Investors following North American economic data on a day-to-day basis likely get the impression reports are mixed – some good, like June's Canadian report on domestic manufacturing activity, and some bad, like Friday's release of weak Canadian on retail sales growth data.
A step back to look at the overall outlook however, shows a steady, significant increase in economic pessimism.
The first chart below tracks the consensus economists' forecast for Canadian and U.S. gross domestic product growth for 2016. For Canada, the trend is not mixed at all – it's a consistent march lower. Eighteen months ago, economists expected national economic growth of 2.4 per cent whereas now projections point to a meagre 1.2 per cent.
There is no doubt that the Alberta wildfires, which began May 1, made a deep dent in growth expectations. But it's also the case that growth forecasts were declining well before the tragedy and continue to fall.
Toronto-Dominion Bank economist Brian DePratto writes, "From a rotation perspective, [recent data provide] further evidence in favour of our argument that the rotation away from the commodity sector and housing stalled out in the first half of the year. … The result is likely to be slower growth in coming years than Canadians have been used to."
The outlook south of the border is little better, but there may be a silver lining. The chart shows that U.S. economic forecasts have followed the same path as Canada's – lower. Despite optimism regarding the American housing market and wage growth, the consensus 2016 GDP predictions have dropped from 2.8 per cent to the current 1.5 per cent.
The potential note of optimism is apparent in the second, lower chart depicting the Atlanta Federal Reserve's GDP Now index. Government sources report economic growth after multi-week delays, but the GDP Now index attempts to measure growth in real time, incorporating important indicators like industrial production and retail sales into the index as they are released.
The GDP Now index is predicting third-quarter U.S. economic growth of almost 4 per cent, the best reading since early 2014. The GDP Now index changes quickly, but if it's accurate at the moment, full year U.S. growth estimates are about to be revised higher.
For Canadian equity investors, the outlook suggests caution in domestic sectors like retail that are highly sensitive to economic growth. A comparison of domestic and U.S. forecasts implies that economically sensitive U.S. stocks are likely to outperform their Canadian counterparts until the investing backdrop changes.