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Economic Insight Stabilizing Canadian economy has little to fear but fear itself

Two big Canadian economic reports at the end of last week – employment and trade – told us that, despite what you might have heard ... the economy is getting back on track

Mark Blinch/Reuters

Two big Canadian economic reports at the end of last week – employment and trade – told us a couple of important things about Canada's economy. One is that, despite what you might have heard, both indicators were pretty good, suggesting that the economy is getting back on track. The other is that after a volatile period filled with worrisome headlines, businesses are hesitant to come along for the ride.

First, let's clear one thing up: The supposedly negative jobs number – a dip of 5,700 jobs in January – really wasn't so negative. Indeed, it largely sustained the unexpectedly large gain of 23,000 positions in December, suggesting that the labour market's modest growth trend remains intact. Full-time employment grew. And given the statistical margin of error in the Labour Force Survey (it's only accurate to within plus or minus 29,500, two-thirds of the time), a dip this small is little more than a rounding error.

Not to mention the inexplicable 23,000-job plunge in the 55-plus age group, a segment of the work force that hadn't seen its employment decline for 85 consecutive months until this one. That's the kind of anomaly that makes you wonder if this isn't one of those months where the survey sample simply misfired.

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Taken as a whole, it suggests, probably, a roughly steady job market in the month, in the context of a modestly growing job market over the past many months. All in all, a comforting report.

There also aren't a lot of bad things to say about a December trade report that showed a brisk one-month gain of 3.9 per cent in exports – except, maybe, "it took you long enough." Exports, especially of the non-resource variety, were supposed to be motoring ahead nicely thanks to the weak Canadian dollar, which makes them cheaper for foreign buyers. But they spent a perplexing few months in a downward drift, before regaining momentum through November and December. It's still a tad early to say for sure, but perhaps the currency effects and the generally healthy state of U.S. domestic demand are, at long last, starting to pay off as predicted.

Still, the details of both reports show where the soft underbelly of Canada's economy is exposed.

Imports of industrial machinery, equipment and parts – a pretty reliable proxy for companies investing in expanding and/or upgrading their operations – remain decidedly weak. They managed a thin 0.5-per-cent increase in the month, all due to higher prices; volumes were actually down 2.3 per cent. The fourth quarter continued a string of now five successive quarters in which volumes of machinery and equipment imports have declined. The weak December figures suggest the trend is alive and kicking.

They're the kind of numbers that reinforce the Bank of Canada's recent forecast that business investment would subtract 0.5 percentage points from gross domestic product growth in 2016, which would mark its third straight year of contraction.

The employment statistics, too, remind us of the ailing pockets of the economy where businesses are reluctant to spend. In Alberta, where the capital-intensive oil-and-gas sector has spent the past year or so cutting spending budgets to the bone, employment slumped 10,000 in January, the fourth consecutive monthly decline, during which it has shed 35,000 jobs. Oil-rich Newfoundland and Saskatchewan also suffered job losses. Nationally, employment in construction fell in December for the third time in four months, another casualty of the business spending slump.

In the context of the past couple of months, can you blame businesses? The relentlessly negative news flow would have rattled anyone in the epicentre of the resource slowdown, and would have given pause to even the most confident business manager elsewhere. A deeper slide in oil, a plunging Canadian dollar, slumping financial markets, uncertainty about the global economy and about interest rates on both sides of the Canada-U.S. border, and even some rekindled inflation jitters, all injected a justifiable tone of caution into the country's corporate offices. Executives are no more immune to the climate of worry than the rest of us.

Given the environment, it would have been shocking if these latest economic indicators didn't show signs of a wary business sector sitting on its hands. It's not necessarily evidence of a coming new wave of spending constraint, especially given the otherwise encouraging tone of the data. But it is a reminder that we still have a lot of very nervous businesses in this country that, given what has gone on over the past year, are going to need considerable convincing before they launch into substantial new spending commitments.

Even for businesses not mired in the oil slump, it will take more than a couple of months of healthy, stable economic data to bring back that confidence – and it's still prone to be easily shaken. Over the next few months, fragile business confidence might the biggest economic hurdle for the Canadian economy to clear.

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