TORONTO - Recalibrating the federal-provincial fiscal balance in response to demographic pressure on provincial program spending, such as elderly benefits and healthcare, is one way of responding to fiscal worries among the provinces, says a C.D. Howe Institute study. In "Recalibrating the Federal Balance: Federal-Provincial Priorities for 2006 and Beyond," Finn Poschmann, Director of Research at the Institute, reports on the views of a panel of experts in federalism and federal-provincial relations who met at the Institute earlier this summer.

The panelists considered questions raised by the May 2006 federal budget about fiscal priorities and the role of federal and provincial governments. They concluded that the response to those questions should include a package of tax, transfer and regulatory reforms aimed at strengthening the economic union. A strong federal role in post-secondary education, in improving aboriginal health and education, and perhaps in facilitating infrastructure financing, received broad support from participants.

The report is available at http://www.cdhowe.org/pdf/backgrounder_95.pdf

TORONTO - Economic freedom has a greater impact than foreign aid in helping people in poor nations escape poverty, according to the Economic Freedom of the World: 2006 Annual Report, released today by The Fraser Institute.

In new research published in this year's report economist William Easterly of New York University compares the impact of economic freedom and foreign aid on economic growth in the poorest nations.

"The demand for foreign aid is typically made in the absence of any empirical evidence that it leads to benefits for recipient nations and without asking whether there are better approaches to poverty reduction for the international community to support," said co-author of the report, James Gwartney, Professor of Economics at Florida State University. "What the research in this edition of Economic Freedom of the World suggests is that economic freedom, rather than foreign aid, does have a powerful positive impact and is a better approach."

Easterly demonstrates that foreign aid has no positive impact on economic growth in the poorest nations. His research shows that economic freedom has a strong and positive impact on prosperity in general and on helping lift nations out of poverty.

Once economic freedom is taken into account, poor nations, far from being caught in a perpetual cycle of poverty, grow faster than rich nations. "A key component of the success created by economic freedom is the ability to experiment, find economically successful areas of production, and prune those that do not succeed so that resources may be transferred to where they are most productive," said Fred McMahon, The Fraser Institute's director of trade and globalization studies.

Canada's Ranking

In this edition of the Index, Canada received a score of 8.0 out of a possible 10 and ranked 8th. In last year's edition, Canada had the same score but it ranked 7th. The reason for this is that Ireland, Canada's economic peer, improved its score while Canada's score remained the same.

<< Canada's scores in key components of economic freedom:

- Size of government: Canada's score for size of government stayed the same at 6.6.

- Rule of law: Canada's score on the rule of law declined slightly from 8.7 in last year's edition to 8.4.

- Sound money: Canada's score improved from 9.5 last year to 9.6 in this year's edition.

- Freedom to Trade: Our score slightly declined from 8.0 to 7.8.

- Regulation: Our score increased from 7.3 to 7.8 but this is mainly due to changes in the data sources rather than actual changes in economic freedom in this area. >>

International rankings

In this year's index, Hong Kong retains the highest rating for economic freedom, 8.7 out of 10, closely followed by Singapore at 8.5. New Zealand, Switzerland, and the United States tied for third with ratings of 8.2. The United Kingdom and Ireland are tied for the 6th place. Canada receives a score of 8.0 and ranks 8th. Iceland and Luxembourg are tied for 9th place.

The rankings of other large economies are Germany, 17; Japan, 19; France, 24; Italy, 45; Mexico, 60; India, 53; China, 95; Brazil, 88; and Russia, 102.

Among those nations that have made substantial gains in economic freedom since 1985 are Hungary, Iceland, El Salvador, Zambia, Poland, Bolivia, Israel, Ghana, Uganda, Peru, and Nicaragua - though some of these began at very low levels or have experienced ups and downs over the period. Among those nations that have registered significant losses in economic freedom since 1985 are Myanmar, Venezuela, and Zimbabwe.

Most of the lowest-ranking nations are African, Latin American, or former communist states. Botswana's ranking of 35 is the best among continental sub-Saharan African nations. Chile, ranked at 20, has the best record in Latin America.

The bottom nations were the Central African Republic, Rwanda, Burundi, Algeria, Guinea-Bissau, Venezuela, Democratic Republic of Congo, Republic of Congo, Myanmar, and Zimbabwe. However, a number of other nations for which data are not available, such as North Korea and Cuba, may have even less economic freedom.

Economic freedom on the rise

The report reveals that economic freedom levels have been rising around the world over the last quarter century, and that's good news for people, particularly for the poorest of the poor.

<< Among the key findings:

- Nations in the top quartile (one-fourth) in economic freedom have an average per capita GDP of US$24,402, compared to US$2,998 for those nations in the bottom quartile.

- The top quartile has an average per capita economic growth rate of 2.1 percent, compared to negative 0.2 percent for the bottom quartile.

- In nations of the top quartile, the average income of the poorest 10 percent of the population is US$6,519, compared to $826 for those in the bottom quartile.

- Unemployment in the top quartile averages 5.9 percent, compared to 12.7 percent in the bottom quartile.

- Life expectancy is 77.8 years in the top quartile compared to 55.0 years in the bottom quartile.

- In nations of the top quartile, only 0.3 percent of children are in the labor force, compared to 19.3 percent in the least economically free nations.

- Nations in the top quartile of economic freedom have an average score of 1.8 for political rights on a scale of 1 to 7, where 1 marks the highest level of freedom, and 7 the lowest level. The bottom quartile has an average score of 4.6. >>

About the Economic Freedom Index

Economic Freedom of the World measures the degree to which the policies and institutions of countries are supportive of economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to compete, and security of privately owned property. This is the 10th edition of Economic Freedom of the World. This year's publication ranks 130 nations for 2004, the most recent year for which data are available. The report also updates data in earlier reports in instances where data have been revised.

Thirty-eight components and sub-components are used to construct a summary index and to measure the degree of economic freedom in five areas: (1) size of government; (2) legal structure and protection of property rights; (3) access to sound money; (4) international exchange; and (5) regulation. The annual report is published in conjunction with the Economic Freedom Network, a group of independent research and educational institutes in over 70 nations.

For more information on the Economic Freedom Network, data sets, and previous Economic Freedom of the World reports, visit www.freetheworld.com.

Terrorist threats haven't impacted majority of Canadian SME businesses

CALGARY, ALBERTA - After last quarter's slip in chief executives' confidence in the nation's economic expectations, this quarter's survey of Canada's CEOs done by TEC Canada, Canada's premier chief executive development organization, saw a near 1 per cent rebound in confidence from 117.6 to 118.5.

According to the survey, the bulk of Canadian business leaders are expecting an improvement in fixed investment expenditures and profitability, while a surprising 80 per cent are anticipating their sales to grow over the next 12 months.

When asked to identify their most significant issue, Canada's bosses once again identified staffing as their number one obstacle and listed their inability to find qualified candidates as the biggest factor impacting hiring. However, more than sixty per cent of them still plan to increase their staff numbers. While the majority of this hiring is planned over the next 12 months, 14 per cent of chief executives will be filling their ranks this fall.

Thirty-nine per cent of Canada's chief executives anticipate the Canadian dollar's value to increase, an unattractive projection for the nation's manufacturing and tourism industries which have been negatively impacted by the dollar's strength. However the majority of businesses leaders responding to this quarter's survey don't plan to raise prices, a surprising trend given that most SME businesses have to contend with rising energy costs.

Although 38 per cent of respondents have been dealing with a negative impact on their businesses as a result of recent terrorist threats against air travel, for over 60 per cent of Canadian SME businesses it is business as normal.

This perspective however wasn't reflected in the nation's business leader's responses when asked about global warming. Concern over the impact of global warming was expressed by 78 per cent of Canada's chief executives.

This concern wasn't evident when asked about the real estate market's affects on their businesses. According to the survey, Canada's CEOs haven't experienced a negative effect, in fact, 27 per cent of them see it as positive.

This positive perspective is also evident in Canada's bosses' responses when asked about the affect of the current federal government's policies on their business. A relative small 12 per cent of them listed the effect as negative, while 39 per cent saw it as positive. However the majority of respondents stated that their business has not been affected at all.

For over two years, the TEC Confidence Index has forecasted annual changes in the economy, including job creation and price increases. The quarterly survey continues to serve as an accurate snapshot of Canada's economic landscape.

Over 100 CEOs of small to mid-size businesses took part in the survey and shared their views on current economic trends, issues affecting business and Canada as a whole.

TEC Confidence Index Component Questions

----------------------------------------

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2004 2005 2005 2005 2005 2006 2006 2006

Index Score: 115.4 116.2 112.4 112.1 121.9 122.4 117.6 118.5

Current Economic

Conditions 145 125 117 125 136 134 142 134

Expected Economic

Conditions 113 109 96 102 109 119 110 106

Planned Fixed

Investment 128 136 144 130 149 146 144 147

Planned Revenue Growth 165 174 171 166 176 181 167 177

Expected Profit Growth 156 156 155 146 159 155 143 147

Expected Change in

Employment 135 147 138 148 159 158 151 154

NOTE: All component questions are scored as the percent giving favorable

replies minus the percent unfavorable plus 100. The TEC Confidence

Index is the sum of the components calculated as a percentage of

the level recorded in the Q2 2003 survey.

ABOUT THE CANADIAN TEC CONFIDENCE INDEX

Canadian businesses with annual sales between $1 million and $900 million represent the most vital component of the nation's economy. This small to mid-size business sector creates 75 percent of all new jobs and generates 50 percent of revenue. The opinions of these business leaders provide a clear snapshot of current economic, market, and industry trends and demonstrate their plans for growth over the next 12 months. These insights provide a leading indicator for employment, capital expenditure, sales, and revenue trends.

The Q3 2006 TEC Confidence Index is a compilation of responses from more than 100 Canadian CEOs of small to mid-sized companies, surveyed August 16 -- August 24, 2006. The TEC Confidence Index is the only comprehensive report of their opinions and projections. TEC Canada conducts the TEC Confidence Index quarterly.

TORONTO - The City of Windsor will host a planning meeting of the Southwest Economic Assembly (SWEA) to be held in Windsor on Wednesday, September 6, 2006. Eighty-two participants are expected from across southwestern Ontario, representing colleges and universities, municipalities, chambers of commerce, development agencies, industry and governmental organizations and various private sector businesses. They will discuss future activities and build on the consensus established at the assembly's inaugural meeting in Stratford this past May. Greater prosperity in the southwest is possible with stronger relationships in an enhanced economic partnership.

The economy slowed in the second quarter as real gross domestic product (GDP) advanced 0.5%, following a robust 0.9% increase in the first quarter. This slower growth reflected reduced but sustained growth in consumer spending and business investment in plant and equipment as well as a cooling in the housing market.

Economic activity in June was essentially unchanged from May, as the production of goods declined, offsetting gains in service industries. The economy grew by 0.2% in April, followed by a 0.1% increase in May.

A more detailed analysis is available in Canadian Economic Accounts Quarterly Review.

Service-producing industries continued to record strong growth (+0.8%) in the second quarter, as activities in retail and wholesale trade, finance, insurance and real estate all advanced.

Output of goods-producing industries continued to soften, decreasing 0.3% in the second quarter, partly reflecting waning foreign demand for Canadian products, as exports declined for the second consecutive quarter.

Output in the manufacturing sector as well as in the mining and oil and gas extraction sector decreased. These declines were partially offset by a gain in the output of utilities. Industrial production (the output of factories, mines and utilities) fell 0.6%. In the United States, the index of industrial production rose 1.5%, with all three sectors showing strength.

Rising domestic spending on final goods and services continued to drive the economy forward. However, final domestic demand slowed as the first quarter jump in residential construction was not sustained in the second quarter.

Continued strength in business investment in plant and equipment, particularly in machinery and equipment and engineering construction, and consumer expenditure, were behind most of the second quarter GDP growth. A surge in investment in telecommunication equipment and a jump in computers and other office equipment purchases accounted for much of the increase. Consumer spending, while having eased from the first quarter, increased at a moderate pace.

A large business inventory investment was also evident in the second quarter.

Economy-wide prices, as measured by the chain price index for GDP, fell 0.2% in the quarter (down 0.1% excluding energy). However, aggregate prices rose 0.3% in the second quarter when adjusting out the impact of a special pension contribution in the first quarter, which had the effect of reducing the price index for government goods and services in the second quarter. This reflected firmer prices for consumer non-durable goods and services as well as in construction, which were only partly offset by continuing declines in goods export prices. Excluding energy and the special pension payment, economy-wide prices advanced 0.5%

The economy grew at an annualized rate of 2.0% in the second quarter, a sharp deceleration from the 3.6% pace set during the previous quarter. Growth in the US economy slowed to 2.9% in the second quarter, in tandem with the Canadian economy.

Output in the residential construction and real estate agents-brokers industries retreated, as investment in residential structures declined 1.3% following a 3.0% increase in the first quarter.

Much of the strength in new residential construction in the first quarter likely resulted from mild winter weather conditions, which allowed builders to get an early start to the season. This activity returned to more normal levels in the second quarter. Declines in resale activity also contributed to the quarterly decline in overall residential investment.

Business investment in plant and equipment eases

Businesses continued to invest in plant and equipment, though at a slower pace (+1.8%) than in the first quarter. Capital expenditure on machinery and equipment increased across the board with the exception of automobiles and other transportation equipment which posted significant declines. Business engineering construction activity accelerated while building construction declined.

Consumer spending slows

While consumer spending slowed slightly in the second quarter (+1.0% compared to +1.3% in the first quarter), it continued to significantly support growth in the economy. The retail trade industry advanced at a good clip (+2.0%), as many consumer expenditure components recorded strong growth. Consumption of non-durables accelerated, led by food and beverages as well as motor fuels.

Consumer expenditure on durable goods decelerated sharply, as purchases of new trucks and vans declined on the heels of a significant increase in the first quarter. Weakened spending on furniture and household appliances reflected, in part, the dip in the housing market. Expenditure on recreational, sporting and camping equipment remained strong.

Exports decline for a second consecutive quarter

Exports fell 0.3%, adding to the decline in the first quarter. This slump in foreign demand was reflected in manufacturing output, which weakened further in the quarter. Production slid among export driven manufacturing industries including motor vehicles and wood products manufacturers, as well as selected non-durable industries.

Automotive exports (-5.1%), which had increased significantly in the last half of 2005, fell for a second consecutive quarter. Likewise, exports of agricultural and fish products, which performed well throughout 2005, declined 1.8%. Exports of forestry products posted a second significant decline. Energy was the only group to register a significant increase in exports (+5.8%), following a modest increase in the first quarter.

Imports rebounded following a weak first quarter, as the Canadian dollar appreciated. The strength in business investment accounted for much of the increase, as imports of machinery and equipment advanced.

Likewise, retailers and wholesalers continued to snatch up cheaper foreign goods. Imports of crude petroleum products and automotive products also picked up in the second quarter.

Non-farm inventory accumulation picks up steam

Over $16 billion was added to inventories in the second quarter, up from the $11 billion build-up in the first. Non-farm inventory accumulation picked up steam, despite lower production in manufacturing.

Wholesale inventories of durable goods piled up, in line with sagging foreign demand. Manufacturers also added to their stocks at a faster clip in the quarter.

Retail inventories posted a third consecutive quarter of strong accumulation. Both motor vehicle and other durable goods inventories were built up, reflecting softer consumer demand in these areas.

Labour income remains strong, corporate profits edge ahead

Current dollar labour income (+2.4%) remained strong, despite the sharp deceleration from the first quarter. (The jump in the first quarter was due to a large special payment to reduce an actuarial deficit of a government employer-sponsored defined benefit pension plan.) Removing the effect of this special payment, the first and second quarter growth in labour income would be 1.3%.

Wages and salaries grew by 1.4% in the first quarter and 1.3% in the second quarter. The strength in the second quarter was driven by the services industries.

Corporate profits in nominal dollars edged ahead 0.4% in the second quarter, following a sharp 3.7% decline in the first, which arose from lower export prices for energy. The sluggish growth in the second quarter was in line with the second consecutive decline in the output of the manufacturing sector. In addition, profits of financial industries declined 1.6%.

GDP by industry, June 2006

The Canadian economy remained stable in June, after increasing by 0.2% in April and 0.1% in May. The production of goods, which has been showing signs of weaknesses since the beginning of the year, declined 0.2% in June. Service industries gained 0.1%.

Oil and gas extraction, the manufacturing of chemical products, wholesale trade as well as construction recorded declines, while the manufacturing of motor vehicles and parts, of fabricated metal products, and forestry and logging posted the largest increases.

The energy sector declined for a third consecutive month, falling 0.8% in June. This loss was largely attributable to lower oil and gas extraction (-3.1%), particularly of natural gas. Declining prices and a high level of inventories of natural gas were the main factors behind this contraction.

Manufacturing output remained essentially unchanged in June. Of the 21 major groups, 10 boosted their production, accounting for 54% of total manufacturing output. The 0.4% increase in durable goods production was offset by a 0.6% decline in non-durable goods output.

Industrial production, the output of mines, factories and utilities, slipped 0.2%, with utilities reporting the only gain (+1.0%). In the United States, industrial production increased 0.8% in June, with the three sectors posting increases.

Percentage changes for expenditure-based and industry-based statistics (such as consumer expenditures, investment, exports, imports, production and output) are calculated using volume measures, that is, adjusted for inflation. Percentage changes for income-based statistics (such as labour income, corporate profits and farm income) are calculated using nominal values, that is, not adjusted for inflation.

Canada's current account surplus with the rest of the world, on a seasonally adjusted basis, decreased $4.0 billion in the second quarter to $4.2 billion. This was the second consecutive important decrease in the surplus after it had reached a peak at the end of 2005. As in the previous quarter, most of the decline came from a lower surplus on trade in goods.

In the capital and financial account (not seasonally adjusted), Canada's international assets and liabilities grew strongly in roughly equal measures for a second consecutive quarter. The increase to Canada's foreign assets came, in part, from near record acquisitions by portfolio investors.

Current account

Goods surplus falls again

The surplus on trade in goods decreased $3.8 billion to $12.8 billion in the second quarter, following a similar reduction in the first quarter. While the first quarter saw imports and exports decline, second quarter exports continued to decline while imports rebounded.

Exports shrank $2.0 billion to $112.5 billion while imports rose $1.8 billion to a record $99.7 billion.

The value of energy product exports improved somewhat in the second quarter, following a drop of $4.5 billion in the previous quarter. While prices of natural gas continued to diminish, prices of crude petroleum rose by more than 20% during the quarter, notably due to much higher prices for heavy crude petroleum, which accounted for roughly two-thirds of the total export volume.

Lower exports of cars during the second quarter resulted in a $1.7 billion reduction in exports of automotive products. This was the lowest level of exports for this group of products since 1998.

Machinery and equipment exports fell $0.8 billion during the quarter, the drop being spread among most of the components, while forestry products continued their downward trend which started two years ago. These decreases were partly offset by an improved performance for industrial goods, notably metal and alloys products.

Imports of energy products rose $1.8 billion in the second quarter. Crude petroleum accounted for most of the rise as both prices and volumes went up while petroleum and coal products also registered a significant increase.

Deficit on investment income widens

The deficit on investment income increased $0.4 billion to $4.4 billion. Despite a second consecutive increase, the deficit remained low on an historical basis.

Profits earned by non-residents on their direct investments in Canada remained relatively stable in the second quarter. However, the dividends paid declined to more normal levels after two consecutive quarters above the $5 billion level. At the same time, the profits earned by Canadian direct investors went down $0.8 billion.

Receipts of interest on foreign bonds and money market instruments increased for the ninth consecutive quarter as Canadians continued to augment their holdings of such securities. Payments of interest on Canadian portfolio liabilities remained low, as lower payments on bonds were partly offset by higher transactions related to money market instruments.

Services deficit up slightly again

The services deficit increased $0.3 billion during the second quarter to $4.5 billion, another record. Higher payments for transportation services were the main contributor to the increase with the travel deficit remaining high. Both commercial service exports and imports registered similar increases and the deficit stayed at $0.8 billion.

Canadian travellers have again increased their international payments in the second quarter, notably in countries other than the United States. However, for the first quarter since the end of 2004, there was an increase in spending by US travellers in Canada.

While the total number of travellers from the United States coming to Canada decreased slightly in the second quarter, there were a larger number of people staying at least one night in the country. On average, this group of travellers stay three to four days in the country and spend eight times more than same-day travellers.

Financial account

Near record investment in foreign securities

Canadians purchased $18.8 billion of foreign securities in the second quarter, consisting of bonds and equities. Together with the record first quarter buying, Canadians have invested $38.7 billion in foreign securities during the first six months of the year, already over 60% of the record total for 2000.

Two-thirds of the $18.8 billion investment was in foreign bonds, a record high for a second straight quarter. The investment in foreign bonds was roughly split between US corporate bonds and overseas bonds. Canadian investment in US treasuries was little changed after 10 quarters of investment. Similar to the first quarter, some of the Canadian investment was channelled into "maple bonds". Foreign issuers have been marketing their debt in Canada for some time now. Typically, the bonds are denominated in Canadian dollars and sold to institutional investors.

The second quarter saw Canadian investors again buy large amounts of foreign equities, totalling $7.6 billion. Canadian pension funds have been particularly active in acquiring foreign shares. Just over half of the total was in US shares with the remainder in overseas equities. At the same time, Canadian investors sold back the $1.1 billion worth of foreign money market paper they acquired in the first quarter. During the second quarter, investors bought $1.6 billion of US paper but sold $2.8 billion of overseas paper.

Direct investment abroad up strongly after a low first quarter

An $11 billion injection into foreign economies by Canadian direct investors was a return to a more usual level of investment comparable to those observed over the last few years. The first quarter investment of $7.3 billion was the lowest quarterly amount in two years. Most of the investments in the current quarter were injections of working capital into existing foreign affiliates. From an industry perspective, investment was concentrated in the finance and insurance sector. Direct investment abroad was well spread geographically, led by investment in Europe.

Foreign direct investment lower in Canada after three strong quarters

In the second quarter, foreign direct investors injected $8.4 billion into the Canadian economy, down from the average of $14.4 billion of the past three quarters. The foreign investment was split between acquisitions, advances of working capital and strong reinvested earnings. While there have been a number of announcements of major foreign acquisitions during the second quarter, many of these have not formally closed. Much of the second quarter investment came from American investors and was widely spread by industry.

Strongest foreign investment in Canadian securities in six quarters

Foreign portfolio investment strengthened in the current quarter as investors bought equities and money market paper. They bought $10.4 billion worth of Canadian securities in the quarter, which exceeded investment for all of 2005.

Foreign investors bought $9.1 billion worth of equities during the quarter — despite a falling S&P/TSX composite index. The investment came largely from the United States, while investment from British investors was offset by sales of other European investors.

Biggest quarterly foreign investment in Canadian paper since 1997

Foreign investors made a significant investment in Canadian money market paper for a third consecutive quarter. They bought $4.6 billion worth of Canadian money market paper after buying a similar amount in the two previous quarters. Over half of the investment went to paper issued by federal enterprises with the remainder spread between corporate and government paper. Regionally, investors out of the United States and United Kingdom led the buying. Short-term rates continued upward in the United States and in Canada, with the differential favouring investment in the United States narrowing to just under one-half of a percentage point.

Non-residents continued to sell Canadian bonds for a fourth straight quarter. The foreign divestment of $3.2 billion in the second quarter was the largest of the four quarters, which have totalled $8.9 billion. In the second quarter, they sold federal government and corporate bonds but bought some bonds issued by federal enterprises. Regionally, the divestment came mainly from the United States and emerging economies, countered by some buying from European investors. On a currency basis, the foreign selling was largely in Canadian bonds denominated in US dollars. However, there were purchases of bonds denominated in other foreign currencies.

Transactions in deposits, loans and reserves

The other investment account recorded a large net inflow of $13.8 billion. The inflow was mostly related to higher deposit liabilities and secondly loan liabilities. Deposits and loans also increased strongly on the asset side, partly offsetting the increased liabilities. The Canadian dollar jumped four full cents during the quarter to close at 89.6 US cents against its American counterpart. The Canadian dollar declined somewhat against most other major foreign currencies except the yen.

Note to readers

The balance of payments covers all economic transactions between Canadian residents and non-residents. It includes the current account and the capital and financial account.

The current account covers transactions on goods, services, investment income and current transfers. Transactions in exports and interest income are examples of receipts, while imports and interest expense are payments. The balance from these transactions determines if Canada's current account is in surplus or deficit.

The capital and financial account is mainly composed of transactions in financial instruments. Financial assets and liabilities with non-residents are presented under three functional classes: direct investment, portfolio investment and other investment. These investments belong either to Canadian residents (Canadian assets) or to foreign residents (Canadian liabilities). Transactions resulting in a capital inflow are presented as positive values while capital outflows from Canada are shown as negative values.

A current account surplus or deficit should correspond to an equivalent outflow or inflow in the capital and financial account. In other words, the two accounts should add to zero. In fact, as data are compiled from multiple sources, the two balance of payments accounts rarely equate. As a result, the statistical discrepancy is the net unobserved inflow or outflow needed to balance the accounts.

The composite index rose by 0.2% in July, after an upward revised 0.3% increase in June. The components related to consumer spending continued to lead growth, while the housing and stock markets rebounded from their spring slump after leading growth at the start of the year. Partly offsetting these gains was a slowdown in the United States, which aggravated the drop in orders for manufactured goods in Canada.

The largest increases among the 10 components of the composite index were in sales of furniture and appliances (+1.0%) and other durable goods (+0.9%). Higher housing starts helped buttress the housing index. Starts in the first half of the year were running ahead of last year's pace, in marked contrast to the slowdown in the United States.

The stock market rallied over the summer. Increased demand for business services also helped boost the services employment component.

The leading indicator for the United States fell 0.2%. This followed a 0.1% drop the month before, and suggests a continuation of the economy's slow growth that surfaced in the second quarter. A retreat in the housing sector outweighed a pickup in industrial demand and exports.

Lower shipments to the United States continued to hamper manufacturing activity in Canada. New orders were particularly weak, down 0.9%, their largest drop since early 2003. The ratio of shipments to inventories was unchanged, thanks to firms moving quickly to trim output in line with the drop in shipments.

Since the beginning of 2006, services accounted for all the growth in output and jobs, thanks mainly to wholesale trade and, to a lesser extent, to finance and information industries. Many consumer-related industries took a respite from their recent rapid gains. This break was partly offset by a pickup in government spending, notably for the census.

On the Prairies, all components of household demand continued their steady growth. Retail sales increased again in May, and are up nearly 10% since December. Housing starts rose to 51,000 units (at an annual rate) in June, close to their all-time high recorded in March. Alberta's population has grown by nearly 10,000 every month this year. This alone would represent a need for some 50,000 additional dwellings per year.

After a slow start to the second quarter, economic conditions in British Columbia quickly improved. Non-residential construction expanded rapidly earlier in the year and, in May, this began to have an impact on manufacturing production.

Ontario again relied primarily on the housing sector for its growth, with housing starts continuing to rise in June from their low in April. Exports and shipments in the automotive sector continued to decline, despite the rebound posted by the Canadian plants of foreign manufacturers. This weakness of exports and shipments helped curtail retail sales, which fell 1.9% in May, the steepest decline in the country.

Household demand also remained weak in Quebec. However, manufacturing picked up, as in the West. Shipments jumped 3.2% in May, led by capital goods, which largely offset a sudden one-third drop of refinery shipments, following temporary stoppages for maintenance. Shipments rose 67% for transportation equipment, including nearly $600 million for aircraft shipments.

The 12-month percentage change in the Consumer Price Index (CPI) was down for a second consecutive month, from 2.5% between June 2005 and June 2006 to 2.4% between July 2005 and July 2006. Prices were down slightly despite the 1.0% reduction in the goods and services tax (GST) that took effect on July 1.

The 12-month change in the All-items CPI excluding eight of the most volatile components identified by the Bank of Canada for the purpose of monetary policy rose 1.5% between July 2005 and July 2006. This movement represents a net decline in comparison with the 1.7% rise posted between June 2005 and June 2006. The 12-month change of this index in July 2006 was the lowest since July 2005.

Excluding energy prices, the 12-month increase in the CPI slowed down slightly, from 1.5% in June to 1.4% in July.

On a monthly basis, the CPI increased 0.1% in July. This suggests that price increase pressures were important enough in July to more than compensate for the expected effect of the 1.0% reduction in the GST.

The CPI release in The Daily on July 21, 2006, suggested that the CPI could fall by roughly 0.6% following the 1.0% reduction in the GST. Based on a simulation exercise, this estimation rests on the assumption that the entire amount of the decrease is transferred to consumers and that the industrial structure that underlies the way that prices are determined remains the same. In addition, this measure of impact does not take into account the increase in the Federal excise taxes on tobacco products and alcoholic beverages announced by the government.

The 4.6% gasoline price increase between June and July partly explains the 0.1% monthly advance. Other economic factors, such as the reaction of some retailers to changes to the GST, adjustment lags and the seasonal increase of some prices may have contributed to mitigate the expected downward pressure on the CPI resulting from the GST reduction. It is, however, difficult to quantify their individual impact.

For a second consecutive month, the All-items index excluding energy slipped 0.2%. The same trend was observed for the All-items index excluding eight of the most volatile components identified by the Bank of Canada. The latter slid 0.2% between June and July, a change identical to that of the previous month.

Higher gasoline prices still major factor in 12-month change

In July 2006, the CPI climbed 2.4% over July 2005, less than the 2.5% increase posted the previous month. Higher gasoline prices accounted for most of this increase, followed by the rise in homeowners' replacement cost, the cost of purchasing and leasing automotive vehicles, and electricity prices. These increases were partly offset by lower prices for computer equipment and supplies, women's clothing, video equipment and men's clothing.

Gasoline prices climbed 16.1% between July 2005 and July 2006, up from the 15.4% leap between June 2005 and June 2006. The steep rise in the price of a barrel of oil on world markets was the main reason behind the higher prices paid by consumers at the pump last year. Aside from Prince Edward Island, the provinces registering increases higher than the national index were all situated west of Ontario. Saskatchewan posted the largest jump (+19.2%) while drivers in Newfoundland and Labrador faced the lowest increases (+11.1%) in the country.

Homeowners' replacement cost, which represents the worn-out structural portion of housing and is estimated using new housing prices (excluding land), rose by 7.6% from July 2005 to July 2006. Most of the increase originated from the special situation in Alberta, where prices have skyrocketed 40.2% over the past year. The boom in that province is stimulating housing starts, thus exerting upward pressure on material and labour costs and contributing to the rise in the CPI. Saskatchewan was a distant second, with a 12-month increase of 7.5% in July.

Prices for the purchase and leasing of automotive vehicles were up 2.4% in July compared with the same month last year. Although consumers only occasionally purchase or lease an automotive vehicle, the value of the transaction represents an important share of the average expenditures of Canadian households as a whole, which explains its influence on the All-Items index.

Electricity prices climbed 6.3% from July 2005 to July 2006. This increase is attributable mainly to increases in Ontario, Alberta, Quebec and British Columbia over the past year. Between June and July, although the GST reduction effects were felt in all provinces, they were totally offset by higher tariffs in Newfoundland and Labrador, British Columbia, Alberta and Prince Edward Island. As a result, the national index for electricity went up 0.5% between June and July.

Confirming the trends observed for a while now, information technology products contributed to mitigate upward pressures from energy and shelter prices, thus moderating the 12-month growth in the All-Items index. The index for computer equipment and supplies plunged 17.1%, while that for video equipment dropped 11.6%. The combined effects of technological progress, as well as the appreciation of the Canadian dollar (which encourages imports of goods), lowered prices for computers, televisions and video players.

Men's clothing prices dropped 3.7% from July 2005 to July 2006, in comparison with women's clothing which fell 3.4%. The strong dollar enabled Canadian consumers to pay less for clothing. These items are often imported from Asian countries like China and India, where production costs are known to be globally competitive.

GST reduction offset by price increases in July

After slipping 0.2% between May and June, the All-items index was up 0.1% from June to July 2006. The upward pressure on the CPI came mainly from gasoline and fresh fruit. The purchase and leasing of automotive vehicles, restaurant meals and telephone services were the most significant factors in offsetting this upward movement.

After dropping slightly the two previous months, gasoline prices rose 4.6% between June and July despite the GST reduction. The largest increases were in Quebec (+6.5%) and Alberta (+6.4%), while Newfoundland and Labrador (+0.9%) and British Columbia (+1.5%) recorded the smallest advances.

The upward trend of fresh fruit prices continued for the third month in a row, climbing 7.4% between June and July. Since April, fresh fruit prices have shot up 18.1%, the most substantial increase for the same period since 1990. In July, prices for oranges, grapes, apples, pears, and pineapples have increased, pushing up the fresh fruit index.

Mitigating the upward trend in the monthly index to some degree, prices for the purchase and leasing of automotive vehicles were down 1.0% in June. The 1.0% reduction in the GST in July had a more significant impact on the decrease in automotive vehicle prices than the financial incentives offered by some car manufacturers to diminish their inventories.

The 0.7% decline in prices for restaurant meals also served to push down the All-items index, as did the 0.9% drop in the cost of telephone services. The lowering of the GST accounts for much of the downward movement in these two components, which have a relatively important weight in the CPI basket.

Alberta stands out once again

In July, Alberta continued to set itself apart by posting the largest 12 month increase in the CPI, at 4.3%. Since early 2006, Alberta has recorded 12-month changes of more than 3%, reflecting the flourishing economic activities in the province. The rise in the Albertan index was mainly the result of the appreciation in the prices of the shelter components which are weighted fairly heavily in the CPI. The increases in homeowners' replacement cost, homeowners' insurance premiums, mortgage interest cost, and electricity have led to the substantial rise in the CPI in Alberta, despite an important fall in natural gas prices. This situation contrasts with that of other provinces for which CPI increases are mainly fuelled by the gasoline price hikes.

Excluding shelter, the 12-month increase in the All-Items index was 2.4%. This rise is more comparable with increases in other provinces, which fluctuated between 1.6% and 3.2%.

The seasonally adjusted CPI increased from June to July

After adjusting for seasonal variations, the CPI increased 0.1% between June and July 2006. The upward pressure came from the transportation (+0.8%), shelter (+0.3%) and food (+0.2%) components.

The downward pressure on the seasonally adjusted index came from household operations and furnishings (-0.6%), recreation, reading and education (-0.5%), clothing and footwear (-0.4%), health and personal care (-0.4%) and alcoholic beverages and tobacco products (-0.1%).

The seasonally adjusted CPI without eight of the most volatile components identified by the Bank of Canada dropped 0.2% between June and July 2006.

All-items index excluding eight of the most volatile components

One of the elements used by the Bank of Canada to measure core inflation for the purpose of monetary policy is the CPI without eight of the most volatile components identified by the Bank. These volatile components are fruit, fruit preparations and nuts; vegetables and vegetable preparations; mortgage interest cost; natural gas; fuel oil and other fuel; gasoline; inter-city transportation; and tobacco products and smokers' supplies.

The 12-month increase in this index was 1.5% in July 2006. The major factors that contributed to this rise were homeowners' replacement cost (+7.6%), the purchase and leasing of automotive vehicles (+2.4%), electricity prices (+6.3%) and prices for restaurant meals (+2.1%). The increase was mitigated by lower prices for computer equipment and supplies (-17.1%), women's clothing (-3.4%), video equipment (-11.6%), and men's clothing (-3.7%).

Between June and July 2006, the All-items index excluding eight of the most volatile components identified by the Bank of Canada was down 0.2%, matching the decline of the previous month. The purchase and leasing of automotive vehicles (-1.0%), restaurant meals (-0.7%) and telephone services (-0.9%) were the primary sources of this decline. Those three components were down largely as a result of the GST reduction.

Energy

In the wake of 12-month increases of 14.1% in May and 11.5% in June, the energy index continued to decelerate, posting a relatively smaller increase of 10.6% in July. Aside from natural gas, all components contributed to the rise in the energy index, with gasoline (+16.1%) playing the largest part, followed by electricity (+6.3%), fuel oil (+12.1%), and fuel, parts and supplies for recreational vehicles (+10.1%). Natural gas prices were nonetheless down by 3.3% in July, largely owing to the 18.8% drop in Alberta.

On a monthly basis, the energy index climbed 2.6% between June and July 2006, despite the 1.0% decrease in the goods and services tax that applied to all energy components of the CPI. Rising gasoline prices (+4.6%) explained most of the upward movement in the index. Higher prices for electricity (+0.5%), natural gas (+0.5%), and fuel, parts and supplies for recreational vehicles (+1.8%) also pushed the index up. Lower fuel oil prices (-1.3%), however, exerted a dampening effect. It should be noted that natural gas prices varied widely in July, with Alberta posting a 44.8% increase and Ontario a 10.3% drop.

Consumer Price Index and major components
(1992=100)
	Relative importance1	July 2006	June 2006	July 2005	June to July 2006	July 2005 to July 2006
		Unadjusted
					% change
All-items	100.002	130.5	130.4	127.5	0.1	2.4
Food	16.89	131.4	131.4	128.6	0.0	2.2
Shelter	26.75	128.8	128.4	124.5	0.3	3.5
Household operations and furnishings	10.58	115.4	116.2	115.7	-0.7	-0.3
Clothing and footwear	5.37	98.4	99.0	100.9	-0.6	-2.5
Transportation	19.79	159.0	157.7	150.3	0.8	5.8
Health and personal care	4.52	122.1	122.6	121.5	-0.4	0.5
Recreation, education and reading	11.96	128.0	127.9	128.5	0.1	-0.4
Alcoholic beverages and tobacco products	4.13	150.2	150.5	147.7	-0.2	1.7
All-items (1986=100)		167.2
Purchasing power of the consumer dollar expressed in cents, compared to 1992		76.6	76.7	78.4
Special aggregates
Goods	48.84	125.1	124.8	122.4	0.2	2.2
Services	51.16	136.6	136.5	133.3	0.1	2.5
All-items excluding food and energy	74.27	125.2	125.4	123.5	-0.2	1.4
Energy	8.84	184.0	179.4	166.3	2.6	10.6
All-items excluding eight of the most volatile components3	82.75	128.5	128.8	126.6	-0.2	1.5
1. 2001 CPI basket weights at June 2004 prices, Canada - Effective July 2004. Detailed weights are available under the Documentation section of survey 2301 (http://www.statcan.ca/english/sdds/index.htm). 2. Figures may not add to 100% due to rounding. 3. Excluded from the All-items CPI are the following eight volatile components, as defined by the Bank of Canada: fruit, fruit preparations and nuts; vegetables and vegetable preparations; mortgage interest cost; natural gas; fuel oil and other fuel; gasoline; inter-city transportation; and tobacco products and smokers' supplies. The Bank of Canada further adjusts this series to obtain their measure of core inflation, which also excludes the effect of changes in indirect taxes. For data and information on core inflation, please consult the Bank of Canada website (www.bankofcanada.ca/en/inflation/index.htm).

Consumer Price Index by province
(1992=100)
	July 2006	June 2006	July 2005	June to July 2006	July 2005 to July 2006
	Unadjusted
				% change
Newfoundland and Labrador	129.6	129.4	126.6	0.2	2.4
Prince Edward Island	132.4	132.2	128.3	0.2	3.2
Nova Scotia	133.3	133.0	129.4	0.2	3.0
New Brunswick	130.1	130.5	127.5	-0.3	2.0
Quebec	126.2	126.0	123.6	0.2	2.1
Ontario	130.9	131.3	128.4	-0.3	1.9
Manitoba	135.0	134.5	131.7	0.4	2.5
Saskatchewan	135.9	135.6	132.4	0.2	2.6
Alberta	140.8	138.9	135.0	1.4	4.3
British Columbia	128.2	128.1	125.7	0.1	2.0
Whitehorse	126.5	126.9	124.1	-0.3	1.9
Yellowknife2	125.4	125.4	123.8	0.0	1.3
Iqaluit (Dec. 2002=100)	104.8	105.1	103.0	-0.3	1.7
1. View the geographical details for the city of Whitehorse, the city of Yellowknife and the town of Iqaluit. 2. Part of the increase first recorded in the shelter index for Yellowknife for December 2004 inadvertently reflected rent increases that actually occurred earlier. As a result, the change in the shelter index was overstated in December 2004, and was understated in the previous two years. The shelter index series for Yellowknife has been corrected from December 2002. In addition, the Yellowknife All-items CPI and some Yellowknife special aggregate index series have also changed. Data for Canada and all other provinces and territories were not affected.

OTTAWA - Housing starts will register another strong year in 2006, according to Canada Mortgage and Housing Corporation's (CMHC) third quarter Housing Market Outlook, Canada Edition report. Starts will reach 227,900 units in 2006, before decreasing to 209,100 units next year. Although residential construction will ease, 2007 will mark the sixth consecutive year in which housing starts exceed 200,000 units.

"Housing starts this year will be stronger than previously forecast, mainly due to persistent strong demand in Alberta where starts will increase by 20 per cent in 2006," said Bob Dugan, Chief Economist at CMHC. "Higher mortgage carrying costs, due to modest increases in mortgage rates and rising house prices, will temper housing demand in Canada in the latter part of this year and next."

Existing home sales, as measured by the Multiple Listing Service (MLS (R)), will register their second best year on record with 481,700 units in 2006, a slight decrease compared to the previous year. A rising supply of listings will give home buyers more choice thereby reducing the spillover effect into the new home market. The level of MLS(R) sales will remain high in 2007 at 462,200 units, their third highest level on record. However, marginally higher mortgage carrying costs will ease demand for existing homes in many centres across Canada.

Strong MLS(R) price growth in the western provinces will push the Canadian average price increase to a 17-year high of 12.0 per cent in 2006. In 2007, higher listings and lower MLS(R) sales will move the resale market toward more balanced conditions, and growth in average MLS(R) prices will slow to 6.4 per cent.

In 2006 new home construction in British Columbia entered its sixth consecutive year of growth. This is the longest up-swing since the 1985-1989 expansion and the most consecutive years of growth on record. A healthy economy, a strong labour market, confident consumers, and relatively low mortgage rates will result in 37,000 housing starts this year, a 6.7 per cent increase from last year. In 2007, housing starts in B.C. will decrease to 34,900 units.

In Alberta, robust growth in the resource sector is creating high paying jobs, which are attracting workers from other parts of the country and boosting population growth in the province. As a result, total housing starts are expected to reach 49,000 units this year, surpassing the previous record of 47,925 in 1978. The strong performance will continue into 2007, though starts will slip to 45,000 units as escalating ownership costs inhibit demand.

Despite persistent migratory outflows, housing starts in Saskatchewan will remain elevated thanks to strong activity in Regina and Saskatoon. Total housing starts are expected to increase 4.7 per cent to 3,600 units in 2006 and remain unchanged in 2007.

Buoyed by favourable demographic and economic conditions, housing starts in Manitoba will surpass 5,000 for the first time since 1988. Total housing starts are forecast to reach 5,150 units in 2006 and 5,100 units next year.

Less stimulative economic and demographic conditions suggest that Ontario home starts will moderate, but will remain above historical averages. Housing starts will decrease to 77,000 units in 2006 and to 70,000 units in 2007. The decrease in housing starts in Ontario in 2006 reflects weaker single starts due to rising new detached home prices. In 2007, the decrease in housing starts will reflect decreases in both single and multiple units due to increased choice in the resale market and a limited supply of land.

Declining residential construction, a dip in sales of existing homes, weaker price growth and a more balanced rental market will be the hallmarks of Quebec's housing market in 2006. Modest economic growth, rising mortgage carrying costs, and the erosion of pent up demand will cause demand for ownership housing to slow. Housing starts will drop by 11.6 per cent in 2006 to 45,000 units and will decrease to 40,000 units in 2007.

In New Brunswick, rising mortgage carrying costs and modest provincial economic growth will contribute to a slight decrease in new residential construction. Starts will decrease to 3,445 units and 3,120 units in 2006 and 2007, respectively.

Housing starts in Nova Scotia will reach 5,075 total units this year and 4,800 total units in 2007. However, softer demand for new rental and condo units could cause starts to be lower than forecast.

In P.E.I., housing starts are expected to decline slightly over the forecast period but remain strong in historic terms. Expect total starts to reach 725 units in both 2006 and 2007.

In Newfoundland and Labrador, housing starts will decline to 1,875 units this year and 1,850 units in 2007, as higher mortgage carrying costs and weaker employment growth dampen housing demand.

Canada Mortgage and Housing Corporation (CMHC) has been Canada's national housing agency for more than 60 years. CMHC is committed to helping Canadians access a wide choice of quality, affordable homes, while making vibrant, healthy communities and cities a reality across the country. For more information, visit www.cmhc.ca or call 1 800 668-2642.

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National Housing Outlook

Key Housing Market Indicators

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2005 2006 2007

Actual Forecasts Forecasts

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Total housing starts (units) 225,481 227,900(1) 209,100(1)

Total single-detached houses 120,463 118,800(1) 107,600(1)

Total multiple housing units 105,018 109,000(1) 101,500(1)

Total MLS(R) sales(2) 482,788 481,700(1) 462,200(1)

Average MLS(R) selling price ($)(2) 249,365 279,300(1) 297,100(1)

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Provincial Housing Outlook

Total Housing Starts

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2005 2006 2007

Actual Forecasts Forecasts

-----------------------------------

Newfoundland and Labrador 2,498 1,875 1,850

Prince Edward Island 862 725 725

Nova Scotia 4,775 5,075 4,800

New Brunswick 3,959 3,445 3,120

Quebec 50,910 45,000 40,000

Ontario 78,795 77,000 70,000

Manitoba 4,731 5,150 5,100

Saskatchewan 3,437 3,600 3,600

Alberta 40,847 49,000 45,000

British Columbia 34,667 37,000 34,900

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SOURCE: CMHC Housing Market Outlook, Canada Edition, Third Quarter 2006.

_______________________________________

(1) Rounded off to the nearest hundred.

(2) The term MLS(R) stands for Multiple Listing Service and is a

registered trademark of the Canadian Real Estate Association (CREA).

Data are for 10 provinces.

§- Ontario’s diversified economy will help keep job growth respectable, despite pressure from a high Canadian dollar. Expect the service sector to deliver the bulk of the job gains.

- Home sales through the Multiple Listings Service (MLS) will edge down by two per cent to 192,500 sales by end of 2006 and four per cent to 184,000 sales in 2007. The supply of new listings will continue to grow and nudge Ontario’s housing market towards balanced market conditions.

- Balanced market conditions will dampen the pace of house price growth. Expect the average MLS price to rise by 6.4 per cent to $280,384 in 2006 and 3.6 per cent to $290,973in 2007.

- Ontario home starts will edge down to 77,000 units in 2006and 70,000 units in 2007. Multiple-family dwelling starts, the less expensive home types, will remain strong and increase over six per cent to 39,500 units in 2006. The pricier single-detached home starts will move lower.

- Ontario home starts will continue to edge down reaching 64,000 units by 2010.

“Increasing choice in the resale market, often at a lower price, will mean less spill over demand for new home construction,” explains Ted Tsiakopoulos, CMHC Regional Economist. “However, condominium apartments and town home starts will remain strong as rising prices of single-detached homes are increasingly becoming out of reach for many first-time homebuyers” says Tsiakopoulos. ‘’Slow population growth and an outpouring of migrants to Canada’s oil-rich West will also dampen housing demand in Ontario’’, adds Tsiakopoulos.

Canadian international merchandise trade
June 2006 Previous release

Canada's merchandise trade surplus grew in June as exports rose for the second time this year and imports slipped for the second month in a row.

Exports increased 1.1% to $37.6 billion in June &#8212; mostly because of energy products, and industrial goods and materials.

At the same time, Canadian companies imported $32.8 billion worth of merchandise, down 0.7% from May. This follows a rising trend that began in August 2003.

A gain in imports from the United States was more than offset by lower purchases from all other countries.

Canada's trade surplus moved up from $4.1 billion in May to $4.7 billion, the second consecutive month it has grown.

The merchandise trade surplus with the United States stood at $8.2 billion in June, and the trade deficit with all other countries was $3.5 billion.

While exports advanced to the United States, Japan and the European Union, they declined to all other trading areas.

The increase in imports from the United States came primarily from agricultural and fishing products; aircraft, engines and parts; motor vehicle parts including engines; industrial machinery; and consumer goods, particularly medical and pharmaceutical products.
Energy products, industrial goods lead exports

Gains in exports of energy products, industrial goods and materials, automotive products, and forestry products in June offset weaker performances in machinery and equipment, agricultural and fishing products, and other consumer goods.

The biggest boost came from the energy products sector, where exports rose 3.4% to $7.4 billion. Reflecting increased US demand, exports of crude petroleum rose 3.9%, as an increase in volume more than compensated for a 1.4% decline in prices. On the other hand, the value of natural gas exports fell 1.1%, continuing a downward trend that started in January 2006, mainly due to falling prices.

Canadian companies exported $7.8 billion worth of industrial goods and materials in June, up 2.9% from May and the highest level ever. It was the second consecutive monthly increase for these exports, which occurred in the wake of recent gains in industrial production in the United States, United Kingdom and other Euro area countries. The sector has been on an upward trend since June 2003.

Within industrial goods and materials, metals and alloys posted their fourth consecutive advance, rising 5.4%, primarily on the strength of copper and alloys (+27.0%), aluminum including alloys (+4.0%), and zinc and alloys (+23.0%). These three commodity sub-groups reached record high levels in the month. Exports of metal ores also registered their third monthly gain (+14.2% in June) to reach a record high level.

Exports of automotive products moved up for a second consecutive month, rising 0.9% to $6.9 billion. The increase was driven by exports of passenger autos and chassis (+3.0%), and motor vehicle parts (+1.6%). It was offset by a 5.3% decline in exports of trucks and other motor vehicles, which followed a 23.7% surge in May.

Forestry product exports edged up 0.3%, thanks to the third monthly increase in wood pulp and other wood products (+5.6%), and the second monthly gain in newsprint, other paper and paperboard (+1.8%). These were moderated by a 2.7% decline in exports of lumber and sawmill products, which were down for the fifth consecutive month because of the ongoing decline in residential construction activity in the United States.

Machinery and equipment exports were virtually unchanged for the second straight month in June after a significant 8.2% boost in March. Lower exports of industrial and agricultural machinery and other machinery and equipment offset a 2.0% gain in aircraft and other transportation equipment.

Exports of agricultural and fishing products posted their third monthly decline, falling 6.8% in June.
Large declines in imports of energy products and industrial goods

The industrial goods and materials sector accounted for over 95% of the net decline in total imports in June. After advancing 2.1% in May, imports of industrial goods and materials fell 2.9%.

The sector had experienced accelerated growth since the third quarter of 2003 on the strength of metals and metal ores, and chemicals and plastics.

Although all three commodity groups within the sector fell in June, the bulk of the decrease came from chemicals and plastics, which were down 5.5% following a 2.2% gain in May. The drop in the chemicals and plastics sub-sector primarily reflected lower demand for organic chemicals by the pharmaceutical industry, and also for other chemicals by the aluminum industry.

Energy was the second largest contributor to June's overall decrease in imports. Following a 24.0% surge in April, imports of energy products posted their second monthly decline, falling by 6.7% in June. Within the sector, crude petroleum imports increased 5.0%, while, after three successive gains, imports of other energy products plunged 22.5%. This largely reflected a drop in refined petroleum imports.

Imports of machinery and equipment slipped 1.2%, as imports of industrial and agricultural machinery returned to their recent trend following an 11.8% surge in May. Except for industrial and agricultural machinery, which fell by 7.2% in June, all other commodity groups within the sector advanced.

On the plus side, imports of automotive products increased 1.3% to $6.4 billion, solely on the strength of motor vehicle parts, which gained 5.1%. Imports of both passenger autos and chassis (-1.2%), and trucks and other motor vehicles (-3.5%) registered their second consecutive declines. These declines occurred as new motor vehicle sales fell in both April and May.

After a 1.0% drop in May, imports of other consumer goods rebounded with a 1.9% gain. All components of the sector, except for apparel and printed matter, posted growth in June.