Our summary of recent economic events and what to expect in the weeks ahead.
Canadian Highlights
- Monthly GDP momentum remains solid, pointing to annualized growth of 1.8% in Q3.
- Downside risks remain concentrated in the fourth quarter. While tariff-related front-running could flatter August activity, it will also result in some giveback in the months that follow.
- Announcements about the Kitimat LNG expansion and the proposed Alberta-to-West Coast pipeline, offer material upside for 2027 and beyond.
U.S. Highlights
- Annual revisions strengthened the economy’s growth profile and softened its inflation history, with firmer private demand alongside cooler underlying core PCE momentum.
- The jobs report delivered a more benign signal than the headline payroll miss suggested: hiring slowed but remained close to the labor market’s breakeven pace, while unemployment edged higher as more workers entered the labor force.
- Improved inflation trends alongside softer hiring and wage growth reduce the urgency of an October hike.
Canada – Solid Summer Data and Investment Announcements
Bond yields fell this week, unwinding some of the recent run-up as near-term trends in U.S. inflation and a soft payrolls report pared expectations for Fed rate hikes. The rally in U.S. bonds helped to drag Canadian yields lower, with the 10-year government yield down to 3.87% at the time of writing. While borrowing costs remain high, this week’s news and data flow showed some bright spots for the Canadian economy.
Canada’s monthly GDP report showed economic growth stalled in July. Not a great signal at first blush but taking a step back shows a much more encouraging picture. Growth in April, May and June was robust, so the breather in July isn’t entirely surprising. Moreover, August looks set to show a bounce-back, with the flash estimate pointing to an uptick of 0.2% month-on-month (m/m), equivalent to annualized rate of growth north of 2%. Encouragingly, the breadth of growth appears to be widening. This was also true in July, where half of industries expanded, while 90% of industries experienced growth over the last six-months (Chart 1).
We have lifted our tracking for third quarter growth to 1.8% or slightly above our prior forecast of 1.2% (Chart 2). Granted, there is still information outstanding, with the effects of August’s new tariffs on September growth being an important unknown. So, next week’s international trade figures for August and September’s labour market update should give an early indication of what might be going on under the hood.
First up, we’ll be looking to see whether August’s trade data show any signs of front-running. A sharp rise in shipments to the U.S., could mean a bigger reversal in September, taking some of the luster off Statistics Canada’s August flash estimate on growth. Later in the week the September jobs data will give us a first reading of the potential damage caused by the most recent tariffs. Despite economic headwinds, the unemployment rate has steadily drifted lower this year. However, we expect some reversal in this trend amid weaker job growth in the months ahead.
So, while the third quarter is tracking better than expected, exports and hiring look set to slow in Q4 as trade uncertainty and tariffs take a bite out of growth. Moreover, higher borrowing costs are also likely to weigh on housing activity, adding another headwind over the near-term.
The end of the year may look somber, but there are still reasons for optimism. The announcement of an investment decision to expand the LNG facility (and associated pipeline infrastructure) at Kitimat and the designation of a new pipeline from Alberta to the West Coast could be significant tailwinds to growth. The costs of the projects, $33 billion and $35-$44 billion for the LNG and pipeline, respectively, are each equivalent to roughly 1% of GDP. The timeline for the commencement of any construction is still uncertain, but this week’s announcements present material upsides for the Canadian economy in 2027 and beyond.
U.S. – Hot and Cold
Wall Street spent another week discovering that a resilient economy does not guarantee life is simple or easy. Treasury yields remained elevated as oil prices, inflation concerns and expectations for another Federal Reserve hike outweighed an otherwise encouraging run of economic data. The broad message was awkwardly balanced: the economy is growing more quickly than previously estimated, underlying inflation has cooled more than previously thought, and the next wave of cost pressures is already appearing. Higher long-term yields tightened financial conditions in real time and kept equities on the defensive.
Wednesday’s annual update did more than lift the GDP numbers—it revealed that the economy had been running on a stronger engine than previously understood. The clearest signal came from real final sales to private domestic purchasers, which advanced at a robust 4.6% pace in Q2 (Chart 1). By stripping out inventories, trade and government spending, this measure showed that the resilience was rooted in household and business demand, not statistical noise or temporary supports. At the same time, the revisions lowered the recent inflation profile, giving the Fed a better combination of growth and price performance in hindsight. But hindsight is the key word: the revisions rewrote the economy’s past, but they do not guarantee its future. The revisions show that demand entered the current period from a position of strength but cannot speak to whether it can withstand elevated yields and cost pressures.
Other data this week, including spending and manufacturing reports, told a similar growth story, but with less comfortable inflation implications. Real consumer spending jumped 0.6% in August, its strongest monthly gain since March 2025, even as income lagged and the saving rate slipped to 4.1%. Consumers sounded glum in the confidence survey but kept spending, a familiar gap between what households say and what they do. Manufacturers were similarly busy. The ISM index held at a healthy 54.5 as new orders, backlogs and employment improved. But the catch was prices: the input-cost index surged as firms cited tariffs, metals and petroleum costs. The takeaway is that while demand is holding up, price pressures are building upstream.
Payrolls rose by just 29,000 in September and prior months were revised lower, but the three-month average remained near the pace needed to keep the unemployment rate roughly stable (Chart 2). The slight rise in the unemployment rate was also less troubling than it appeared: it reflected a stronger expansion in the labor force than in household employment, with participation moving higher. Wage growth cooled further, easing concern that the labor market is adding to inflation pressure. Taken together, the report points to a labor market that is moderating without coming apart. Alongside softer PCE inflation and lower historical price estimates, that reduces the urgency for the Fed to hike again in October. The meeting remains live, with another CPI report still to come, but policymakers now have more room to wait.
