TD Economics

August 4, 2010

Data Release: Small Businesses Settling into the Mid-Cycle Moderation

• The Canadian Federation of Independent Business’ small and medium-size enterprise business outlook
survey index fell to 65.7 in July from 66.4 in June. The index is a weighted average of small business
owners reporting future business expectations over the next 12 months as either stronger, the same, or
weaker. An index level above 50 indicates that optimistic business owners generally outnumber their
pessimistic counterparts.

• The index fell in 8 of 13 industries with the professional services, other services, and the natural
resources sectors being the hardest hit, and in 7 of 10 provinces with Ontario and PEI leading the
declines.

• Though broad-based declines in index levels littered the report, they sat above 50 in every sector.

• Elsewhere in the report, an almost identical number of business owners expected to increase and
decrease their staff levels (about 15% on either side when considering both full-time and part-time
status), while the vast majority expected to keep employment levels steady in the coming 3-4 months.
Key Implications
• The business outlook survey index, in fact, moves fairly consistently alongside the broader Canadian
economy (real GDP growth) and so can provide some insights into the future of the economic recovery.
After declining for two years and hitting its low of 39.4 in December 2008, the index then improved
dramatically, rising above 50 by April 2009 and returning to its normal range of 65-75 by last August.
This is certainly reminiscent of the rapid improvement in the Canadian economy that we have seen in
the past year, with skyrocketing real GDP and employment growth and a robust recovery in the housing
market.

• However, after hitting its high of 69.9 in April 2010, the index has since fallen for the past 3 months to its
current level and 45% of owners are complaining of insufficient domestic demand.

• Indeed, this coincides with our expectation of a mid-cycle moderation in Canadian real GDP growth
which is reflecting the overspent condition of Canadian households and the maturation of the U.S.
economic recovery.

Francis Fong, Economist

416-982-8066

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