In this week’s The Seven… 

• $1 trillion in private investment - Federal budget has big aspirations 
• We’ll take it - You don’t always need to ‘explain away’ good job news
• (Mostly) closed for business - The U.S. government shutdown
• Supreme uncertainty - U.S. Supreme Court hears tariff arguments
• Interesting Fact: Population lift-off - Airdrie emerging as one of Alberta’s largest cities
• Chart of the Week: Canola crush

It’s been a busy week in economics land! We sent you the labour force report this morning and did a pretty extensive review of the federal budget. So our plan is to keep this Seven short. Believe us?

The right productivity diagnosis - Fixing it is the hard part

Our quick take, outlined in Wednesday’s Twenty-Four, is that the federal budget got the diagnosis right, and it moves in the right direction towards addressing Canada’s growth and productivity woes. But it’s subject to execution risk. Individual budget measures themselves don’t seem to add up to the lofty goals. Those aspirations are, among other things, to enable $1 trillion in private sector investment.

As Trevor Tombe, Professor of Economics at the University of Calgary, and I discuss in the latest edition of the Alberta Edge podcast, we should first acknowledge the fact that this budget did indeed lay bare the real problem: Canada’s economy has barely grown in per capita terms over the last decade and its labour productivity growth is among the worst among developed economies. Business investment is well below what it was a decade prior. The budget doesn’t hide from these realities.

I argued that this budget is more about addressing pre-existing issues than the current trade war itself. And as Tombe notes, the structural shock from the trade war is much smaller than the one we saw before Trump 2.0.

The reality, though, is that the ambitious government “investment” outlined can only take us so far. What will need to shift is sentiment about Canada as a place to invest, and perhaps some early wins on major projects could set us on the right course. As Tombe noted, the challenge is daunting given the starting point. The per capita output gap between the U.S. and Canada has exploded (Canada's real output per person is now only about 70% of U.S. levels). I discussed that another way to look at the growth problem is through the composition of output. As shown in the chart below, much of the tepid per capita GDP gains in Canada have been consumer- and government-driven. That can’t continue.

But at least there is now an appetite to do more given U.S. trade actions. If not now, then when? Alberta will need to be a big part of the solution. Hitting investment and trade goals (recall Carney wants to double non-U.S. exports) will need to include the energy sector. It’s by far the single largest contributor to Canada’s exports. And it’s also easier to grow off a lower base. Despite recent export gains to Asia through LNG Canada (natural gas), TMX (oil) and Ridley Island (propane), Canada is just starting to scratch the surface on overseas energy shipments.  

We’ll take it - It was a good jobs report, accept it

When the economic data doesn’t align with my expectations, it’s easy to come up with excuses:  the sample size is too small, or there were one-off swings in the numbers, or it was all part-time jobs, etc.

For today’s jobs report, we at ATB Economics (and the economics community at large) should just admit it’s better than we thought for the second straight month. In our defence, other surveys tell us businesses are super cautious and the GDP data has not been reassuring. But that does not take away that Canada has recovered all its jobs lost from the summer. And it’s not just public employees - private sector employment has bounced back the last two months. 

Alberta is an extreme version of all this, with job gains the last two months of 52,800, more than offsetting July/August losses of 31,000.

All that said, there is good reason to believe that these positive surprises will not continue, and we’re sticking with our forecast for more tepid readings the rest of the year. The reason is that trade uncertainty looms large, with no trade deal in sight, and business investment remains lacklustre.

(Partially) closed for business: The U.S. government shutdown

Government shutdowns in the U.S. have happened before (there have been five major shutdowns since 1996), but the current one is the longest at 38 days and counting.

A U.S. government shutdown happens when Congress fails to pass, or the President refuses to sign, the funding legislation required to finance federal government operations before the current funding expires. As a result, federal government functions are disrupted until the funding is restored. Essential services such as the military and air traffic control continue (with many employees having to work without pay) and programs funded by mandatory spending such as Social Security and Medicare continue to issue benefits.

Even though air traffic controllers are required to work without pay, the shutdown is disrupting air travel in the U.S. with the Federal Aviation Administration (FAA) announcing Wednesday that it would reduce air traffic by 10% across 40 markets to maintain safety.

Non-essential staff are typically furloughed and programs funded by non-mandatory appropriations may be impacted such as food assistance. According to the latest update from the Bipartisan Policy Center, at least 670,000 federal employees are furloughed, while roughly 730,000 continue to work without pay. Active-duty military members have been paid through October 31st, but it is not clear they will get their next scheduled pay on November 15th.

Shutdowns have a negative impact on the economy, but much of the loss is recovered after it ends and workers get paid retroactively. This shutdown, however, may be more damaging due to its length and comments from the Trump administration that some furloughed workers may not get back pay.

The Congressional Budget Office (CBO) estimates annualized real GDP growth will be 1-2 percentage points lower in the fourth quarter than it would have been without a shutdown. Although most of this will be recovered over time, the CBO estimates $7-$14 billion of economic output will be permanently lost.

Supreme uncertainty - U.S. Supreme Court hears tariff arguments

On Wednesday, the U.S. Supreme Court listened to oral arguments regarding the legality of the Trump administration's use of the 1977 International Emergency Economic Powers Act (IEEPA) to justify the imposition of broad “reciprocal” tariffs (including the 35% tariff on Canadian goods) without the approval of Congress. The case before the court does not apply to the sectoral tariffs on, for example, steel, aluminum, and autos imposed by the President in the name of national security using Section 232 of the 1962 Trade Expansion Act.

A majority of the justices appeared skeptical of the President’s authority to use the IEEPA to impose tariffs, but we might not learn what the Court decides for several months and we don’t know how the Trump administration will respond. As a result, uncertainty continues to be a key theme of U.S. trade policy.

Interesting Fact: Airdrie closing in on 100K

I presented to the local business community this week in Airdrie, a city that has experienced unbelievable growth.

Airdrie is Alberta’s sixth largest municipality with a population of almost 90,000. It is forecast to join the municipalities of Calgary, Edmonton, Lethbridge, Strathcona Country, and Red Deer in the 100,000 and over population club in 2028 when it will be almost five times bigger than it was in 2001.