E-sight August 5: Canada sheds jobs for a second consecutive month, US payrolls surge, BoC and Fed to keep hiking

The Canadian economic expansion is losing momentum and the weakness has started showing up in the labour market. The economy lost 30,600 net jobs in July, disappointing market expectations for an increase of 20,000 and building on a 43,200 loss in June. A decline in the labour force (i.e. fewer people looking for work) kept the unemployment rate unchanged at 4.9 per cent. 

The details of the report were weak. Full-time employment fell by 13,100 while part-time retreated 17,500. Employment in the public sector contracted 51,000 while the private sector shed 13,800 – with an offset coming from an increase of 31,300 self-employed positions.

The industry story showed surprising losses in the services-producing sectors, and this is where the numbers raise some skepticism that perhaps the monthly volatility is overstating the labour market weakness. 

Statistics Canada reported that the health care and social assistance sector cut 22,000 jobs and educational services lost 18,000 positions. I am suspicious of large losses in these segments during the summer. Although the data is seasonally adjusted and should remove normal seasonal swings in employment, these categories – particularly education – seem to have a track record of large drops in the summer followed by large offsetting rebounds. 

Nevertheless, other areas of services were also weak. Wholesale and retail trade lost a net 26,900 positions and business, building and support services cut 12,300 jobs. In contrast, finance and insurance continued to hire. Transportation and information, culture and recreation also posted gains. 

The goods-producing industries added a healthy 22,600 jobs, with gains across all sub-sectors. Manufacturing (+7,100) and construction (+7,700) were the most notable. 

Total hours worked were down 0.5 per cent in July, which augurs for a weak month for real GDP. 

Average hourly wages of employees were roughly unchanged from June at +5.2 per cent year-over-year, well short of the above 8 per cent pace of inflation.

Overall, this was a weak employment report and marks the second monthly aggregate job loss. The resilience in goods sector is a bit surprising, as the slowing economic growth in recent data seemed more concentrated on this side of the economy. I am deeply suspicious of the degree of job losses in the public sector during the summer. However, the large increase in self-employment in July was a rebound to offset some of the dramatically large 59,000 loss in June.

Looking past the volatility, I don’t think the last two employment reports have been as bad as they look at face value, but they definitely paint a picture of an economy where employment is moderating. This is broadly consistent with the Canadian real GDP by industry data. Last Friday, Stats Can reported that the Canadian economy posted no growth in May and the flash estimate for June was for a small 0.1 per cent increase. With that release, we now know that the Canadian economy recorded strong annualized 4.4 per cent growth in the second quarter, but the pace of growth was slowing rapidly heading into the third quarter, reducing labour demand.

All told, the weakness in the Canadian labour market is just beginning. The impact of the Bank of Canada’s and US Federal Reserve’s aggressive tightening of monetary policy has yet to show up in the Canadian labour market. Perhaps some of the retail and wholesale job losses in July might be attributed to the softening of consumer spending, but the impact of higher interest rates on construction and manufacturing wasn’t evident in todays’ data. With the unemployment rate remaining at multi-decade lows, labour scarcity will remain a key challenge for businesses, and combined with a rapidly rising cost of living, there is considerable risk of increased wage pressures that might make getting inflation back to the Bank of Canada’s 2 per cent mid-point target difficult. Accordingly, the Bank of Canada is likely to stick to its guns and continue raising interest rates, with the goal tempering domestic demand and lowering inflation and inflation expectations. This will translate to further weaker employment reports in the months to come. The starting point is a labour market in excess demand, where labour and skills shortages are pervasive. It will take time before slack in the labour market starts to develop.

In other news, the US labour market delivered a strong performance in July, posting an increase of non-farm payrolls of 528,000 – more than double market expectations. The unemployment rate ticked down a tenth of a percentage point to a new record low of 3.5 per cent. In the last E-sights weekly, I argued that the US was not in a recession yet, despite two quarterly contractions in real GDP, and this sort of labour market strength confirms that assessment. Financial markets have been pricing in a 50 basis point hike by the Federal Reserve at its next policy announcement, but strong data like this will get markets thinking that a 75 basis point hike could be in the offing.