QE3 – Nothing To See Here FolksOctober 1, 2012
Overview: How the World Looks From My DeskOctober 15, 2012
We learn whether average incomes are rising or falling (which ties into many other parts of the economy such as the cost of labour and consumer spending rates). We learn where jobs are being created and lost (this tells us which sectors and industries are strengthening and which are weakening). We learn whether people are working more or less (which helps us gauge whether our economy is gaining or losing momentum – expressed as the change in our GDP output). We also learn, on an overall basis, what percentage of our total available labour force is currently employed (this tells us how much more room our economy has to grow before it reaches full capacity – a key threshold in our economic cycle beyond which adding incremental production becomes more expensive and as such, can lead to significantly higher rates of inflation).
In today’s environment, both the U.S. and Canadian employment reports have taken on even more significance. U.S. Fed Chairman Ben Bernanke has made it clear that the Fed’s monetary policy will be geared toward promoting employment growth, even at the expense of above-target inflation for an extended period. Meanwhile, Bank of Canada (BoC) Governor Mark Carney has predicted that Canadian interest rates will rise faster than most are expecting in large part because he believes that the Canadian economy will return to full capacity more quickly than the consensus is forecasting.
On Friday of last week we received the latest Canadian and U.S. employment reports for September and given their elevated importance, today’s Update will take a look at both in detail.
The U.S. Employment Report
The latest U.S. employment data was weaker than expected, although some optimists argue that the numbers show a positive trend when compared to employment growth in the early summer. (In my view the optimists are reaching for a pretty thin silver lining here because the data still barely clears today’s ultra-low bar of expectations for U.S .employment.)
Here were the highlights from the report:
- Overall employment increased by 114,000 new jobs and the previous two job reports were revised upwards by a total of 86,000. The upward revisions created a mixed reaction because while they raised the most recent three-month average for monthly new-job creation to 146,000, these revisions also mean that the current month, at 114,000, now shows waning momentum. (To give 114,000 new jobs some context, the U.S. economy needs to create about 150,000 new jobs each month just to keep pace with its population growth and most experts agree that it needs to average about 200,000 new jobs per month, for several years, to get anywhere close to the U.S. Fed’s long-range target of 5.5% unemployment.)
(Side note: David Rosenberg recently pointed out that only about half of the eight million U.S. jobs that have been lost since the start of the Great Recession have been recovered, despite rampant and unsustainable levels of government stimulus. He also offered a surprising statistic: there are now more Americans enrolling in the federal food stamp program each month than there are new jobs being created).
- Average hours worked increased slightly from 34.4 in August to 34.5 in September, which is a trend in the right direction but also the first uptick since the June report.
- Average incomes rose an impressive 0.6% for the month but the experts I read expect the September consumer price index (CPI) to increase by almost the same amount as a result of higher food and energy prices. As such, this increase in earnings is not expected to expand the purchasing power of the average American over the short term.
- Most of the new jobs were created in the service sector and these are often of a lower-paying variety.
- Factory payrolls fell by 16,000 for the month after a 22,000 slide in August. This may be a signal that a significant slowdown in U.S. export demand is now taking root.
- Two-thirds of the new jobs created in September were in part-time work and most of these were taken for what are deemed to be “economic reasons”. In other words, people took part-time work because they could not find full-time work (this group is often referred to as “the under-employed”). The 582,000 new jobs created in this category marked its largest single monthly gain ever.
- On an overall basis the U.S. unemployment rate fell to 7.8%, which is a happy political coincidence for President Obama because it is now back to the same level it was at when he first took office in January of 2009. In reality though, the sub-8% unemployment rate was really just the bi-product of a lower participation rate (which measures only those people who are either working or actively looking for work). One U.S. analyst reported that if the participation rate was the same as it was 19 months ago, the U.S. unemployment rate would actually be 8.6%.
- Meanwhile the U6 unemployment rate, which many experts feel is a more accurate and meaningful measure of the U.S. employment picture (because it counts people who have not actively looked for work in the past month as well as those who are under-employed), held steady at 14.7%, or about double the “official” unemployment rate.
The Canadian Employment Report
The latest Canadian employment report came in much higher than expected. But while the overall Canadian employment picture is far rosier than the one south of the 49th parallel, the details in our September employment data still showed some areas of concern.
First, the positives:
- Overall employment increased by a whopping 52,000 new jobs in September, which was more than five times what the market was expecting. Better still, Canadian employment levels are now at an all-time high.
- Full-time jobs accounted for 85% of the total gain and the private sector expanded by 30,000 new jobs.
- While the unemployment rate increased slightly from 7.3% to 7.4%, that was only because 73,000 more Canadians began actively looking for work. Without this change in our participation rate, unemployment would have actually fallen to 7.1%.
(Side note: By comparison, if we use the same methodology that the U.S. uses to calculate its unemployment rate of 7.8%, ours would be 5.8%.)
- Average hours worked jumped by 0.4% and average earnings increased by 1.5% on a month-over-month basis, and by 3.5% on a year-over-year basis. This means that, unlike our southern neighbours, the average Canadian’s earnings are rising more quickly than our rate of inflation (as measured by our CPI).
Now you’re probably wondering: If we have record employment levels, if most of our new jobs are full-time and in the private sector, and if our incomes are outpacing our rate of inflation, what’s not to like?
Consider the following:
- Of the 52,000 new jobs created last month, 33,800 of them were for newly self-employed workers. This is considered a ‘soft’ employment category because people who are actually in a job transition or who are unable to find more traditional employment will often categorize themselves as self-employed. As such, a spike in newly self-employed workers is treated with a dose of scepticism and is not normally considered a strong employment indicator.
- The September report showed 34,000 new retail positions, which can tend to be lower-paying jobs, and 29,000 new jobs in construction, which many experts consider to be tenuous given the consensus outlook for most of our regional housing markets.
- Youth unemployment rose to 15% and that sub-group holds 70,000 fewer jobs than it did only a year ago.
- Of greatest concern was the loss of another 6,200 manufacturing jobs, marking the fourth month in a row that jobs in this sector have contracted. The strong Loonie combined with slowing economic growth in most of the world’s largest economies continues to hurt demand for Canadian exports. While a strong surge in service-related jobs is a welcome short-term development, manufacturing jobs still form the bedrock of our economy, particularly in Ontario and Quebec, and this sector continues to shrink.
Five-year Government of Canada (GoC) bond yields drifted lower through most of last week before surging higher after our latest employment report was released. When the dust settled the GoC five-year yield finished the week 3 basis points higher, closing at 1.33% on Friday. That momentum carried through to yesterday with the five-year yield rising another 4 basis points to close at 1.37%. But despite this continued volatility, the GoC five-year continues to fluctuate in a fairly tight range between 1.25% to 1.50%. Five-year fixed-mortgage rates can still be found in the 3.00% range and a few lenders dropped their shorter-term fixed rates last week, bringing them more in line with the market.
Variable rate discounts can be found in the prime minus 0.40% range (which translates to 2.60% using today’s prime rate) and that is tweaking the curiosity of borrowers who are looking to take advantage of the savings offered at the short-end of the yield curve. To that group of borrowers I still suggest that a one-year fixed rate may prove a better bet. Consider that my best one-year fixed rate (2.49%) is currently lower than my best five-year variable rate (2.60%) and that BoC Governor Mark Carney has made it very clear that he has no intention of lowering the BoC’s overnight rate (on which variable mortgage rates are based) any time soon.
The bottom line: The latest U.S. jobs report basically confirmed that U.S. employment remains “stuck in the mud” (to use U.S. Fed Chairman Ben Bernanke’s words). While the Canadian employment picture is more encouraging by comparison, there is still plenty of slack in our economy and we’re a long way from reaching full capacity. On balance then, these reports did not alter my long-standing view that GoC bond yields (and our fixed-mortgage rates by association), should remain at ultra-low levels for the foreseeable future.