OTTAWA (CP) -- Canada's economy hit a hidden pothole in July according to newly release data that suggests the consumer-led recovery may be tamer and take longer to develop than previously believed.
The surprising 0.6-percent-contraction in retail sales, when a 0.7 percent advance had been predicted, shocked economists, and put in jeopardy some of the rosier expectations for a strong initial bounce-back from recession.
But most economists stuck to their guns that the economy is climbing out of a deep hole and gathering steam.
"Quite a disappointing report. It looks like we're going to need a significant turnaround in labour markets if we want to see consumers bounce back," said economist Krishen Rangasamy of CIBC World Markets.
Consumers were likely scared off by the 45,000 job losses experienced in July, he said.
Liberal finance critic John McCallum also saw the sales drop-off as an indication job creation is lagging other indicators of growth.
He said the Conservative government's stimulus program has yet to yield results. "In order to have effective stimulus spending, shovels had to be hitting the ground in mid-May," he said in a release. "But those shovels are still idle and jobs aren't being created because the stimulus still isn't flowing, and as a result we see less spending by Canadians."
McCallum estimated only 12 percent of approved infrastructure projects are currently underway.
Government ministers insist that the two-year stimulus package, worth about $46 billion, is working, however.
On Monday, Finance Minister Jim Flaherty said the government will table the third update on how the budget plan is unfolding "very shortly" and that it will show "progress" from the previous June update. He did not offer details.
The retail sales figure will weigh down on July growth, but many economists believe there were enough extenuating circumstances in the Statistics Canada data released Tuesday morning to suggest August and September numbers will be better.
Statistics Canada has already reported that 27,000 new jobs were created in August, partially reversing July's losses.
As well, the 0.6-percent headline number, which measures the value of sales, exaggerated the weakness because sales volumes were down only 0.1 percent, noted Benjamin Reitzes of BMO Capital Markets.
July saw the volume of auto sales jump 5.3 percent, but retail sales in autos only rose by 0.2 percent. That meant buyers were either taking advantage of deep discounts or purchasing less expensive vehicles.
Also, the overall value of sales -- $34.2 billion -- was sideswiped by a 3.4 percent drop in gasoline sales figures during the month.
Economists noted that the retail sales have shown growth in five of the last seven months and that June's strong one percent advance was not revised by the statistical agency.
"Although households face a need to rebuild net worth, the trend in retail spending remains positive," said Grant Bishop of TD Bank.
A conference of retailers in Toronto on Tuesday also saw the glass as half full, with many bullish about sales activity in the second half of 2009, and in 2010.
The stock markets barely noticed. The Toronto exchange index was up 161 points Tuesday, and the Canadian dollar, which had been up about one cent in overnight trading, lost only about one-third of that gain as the data became known at 8:30 a.m. ET. It closed up almost three-quarters of a cent at 93.54 cents US.
Most economists see the economy advancing strongly at about three percent in the latter half of this year.
The disagreement is whether the growth can be sustained in 2010, when the initial spurt of productivity to re-stock depleted inventories is exhausted and governments begin phasing out consumer stimulus programs.
The Bank of Canada believes it can and has projected growth to average three percent next year.
Scotiabank economist Derek Holt is not so sure, however.
Holt says the key problem for the economy going forward continues to be that the American consumer is tapped out and must rebuild savings before being in a position to return to past free-spending ways. That means Canadian exports of manufactured goods to the U.S. will continue to suffer.
"With retail sales down and trade down, those are two big knocks on the so-called recovery," he said.
"My gut is we'll see growth, but it will be muted."