In this week’s The Seven…

• Sticking the landing - U.S. economy
• Those dovish summertime feelings - inflation and interest rates
• Next week - Bank of Canada clear to cut again (but will it?)
• On a roll - Alberta home construction
• Retail retreat - higher interest rates continue to weigh
• Interesting Fact: What is the ‘Trump Trade’?
• Chart of the Week: Record Stampede attendance

Funny thing about vacations is that the world keeps moving at a frenzied pace with or  without you. Many thanks to my colleagues Rob and Sid for their great work holding down the ATB Economics fort while I was away.

There is a lot happening in the economics sphere during this summer heat wave and plenty of data to digest.

In this week’s Seven, we travel to the U.S. economy, return to Canada for next week’s Bank of Canada rate announcement, and finish our journey in Alberta.

U.S. economy - signs of slowing, but far exceeding expectations

The summer Olympics kick off July 26 in Paris! I especially enjoy watching sports that I can’t come close to doing myself. Gymnastics ranks at the top of that list—it’s ridiculous what these athletes can do.

In gymnastics, points are earned for sticking the landing.

So how has the Canadian economy ‘landed’ after a prolonged bout of inflation and rising interest rates? A technical recession has so far been avoided, but the labour market has clearly softened (the unemployment rate is now at 6.4%), and the economy has slowed to a crawl, declining in per capita terms. We’re expecting Canadian GDP growth of 1.2% this year and 1.8% next year.

The U.S. economy, in contrast, has been a stand out performer. In the IMF’s latest global economic forecast, released this week, the U.S. economy is expected to grow at roughly last year’s pace (2.6%) in 2024 before slowing to 1.9% next year. You may recall that the IMF had penciled in a paltry 1% growth forecast for 2023 at the beginning of last year. So to say the U.S. economy has outperformed would be an understatement.

It’s not just the IMF. June’s median ‘dot plot’ forecast from the U.S. Fed had 2.1% growth this year and 2% next. That same dot plot had the U.S. unemployment rate at just over 4%, on average, in 2024 and 2025.

Still, the U.S. economy is finally showing modest signs of fatigue. The unemployment rate rose to 4.1% in June—the highest since October 2021. And the closely watched Sahm recession indicator is edging closer to the recession threshold. The Conference Board’s leading index fell in June, and is down year to date.

Bad news right? Not exactly. It seems from a market’s perspective that we’re getting the ‘right’ amount of bad news. Bad enough to allay inflation fears, but not so bad to raise recession flags.

Look at the stock market. Both the Dow and the S&P 500 touched record highs on Wednesday before falling Thursday and early Friday. And it’s more than Tech, with the Magnificent 7 stocks taking a step back and smaller caps stepping up to the plate as of late.

Of course, nothing is guaranteed. The U.S. election takes place in November, and geopolitical risks are high. The wars in Ukraine and the Middle East continue. China’s economy is wobbly, and U.S. trade tensions with that country have escalated. In short, there are lots of risks to worry about, but overall the U.S. economic picture looks better at this stage than almost anyone would have expected.

So, heading into the Olympics, it seems that the U.S. may get the most points for its economic landing to date (and on the gymnastics front, they also have Simone Biles).

Fun aside: The terms hawkish and dovish apparently come from the world of bird-watching. In the economics world, a ‘hawk’ is more aggressive and concerned about inflation and will want to keep interest rates higher, whereas a ‘dove’ is less concerned about inflation.

Good enough to cut

All this brings us to Canada’s inflation report, coming just ahead of July 24 rate decision. The report didn’t blow us away, but we think it’s good enough to justify a cut. The inflation rate fell from 2.9% in May to 2.7% in June, largely as expected. Less thrilling were the core inflation readings which moved higher on a three-month basis.

If you take the compilation of economic data since June, we think it’s enough to justify a cut. To recap, here are a a few key data points:

• Inflation has been in the 1-3% control range for six straight months.
• Near-term inflation and wage expectations are easing, according to the Bank of Canada’s business and consumer outlook surveys released Monday.  
• A rising unemployment rate, now 6.4% in June (highest since January 2022).
• GDP improving, but not keeping pace with population.
• Today’s retail report (more below) points to a very tired consumer.  

And yet… there is a decent chance the Bank of Canada will take the cautious path and wait until September. We see two things that may hold the Bank back: 1) persistently high wage growth; and 2) not enough progress on core inflation.

Our point is if the Bank does wait, it will be because they need more time to be convinced, not because the data are not ‘good enough’.  We’re leaning towards a cut next week, but we also think it’s a fairly close call (closer than what the market is pricing in).

Why are rents still driving inflation higher?

Shelter costs are driving Canada’s inflation rate and are worth more attention. In fact, excluding shelter costs, annual inflation was only 1.3% last month.

Shelter has the largest basket weight of the eight major components in the Consumer Price Index (CPI), accounting for nearly one-third of the total expenditures on goods and services. Rented accommodation and owned accommodation are the most important components of the shelter index.

Measuring shelter costs in the CPI is tricky. The reason is that people don’t transact in housing as often as they do in other areas, like buying groceries. Therefore, to capture changes in shelter costs, Statistics Canada attempts to estimate the rents paid by the typical renting household, as opposed to looking at today’s market rents. They do the same thing for homeowners using mortgage interest costs (as opposed to house prices).

On rents, Statistics Canada draws from a rolling sample in the labour force survey and a ‘hedonic’ regression model. The methodology does not make for light reading, but the bottom line is that this rental measure is lagging current market rents. Rentals.ca shows that ‘asking rents’ have been leveling off nationally and that year-over-year (y/y) growth in rents peaked in 2022. In contrast, the y/y growth in rent in the CPI is near its peak.

The bottom line is that a forward-looking Bank of Canada may see some relief on the shelter component as the estimated cost of renting in the CPI ‘catches up’ to what’s now happening in the market. The same goes for mortgage interest costs, which are already starting to decelerate as interest rates stopped rising.

A little less sticky - inflation expectations

Inflation is not the easiest thing to relate to. It’s the change in consumer prices. So inflation going down doesn’t mean prices are going down—just that they’re growing at a slower rate. Try telling a group of people (like I just did) that food inflation has fallen. Not a lot of nodding of heads.

Perhaps this may help explain why perceptions of current inflation are much higher than actual readings, as illustrated in the latest Bank of Canada Canadian Survey of Consumer Expectations.

That said, we are finally getting some reassuring news that Canadians now expect inflation to come down. In the second quarter, the one-year-ahead inflation expectation went from 4.9% to 4.1%. That’s still more than a full point higher than June’s reading and well above current forecasts, but the Bank of Canada will welcome the decline.

Alberta inflation - less on electricity,  more on rents

In Alberta, the inflation rate held at 3% last month. There are a couple big things driving the numbers.

The first is electricity prices. They surged last summer, adding to inflation. This summer, they are doing the exact opposite. Based on the latest regulated rate and last year’s index, we’re likely to see up to a 40% y/y decline in electricity prices in July—shaving about 0.4 points from Alberta’s  year-over-year inflation rate. This is good news for consumers, but it will only partly offset what we’re seeing on the other major inflation driver: shelter. Rented accommodation is up 14.5% y/y, driving up shelter costs amid Alberta’s tight housing market.

Overall, our June forecast pegs Alberta’s inflation rate at 3.2% this year, falling to 2.5% next year.

Hammering it home - Alberta’s hot streak continues on residential construction

As we noted this week, home construction has been a tear in the province. So impressive that our forecast can’t keep up. We’ve been consistently upgrading our housing starts forecast for Alberta, and now our June call for 42.9K for the year looks too low (again).   Home construction is one of the factors pushing Alberta’s GDP growth ahead of the national average in our latest forecast.

Why have we been surprised? We knew the demand was there from record population growth, but also saw headwinds from labour shortages and the dampening impact of higher interest rates. But the industry has stepped up to the plate with the longest run of 40K+ (annualized) starts since the natural gas-driven boom of the mid-2000s when starts were over 40K for 27 months in a row (Sept. 2005 to Nov. 2007). It’s too soon to change a forecast that’s been sitting on the shelf for one month, but based on the latest data, it’s fair to say our housing start forecast looks on the low side. All that said, Alberta is still in catch up mode and many more homes need to be built.

Consumer retreat - retail sales reverse course

Alberta retail sales, released this morning, continued down their bumpy road.  After a 3.2% jump in April, sales slipped by 2.5% in May. Vehicle sales, notoriously volatile, account for most of these losses/gains.*

Looking at a longer time period, retail sales are still below the January 2023 peak and are down 1.1% year-to-date. It looks better when you zero in on ‘core sales’, which strip out volatile gasoline and vehicle purchases. They are up 2.1%—though still below population growth.

Bottom line: We didn’t get too excited about the April gain, and we are not too alarmed about the May drop. The trend is largely unfolding as we expected in our June forecast: very modest growth in consumer spending this year and declining in per capita terms, weighed down by lingering impacts of previous rate hikes and a prolonged period of high inflation.

What are the implications of today’s report for the Bank of Canada? Yet another sign that consumers are buckling under the weight of rate hikes, and another data point in favour of a rate drop next week.

The retail numbers for Canada (-0.8% month over month in May) came in lower than the advance estimate (-0.6%). Moreover, both core and inflation-adjusted sales fell. June’s advance reading is also negative (-0.3%).

*Motor vehicle sales in Statistics Canada's Retail Trade Survey measures the purchase of vehicles (old and new) from retail establishments in Alberta whereas the New Motor Vehicle Sales Survey data we reported on yesterday measures new vehicles sold in Alberta including those purchased from non-retail and out-of-province sellers.

Interesting Fact…What is the Trump trade?

U.S. politics has dominated the news. The Republican National Convention took place this week and there was an assisination attempt on former President Donald Trump. With Republican polling improving in the lead up to the November election, there is much speculation about what a second Trump presidency would mean for the economic and inflation outlook. This has ushered in the so-called “Trump trade,” where investors bet on stocks and bonds that may go up or down during a Trump presidency.

For example, one line of thinking is that with potential new tariffs, loosening regulations and tax cuts, inflation and interest rates could be higher. As Bloomberg notes, “in the aftermath of the debate, money managers in the $27 trillion Treasuries market reacted by buying shorter-maturity notes and selling longer-term ones—a hedge against higher inflation known as a steepener trade.”

Chart of the Week: Stampede attendance hits record high

Despite the heat, the Calgary Stampede drew a record crowd this year of almost 1.5 million visitors to the grounds, as shown in our Chart of the Week. The event, dubbed the Greatest Outdoor Show on Earth, is a massive tourism draw. As we’ve noted, entertainment spending and airport arrivals spike during the event.

With a strong finish, Stampede attendance ended at 1.47 million, up 6.7% from last year and 4.9% above the previous record set in 2012 during the 100th anniversary.

Answer to the previous trivia question: The first Formula One World Championship race was held at Silverstone Circuit in the United Kingdom on May 13, 1950.

Today’s trivia question: When was the first year that attendance at the Calgary Stampede broke the one million mark?