Will Mortgage Rates Be Impacted By the Latest Canadian and U.S. Employment Reports?

The latest Canadian and U.S. employment reports were released last week and both were mixed.

Canadian employment rose by 29,400 jobs, recovering a good chunk of the 46,000 jobs we lost in December. Looking at the longer-term trend, we see that our economy has now created an average of 15,000 new jobs per month over the most recent six months, which is fewer than the 20,000 new jobs per month that we need just to keep pace with our population growth.

Here are the other highlights from the most recent report, with my take on each one:

• Our self-employed ranks increased by 28,300, accounting for almost all of the last month’s gains. Policy makers can be sceptical of job creation fueled by self-employment because it often includes a sub-group of would-be full-time workers who are really just underemployed.
• Private-sector employment fell by 13,600, after falling by 30,200 in December. This is concerning because private-sector job growth forms the backbone of a healthy, growing economy.
• Our economy created 50,500 new full-time positions in January, recovering most of the 56,000 full-time jobs that were lost in December. This reassuring reversal implies that last month’s plunge was a one off, instead of the start of a longer-term downtrend.
• Average hourly wages rose again and are now growing at 2.6% on a year-over-year basis. While that may not sound like much to get excited about, it’s more than double our average inflation rate of 1.2% (as measured by our Consumer Price Index) over the same period. This means that the average Canadian worker has been getting more bang for his/her buck of late.

U.S employment rose by 113,000 new jobs in January. This is the second month in a row that the U.S. jobs data have disappointed (only 75,000 new U.S. jobs were created in December). While the December report was dismissed by many as a one off that was primarily due to bad weather, the January data were seen as being less influenced by one-off factors. The U.S. labour market has created an average of 175,000 new jobs per month over the most recent six months, which is a little above the 150,000 new jobs per month that the U.S. economy needs to keep pace with the natural expansion of its labour force.

Here are the highlights from the latest U.S. employment data, with my take on each one:

• The U.S. unemployment rate dropped from 6.8% to 6.6% at the same time as the U.S. participation rate increased from 62.8% to 63%. (As a reminder, the U.S. participation rate measures the percentage of working-age Americans who are either employed or who are actively looking for work.)  That means that the U.S. unemployment rate fell because more people found jobs, not, as has so often been the case since the start of the Great Recession, because frustrated unemployed Americans gave up looking for work altogether.
• Goods-producing manufacturers added 76,000 new jobs, creating the highest number of new jobs in this category since January 2006. Just as in Canada, U.S. manufacturing jobs fuel job creation in other areas of the U.S. economy, so if this momentum holds, it should create a positive spillover for the U.S. service sector employment in future months.
• Average hourly earnings rose by 0.2% on a month-over-month basis and have risen by 1.9% on a year-over-year basis. As in Canada, U.S. earnings growth is outpacing inflation growth (as measured by the U.S. Consumer Price Index), which rose by 1.5% over the same period.
• On an overall basis, this report was deemed  not weak enough to cause the Fed to slow its tapering timetable, but nowhere near strong enough to cause the Fed to accelerate that timetable either.

Five-year Government of Canada bond yields rose by three basis points last week, closing at 1.6% on Friday. Fixed rates fell in response again last week and lender competition continues to heat up in advance of the spring market. Borrowers who are putting down at least 20% on the purchase of a new home should be able to find a five-year fixed rate in the 3.14% range and borrowers who are putting down less than 20% can now find five-year fixed rates for as low as 3.04% (albeit with more limited terms and conditions).

Five-year variable-rate mortgages are offered at rates as low as prime minus 0.65%, which works out to 2.35% using today’s prime rate of 3.00%.

The Bottom Line: The January Canadian and U.S. employment data provide insight into the employment trends in both countries. While working Canadians are incrementally better off because average incomes are rising faster than prices, our employment growth momentum continues to slow. Meanwhile, the purchasing power of the average working American isn’t rising as quickly, relative to prices, as in Canada, but U.S. employment growth trends are more encouraging.

Overall, these latest job reports should not substantially alter the plans of either the U.S. Federal Reserve or the Bank of Canada. From a mortgage-rate perspective, that means steady as she goes.