Canadian employment numbers disappoint consensus

Week in review

Canada – Employment fell 10.7K in November according to the Labour Force Survey, disappointing consensus which was looking for no change. That, coupled with an unchanged participation rate at 66%, caused the unemployment rate to rise one tick to 6.6%. The decrease in November employment was due to declines in the private sector (-46K) which dwarfed the increase in government (+23K) and in self-employment (+12K). Paid employment i.e. total employment excluding self-employeds fell 23K. The goods sector added 17K jobs as declines in construction and manufacturing were more than offset by gains in resources, agriculture, and utilities. Services sector employment fell 28K with weakness in trade, transportation, professional services dwarfing gains in education and health among others. Full-time employment rose 6K, while part-time employment was down 16K.

Overall, November’s results were weak considering the drop in private sector jobs, which dwarfed the only piece of good news i.e. an increase in full time employment. Looking at the more reliable 12-month average, Canada has created on average 12K jobs/month, of which 5K was in the private sector, 4K was in government, while 3K were self employeds. Hours worked were soft in November, and they are on track to expand at annualized pace of just 1.4% annualized in Q4, contrasting with the 3.5% advance in Q3. That’s consistent with a moderation of Canadian GDP growth in Q4 after two strong quarters.

Labour productivity rose 0.1% in Q3 as real GDP grew 0.8%, a bit faster than hours worked (+0.7%), all in unannualized terms. Hourly compensation was up 0.4%, while unit labour costs rose 0.2% unannualized.

The merchandise trade surplus fell to C$0.10 bn in October. The prior month’s surplus was revised down to just C$0.3 bn (from the +C$0.7 bn previously reported). The deterioration in October was due to nominal imports (+0.5%) rising faster than nominal exports (+0.1%). The small increase in exports was made possible by gains for aircrafts, electronics, industrial machinery, and forestry products which offset declines elsewhere, including energy and autos. Imports of energy sank 10.1%, allowing the energy trade surplus to rise to C$7.1 bn, a three-month high. The non-energy trade deficit widened to C$7 bn, the worst in five months. The trade surplus with the U.S. rose to C$3.9 bn. In real terms, Canada’s exports fell 0.7%, while imports were down 0.3%. Assuming no change in November and December, real exports are tracking a contraction of 3.2% annualized in Q4 (after a sharp 9.3% advance in the prior quarter), while real imports are growing, albeit at a slower pace than in the prior quarter. So, trade seems to a drag on the economy in Q4. However, we doubt this is the start of a concerning trend, because our biggest trade partner, the U.S., is on a clear uptrend. We continue to expect trade to be a major driver of Canadian growth in 2015.

The Bank of Canada left the overnight rate unchanged at 1.00%. The central bank acknowledged that inflation rose more than it had expected, but it attributed that to “temporary” factors such as the lower Canadian dollar and sector-specific developments. However, it didn’t seem concerned that inflation has now surpassed its 2% target, stating that weaker oil prices pose “an important downside risk to the inflation profile”. The BoC says the Canadian economy is showing signs of a broadening recovery as stronger exports are starting to be reflected in higher investment and employment. However, it cautioned that declining oil prices will weigh on the economy. The central bank acknowledged Statistics Canada’s upward GDP revisions for the last three and a half years, and Q3’s results, and said that the output gap “appears to be smaller” than it had estimated in October’s Monetary Policy Report. It, however, still thinks that the labour market indicates “significant slack” in the economy. The central bank now says that household imbalances present a significant risk to financial stability.

United States – Non farm payrolls soared 321K in November, the biggest monthly gain since early 2012. That blew past consensus which was expecting just a 230K increase. The icing on the cake was a 44K upward revision to the prior months to reflect more complete data. The private sector added 314K jobs in November. Goods sector employment rose 48K thanks to gains in manufacturing and construction which more than offset declines in mining. The private services sector created a net 266K jobs with broad based gains. Government added 7K jobs, a 10th straight increase. Average hourly earnings rose 0.4% while aggregate hours worked increased 0.6%. Released at the same time, the household survey (similar in methodology to Canada's LFS) showed a gain of only 4K jobs. The unemployment rate, however, held steady at 5.8% thanks to the participation rate which was unchanged at 62.8%. Full-time employment was down 150K, after sharp gains in the prior months.

The ADP employment report, a gauge of the private sector component of the non-farm payrolls, showed a 208K increase in November. The job gains were mostly in small firms i.e. those employing less than 50 employees, which added 101K, while medium-sized firms added 65K to payrolls. Large firms increased payrolls by just 42K.

Weekly jobless claims data for the week of November 29th showed initial claims falling to 297K (from an upwardly revised 314K in the prior week). The more reliable 4-week moving average rose to 299K. Continuing claims for the prior week were up 39K to 2.36 million. Initial claims averaged 299K/week in November, which is quite low, but is nonetheless the highest in three months.

The ISM manufacturing index fell three ticks to 58.7 in November (from 59.0 in the prior month). The production and employment indices fell slightly, but the new orders sub-index rose to a three-month high, buoyed by export orders. More importantly, all of the major sub-indices were comfortably above 50, i.e. in expansion territory.

The non-manufacturing ISM index rose to a three-month high of 59.3 in November (from 57.1 in the prior month). A reading above 50 implies the services sector is expanding. The business activity index jumped to 64.4, and the new orders sub-index rose to 61.4, both at three-month highs. The employment sub-index fell to 56.7 but remains well in expansion territory.

Construction spending jumped a consensus-topping 1.1% in October. That’s the biggest increase in five months. Adding to the good news was the upward revision to the prior month to - 0.1% (from -0.4%). October’s increase was split between the residential sector (+1.3%) and the non-residential sector (+1.0%).

The trade deficit improved slightly to $43.4 bn in October. The improvement in the trade balance was due to exports (+1.2%), rising faster than imports (+0.9%) in nominal terms. In real terms, exports rose 2.4%, while real imports increased 1.7%. The gains in export volumes more than erase the losses of the prior month.

The factory report showed a 0.7% drop in orders in October, after a 0.5% decline in the prior month. Transportation orders surged 3.4% but excluding transportation, new factory orders fell 1.4% due to declines for both non-durables and durables. Total factory shipments dropped 0.8%, driven by the 1.5% decline for non-durables.

The Fed's Beige Book provided the latest information about the U.S. economy, covering the period to November 24th. The Fed says that economic activity continued expanding in October and November. Consumer spending expanded in most of the districts, helped by lower gasoline prices and an early winter which spurred sales of seasonal items. Auto sales were generally strong, with cheaper gasoline boosting sales of SUVs and light trucks. Tourism was viewed as being generally positive. Employment was strong across Districts, with many firms reporting increased difficulty in retaining key workers. Business spending improved and inventories were reported to be in line with sales. Manufacturers and even service-sector firms in several Districts were planning increased capital spending. Manufacturing activity strengthened further, buoyed by the automotive and aerospace sectors. Construction expanded further, with homebuilding in the multi-family segment remaining stronger than that of singles. Nonresidential construction also rose in most Districts. Real estate activity was mixed with about half of Districts reporting higher home sales. Sales of multi-family homes were deemed to be stronger than those of singles. Lending activity improved further. Some Districts reported competitive loan pricing and easing loan standards. Activity in agriculture was mixed, with lower crop prices but higher livestock prices. Energy and mining activity was higher. Lower oil prices were a concern for the oil industry, but that didn’t prevent exploration, drilling and extraction from remaining at high levels. Price and wage inflation remained subdued, although there were upward wage pressures for skilled workers.

World – The European Central Bank left monetary policy unchanged in December. But President Draghi said that the Governing Council was unanimous in its willingness to provide further stimulus if necessary early next year. The ECB was concerned about the recent slump in oil prices and said that it will be important to assess the broader impact “on mediumterm inflation trends and to avoid spillovers to inflation expectations and wage formation”. The ECB released new 2015 forecasts which showed GDP growth being downgraded to just 1% (from 1.6%) and inflation lowered to 0.7% (from 1.1%).