The imminent U.S. economic slowdown will leave various footprints on Canada’s industrial performance. Industries highly exposed to the U.S. market such as manufacturing will expand slowly, according to the semi-annual edition of TD Economics’ Industrial Outlook, written by TD ecnonomist Sébastien Lavoie.

Nevertheless, the report says that Canada’s strong economic diversification will help prevent the nation from feeling the full affects of a slowdown south of the border. Service-related industries will perform well because they are less vulnerable to U.S. economic activity and benefit more from healthy domestic conditions.

The report notes that manufacturers are currently light years away from the “golden days” of late 1990s; a period in which the U.S. economy was running at full-steam and the low-trading loonie was making Canadian manufacturing products cheap for foreigners. But the sector has become a laggard in terms of output growth in the last five years.

“We do not expect much improvement in manufacturing activities to take place before mid-2007 because of the weakening U.S. economy,” said Lavoie. “For each dollar of manufacturing output produced in Canada, 50¢ is exported abroad, mostly to the U.S.” The good news, though, is that the U.S. mid-cycle slowdown is likely to be short-lived, lasting about a year. Manufacturers will then experience some revival in the second part of 2007, he notes.

At the same time, Lavoie believes conditions will vary across the manufacturing industries. The hardest hit manufacturing industries will be automotive and parts, plastic and rubber, and forestry products because of their higher dependence on demand south of the border. Some manufacturers will hold up well because they benefit more from healthy domestic conditions. This is particularly true for factories producing metals, computers, and machinery products — areas that will benefit from still-solid prospects for business investment in Canada.

The weakening U.S. economy will also leave its mark on other goods-producing industries. “Most notably, the current cooling of U.S. housing markets will put a sizeable dent in Canada’s logging activities,” said Lavoie.

In addition, the softening of the world’s largest economy will translate into a correction in commodity prices, with crude oil and base metals accounting for the bulk of it. “This is likely to temper some of the excitement we have seen lately in the mining, oil and gas industry, particularly drilling activities,” he said.

One sector that is likely to buck the trend is non-residential construction. “With skilled trades workers building multi-billion investment projects in the oil patch, hydro-electric facilities in Quebec, infrastructures related to the 2010 Olympics in British Columbia, automotive facilities in Ontario, and office towers in Calgary, non-residential construction will get even hotter, “ said Lavoie.

Meanwhile, residential construction appears to be taking a different route. “The pace of housing starts and resale home units has already begun to cool off gently in most of Canada’s housing markets because of higher mortgage rates and more expensive homes,” said Lavoie.

As for the service industries, since they have “typically fewer ties to economic developments beyond our borders, we anticipate the service sector will perform better than the goods sector in 2006 and 2007, with growth slightly above the 3% mark,” said Lavoie. Notably, wholesalers, retailers, financial services, professional services and telecoms will be among the top performers.

The tourism-oriented accommodation and food services industry will not be as fortunate. The strength in the Canadian dollar makes trips to Canada expensive for international travelers. The slowdown in the U.S. economy and sky-high gasoline prices can only keep more Americans home.