In this week’s ATB Economics Weekly Wrap…

• Home construction - running behind the population
• Canadian exports - reenergized
• U.S. and Canada on separate growth paths
• U.S. recession indicator - flashing yellow
• The rise of Alberta’s technology sector
• Oil prices dip 
• Interesting Fact: What is a recession anyway?
• Chart of the Week: What do we export?

This week we go broad—very broad. Home construction is still playing catch-up, Canadian exports are getting a boost from energy, and the U.S. and Canada have parted ways on GDP growth. There’s lots of talk around Alberta’s growing tech sector, and we dig into that. And with all this chatter about a potential Canadian recession, we ask: what is a recession anyway?

Building more, just not enough yet

After a first-half pullback, home construction activity in Alberta rebounded in the third quarter. The sector continues to play catch-up amid record migration and a tight housing market. We expect stronger activity, on average, next year.

Upward momentum on residential permits met some opposition in September, as values took a step back. Permits are notoriously volatile, so we prefer to look at three-month and six-month average readings. This points to a flattish (three-month) to upward (six-month) trend. The data on housing starts in the province are more clear—a strong rising trend, driven by multi-units (particularly in Calgary). Starts averaged 43K (annualized) in Q3, the highest quarterly reading since early 2015.

We expect residential construction to strengthen overall in 2024, driven by incredibly strong demand from migration and low inventories. This demographic push should help offset the pull from continued labour shortages and higher interest rates. Our current forecast for starts is 38,500, up from the year-to-date pace of 33,800 (annualized). 

U.S. and Canada - fast and slow lanes

As of late, the U.S. and Canadian economies have been on different growth paths. Not-so-great GDP in Canada has been juxtaposed with blockbuster data in the United States.

• In Canada, there was a mild contraction in Q2 and monthly GDP suggest a flattish Q3. There is the possibility of a so-called ‘technical recession’ if Q3 slips negative (see this week’s Interesting Fact on what defines a recession).  
• In the U.S., GDP surged 4.9% annualized in Q3 on the heels of a 2.1% performance in Q2. A slowdown from this feverish pace is expected in Q4, with the Atlanta Fed’s GDPNow forecasting model currently tracking 2.1%. This is still much stronger than the Bank of Canada’s Q4 forecast for Canada (0.8%).

The contrast is greater in per capita terms, given rapid population growth in Canada. Canada’s population grew 3% in 2023 (July to July). Per capita GDP has been falling. In the United States, annual population growth is running at about 0.5% and per capita GDP is rising.

What’s going on? While Canada had some temporary disruptions (wildfires, droughts, port strikes), it’s more than that. In particular, the U.S. consumer has proven far more resilient to rate increases than in Canada. U.S. households are less indebted (as a share of income), and the prevalence of 30-year term mortgages also makes them less sensitive (at least initially) to rate increases. Languishing labour productivity in Canada (versus the U.S.) has also hurt, in part due to chronically weak business investment. Fiscal stimulus in the U.S. is another factor with large spending programs focused on climate and infrastructure.

U.S. recession indicator - from green to flashing yellow

The U.S. economy will slow from its blistering Q3 pace, but can it pull off a soft landing? The Sahm recession indicator is getting more attention with the recent uptick in unemployment.

Equity markets responded favourably to the lukewarm U.S. jobs report last Friday in a classic case of bad news=good news. Some believe that the Fed might hit the sweet spot—a gradually cooling labour market that helps bring inflation to 2% without major damage to the economy (i.e. the coveted ‘soft landing’).

Still, there are concerns that soft could turn ‘softish’, or even ‘hard’. One indicator to watch is the Sahm rule. Developed by economist Claudia Sahm when she was at the U.S. Federal Reserve, her indicator has an excellent record of identifying when the economy is near or in a recession. To get technical, according to the Sahm indicator, a recession is signaled when the three-month moving average of the jobless rate moves 0.5 percentage points (or more) above its low point of the previous 12 months.

With the unemployment rate up to 3.9% (still low), the Sahm indicator now stands at 0.33—not at the 0.5 threshold, but getting closer.

Even if the indicator breaches the threshold, a recession is not a guarantee. Sahm herself  admits that, and the indicator has had some false positives. But the indicator’s track record speaks for itself and will be closely watched.

Alberta’s burgeoning technology sector

A number of recent reports and indicators point to rapid growth of Alberta’s technology sector.

It seems like every week we hear more stories about Alberta’s now-thriving technology sector.

This week, Deloitte released its Technology Fast 50 winners. In the companies to watch category, Alberta had three of the top five companies: Neo Financial ranked first, PurposeMed second, and Falkbuilt fourth. In the clean tech category, Calgary-based Convrg Innovations ranked first.

Looking beyond individual companies and at broader trends, there are recent indications that Alberta (especially Calgary) has quickly emerged as an important tech player.

• Venture capital investment has risen for five straight years in Alberta, and based on first-half results, Alberta is on track for a new record in 2023 according to the Canadian Venture Capital and Private Equity Association (CVCA).  
• PitchBook places Calgary 12th globally among the fastest-growing venture capital ecosystem locations. 
• Calgary is ranked second in high tech talent growth in North America, according to CBRE’s latest report. This ranking is based on tech workforce growth in larger markets (over 50,000 tech employees) between 2017 and 2022. Tech talent in Calgary in 2022 was estimated at 52,200.

Oil prices wane

Oil prices are known to rise and fall in dramatic fashion so we don’t want to read too much into the recent downward trajectory. With that said, the WTI benchmark has dropped below US$80 for the first time since August.

Oil markets have teeter-tottered this year between concerns over supply shortfalls (higher prices) and sluggish demand (lower prices). Lately, fears over languishing demand, especially in China, have dominated. The latest bout of price weakness comes despite low global inventories and the potential for Middle Eastern supply disruptions.

The U.S. Energy Information Administration, a go-to source for forecast information on energy markets, updated its short-term outlook this week. It’s calling for US$89/bbl WTI next year amid ongoing production cuts by OPEC, declining global inventories, and elevated risks of disruptions given the conflict in the Middle East. Key to their forecast is that OPEC will maintain voluntary cuts.

Interesting Fact…What is a recession anyway?

”It’s a recession when your neighbour loses his job; it's a depression when you lose yours.”  —Former U.S. President Harry Truman

A recession can mean different things to different people, and even the concept of a recession is not canon among economists. If you’re hearing more about a recession these days, it's probably because Canada is at risk of entering what some call ‘technical’ recession territory. A ‘technical’ recession typically refers to two straight quarters of negative GDP growth. So if Q3 comes in negative for Canada like Q2 did, it would meet that definition (we’ll know at the end of this month with the release of Q3 GDP data).

Who decides if we’re in an actual recession? The C.D. Howe Institute’s Business Cycle Council is an arbiter of the Canadian recession call, which they define as “a pronounced, persistent, and pervasive decline in aggregate economic activity.” The Institute looks at the decline in GDP, including the breadth and duration of the decline, as well as changes in employment. For example, the two-quarter GDP contraction in 2015 was not enough for the C.D. Howe Institute to call the episode a recession for Canada (though it was a close call, and it was definitely a recession for Alberta). In the United States the recession call is made by the National Bureau of Economic Research.

Chart of the Week: What do we export?

With three quarters of export data in the bag for 2023, it’s worthwhile stepping back and asking: what does Canada export to the rest of the world? Looking at the value of merchandise exports so far this year, energy is by far the largest contributor—more than doubling the share from second place motor vehicles and parts.

These shares will vary from year to year, mostly from price changes. However, energy has been at the top spot since 2005 (occasionally eclipsed by motor vehicles and parts during periods of very low oil and gas prices—such as early 2016 and briefly during COVID).

Not surprisingly, energy dominates Alberta’s export mix—over 73% so far this year. Food ranks second, followed by chemicals, consumer goods, and forest products.

Daily trivia

Answer to the previous trivia question: The Great War Veterans Association of Canada (predecessor to the Royal Canadian Legion) adopted the poppy as a symbol of remembrance in aid of fundraising in 1921.

Today’s trivia question: What is the economic problem that human wants cannot be fully satisfied with available resources called?