A Review of Our Latest Employment Report with Implications for Canadian Mortgage Rates

Anyone keeping an eye on Canadian mortgage rates should pay special attention to our Labour Force Survey (commonly referred to as our ‘employment report’), which is released by Statistics Canada each month.

The Survey gives us a bevy of useful information about whether and where our economy is adding jobs, whether average incomes are rising or falling, and whether the average worker is putting in more or less  hours of work each month. Together, these factors combine to give us valuable insight into where our overall economic momentum is headed.  

Here are the data from the latest report, which was released last Friday, with some thoughts on its implications for Canadian mortgage rates:

• Our economy added 12,500 new jobs overall last month, almost bang on the 12,400 new jobs that we have averaged over the last six months. The federal government has hinted that over the near term the Bank of Canada (BoC) will lean its monetary policy more towards job creation than tight inflation control and the April employment data shouldn’t give them any cause to alter that approach.
• The public sector added 34,200 new jobs in April. In other words, full-time government hiring was the only reason we added jobs over the past month. That’s an unsustainable trend that can’t be relied upon in this age of austerity-themed government budgets.
• The private sector lost 20,000 jobs in April and has now shed 105,400 jobs over the past two months. In fact, this sector has grown by only 0.1% over the past year so our current private-sector hiring slump is actually very well entrenched. This is a big concern because private-sector job growth and GDP growth go hand-in-hand, making it unlikely that we will see any real change in our overall economic momentum until private-sector hiring looks very different than it does today.
• The manufacturing sector added 21,000 new jobs in April. That would be a more encouraging development if the same sector hadn’t shed 54,000 jobs in March, meaning that we’re still down 33,000 manufacturing jobs over the last two months. In fact, we have seen the total number of manufacturing jobs shrink by 52,000 over the past twelve months, so this slump is also well entrenched. Manufacturing is a key sector of our economy because its jobs produce a powerful multiplier effect that ripples through the broader economy. This impact was highlighted in a report by the Department of Finance last year which estimated that each manufacturing job in the automotive industry, for example, produces 3.6 other jobs, 2.4 of which are in non-manufacturing sectors. Here’s hoping that the recent hiring pick up in manufacturing continues.
• Average hourly wages rose by 2.9% for the month, which was well above the rate of inflation. At first glance this is not intuitive. Why would labour costs be significantly outpacing our overall rate of inflation when we still have surplus labour available? David Rosenberg is now highlighting the risk that a shortage of skilled labour could trigger cost-push inflation. (While he is primarily focusing on the U.S. labour market, the risk exists here in Canada as well.) This type of inflation is caused when there is a skills mismatch between unemployed workers and the jobs available to them, forcing employers to bid up the cost of qualified skilled labour. There is an 80%+ correlation between rising labour costs and rising inflation, so if skilled labour remains in short supply over an extended period, higher prices will inevitably follow. This raises the medium-term risk of stagflation, a scenario we last faced in the 1970’s when high inflation coincided slowing economic growth and high levels of unemployment.

Government of Canada (GoC) five-year bond yields were 11 basis points higher for the week, closing at 1.34% on Friday. Most of that spike happened on Friday so I’ll be watching to see if that momentum carries through into this week. Only a few smaller lenders have raised their fixed-mortgage rates in response thus far but if the five-year GoC yield continues to move higher, more are sure to follow. As such, anyone currently in the market for a five-year fixed-rate mortgage will be wise to lock in today’s sub-3% rates while they still can.

Five-year variable rate mortgages are still offered in the prime minus .45% range (which works out to 2.55% using today’s prime rate).

The Bottom Line: The April employment report confirmed that private-sector employment continued to shrink last month. While our ongoing private-sector slump was temporarily offset by an increase in full-time public-sector jobs, the experts I read expect government hiring to slow in the near future. Normally excess labour capacity would coincide with continued low inflation and mortgage rates, but the threat of stagflation, which would trigger higher inflation and mortgage rates, is slowly rising. While this is still a distant threat, we should stay tuned on that front.