Week of May 19

A Tale of Two Data Streams

The economic data of late is telling two slightly different stories. The soft data, such as the sentiment surveys, tells the tale of an economy headed for a significant slowdown. The hard data though, such as the jobs numbers and retail sales, are showing an economy that is bending, but not breaking.

Where does the truth lie? I still lean towards the bending and not breaking story. The U.S. economy will definitely downshift and hit a low in the third quarter but will avoid recession. While this could change based on the President’s tariff policy it does seem like some of the steam has left the room now that China is slated to come to the table and I would anticipate that Canada will follow along.

Important Data Points From The Past Week

Conference Board Leading Indicator

The Conference Board Leading Economic Index fell 1% in April, the largest one month decline since March 2023. Mostly notably, consumer expectations fell sharply along with the new order components.

Given the fluctuations in tariff policy, especially as it relates to China, I’m not sure if much weight can be given to this. We know that consumers felt rotten and businesses were nervous, but what we don’t know yet is if that changed after the announcement that China and the U.S. would start trade negotiations.

Canadian inflation moderated in April with the headline CPI number cooling from 2.3% on year-over-year basis in March to 1.7% as energy prices drifted lower. The core reading, which excludes energy, moved higher – from 2.5% in March to 2.9% in April – indicating that tariffs maybe be pushing consumer prices higher. Food prices rose sharply in the month.

Like the Fed in the U.S., this data puts the Bank of Canada (BoC) in a tight spot. The weak labor data would suggest a rate cut, but not if inflation starts to run hot (again). This is likely to translate into the BoC sitting on the sidelines until more data comes in.

Canadian Industrial Product and Raw Material Price Index (IPPI)

Energy prices were a contributing factor to April’s 0.8% decline in the industrial price index. The core price index (excluding energy) fell 0.5%. On a year-over-year basis, the headline price index slowed to 2%, while the core slowed to 3.6%.

Most construction-related prices decelerated in the month. This is mostly likely due to reduced demand rather than supply-related issues resulting from tariffs. Prices will remain suppressed as Canadian economic activity erodes over the course of the year.

Canadian Retail Sales

Canadian retail sales inched higher in March, growing just under 1% from February. Much of this gain was due to a sharp pick up in car sales, which was likely pre-purchasing before the worst of the tariffs hit. Elsewhere, there was decent growth in home related goods while general merchandise and food and beverage sales were down.

Looking ahead, I would expect a steady pullback in consumer spending over the next several months of data as tariffs hit and the federal election at the end of April.

U.S. Single Family Home Sales

New home sales hit a seasonally adjusted annual rate of 743,000 in April – an 11% gain over March, and 15% above April 2024. On the price side, the median sales price of a new home was $407K, 1% above March, but 2% below April 2024. Unsold supply sits at 8 months, down from 9 in March.

Home sales continue to trend higher following their low point last fall and I still expect sales to be up 5% from 2024. In 2024 home construction got a little ahead of sales and with the elevated supply of unsold homes, moderating price growth will provide potential buyers with some modest relief on affordability even as rates remain elevated. That being said, I don’t expect a construction response until early 2026.

Canadian Consumer Price Index (CPI)

What I’ll Be Watching This Week

In the U.S. we’ll see data on orders for durable goods, GDP, consumer sentiment and an inflation read. A light week in Canada with just GDP data.

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