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Canada's (marvelous?) jobs market: Better than you think or something more ominous?

Briefing highlights

  • Various views of the labour market
  • What it could mean for Bank of Canada
  • Markets at a glance
  • Bond selloff continues
  • Canada launches trade complaint against U.S.

Views of the labour market

The beauty of Canada's jobs market appears to be in the eye of the beholder.

Most economists applauded Friday's labour report from Statistics Canada, which showed a spectacular number of jobs created in December and an unemployment rate down to its lowest in decades.

But there are those who say it's even better than it looks, and at least one who questions why Bay Street gushed and the Canadian dollar rose on bets that Friday's strong report signalled an interest rate hike next week.

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That view solidified on Monday after an optimistic business outlook survey released by the Bank of Canada. Observers now believe central bank governor Stephen Poloz, senior deputy Carolyn Wilkins and their colleagues will raise their benchmark overnight rate by one-quarter of a percentage point to 1.25 per cent.

"After [Monday's] business outlook survey confirmed there is little slack left in the economy, we officially pulled forward our call for the Bank of Canada to raise rates next week, rather than in March," said Bank of Montreal senior economist Sal Guatieri.

"For a data-dependent bank with an eye on capacity pressures, the survey, coupled with another stellar jobs report, greatly raises the odds on a Jan. 17 move … even as Q4 GDP growth looks to fall shy of the bank's estimate," he added.

"We expect follow-up moves in July and October, with the lengthy pause reflecting concerns at NAFTA trade talks, new mortgage rules and the sensitivity of indebted households."

Mr. Guatieri was referring to troubled negotiations to remake the North American free-trade agreement, the commercial bank regulator's new mortgage qualifying rules, and how the central bank's two 2017 rate hikes might be affecting consumers who have among the highest debt burdens in the world.

Here are some views:

What Statistics Canada reports

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The federal agency's monthly labour force survey showed a net 78,600 jobs created in December, most of them part-time positions.

The number of employed Canadians rose to 18.65-million from 18.57-million, and the number without work eased to 1.13-million from 1.16-million.

All of this brought total jobs created last year to 423,000, a jump of 2.3 per cent and most of it in full-time work.

Unemployment, in turn, eased to 5.7 per cent, down by 1.2 percentage points over the course of 2017 to mark the lowest in at least about four decades, based on comparable numbers.

Unemployment among our young people inched down in December to 10.3 per cent from November's 10.8 per cent, a marked easing of 2.3 percentage points over the course of 2017.

This is a monthly surrvey whose findings have raised eyebrows among economists before, with Statistics Canada standing by the numbers.

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State of the labour market

"The two-month slide in the jobless rate is the largest such drop since the 1990s," said BMO chief economist Douglas Porter.

"After essentially being landlocked around the 7-per-cent mark for almost four years, the unemployment rate has come a tumblin' down since late 2016," he added.

If Canadian unemployment were measured in the same manner that the U.S. does it, Canada's jobless rate would be 4.8 per cent, Mr. Porter noted.

Which, of course, has a ripple effect.

"In turn, this significant tightening – and we judge that full employment is consistent with a jobless rate of 5.5 per cent to 6 per cent – is beginning to put some upward pressure on wages. Combined with the 20-per-cent rise in Ontario minimum wages at the start of 2018, we could easily see average earnings rise by well over 3 per cent this year."

Because a drop in unemployment can at times be attributed to people dropping out of the work force because they're fed up trying to find a job, Mr. Porter noted that this was not the case.

"December's data quashed that view in a hurry," he said.

"The participation rate for those aged 15-64 reached an all-time high in the month at 78.7 per cent (All of 2017 was a record annual high, as well, so the latest month was no fluke.)"

Another tidbit, this one from Mr. Guatieri: Unemployment in manufacturing has never been lower, having led the way in 2017.

"Despite flat exports, the sector punched well above its weight in job creation last year," he said.

"The 85,700 net new jobs (the most since 2002) accounted for 20 per cent of the total, double the sector's share. Of course, factory employment is still lower than it was four decades ago, and few expect a repeat performance in 2018. Still, workers in the sector can breathe easier, barring an abrupt turn toward trade protectionism."

Better than it looks

Pretty good, right? In fact, it's "even better than you think," according to Benjamin Tal of CIBC World Markets.

The number alone are impressive, said Mr. Tal, but he looked deeper. Here's what he found:

After a run-up in 2016, part-timers are now back to their long-term average sale of overall employment.

Like BMO's Mr. Porter, Mr. Tal noted that pay is on the rise, with both average and median wages perking up, which suggests "broadly based and more inclusive wage gains."

But wait, there's more.

"Even more important has been the improvement in the composition of job creation," Mr. Tal said in his study, released today.

"Regardless of how you measure it, by industry or by occupation, the number of high-paying jobs rose faster last year than the number of low-paying jobs," he added.

"So with wage inflation and job composition pointing in the same direction, real labour income is now rising at its fastest rate in five years."

Youth unemployment is also lower than you'd think because the number takes in those between the ages of 15 and 18 who are still in school, but also looking for jobs.

"It's reasonable to suggest that many of these high-school students should not be classified as unemployed as their main activity is learning," Mr. Tal said, adding that the real overall rate for young folks would be a record low 7 per cent.

"In fact, this factor also works to reduce the headline national unemployment rate by close to 0.5 per cent. That is, if it was not for the 'unemployed' high-school students, the Canadian unemployment rate in December, 2017, would have been 5.2 per cent, as opposed to the headline number of 5.7 per cent."

But hold on, now

David Rosenberg doesn't buy it.

The chief economist at Gluskin Sheff + Associates has damned the overall sentiment for a couple of days now, warning the jobs market isn't as good as you'd think and that it's ridiculous to suggest that it should sway the Bank of Canada next week.

I documented Mr. Rosenberg's comments Tuesday, and you can find them here.

But he returned to the subject in his daily research note again Wednesday, and adding more.

Among his additional points were that 35,600 jobs were lost in December among those between the ages of 20 and 24, the worst showing since April, 2006.

Private-sector jobs in Ontario – "the country's backbone – declined by 5,000 to mark the first loss since April And full-time jobs fell by 13,200.

In Quebec and British Columbia, jobs on the goods-producing side declined by 5,500 and 4,100, respectively.

He also questioned the official, dramatic gain in jobs in Quebec, particularly in the financial industry, where employment rose in December by more than "in the previous 10 years combined!"

And then there's Alberta, where 26,300 jobs were added, a development "that has happened two other times in the past and in the context of an energy boom that we know is not happening today," Mr. Rosenberg said.

"That is equivalent to the U.S. economy generating more than a million jobs in a month," he added.

"As if. And the situation in Alberta was about accommodation and food services - practically an unheard of 8,900 such jobs added in that sector in the province last month. Must have been all that great egg nog being served at the Chateau Lake Louise."

Mr. Rosenberg noted the exceptional rise over a short period in speculation that the central bank will raise rates next week.

"And not just next week, but that the markets now feel three BoC moves for the entire year are a fait accompli?" he said.

"I smell an opportunity here to go long the front end of the Canada curve and resist this recent up-leg in the loonie."

For the record

We should never lose sight of the broader look, notably Statistics Canada's "R8" measure of underployment, which includes discouraged job seekers, those waiting to be recalled, and part-timers who want a full-time job. That measure is down, to be sure, but it still stands at about 8 per cent.

So we'll see where the Bank of Canada comes down on things next week.

"Of course the Bank of Canada will be the first to tell you that the headline numbers are insufficient to justify a shift to a more aggressive rate hiking mode," said CIBC's Mr. Tal.

"You have to dig deeper in search of fragilities that might jeopardize the current expansion and the durability of the recent improvement in wage inflation."

The one thing we can count on is uncertainty, from the NAFTA bargaining table to the monthly mortgage bill, as the central has noted.

"The labour market of 2018 will be tested," Mr. Tal said.

"Minimum wage hikes will act as a negative for job creation as will the headwind blowing from the tricky NAFTA negotiations. The ultimate impact of those forces is unknown. But what we do know is that the labour market is well positioned to face what's coming."

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Markets at a glance

"Ten-year yields are up another four basis points to 2.60 per cent, the highest since March, 2017, and nearing last year's peak of 2.63 per cent, amid an upbeat economic outlook, increasing expectations that inflation is making a comeback (rising oil prices have certainly helped on that front) and reports that China officials view treasuries as less attractive," said Benjamin Reitzes, BMO's Canadian rates and macro strategist.

"Bill Gross has declared a bear market in bond-land and Jeffrey Gundlach has proclaimed the start of an 'era of quantitative tightening,'" said Kit Juckes of Société Générale.

"Yesterday I pointed out that the turn higher in [the U.S. dollar versus the yuan] last September was accompanied by a sharp rise in treasury yields, but the collective wisdom is that this bond selloff is made in Japan rather than China, and triggered by a tiny reduction in the pace of [Bank of Japan] bond-buying," he added.

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