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Christinne Muschi/christinne muschi The Globe and Mail

Canada's economy will continue to churn out growth, but the pace is set to slow as the housing market cools and the U.S. economy falters, according to a Statistics Canada report released Thursday.

The agency's leading economic indicator index - a monthly gauge of where the economy appears headed in the coming months - slowed to a 0.4 per cent increase in July, after a gain of 0.7 per cent in June.

July's gain is the smallest recorded in 13 months and follows five steady months of increases closer to 1 per cent.

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"The economy is downshifting partly because of the slowing housing market," said Sal Guatieri, a senior economist at BMO Capital Markets.

The slowing U.S. economy is also dragging down Canada's leading economic indicators, Mr. Guatieri said.

"Those are two areas we need to focus on going forward - that Canada's housing market will cool too rapidly because too much demand was pulled forward into earlier this year, and we have to focus on the U.S. situation because there is a higher-than-normal risk of a recession," he said.

The housing index was down 4.1 per cent from June, continuing a months-long cooling trend in Canada's once-bustling real estate sector, as many sales were pulled forward into the first part of the year in advance of interest rate hikes, changes to mortgage requirements and the harmonized sales tax in British Columbia and Ontario.

Most of the slowdown in July's leading economic indicators originated in the household goods sector, where three subsectors fell. None of the seven other components decreased.

Mr. Guatieri had predicted a gain of 0.6 per cent in July - still the lowest figure in over a year - but said the housing market was a bigger drag than anticipated.

The sector, which once led the economy out of recession, is expected to contribute less to Canada's gross domestic product in the second half of the year, or even become a drag on it.

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The slump in home sales was also reflected in falling sales of furniture and durable goods, and consumer spending on household goods is expected to continue to slow in the coming months.

"Consumer spending is cooling down as households focus on debt repayment or try to rebuild their savings rates," Mr. Guatieri said.

Waning fiscal stimulus spending, slowing export growth due to a high Canadian dollar and weak U.S. demand will also contribute to slower growth, he added.

"We won't see the type of growth we saw in the first quarter, at that 6 per cent pace that was the strongest in a decade, because most areas will be slowing down."

While growth is expected to slow from the unsustainable level recorded in the first quarter of the year, the economy will continue to recover and is expected to record more moderate growth of around 2.5 per cent.

However, weaker figures stateside could prove to be a drag on Canada's economy in the coming months.

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"If the U.S. economy slows further, or worse, dips into recession, Canada's economy would also be susceptible to a much slower outlook ... because of the very strong trade links between the two countries," Mr. Guatieri said.

The U.S. Conference Board, a private-sector forecaster, said Thursday its index of leading economic indicators rose 0.1 per cent last month, suggesting growth will be sluggish for the rest of the year after dropping 0.3 per cent in June.

And a report on U.S. unemployment insurance claims released Thursday showed that new applications reached the half-million mark last week for the first time since November, a sign employers are cutting jobs again as the recovery slows.

The threat of a so-called double-dip recession in the U.S. could hit Canada's manufacturing sector, which so far continues to show a steady recovery. New orders for durable goods rose 2.2 per cent in July, their sixth straight advance.

A second report released by Statistics Canada on Thursday found that wholesale sales declined 0.3 per cent to $43.9-billion in June, reflecting softness in exports and pointing toward a potential decline in the retail sector as well.

Fewer wholesale sales sent trade inventories climbing 0.6 per cent to $52.7 billion in June, their highest level since September, 2009.

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