The Inconvenient Truth About Our Latest Employment Report
Monday Morning Interest Rate Update for December 4, 2017
Our pace of job creation matters to anyone keeping an eye on Canadian mortgage rates because over time, as the demand for labour increases, its cost should rise. And since labour costs are a significant component in the overall cost of most of the items and services that we buy, their relative movements can have a powerful impact on overall inflation (which can then lead to higher mortgage rates).
Bank of Canada (BoC) Governor Poloz recently stated his belief that our economy is hovering in what he calls an “inflationary sweet spot” where both our actual output and our maximum potential output are expanding. At the moment, this is giving our economy more room for non-inflationary growth, but a surge in employment demand could easily upset this delicate balance and compel the BoC to accelerate its rate-hike timetable.
The market’s reaction to the latest employment data was dramatic. Government of Canada (GoC) five-year bond yields surged higher by almost ten basis points, the Loonie registered its biggest one-day gain against the Greenback in almost two years, and the futures market increased the odds from 40% to 66% that the BoC will raise its policy rate in January.
In the blink of an eye the consensus market view u-turned from expecting the BoC to maintain a lower-for-longer approach to betting that the BoC’s next hike is now just around the corner. We are fortunate that the Bank keeps a much steadier hand on its policy-rate tiller.
Interestingly, there was at least one critical detail in the report that contradicted the market’s assumption that a surge in the demand for labour is about to trigger an inflation spike that will force the Bank to accelerate its rate-hike timetable. But before we get to that, let’s look at five highlights from our latest employment data to see what got investors so excited:
- Our economy created 79,500 new jobs in November on top of the 35,000 new jobs that were created in October.
- Our official unemployment rate fell from 6.3% in October to 5.9% in November, marking its lowest level since early in 2008. The participation rate, which measures the percentage of working-age Canadians who are either employed or actively looking for work, held steady at 65.7%.
- Full-time employment increased by about 30,000 new jobs and our economy has now expanded by almost 400,000 full-time jobs over the past year. Part-time employment also rose by 50,000 new jobs.
- Average hourly earnings rose by 2.7% last month on a year-over-year basis, up from 2.4% in October, and way up from the 0.5% year-over-year pace we saw in April of this year.
- The manufacturing sector added another 30,000 jobs in November on top of the 7,800 new jobs that it added in October. That’s a hopeful sign for the continued recovery of a sector that is vital to our overall economy.
Notwithstanding these encouraging data points, economist David Rosenberg noted a devil in the detail that casts our latest employment report in a very different light. Average hours worked plunged by 1.1% in November, which he estimates is equivalent to losing 130,000 jobs over the month.
Rosenberg also noted that “the aggregate hours worked index, which is the total volume of labour input into the economy, sagged 0.7% last month”. In other words, while we added more workers, they did less actual work.
With that understood, warnings about imminent policy-rate rises seem premature. If our economy’s overall demand for labour didn’t even rise last month, it should be able to continue hovering in today’s inflationary sweet spot for longer than the market consensus now believes.
The Bottom Line: If you’re a policy maker worried about rising inflationary pressures, a drop in the overall demand for labour matters much more than a rise in worker headcount. With that in mind, I won’t be betting the farm on a BoC rate raise in January just yet.