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Special Report
A timely analysis of recent economic events
Spring 2017
Great Lakes-St. Lawrence Region
Driving North American Growth and Trade
Robert Kavcic, Senior Economist • [email protected] • 416-359-8329
The Great Lakes-St. Lawrence region is a vital driver of North American economic
output, employment and trade, accounting for nearly a third of combined Canadian
and U.S. output, jobs and exports. Economic growth in the region is expected to
accelerate in 2017 as Ontario and Quebec post another year of strong activity, while
states in the region pick up alongside a broader increase in U.S. momentum. Overall,
ongoing expansions in housing and consumer spending are supportive, with the
currency impact adding a modest boost on the Canadian side of the border. Still,
some longer-term issues remain for the region’s economy. Labour costs are in focus
as the factory sector seeks to remain competitive, while demographic headwinds will
be a persistent challenge. At the same time, uncertainty on the trade front is an area
of concern given the deeply integrated nature of cross-border activity
Chart 1
in the region, and its impact on the overall North American
Facts
and Figures
economy.
Pulling the Weight of a Nation
 GDP of US$6 trillion
(2016 est)
The Great Lakes-St. Lawrence region boasts a massive geographic
footprint, and is a major driver of the North American economy.
With economic output estimated at US$6 trillion in 2016, the region
accounts for 30% of combined Canadian and U.S. economic activity
and employment. The region’s output ranks ahead of Japan,
Germany, the U.K. and France, and it would rank as the third largest
economy in the world if it were a country, behind only the U.S. and
China—notably, the region overtook Japan a few years ago. Quite
simply, the economic importance of the region can’t be overstated.
 Population: 107
million (2015)
Economic Update—Growth Improving
The Great Lakes-St. Lawrence economy is poised to accelerate in
2017, after posting sturdy growth in recent years. Real GDP in the
region expanded at an expected 1.6% pace in 2016, roughly in-line
with each of the prior two years. Growth in Ontario and Quebec has
strengthened above 2%, while the U.S. states in the region have
lagged—but the latter look to do some catching up this year.
The U.S. economy is expected to accelerate this year, growing at a
2.3% clip in 2017, up from a 1.6% pace last year. Canada is expected
to outperform slightly after lagging in recent years, growing at 2.5% as
Central Canada remains strong, while the oil-producing provinces
emerge from recession. Ontario is seeing sturdy growth around the
2.6% mark, topping the national average on a sustained basis for the
first time in more than a decade, while Quebec is piercing through the
2% threshold—both well above-potential economic growth.
Quebec
Ontario
 30% of Canadian/U.S.
economic activity
 51 million jobs
Minnesota
Wisconsin
Michigan
New
York
Pennsylvania
Illinois Ohio
Indiana
 30% of Canadian/U.S.
workforce
 More than half of
Canada/U.S.
cross-border trade
Chart 2
Gross Domestic Product
2015 (US$ trlns)
United States
China
Great Lakes Region
Japan
Germany
United Kingdom
France
India
Italy
Brazil
Canada
Russia
0
5
10
15
20
A publication of BMO Capital Markets Economic Research • Douglas Porter, CFA, Chief Economist • economics.bmocapitalmarkets.com • 416-359-6372
Special Report
Page 2 of 5
North American car and truck production hit a 14-year high in
2016, while sales remain buoyant (especially in Canada), supporting
activity through the supply chain. However, unlike on the Canadian
side of the border, the strong U.S. dollar has been a headwind to
U.S. export activity, and contributed to below-average GDP growth
in the Great Lakes states in the three years through 2016. Some
firms in the factory sector have also been clipped by capital
spending retrenchments in energy and agriculture, but the tide
appears to be turning modestly on both fronts.
The housing market continues to recover across the U.S. Midwest.
Still-attractive affordability, healthy job growth and some easing in
credit conditions should support continued gains in the sector.
Importantly, U.S. housing affordability remains attractive enough
that home prices will continue to rise even as the Federal Reserve
raises interest rates more aggressively this year and in 2018.
Meantime, Toronto’s market continues to set record price levels and
conditions have strengthened across Southwestern Ontario and in
areas such as Ottawa and Montreal.
For consumers in the region, the steep decline in oil prices has
helped, while jobless rates fell in most jurisdictions in the Great
Lakes region last year. Indeed, hiring continues across the region,
led by sturdy gains in the service sector, while some states are
seeing cyclical rebounds in construction and manufacturing—
sectors that are still below peak levels.
Adding it all up, the Great Lakes region continues to churn out
sturdy economic growth. While some headwinds have kept the pace
of growth in check south of the border, most signs point to a
stronger expansion in 2017.
A Diverse Employment Engine for North America
The region plays an extremely important role in the North American
labour market, supporting roughly 51 million jobs in 2016. That is 30%
of the combined Canadian and U.S. workforce. Employment growth
was a healthy 0.8% last year, down slightly from 2015 as slowdowns in
Illinois and New York weighed. Still, job gains overall pulled the
regional jobless rate down to 5.0% in early 2017, a cycle low.
The region’s highly diverse economy drives employment across a
wide range of manufacturing and service industries. While
traditionally considered the manufacturing heartland, factory-sector
employment now makes up just over 10% of the region’s workforce,
down from about 15% a decade ago. Still, on a relative basis,
manufacturing does carry a disproportionately high weight in the
region versus North America as a whole, where factory jobs account
for less than 9% of the total. Part of the decreased reliance on
manufacturing reflects capacity lost during the Great Recession, but
also the gradual long-term diversification of the region’s economy.
Spring 2017
Chart 3
Growth Outlook Improves
(y/y % chng)
8
15 16 17 18
Canada
0.9 1.4 2.5 1.9
U.S.
2.6 1.6 2.3 2.5
Great Lakes Region 1.7 1.6 2.2 2.1
6
forecast
Real GDP
Canada
4
2
0
-2
U.S.
-4
-6
00
02
04
06
08
10
12
14
16
18
Chart 4
Service Sector Steadily Hiring
Great Lakes-St. Lawrence Region
Construction and
Manufacturing
Education, Health
and Services
140
140
130
130
120
110
Education
and Health
120
All
Sectors
(2002 = 100)
110
100
100
90
Construction
90
80
Manufacturing
80
70
All
Sectors
Professional
Services
70
02
07
12
17
02
07
12
17
Chart 5
More than Manufacturing
Great Lakes-St. Lawrence Region — 2016
(% of Great Lakes Region employment)
Employment by Industry
Education &
Health
Transportation,
Warehousing
& Utilities
Trade
Construction
Financial &
Real Estate
Professional
Services
Other
Government
Manufacturing
Leisure &
Hospitality
Special Report
Page 3 of 5
While manufacturing employment is down 15% from pre-recession
levels, education & healthcare (+21%) and professional services
(+16%) have helped make up the shortfall. In fact, education,
healthcare and professional services alone have added 2.5 million
jobs over the last 10 years, dwarfing the near-1 million
manufacturing job losses.
Elsewhere, retail & wholesale trade, government and professional
services also now carry double-digit employment shares within the
region. Indeed, while manufacturing still boasts a comparatively
high employment share, education & health and finance & real
estate also outweigh the North American average. Construction
employment is still recovering after a deep U.S. recession.
Labour costs remain one challenge for the region, with an increasing
share of new production, particularly in the auto sector, directed
toward the Southeastern United States and Mexico. Indeed, while
Mexican auto production has nearly doubled over the past decade,
U.S. output is little-changed (through the cycle), while Canadian
output is down 20% from the 1999 peak. Right-to-work laws in
Indiana, Michigan and Wisconsin suggest that the push to control
labour costs is moving north, but the broader challenge is to ensure
that productivity growth remains in line with labour costs.
Demographics Weigh on Potential Growth
Population growth continues to slow across the region for a number
of reasons, including cyclical factors, relative economic
performance and aging demographics. Overall population growth in
the region is running at a 0.3% y/y pace, less than half the North
American average. Michigan, for example, was hard-hit by the
recession in the auto sector, and saw net declines during the 2008to-2011 period—that trend has since reversed. Meantime, broadbased aging continues to slow labour force growth in the region,
with the 2016 growth rate just up from the weakest since 1986,
dragging down potential economic growth with it. Notably, Ontario
and Quebec have outpaced their Great Lakes state counterparts in
recent years, spurred by strong international immigration trends and,
recently, surging interprovincial migration into Ontario.
Meantime, the Great Lakes states have been grappling with net
outward migration to other states. Illinois lost a net 114,000 people
to other states in 2016, which contributed to a third-straight annual
decline in that state’s population—the first time since WWII. The
broader region continues to see outflows to the South and West with
stronger economic growth and employment prospects. Ontario and
Quebec should see provincial flows strengthen further this year as
the oil price shock reverses the movement of migrants to oilproducing provinces seen for much of the past decade.
Spring 2017
Chart 6
Manufacturing Heartland—Still
Great Lakes-St. Lawrence Region — 2016
(North American average = 100)
Relative Industry Concentration
Manufacturing
Education & Health
Financial & Real Estate
Trans./Warehous./Utilities
Other
Trade
Professional Services
Leisure & Hospitality
Construction
Government
60
80
100
120
140
Chart 7
Demographic Drag for Many
(y/y % chng)
Population Growth
1.4
2016
North
America
1.2
ON
QC
1.0
MN
IN
0.8
WI
0.6
MI
OH
0.4
NY
Great Lakes
Region
0.2
PA
IL
0.0
77
87
97
07
-0.5 0.0
17
0.5
1.0
Chart 8
U.S. Trade Deficit: Not Made in Canada
United States
(US$ blns : 4-qtr m.s.)
Goods Trade Balance
Canada
0
Mexico
-100
-200
-300
China
-400
00
02
04
06
08
10
12
14
16
1.5
Special Report
Page 4 of 5
A Critical Trade Relationship
Trade is a pressing issue given the policy priorities of the new U.S.
Administration. Note that while the U.S. ran a near-$350 billion
trade deficit with China in 2016, the gap was a much smaller $69
billion with Mexico, and a paltry $16.5 billion with Canada. On a
wide scale, this suggests that the U.S. trade imbalance is not an
issue best resolved at the Canadian border. Meantime, trade
within the Great Lakes region is relatively balanced as well, with
Ontario and Quebec running a modest surplus with the U.S. states.
The bulk of that surplus is with Michigan, while the provinces run
small deficits with Illinois, Wisconsin, Indiana and Ohio.
The Great Lakes-St. Lawrence region is also a critically important
North American trading hub. The region’s states were the origin
of roughly a quarter of total U.S. merchandise exports in 2016,
while Ontario and Quebec accounted for 60% of Canadian
shipments (a decade high). Transportation equipment and machinery
are the major drivers, but agricultural and food products, metals and
chemicals contribute to a diverse range of exports. The region’s
cross-border trade linkages are also immensely important. For
example, the Great Lakes-St. Lawrence states are Ontario and
Quebec’s largest trading partner, accounting for $242 billion of total
trade in 2016. That represents almost a third of total international
trade among the two provinces. Also, it’s notable that fully 33 U.S.
states count Canada as their largest export market, including all in
the Great Lakes-St. Lawrence region. The North American Free
Trade Agreement has certainly helped to spur the trade
relationship in the region, and recent policy rhetoric is concerning
given how integrated the supply chain has become.
Meantime, improving border infrastructure is encouraging. For
example, construction of the Gordie Howe International Bridge
between Windsor and Detroit continues to move closer to reality,
though completion looks to be beyond 2020. This should help
improve the flow of goods at what is currently the busiest
commercial crossing on the U.S.-Canada border.
Finally, the Great Lakes-St. Lawrence Seaway is a critical avenue
for North American trade. According to the Chamber of Marine
Commerce, shipping in the region supports 227,000 jobs, produces
$35 billion of business revenue, and adds nearly $5 billion per year
to federal, state and provincial revenues.
The Bottom Line: The Great Lakes-St. Lawrence region is a key
contributor to North American economic output, employment and
trade, and the current outlook remains positive for the region.
Measures by policymakers to maintain the trade relationship and
further facilitate the flow of goods in the region and beyond would
be a clear positive for economies on both sides of the border.
Spring 2017
Chart 9
Key Trading Partners
2016 (C$ blns)
Ontario and Quebec Trade
Michigan
Exports
to state
Balance
32.7
Imports
from state
New York
Ohio
6.4
-7.1
Illinois
-1.0
Indiana
-3.9
Pennsylvania
2.1
Wisconsin
-2.0
Minnesota
-0.3
0
20
40
60
80
Source: Industry Canada
Chart 10
Strong Cross-Border Ties
2016 (total trade : C$ blns)
Ontario and Quebec’s Trading Partners
Great Lakes States
Other U.S. States
China
Mexico
United Kingdom
Japan
Germany
South Korea
Source: Industry Canada
0
50
100
150
200
250
Chart 11
Selling Mostly to Canada
United States — 2016 (Census basis)
Largest Export Trading Partner by State
WA
OR
MT
ID
WY
UT
CA
AZ
ND
CO
NM
WI
SD
IA
NE
KS
OK
TX
NV
NY
PA
OH
IL IN WV VA
KY
NC
TN
SC
AR
MS AL GA
MO
LA
(Switzerland)
AK
VT ME
MI
MN
HI
(Australia)
Sources: BMO Economics, U.S. Department of Commerce
FL
NH
MA
RI
NJ CT
DE (France)
MD
Canada
Mexico
China
Brazil
United Kingdom
Other
(listed with state)
Special Report
Page 5 of 5
Spring 2017
Regional Economic Indicators
Canada
U.S.
Real GDP (% chng, US$)
2014
2.6
2.4
2015
0.9
2.6
2016e
1.4
1.6
Employment (% chng)
2014
0.6
1.6
2015
0.9
1.7
2016
0.7
1.7
Unemployment Rate (%) ¹
2014
6.9
6.2
2015
6.9
5.3
2016
7.0
4.9
Population (% chng)
2014
1.1
0.7
2015
0.9
0.7
2016
1.1
0.7
Exports (% chng, US$)
2014
10.3
2.6
2015
-0.7
-7.5
2016
-0.7
-3.4
G. LakesSt. Lawr. Ontario
Quebec
Illinois
Indiana
Mich.
Minn.
N.Y.
Ohio
Penn.
Wisc.
1.7
1.7
1.6
2.7
2.5
2.6
1.3
1.2
2.0
1.1
1.8
1.5
2.1
1.4
1.9
1.9
1.6
1.6
2.4
1.9
0.5
0.8
0.9
1.6
2.6
1.8
1.2
1.8
2.8
1.2
2.2
1.1
1.4
1.1
1.1
0.8
0.8
0.7
1.1
-0.1
1.0
0.9
1.3
1.1
0.4
2.9
2.5
2.0
2.1
1.9
2.0
0.9
0.9
0.7
0.5
1.1
0.3
1.4
0.7
0.2
0.6
0.8
0.5
1.4
1.1
1.1
6.2
5.4
5.2
7.3
6.7
6.6
7.8
7.7
7.0
7.0
5.9
5.9
5.9
4.8
4.5
7.1
5.4
5.0
4.1
3.8
3.9
6.3
5.3
4.9
5.7
4.9
5.0
5.8
5.3
5.5
5.4
4.5
4.2
0.3
0.2
0.3
1.0
0.8
1.3
0.7
0.6
0.7
-0.1
-0.2
-0.3
0.4
0.3
0.3
0.2
0.0
0.1
0.6
0.5
0.7
0.2
0.1
0.0
0.2
0.1
0.1
0.1
0.0
-0.1
0.3
0.2
0.2
7.8
8.4
1.2
8.4
10.7
4.2
15.0
7.5
-2.1
3.5
-7.0
-5.7
3.8
-5.1
3.0
-4.6
-4.6
2.4
3.1
-6.5
-3.9
2.4
-6.9
-7.1
3.1
-2.8
-3.1
-1.7
-2.0
-7.2
1.5
-4.2
-6.4
¹ Great Lakes-St. Lawrence = 10-region average
e = BMO Capital Markets estimate
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