In this week’s The Seven…

• On different tracks - U.S. and Canada GDP
• On the road again - Travel spending roars back to life
• Mixed bag - Crop production estimates
• Interesting Fact: Back to school (shoe shopping)
• Chart of the Week: Canada’s GDP - A ten-year look-back

What just happened to August? If I could turn back time, as Cher sang, I would have spent even more time outdoors. As many kids head back to school (before Labour Day!), we look forward to a stronger finish to the year for the Canadian economy.

Canada’s second quarter GDP (released today) was a bit better than expected, but there’s weakness underneath the surface. Per capita growth continues to fall and growth has diverged from the U.S.

Lower interest rates—and we’re expecting three more cuts this year—will help keep growth positive, but we’re not expecting a material improvement until next year.

U.S. and Canada still on different growth paths

You can go your own way
Go your own way
You can call it another lonely day

—Fleetwood Mac, “Go Your Own Way”

Don’t count out the U.S. economy. Since the interest rate hikes, a key storyline has been the surprising resiliency of the U.S. economy. Upward revisions to U.S. growth forecasts have been commonplace.

And now we have another stronger-than-expected report. U.S. GDP in the second quarter grew at an annualized rate of 3%, up from the preliminary estimate of 2.8%.

Again, it’s the consumer that refuses to throw in the towel—consumer purchases were up 2.9% annualized. Why have U.S. consumers kept spending whereas Canadians have pulled back? Lower household debt ratios and longer-term fixed-rate mortgages have made them less rate sensitive. A stronger labour market has also provided a boost.

Expect things to slow. Skeptical readers will have heard that prediction before. But there are some signs. The unemployment rate has risen to 4.3%, triggering the Sahm recession rule, and the Conference Board’s Leading Economic Index for the U.S. fell again in July. The Atlanta Fed’s GDPNow nowcasting model points to 2.5% (annualized) growth in Q3.

For now, the expectation is that the U.S. economy will cool enough to bring down inflation without a recession—the so-called Goldilocks moment. In another sign of moderating price pressures, the personal consumption expenditures price index rose 2.5% y/y in July, which further cements an expected rate cut next month.

In Canada, GDP growth improved to an annualized rate of 2.1% last quarter, but is still not keeping up with the population. Further, much of the improvement was fueled by higher government spending. Business investment moved higher, lifted by engineering structures (mainly oil and gas driven). But it’s a long road back for business investment after a tough decade (see the Chart of the Week). Consumers slowed their expenditures last quarter—real consumer spending per capita was down for the sixth time in the last eight quarters.

Canada’s GDP per capita has been trending lower since mid 2022, with another decline in the second quarter. The U.S, by contrast, has seen per capita GDP rise consistently.  

Looking to the third quarter, momentum is weak, with Statistics Canada reporting this morning essentially no change in the advance July GDP reading following no change in June.

Today's GDP data does not change our view for an interest rate cut next week, followed by two more by year's end.

Crop production estimates - Better than last year, but mixed

The latest ‘model-based’ estimates of crop production for 2024 were released by Statistics Canada this week. As with any model, it’s not perfect and it’s still early harvest. Statistics Canada relies on satellite imagery and agroclimatic data. The information is somewhat dated, and there have been some discrepancies in the past. Some analysts, however, say that at least directionally the estimates make sense.

Those caveats aside, the modeling shows that farmers will produce more wheat and canola than last year, but less barley. The improvement in wheat and canola is due to improved expected yields, while barley’s decline is mostly driven by lower harvested acres. But keep in mind, though, that 2023 was a drought year.

After spring rains, very hot and dry weather have resulted in a decline in crop conditions across the Prairies. As we reported last week, it’s better than last year, but mixed at best. Fortunately for farmers, grain is moving again by rail after last week’s disruption—a prolonged work stoppage would have been devastating during harvest season.

Getting personal - Leisure travel jumps since COVID, while business/conference travel lags

Canadians are traveling more since the pandemic, but the type of travel varies. Recently released Statistics Canada data allow us to look at travel patterns by stated purpose relative to pre-pandemic. In short, personal travel has roared back, but business travel is still down.

The entire increase in overnight visits between 2019Q1 and 2024Q1 is due to leisure travel—up 22%. Other categories tracked by Statistics Canada are still down—like shopping and personal and business conferences.

Interesting Fact…Back to School (shoe) sales

Only one category of retail sales peaks in the month of August (out of 18 major categories). Any guesses?

Shoes. August is a bigger month for shoe sales than any other (including November and December). Shoe retailers post sales that are 34% higher than the typical month in the month before school starts. Not surprisingly, August is also a popular month for buying clothes, coming in 12% higher than the average of all months. But winter holiday shopping (not back to school) is the bigger driver of clothing sales, with October, November and December ranking higher.

Not surprisingly, gas stations (summer driving) and building and garden supply retailers are busier than normal in August.

Chart of the Week: Canada’s GDP growth over last decade

The focus this morning was on the second quarter GDP results for Canada. Taking the long view, consumers and government spending have been major drivers of growth over the past decade. Business investment remains significantly lower, unable to gain much traction since the significant drop in energy investment in 2015-2016.  Lower investment has been one of the factors holding back national labour productivity.

Answer to the previous trivia question: The first Winter Games in Paralympics was held in Sweden in 1976.

Today’s trivia question: Labour Day in Canada has its roots in an 1872 printers’ strike that took place in what city?