In this week’s The Seven… 

• Stateside - Jobless growth and shutdowns 
• Not again - More U.S. tariffs
• Cost cutting - Imperial Oil trimming staff
• Pipeline push - Alberta proposes new project
• Divergence - Calgary home sales go their own way 
• Interesting Fact: The labour market has softened, but tradespeople still wanted
• Chart of the Week: Chasing affordability - An updated scatter plot! 

“At least you know exactly who your friends are/They're the ones with matching scars”

-CANCELLED!  by Taylor Swift

More wise words from Swift in her new album dropped late last night (I missed the launch party slash wasn’t invited).

President Trump’s tariffs and the ensuing trade war has led to economic scars across the country, with the economy slowing and unemployment rising. It has also brought Canadians together as friends with a unified purpose. The rallying call echoing across the nation is to get big things built, expand into new (non-U.S.) markets and knock down internal trade barriers.

Some things have happened in response - like announcements around major projects. But now we wait for execution and delivery. Or, in the recent words of Bank of Canada Governor Tiff Macklem:

"Canadians have embraced the power of economic patriotism—elbows up. But now we need to roll up our sleeves and do the hard work to be more competitive."

So now we’re in the ‘hard work’ phase of the friendship - a critical moment for the Canadian economy, which could use a healthy dose of new investment right about now.

Falling under the ‘expanding market access’ category, Alberta announced that it is advancing a west coast pipeline project. We expect a new tranche of major projects announced by the federal government by Grey Cup next month, and also anxiously await the federal budget November 4.

After some reprieve from tariff announcements, we got another wave of U.S. tariff announcements in the last couple weeks, job losses announced by Imperial Oil, and we are also monitoring a potential teacher’s strike. Now let’s get into this week’s topics.

Looking south - Jobless growth and now a shutdown

The U.S. economy is a bit of a head scratcher. Consider this mix of data. 

• A surprisingly strong Q2 US GDP revision led by a resilient consumer, with Q3 growth tracking north of 3%. 
• Soft jobs reports in July and August and a rise in the unemployment rate signaling a slowdown or even recession risk (the release of September data was delayed today due to the shutdown).
• Escalating tariffs causing supply-chain inflation, while the Fed is cutting rates to fight slowing employment.

Sum it all up, and it looks like jobless growth to me. The prevailing view is that the U.S. will dodge a recession, and that’s what the still-rising stock market is telling us as well. There are some vocal worriers out there, but they are the minority.

But in case you think recession talk is new, it’s not. Back in late 2022, odds of recession for 2023 exceeded 50%, as the Fed fought inflation with higher rates. What actually happened?

Growth surpassed 2.5% in each of the four quarters, and the unemployment rate averaged 3.6%!  Is this false call making economists reluctant to jump back onto the recession bandwagon?

Our view is that U.S. GDP growth will slow to 1.8% this year and 1.9% next, pulled down by tariffs but offset by ongoing AI gains, and Federal Reserve cuts. 

But we’re now tracking a new downside risk - a federal government shutdown. Typically the threat of a government shutdown in the U.S. is largely dismissed as a cost of doing business. There is a standoff, but then some compromises along the way. This one looks different, with President Trump now using it as an “unprecedented opportunity” to “clear out dead wood” with spending cuts. The ultimate impact depends on duration, as the shutdown moves to its third day. Previous estimates by Goldman Sachs suggest a 0.15-0.2 percentage point reduction in growth per week, though this is recouped in subsequent quarters if spending comes back. The larger GDP hit could come from a fiscal retraction through permanent spending cuts. This is all about duration, and we will watch closely before changing our U.S. growth call. 

Not again - More U.S. tariffs

In the past couple weeks, the U.S. President has announced new, highly specific tariffs, which would apply to Canada as well:

• Pharmaceutical products (branded/patented): Up to 100% (with exemptions for companies building manufacturing plants in the U.S.).
• Kitchen cabinets and bathroom vanities: 25% (rising to 50% on Jan 1
• Upholstered furniture: 25% (rising to 30% on Jan 1) 
• Heavy trucks: 25%
• Timber and lumber: 10% (on top of existing softwood lumber duties)
• Renewed threat of tariffs on films made outside the U.S.

Some of the details of the new trade barriers are still sketchy and are not officially part of an Executive Order, but point to an ongoing commitment by the Trump Administration to use tariffs to protect U.S. manufacturing.

At the macro level, Alberta’s dollar exposure should all these tariffs proceed is relatively low, at around $1 billion worth of exports to the U.S. (or 0.7% of total goods exports to the U.S. last year). But, as always, minor macro impacts mask major effects to producers of these products and services. It is especially unclear how a film tariff would work, but it could have a devastating impact on Alberta's film and television industry if U.S. productions stop coming to Alberta.

Cost cutting - Imperial Oil trimming Calgary staff

One theme in ATB Capital Market’s Fall Energy Survey is that oil and gas companies are focused on cost discipline while optimizing existing assets. 

We had an example of that this week as Imperial Oil announced a restructuring plan that involves workforce reduction and corporate centralization over the next two years.The company plans to reduce its employee roles by approximately 20% by the end of 2027.

Based on their employee count (5,100 at the end of 2024), this translates to a loss of approximately 900 to 1,000 jobs. The company didn’t provide a breakdown, but reports are that most of the job losses will be in Calgary. Of the remaining Calgary employees, reports are that most will be relocated to the Strathcona Refinery in Edmonton by late 2028, with only a small corporate presence remaining in Calgary.

Our forecast was already cautious on oil and gas investment and employment given industry trends towards rationalization, though this development poses some new downside risk that we will be tracking.

Pipeline push - Alberta proposes new project

The Alberta government is spending $14 million to advance a proposed oil pipeline to the B.C. coast, hoping to make it onto the federal government’s list of major projects in time for the Grey Cup in November.

Pipeline projects are always complicated, with many hurdles encountered in the past. Our expertise does not lie on how to get them across the finish line. It will require a private sector proponent, Indigenous partnerships, and some regulatory changes (e.g. a federal tanker ban remains in place). The federal government has signalled that its acceptance of a pipeline will be linked to decarbonization efforts through the proposed Pathways carbon capture and storage project.

We do know, however, that pipeline projects can have a material impact on the economy, as demonstrated by increased exports volumes to Asia (and improved prices) via the Trans Mountain Expansion. 

A few thoughts on how the Canadian economy could benefit from additional market access gained through an additional oil pipeline to the B.C. coast:  

• The Canadian economy is screaming for investment. A pipeline would encourage more investment in new production in addition to the pipeline construction itself.
• Oil is Canada’s single largest export as we noted last week, but it almost exclusively flows to the U.S. The pipeline reduces concentration risk. 
• With more diverse market access, oil sells at a smaller discount, improving producer and government revenues. An estimate by IHS (now S&P Commodity Insights) is that revenue forgone on heavy oil by Canada was US$ 14 billion between 2015 and 2019 alone due to pipeline constraints - an estimate that IHS called “likely conservative”. 
• As the Trans Mountain Expansion fills, crude oil pipelines will reach capacity before 2029 according to the majority of respondents in  the ATB Fall Energy Sector Survey. TMX is looking towards expanding further, and the existing pipeline network can be optimized. But without anything new, production growth is limited. 

Sales divergence - Calgary goes its own way

Interesting times in Alberta’s real estate market. On the surface, it looks like sales and prices are holding up relatively well.  But underneath there are two broad forces at play.

1) In Calgary, sales have trended lower, and prices are falling on a year-over-year basis.

2) Outside Calgary, we observe strength across markets in a variety of indicators - sales, sales-to-listings and prices. 

For example, benchmark prices are up 5.3% year-over-year (y/y) in Edmonton, but down 2.3% in Calgary. We don’t have benchmark prices outside these centres, but average resale prices in August are up across the board in a variety of Alberta locations: 8.5% y/y in Lethbridge, 12.6% y/y in Medicine Hat, 6.7% y/y in Grande Prairie, 8.0% y/y in Fort McMurray.

This is a little unusual - normally Calgary moves closely with the rest of the province (see chart). It seems like the rest of Alberta, with a lag, has caught Calgary’s real estate fever from 2023 and 2024.

What’s going on? One possibility is that people are chasing affordability to less expensive Alberta markets, a broader trend underway in the Canadian real estate market. The other reason for the slight pickup is likely that lower interest rates (with a couple more Bank of Canada cuts likely on the way) are enticing some folks back into the market.  

Interesting Fact: High unemployment, with ‘pockets’ of shortages

Observation 1: Alberta’s labour market has softened. This is evident in two key indicators: 1) the unemployment rate in Alberta rising to 8.4% as of August (we get September next week); and 2) the job vacancy rate (vacant jobs as share of jobs demanded) has fallen to around 3%.

Observation 2: Despite this, there are still pockets of labour shortages (based on elevated job vacancy rates) like nursing and residential care facilities, and food and accommodation services. But the real stand out, relative to pre-pandemic trends, is specialty trade contractors with a vacancy rate of 5.8% as of Q2 - not surprising given the home construction boom in the province.

This also speaks to the ongoing skills mismatch story - despite the flood of new people to the province, and more people looking for work, there are still jobs available for those with the requisite skills.  

Chart of the Week: Chasing affordability continues

How many ways can an economist make a point? How about three.

There are three reasons I believe that ‘chasing affordability” has been driving migration and housing patterns in Canada:

1. Interprovincial migration is not responding as much to labour markets, like unemployment rate differentials.
2. Interprovincial migration from expensive housing markets to lower cost housing markets; namely Ontario migration to Atlantic Canada and Alberta, and B.C. migration to Alberta.
3. Housing prices rising fastest in lower cost markets.

Our Chart of the Week looks at point number 3, something we identified a year ago. The general point still holds with our updated scatter plot.

Answer to the previous trivia question: Au is the symbol for gold on the periodic table of elements.

Today’s trivia question: When was a majority interest in Imperial Oil sold to the Standard Oil group in the United States?