Housing starts rose 0.5% to 197.3K in September

Week in review

Canada – Employment rose 74K in September according to the Labour Force Survey, easily topping consensus which was expecting just a 20K increase. That allowed the jobless rate to drop to 6.8% (the lowest since December 2008), with the participation rate remaining unchanged at 66%. Private sector employment which sank by a record 112K in the prior month, bounced back with a 124K increase. Government also added to payrolls with a 6K increase, a third gain in a row. Those gains helped offset the decline in self employment (-56K, after the prior month’s 87K advance). All in all, paid employment i.e. total employment excluding self-employeds, jumped 130K, erasing the 98K slump in the prior month. The services sector saw employment increase 14K, with gains for accommodation, health care, finance/real estate, among others which more than offset declines in education. The goods sector added 60K jobs, the second consecutive increase, as gains in construction, resources and manufacturing more than offset declines in utilities and agriculture. Full-time employment rose 69K, while part-time employment was up 5K. Hours worked grew 0.3%.

Overall, September’s LFS was much better than expected. The results extend the survey’s see-saw pattern because we haven’t had back-to-back gains (or losses) in employment this year. Amidst that volatility, it’s best to look at the longer term trend. On a 12-month moving average basis, Canada is creating 12.5K jobs per month, all paid jobs, of which 6K is fulltime and 5K is in the private sector (i.e. 7K in government). While not spectacular, that’s not a bad performance either. The job gains are consistent with a growing economy. We expect employment to find further support in the coming months thanks to better corporate profits and an improving North American economic outlook.

Housing starts rose 0.5% to 197.3K in September (from an upwardly revised 196.3K in the prior month). Consensus was looking for an increase to 198K. September’s increase in starts was felt in both rural (+1.4%) and urban areas (+0.4%). The increase in urban starts was entirely due to multis (+2.4%), which more than offset declines for single family homes (- 2.9%). On a regional basis in urban areas, gains in Quebec (+16.6%), Ontario (+5.2%), and the Prairies (+1.4%), helped offset declines in Atlantic Canada (-14.9%) and BC (-18.8%). While in Q3, housing starts grew at a much slower pace than in the prior quarter, the composition was better, i.e. a tilt towards the higher value-added single family homes.

Building permits plunged 27.3% in dollar terms in August, erasing the prior month’s gains. Consensus was expecting just a 6.5% decline. But in August, there was a 40.6% slump in the value of non-residential permits. The residential sector saw a 15.9% drop in the value of permits due to the 28.6% slump for multis and the 2.4% decline for singles. The value of permits was down in 22 of the 34 census metropolitan areas, with the largest declines in Montreal, Toronto, and Vancouver. In real terms, residential permits fell 18.9% erasing most of the prior month’s gains due to a 26.3% drop for multis and a 2.7% decline for singles.

The Autumn edition of the Bank of Canada's Business Outlook Survey (conducted between August 25th and September 18th) showed that the business outlook improved from last summer. Firms reported an improvement in sales growth over the past 12 months and are much more optimistic about sales over the next year, the corresponding balance of opinion reaching 35, the highest since 2012Q1. Intentions to invest in machinery and equipment remained positive, although the related balance of opinion dropped slightly from 24 to 20. Firms said that capacity pressures increased a bit, with 41% of respondents, versus 34% in the summer survey, stating either some or significant difficulty in meeting an unexpected increase in demand. The proportion of respondents facing labour shortages dropped a bit to 18% (from 22% in the summer), but hiring intentions were stronger than in the summer, with the balance of opinion jumping to 44, the highest since the spring. Expectations of input price inflation were up, with the corresponding balance of opinion increasing to 9 (from minus 8 in the summer survey). Firms’ expectations of output price inflation also rose a bit. Those were also reflected in inflation expectations which were up compared to the summer survey, albeit remaining in the BoC’s 1-3% target range. Firms reported an easing in credit conditions. Similarly, the separately-released BoC Senior Loan Officer's survey for Q3 (conducted between September the 8th and 12th) showed further easing in lending conditions, with the corresponding index remaining well in negative territory (i.e. easing) at -10.3. The improvement was primarily in the price aspect largely due to competition among lenders. For small businesses, however, while the price aspect improved, there was a slight tightening for the non-price aspect.

United States – Weekly jobless claims data for the week of October 4th showed initial claims remaining roughly unchanged at 287K. The more reliable 4-week moving average fell to 288K, the lowest since February 2006. Continuing claims for the prior week fell 21K to 2.38 million, the lowest since April 2006. The persistence of the low rate of layoffs, coupled with the large number of job openings ― August’s JOLTS report showed that there were 4.8 million job openings, the highest since January 2001 ― suggest the 200K+ monthly pace of non-farm payroll employment gains can be sustained for the next several months.

The minutes of the last Fed meeting were released. FOMC participants, not surprisingly, have different views about the timing and pace of monetary policy normalization. But the divergence is not only related to the appropriate level of the fed funds rate. Some participants also have different opinions about the management of the FOMC’s balance sheet. In their discussion of the economic situation, most view the risks to the outlook as broadly balanced. But a number of participants noted that economic growth over the medium term might be slower than they expected if foreign growth came in weaker than anticipated. Some participants expressed concern that a further appreciation of the dollar may have adverse effects on the U.S. external sector. At the same time, a couple of participants pointed out that the appreciation of the dollar might also tend to slow the gradual increase in inflation toward the FOMC’s 2% goal.

The words “a considerable time” were maintained in the forward guidance because a range of labor market indicators continue to suggest that there remains significant underutilization of labor resources, while inflation is running below the FOMC`s target. Participants noted that changes to the forward guidance, when they do become appropriate, will likely present communication challenges, and that caution will be needed to avoid sending unintended signals about the Fed’s policy outlook. Some participants saw the current forward guidance as appropriate because they felt it would be prudent to err on the side of patience. In their view, the costs of downside shocks to the economy would be larger than those of upside shocks because it would be less problematic to remove accommodation quickly than to increase accommodation.

World – The Bank of Japan and the Bank of England both left monetary policy unchanged. In Germany, exports plunged 5.8% in August, more than erasing the prior month’s gains. As a result, industrial production contracted 4% in the month. In Japan, the current account balance remained in surplus territory in August as the continuing deficits on the trade account was more than offset by investment income from abroad.