In this week’s The Seven…

• Temporarily derailed  - trains expected to roll again soon
• Mixed conditions - farmers coming off drought year
• Speaking of productivity (again) - wood product manufacturing
• Inflation - the trend is your (rate cutting) friend
• Chinook winds blow north - Edmonton housing market heating up
• Fatigued - consumers not in mood to spend
• Interesting Fact: Rail strikes in Canada
• Chart of the Week: The Edmonton-Calgary Housing Price Gap

Not much of a summer break - economic news wise. Early August brought turmoil in financial markets, with fears of a U.S. recession. Those fears have subsided, and markets have returned to the soft landing scenario (goldilocks?). More rate cuts are around the corner with U.S. Fed Chair Jerome Powell saying this morning at Jackson Hole “the time has come for policy to adjust”.

This week a rail strike brought rail traffic to a halt. On the data front, inflation cooperated  and retail sales remained sluggish.  

Rolling again soon - worst of supply chain effects likely averted

A work stoppage ground rail freight traffic to a halt yesterday. Now, the Federal Government has referred the dispute to binding arbitration. Timing is uncertain, with the Labour Minister Steven McKinnon hinting that resumption of service should happen “within days”.

As we reported yesterday, the longer the stoppage lasts, the more the effects compound. A business may be able to keep producing and build inventory for a few days. But at some point, with no takeaway capacity, production needs to be curtailed. The indirect effects multiply the longer it continues. 

Rail is directly responsible for $55 million a day of Alberta’s international exports, and indirectly responsible for much of the $49 million a day that moves overseas via ports (based on 2023 export data). And that’s not including interprovincial trade flows. It’s not just what we export by rail, but also what we import. For example, our ATB Capital Markets team noted this week that nearly 70% of frac sand used in oil and gas wells comes from the U.S.  

Assuming everything is back on track very soon, the overall economic hit this year should be minimal. There could be some temporary pressure on prices for products impacted (e.g. perishable food shipments were halted). But the Bank of Canada, focused on the longer-term trend, is expected to look beyond this transitory event. Our baseline forecast remains cuts at the next three meetings, bringing the policy rate to 3.75% by year’s end. 

More adversity -  rail strike comes after last year’s drought 

It’s difficult to generalize in the agriculture business. For crops, weather and moisture conditions can vary significantly by region. The season started well with spring rain, but then very dry weather ensued.

The latest crop report from the Province shows 44% of crops are rated good to excellent. But that classification ranges widely from  21% in Central Alberta to 60% in Southern Alberta. Harvest is proceeding on schedule. It’s early days, but some reports are for average yields after last year’s drought. The strike will temporarily halt shipments of grain during harvest. More than 90% of Canadian grain is shipped by rail.  

Speaking of productivity - Forest product manufacturing in Alberta

Thought we were done talking about productivity? Not yet.  

Last Friday, we profiled agriculture as a productivity growth leader. 

This week we turn to another productivity growth leader - wood product manufacturing.   This is an industry that has faced adversity - labour challenges, mountain pine beetle, softwood lumber dispute, US housing downturn to name of few.

In the face of these headwinds, the sector has managed to scale up its labour productivity an impressive 2.7% per year between 2000 and 2023 (far exceeding the provincial average of 0.6%). GDP per hour was $100.5 (in 2017 dollars) last year vs. the Alberta business sector average of $75. Strong growth performance holds for the main sub-categories: “sawmills and wood preservation” and “veneer, plywood, and engineered wood”. 

Those in the business would give a better reason for all the reasons why, but we couldn’t help but notice increased capital intensity in the industry - capital investment per worker has jumped and holds consistently above the national average. If you have insights, send us a note at thetwentyfourseven@atb.com..

Less ringing at the tills - Consumer fatigue has set in

A prolonged bout of high inflation and interest rate hikes is not a favourable mix for consumers (or retailers). Add in a much softer job market, and it’s little surprise that Canadian retail spending has dialed back.

The latest retail report, released this morning, shows that spending dipped 0.3% in June in Canada. One month doesn’t make a trend, but several months do. Retail sales have dropped in each of the last two quarters, including a 0.3% decline in volume terms (i.e. adjusted for inflation) in the second quarter. Part of the weakness stems from vehicle sales (a temporary systems shutdown from CDK global likely impacted June auto sales).  But even core sales (which subtract vehicles and gasoline) were down last quarter. The weakness comes despite relentless population growth: per capita sales have been trending lower since mid 2022. The advance reading points to a 0.6% bounce back in July, but the underlying trend is weak.

In Alberta, consumer spending has also slowed considerably. Retail sales were flat last month (-0.1%), and the year-over-year pace has cooled to only 0.6% despite rapid population growth. Retail spending spiked in the first quarter of 2023, bottomed out in the third quarter, and has been slowly climbing back. We were not expecting much from the consumer this year, and are now tracking only about 1% retail sales growth for the year. 

Given lagged effects of monetary policy, we should be near the peak impact of past rate hikes. We do see spending picking up later this year and into next year. But mortgage renewals over the next two years and a cooling labour market will keep the consumer cautious.  

This is yet another data point in support of a September Bank of Canada rate cut. 

Bad news is bad news again

Remember the days when equity markets would cheer a less-than-stellar economic report? That was because it was a sign the economy was slowing, easing inflation pressures and increasing the chances of rate cuts (or preventing rate hikes).

That doesn’t seem to be the case anymore. In early August, markets nose dived on the weak U.S. jobs report and the triggering of the Sahm rule - then rebounded on some better data.

Now hope has sprung that inflation is on the downward path without the need for a recession. Bad news is no longer welcome. 

The market appears extra jittery, responding to any hint of a recession (as opposed to a goldilocks soft landing). Bottom line: keep watching the data (we will be!)

Interesting Fact…Rail Strikes in Canada

This is not the first rail strike in Canada. Since 2012, there have been six (including this one). The longest was in 2012 when CP workers were on strike for nine days. Shorter disruptions occurred in 2015, 2018, 2019 and 2022. What makes this one unique is that both major rail companies - CP and CNKC - are simultaneously on strike, grinding all freight traffic to a halt.

Chart of the Week: Peak gap?  Edmonton vs. Calgary Housing Prices

How much wider can the price gap get between Alberta’s two largest centers?

Average benchmark prices are roughly $190K lower in Edmonton than Calgary as of July - near May’s record high. That’s a 33% gap compared to an average of 19% over the past 20 years (earliest comparable data - January 2005). The narrowest over this time span was 9% in June 2007.  The gap has widened across all housing types as shown in our Chart of the Week. 

The gap however, is stabilizing with Edmonton picking up some heat and Calgary prices decelerating as we discussed above.

Answer to the previous trivia question: CP Rail merged with Kansas City Southern on April 14, 2023.

Today’s trivia question: What was the first Canadian railway?