still very much on the radar for most homeowners.

The unsmoothed composite leading indicator increased by 0.7% in the month, about half the pace recorded in April. This was the fourth-consecutive monthly advance.

Bottom Line: The leading indicator offers a decent glimpse into the growth path of the Canadian economy. The slight cooling in the index does suggest that Canada will not be able to pull off above-6% growth in the second quarter, as we are forecasting. Given the downturn in the housing market in May, real GDP will likely advance at a stronger pace in April, than in May. The manufacturing sector should continue to positively impact the leading indicator, but headwinds may start if the U.S. Conference Board leading indicator begins to cool significantly.