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Posted Tuesday April 9, 2019


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Employment

A modest downside surprise in March, but still a solid quarter

Decline in employment in March followed strong gains in January and February; The unemployment rate remained near its historic low; wage growth picking up; Hours worked continue to point toward tepid GDP growth

Facts

Employment fell by 7,200 in March. This was a downside surprise as the consensus was for a gain of 6,000. However, it follows two large upside surprises in January and February that exceeded consensus expectations by a cumulative 116,500. Employment rose by 115,400 in 2019 Q1, the largest increase since 2017 Q4.

In March, there were declines in both the full-time (-6,400), and part-time (-900) categories. From a year ago, employment is up by 331,500, or 1.8%.

By cohort, employment in the key prime working age category (25 years to 54 years of age) fell by 35,200, the largest monthly drop since April 2014.

The unemployment rate was unchanged at 5.8%, as expected.

Average hourly wages of permanent employees rose by 0.2% m-o-m, and are up by 2.3% y-o-y. Wage growth continues to recover from its November lows.

Hours worked rose by 1.0% m-o-m. This was the first increase in hours worked since November 2018. In Q1, hours worked fell at an annualized 0.9% pace.

By sector, employment rose by 1,600 among goods-producing industries, with a small gain in manufacturing offsetting declines in construction and natural resources. Services sector employment fell by 8,800, with declines in health care, building services, and accommodation and food services. Increases were reported in finance and real estate, trade and public administration.

Source: HSBC, Statistics Canada

Implications

Though the March employment report was a downside surprise, the report contained a number of positive signs regarding the state of the labour market. In particular, the jobless rate remained near its historic low, and wage growth continues to improve.

Other favourable characteristics are that full-time employment has accounted for over 60% of the 331,500 jobs created over the past year. Additionally, the private sector has accounted for 92% of the jobs created. Thus, while firms might have been reluctant to invest in machinery and equipment, they have not been as reluctant to boost payrolls. The job gains are also encouraging given that GDP growth slowed to 1.8% in 2018, from 3.0% in 2017, and that GDP growth in 2018 Q4 was just 0.4%.

The recent increase in the pace of wage growth might be a sign that the tight labour market is again starting to push up labour costs, which could provide some support for consumer spending in 2019.

However, there are some concerns about the labour market as well. Most notably, even though employment is increasing, total hours worked are slowing. The 6m annualized change in hours worked is below 1%. This stands in contrast to readings of between 3% and 3.5% in late 2017. The upswing in hours worked in 2017 were consistent with the increase in the pace of GDP growth. Similarly, the slowdown in hours worked in 2018 aligned with slower GDP growth. Through Q1, hours worked are consistent with another year of sluggish GDP growth. Our forecast is for GDP growth of 1.1% this year.

There is another trend to watch closely -- the increase in employment among those 65 years of age and over. Over the past six months, employment among those of retirement age is up by 96,000, accounting for 45% of total job creation. Prime working age employment is up by 69,000 over the same period. At the present time, those of retirement age account for less than 5% of total employment, while the prime working age category accounts for 68% of employment. That job creation over the past several months has been so reliant on such a small category suggests to us that there might be some underlying weakness in job creation that will need to be closely monitored.

While there have been some encouraging developments in the labour market, other indicators continue to suggest that GDP growth remains weak. It will take time to determine which signals are giving an accurate reading about the underlying pace of growth. Given this uncertainty we think that the Bank of Canada will remain in "wait and see" mode, leaving the policy rate on hold at 1.7%.

David Watt is Chief Economist, HSBC Canada











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