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Posted Tuesday July 9, 2019


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Canada: Employment

Weak headline, but details confirm strength of the labour market

Employment fell in June, compared to expectations of a gain, and the unemployment rate rose slightly; However, the details of the report were strong. Full-time employment increased, and wage growth rose to a 12-month high; Jobs data confirm that domestic economy was on a roll in Q2 - by David Watt

Facts

Employment fell by 2,200 in June. The consensus expectation was for a rise of 9,900. The unemployment rose to 5.5%, in line with the consensus expectation.

Average hourly wages of permanent employees (AHWPE) rose by 3.6% y-o-y, the highest in a year. This was up from the earlier 2.6%, and was above the expected 2.7%. On a month-on-month basis, the increase in AHWPE was 1.1%, the largest since January 2005.

Hours worked rose by 0.7% m-o-m, and increased at an annualized pace of 3.4% in Q2. This is up from -0.9% in Q1.

In the month, there was an employment gain in the full-time category (+24,100) that was offset by a 26,200 decline in part-time employment. Increases in public sector (+16,200), and private sector (+23,000) employment were offset by a drop in self-employment.

Goods sector employment fell by 32,800, the largest one-month drop since March 2016. There was weakness across the goods sector, led by a decline in manufacturing. The goods-sector weakness was almost offset by an increase in services-sector employment of 30,600, led by health care, education, transportation and warehousing, and information, culture and recreation.

Implications

Even though the headline change in employment came in below expectations, and the unemployment rate increased, the other details of the report were strong. Employment increased in the full-time category, the private sector added positions, hours worked were up firmly in the month, and a key wage measure rose to its highest level in a year.

The details also provide further confirmation that the economy rebounded with some vigour in Q2. For example, full-time employment increased by 124,800 in Q2, up from an average of 50,900 over the prior four quarters, when GDP growth averaged 1.3% per quarter. In fact, the increase in full-time employment was the highest since 2017 Q1, when GDP increased by 4.1%. Meanwhile, hours worked increased by 3.4% annualized in Q2, the largest increase since 2017 Q3.

The last time employment and hours worked indicators were posting results similar to those seen in Q2, the economy was on the way to annual GDP growth of 3.0%.

That said, we do not think that GDP growth in 2019 is heading to such a lofty reading. Instead, we expect GDP growth of 1.1% this year. In addition, we think that today's jobs data gave some hints as to why the economy might post underwhelming growth in 2019 H2. For example, the weakness in goods sector employment, particularly manufacturing might be a sign that the slowdown in global factory sector activity is hitting Canada. This bears close scrutiny given that the Markit Canadian manufacturing PMI has been in contraction territory for the past three months through June.

We see two other labour market trends that also need to be watched closely. First, the good news on the employment front in June was primarily driven by the health care, and education sectors. As employment in these sub-categories tend to be more driven by the public sector, rather than private sector demand, we would take a more cautious view of the job market if they remained key drivers of employment growth in coming months.

Second, there was an intriguing demographic story in job creation in the first half of 2019. Over that six month period, the economy generated a solid 247,500 jobs. However, most of those gains were among youth (+102,000), and those 65 years of age or over (+89,200). Job creation in the cohort of those 25 to 64 years of age, which accounts for 82% of total employment, was a comparatively lacklustre 56,300. Employment growth concentrated in the fringe cohorts of the labour market is not considered a key driver of consumption growth. This is important since income gains in the prime-age cohort are a key driver of consumption growth.

Looking ahead to the Bank of Canada policy meeting on 10 July, we think that today's employment report provides more confirmation that the growth soft patch in late 2018 and early 2019 was temporary. While this might tempt the Bank to take a more hawkish stance, we think that the intensifying global challenges will offset the strong domestic story and lead the Bank to maintain a neutral stance. We look for the BoC to leave the policy rate unchanged at 1.75%.

David Watt is Chief Economist, HSBC Canada







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