The Ivey purchasing managers’ index for July dropped sharply to 46.5, down about 10 points from the previous month’s reading, and economists are sounding a warning over the slowing of the Canadian economy.

A reading of below 50 indicates a contraction in purchases. Purchasing managers also reported that employment was higher than the previous month, inventories were lower, supplier deliveries were slower, and prices were higher.

“There is mounting evidence that the Canadian economy is slowing significantly,” says BMO Nesbitt Burns in a research note. “This morning’s release of the Ivey Poll of Purchasing Managers showed a dramatic and unexpected slowdown in spending by businesses and governments in July. This is the first drop in expenditures since January, signaling that growth is nowhere near as robust as earlier this year. The report indicated as well that stockpiles declined as prices remained firm.”

“This survey is based upon end of month survey responses and is not seasonally adjusted, therefore it has the potential to be quite volatile,” caution economists RBC Financial Group. “While it is not good news since the previous five months were indicating rising purchases, it is difficult to interpret too much from this one report. Canadian markets may react negatively, however, particularly given sensitivities to whether or not deteriorating U.S. data in the past month will creep north of the border.”

BMO agrees that this is just one report, but it also sees other indicators pointing to some trouble ahead. “The federal government budget surplus has all but vanished, owing to a marked decline in tax revenues. Corporate, income and capital gains tax revenues have fallen sharply in the past year,” it notes. “In addition, the earnings and revenue disappointments at large Canadian retailers such as The Bay, Zellers and Sears Canada may be early indicators of consumer belt tightening.”

On the upside, RBC notes that Canadian labour markets saw a small pick-up in help wanted postings in July, although tomorrow’s employment numbers will be a far more significant source of information on the true resilience of Canadian labour markets.

BMO says, “the Fed meets next week and will no doubt consider a rate cut, although the odds remain against such a move before further confirmation of continued weakness is in hand. The Bank of Canada will soon reassess its rosy outlook and likely refrain from further rate hikes at its September 4 statement date.”