In this week’s The Seven… 

• Guess who’s back? Rate cuts
• Scaling back - Consumers not super keen to spend
• Green light - Ksi Lisims LNG gets regulatory go ahead
• Failure to launch - Why tariffs may not boost U.S. manufacturing 
• Work to live - Condo conversions take shape in Calgary
• Is there a link? AI and youth unemployment
• Interesting Fact: The Jevons paradox
• Chart of the Week: Alberta housing starts approach Ontario levels  

My road bike is in the shop for some much-needed repairs, which means I've been grinding away on my mountain bike for the commute. I hate it. While a mountain bike is great for gnarly trails, it's a drag on the pavement. The suspension and knobby tires create unnecessary friction, making every pedal stroke feel like a chore.

As I struggled up the paved trails on my mountain bike, I thought to myself - this is what the economy feels like right now. It will move forward this year, but with a lot of drag from tariffs and trade uncertainty.

The drag is already evident in the hard data. Canada’s economy contracted in the second quarter, and the unemployment rate is at its highest rate since 2016 (outside the pandemic). Alberta isn't immune; despite stronger economic growth here, employment has leveled off and the jobless rate has risen.

What to do? You could put some air in the tires to speed things up, but that only goes so far. That’s what the Bank of Canada did this week with its first rate cut since March. It will help at the margin, but it’s not going to lead to a surge in consumer spending and housing activity. Canadians are battle-weary from three years of high inflation, and now face a softer labour market. So yes, Canadians will take the cut, but it won’t on its own get the economy back on track.

The real mission, then, is to get the road bike repaired. For Canada and Alberta that means building productive stuff - and soon. The consumer can’t drive the next leg of growth. As we’ve repeatedly argued, Canada does not so much have a GDP per capita problem, but an investment per capita problem. The challenge predates Trump 2.0. And it’s not just a ‘bricks and mortar' investment. Canada also lags on intellectual property and R&D.

The spotlight was on Governor Macklem during the inflation battle. But he’s almost done cutting. Now attention is shifting to other policymakers trying to fast-track projects and expand into non-U.S. markets (Canada and Mexico agreed to deepen economic ties this week). As we head into the fall, you can almost hear Governor Macklem whisper to the PM: “Over to you, sir.”

Since I’ve used most of The Seven’s limited real estate on a dubious bike analogy, I’ll keep the rest of my updates short – a combination of what’s happening and what I’ve found interesting.

Scaling back - Consumers not super keen to spend

Hot off the press this morning, retail sales shifted into reverse in July (down 0.8% nationally, with a smaller dip of 0.1% in Alberta). There’s nothing earth-shattering here. We saw some front-loading of purchases (particularly vehicles) in the first half and expected things to cool alongside the labour market. Somewhat surprising, though, is the resilience of vehicle purchases (up 8.6% year-over-year in Alberta). Overall, retail sales in Alberta are tracking in line with our forecast of 4% growth for this year, although this entirely reflects a strong start to the year (we expect sales level off in the second half). More on retail next week.

Guess who’s back - Rate cuts

The big story from Wednesday is not that the Bank of Canada trimmed its policy rate as that was widely expected (we had been calling it for some time - cue pat on back).

The main story is that the Bank made some comments that make us think they’re less worried about inflation, including this (“less upside risk to inflation”) and this (“on a monthly basis the upward momentum (on core inflation) seen earlier this year has dissipated”).

They even gave a nod to the Carney government for dropping countertariffs, which they say will ease inflation pressures.

The comments were dovish enough to get us thinking that there could be two more cuts this year. We’ll keep our call at one more for now, but the door to two (one in October and one in December) opened a little further. Keep your eye on the inflation data - if it cooperates, that could be enough to tip the scale.

But, either way, the BofC is almost done in our view. I don’t see how, given still stubborn core inflation, why they would dip much further below their neutral range of 2.25-3.25%. Even as short-term rates drift lower, longer-term borrowing costs (e.g. 5-year) are unlikely to move much as the yield curve normalizes.

Stateside, the U.S. Federal Reserve’s decision to cut was even more of a non-story. It was fully baked into market expectations. The interesting thing about the Fed is that they’re cutting not so much because inflation is cooperating (it’s still around 3%), but because job growth has slowed to a crawl.

The other interesting thing is how much the board has shifted in their rate call. The previous meeting in July, the vote was not unanimous on a rate hold (2 of the 11 called for cuts). This time, all Fed governors wanted a rate cut, but the lone dissenter (Trump appointee Stephen Miran) was calling for a jumbo 50-basis points cut.

In the end, Trump is getting what he wants (lower rates), but for the wrong reasons (weaker employment, not lower inflation). Will this rate cut ease political pressure on the Fed? I wouldn’t count on it. The President has said that interest rates should be 3 percentage points lower. In reality, the Fed will be more cautious, with the dot-plot of median projections pointing to two more 25-basis point cuts this year.  

More LNG progress - Ksi Lisims one step closer

It’s not a done deal, but the Ksi Lisims LNG project (valued up to $10 billion) north of Prince Rupert is one step closer after getting a regulatory approval on its B.C. environmental assessment.

What a difference a year makes. Canada has gone from not being on the LNG export track at all to at least getting off the starting blocks. LNG Canada phase 1 started operations in June.

By our tally, if Ksi Lisims proceeds, Canada will reach export capacity of 4+ billion cubic feet per day (bcf/d) off the West Coast. Here are some other B.C. LNG export projects in play:

• LNG Canada Phase 1 (operational): 1.84 bcf/d
• Cedar LNG (under construction): 0.39 bcf/d
• Woodfibre LNG (under construction): 0.28 bcf/d
• Ksi Lisims LNG (environmental approval): 1.58 bcf/d

Canada is on the scene, but it’s still well behind the U.S., which is on track to reach LNG export capacity of up to 25.2 bcf/d by 2028. This despite Canada having a number of advantages over the U.S. (shorter distance to market, low-cost gas and cold temperatures).

While not located in Alberta, these projects increase takeaway capacity and will improve prices for Alberta natural gas producers. Our forecast is for the AECO natural gas price to increase to an average $3.3 next year.

Last week, LNG Canada Phase 2, which would double capacity at the site, made it on the federal Major Projects List.

Failure to launch -  Why tariffs may not boost U.S. manufacturing

Why is the U.S. imposing tariffs? One reason is to bring back manufacturing jobs, the other may be to generate revenue.

On revenue, the tariff revenue is significant at US$ 164 billion so far this year, though this still only represents 5.3% of the projected U.S. deficit for the 2025 fiscal year.

On jobs, U.S. economist Michael Strain reviews the literature in a recent article and argues that tariffs will not increase manufacturing. He cites three main reasons: 1) tariffs raise the cost of inputs used by manufacturers; 2)  it takes time to build factories - and Trump does not have unlimited time; and 3) the current approach is creating uncertainty, and large swings in tariff policy discourage investment.  

Is there a link?  Youth unemployment and AI

I’ve received this question twice in the last week following my presentations: Is AI contributing to the jump in youth unemployment in Canada?

My first reaction is likely not. The recent spike in unemployment has causes that can be easily explained - a slowing economy and rapid entry of youth into the labour force creating the perfect ‘economic storm’ for youth.

But a recent study made me think twice: an in-depth analysis by Stanford University economists shows that, controlling for other economic factors, ‘early career’ workers (age 22-25) in AI-exposed occupations (like software development and customer support) have seen relative job declines. They conclude: “our results are consistent with the hypothesis that generative AI has begun to significantly affect entry-level employment.”

Interestingly, we recently reported that less-skilled workers are seeing the largest productivity gains from AI.

Before jumping to conclusions, keep in mind this is just one study and it relies on U.S. data. Still, it’s important to watch, as rapid spread of AI changes the skills in demand and workforce requirements.

Work to live - Condo conversions take shape in Calgary

What do you do when you have very high office vacancies and a housing shortage?

One option is to convert offices into condos. It’s something Krista Lauridsen (ATB’s head of real estate) and I chatted about in June.

That’s what Calgary has been up to. Earlier this month, the city’s latest office-to-condo conversion called The Loft opened its doors. It’s now a 56-unit rental building, utilizing 55,000 square feet of vacant office space.

Interesting Fact: The Jevons Paradox

The Jevons paradox, named after 19th-century English economist William Stanley Jevons, states that as technology makes using a resource more efficient, the total amount of that resource we consume can actually increase. This happens because greater efficiency makes the resource cheaper to use, encouraging more consumption and new applications, which can lead to a net increase in total consumption.

Chart of the Week: Remember, housing markets are local not national

Headlines rarely tell the full story. You may have heard that housing starts in Canada have been flat this year. That’s true, but it masks a lot of provincial variation: starts are up this year in most provinces (in some cases by a lot), but way down in Ontario. This year's national weakness, in other words, is mostly an Ontario story.

In Alberta, starts are on pace for a record year and in recent months have even closed in on Ontario’s levels. That hasn’t happened before in the data all the way back to 1990, as shown in our Chart of the Week.

Answer to the previous trivia question: Bill Bryson wrote the best-selling book “At Home: A Short History of Private Life.”

Today’s trivia question: Monday marks the fall (autumnal) equinox in the Northern Hemisphere. In what month is the spring (vernal) equinox?