Canadian and U.S. Employment Lower Than Expected in January

Last week we received the latest Canadian and U.S. employment reports. Although both headline numbers came in lower than expected, there were silver linings in both countries.

Here are the highlights from the latest Canadian employment report:

• Our economy shed 5,700 jobs in January, continuing our seesaw trend of gaining jobs in one month and losing jobs in the next. Looking at the longer-term trends, we have now averaged 10,500 new jobs over the last twelve months but only 8,900 new jobs/month over the last six, so our job-creation momentum is continuing to slow.
• We added 5,600 full-time jobs and lost 11,300 part-time jobs, while paid employment rose by 14,600 new jobs and our self-employed ranks fell by 20,200. Our policy makers will be glad to see us trading part-time jobs for full-time jobs and self-employed jobs for paid employment jobs but they will also be concerned that the improvement in the quality of new-job creation is being more than offset with losses in overall quantity.
• Average hourly wages have now increased by 2.8% on a year-over-year basis. This trend is encouraging because higher wages increase the purchasing power of the average Canadian worker (better to increase spending by raising incomes than by further increasing our household debt levels).
• At the provincial level, Ontario was the biggest gainer, adding 19,800 news jobs in January. When I read that statistic, I assumed that we had seen another surge in manufacturing employment, which had expanded by 30,000 jobs in the prior twelve months. Despite the Loonie’s fall however, the manufacturing sector gave back 13,000 jobs last month and Ontario’s gains were actually in trade, education, and accommodation and food services.
• Not surprisingly, Alberta shed 10,000 jobs again last month and its unemployment rate now stands at 7.4%, putting it above our national average for the first time in almost thirty years. Alberta has served as our economy’s main job-creation engine since the start of the Great Recession and that momentum will be hard to replace.

Overall, this was a mixed report. Our headline employment number declined but other measures of job quality improved (hours worked, average wages, full-time/part-time ratio, paid employment/self-employment ratio). The most concerning trend is the decline in our longer-term job creation momentum, and we’ll continue to keep an eye on that in the months to come.

Here are the highlights from the latest U.S non-farm payrolls report:

• The U.S. economy added 151,000 jobs in January, below the 185,000 the consensus was expecting but still well above the 100,000 new jobs/month that Fed Chair Yellen says the U.S. economy needs to keep up with the natural growth of its working-age population.
• The unemployment rate broke below the 5% threshold, coming in at 4.9% for the month, and is now less than half of the 10% unemployment reading we saw back in 2009.
• Average hours worked increased by 0.1 to 34.6 hours in January, and average hourly earnings rose by a robust 0.5% for the month, raising average earnings 2.5% on a year-over-year basis. (This rise was helped by an increase in the minimum wage in several states at the start of 2016.) Average earnings growth is now well above the U.S. inflation rate of 0.7% over the same period which means that the purchasing power of the average American worker is expanding. If the U.S. labour market continues to firm up it will keep putting upward pressure on wages and U.S. inflation may finally be within reach of the Fed’s 2% target.
• Interestingly, the 25 to 34 year old category saw a surge of 429,000 new jobs last month, the biggest gain for that age cohort in twenty-five years. This group typically spends a high percentage of its disposable income, so more money in the pockets of 25 to 34 year olds should help buoy measures of U.S. consumer spending in the coming months, not to mention the boost it should give U.S. real-estate markets, which have been starved of these prototypical first-time buyers since the start of the Great Recession.
• U.S. manufacturers added 29,000 new jobs in January, which marked the sector’s largest gain since November 2014. The surging U.S. dollar has made life harder for U.S. manufacturers of late, so this is a welcome (and somewhat surprising) development.

Overall U.S. employment growth slowed from its recent torrid pace in January but the details in the data were still encouraging. Full-time job creation was robust in January. Average hours worked and average earnings continue to rise. Even the beleaguered U.S. manufacturing sector is showing signs of life despite the surging Greenback. In summary, I don’t think that this report will cause the Fed to adjust its cautious overall view in either direction.

Five-year Government of Canada bond yields fell by nine basis points last week, closing at 0.58% on Friday. Five-year fixed-rate mortgages are available in the 2.49% to 2.74% range, depending on the terms and conditions that are important to you, and five-year fixed pre-approvals are offered at rates as low as 2.79%.

Five-year variable-rate mortgages are available in the prime minus 0.40% to prime minus 0.30% range, which translates into rates of 2.30% to 2.40% using today’s prime rate of 2.70%.

The Bottom Line: The U.S. and Canadian headline employment numbers came in below their consensus forecasts, but outside of some key areas, like energy, there were still plenty of positives. Nonetheless it should take a while before the still nascent trends of rising average incomes, the increases in average hours worked and the conversion of part-time workers into full-time workers build enough momentum to alter the monetary policies of either country. That means that our mortgage rates should stay at or near their current levels for some time yet.