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Volatile commodity prices have Canadians concerned about a disappointing gross domestic product report for July when it's released next week. They shouldn't worry – the two most reliable indicators suggest the numbers will be strong.
The MLI Leading Indicator index has a strong track record of predicting GDP results. The S&P/TSX Composite Index and manufacturing new orders are two components of the index – both point to a significant improvement over the 0.9 per cent economic growth for June.
The first chart plots the S&P/TSX Composite index against GDP. The correlation is reasonably high at 0.61. The correlation continues to tighten after a dislocation caused by the Fed's quantitative easing (QE) programs in 2011 and 2012. QE pushed domestic equities higher but did little or nothing for Canadian economic growth.
The upward move in the equity benchmark for August suggests that GDP will climb.
Manufacturing new orders has also successfully predicted GDP results. The second chart compares new orders (I've used a three month moving average to smooth the data) with GDP.
The correlation is much higher at 0.71. It's also apparent that improvements in new orders often lead better GDP results. As with the TSX, the manufacturing new orders figures indicate that we'll see a solid report on economic growth.
Economists expect year over year GDP growth of 1.2 per cent. The equity benchmark and manufacturing sales don't guarantee this target will be exceeded, but they're certainly encouraging.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights , and follow Scott on Twitter at @SBarlow_ROB .