Canada – Employment fell 4K according to the Labour Force Survey

Week in review

Canada – Employment fell 4K in December according to the Labour Force Survey, disappointing consensus which was looking for an increase of 15K. But the jobless rate held steady at 6.6% thanks to the one-tick drop in the participation rate to 65.9%. The decrease in December employment was entirely due to self-employment which dropped 15K, more than offsetting gains in paid jobs (+11K). The latter were split between the private sector (+5K) and government (+6K). The goods sector added 22K jobs as gains in resources, agriculture, utilities and construction dwarfed the decline in manufacturing. Services sector employment fell 26K with weakness in accommodation/food services, health, professional services among others, more than offsetting gains in trade, transport/warehousing. Full-time employment rose 54K, while part-time employment was down 58K. Hours worked rose 0.5%.

All told, December’s LFS report is better than it looks. True, there was a second straight decline in employment, but that was entirely due to self employment and part-timers. It’s encouraging to see paid private sector employment rising. Also positive is the sharp increase in full time positions, something that will help household incomes. The drop in manufacturing employment is disappointing, but one has to look at this in context as it comes after solid gains in October. Besides this aberration for factories, trade-related sectors are showing resilience, probably helped by the pick-up in U.S. demand. For 2014 as a whole, LFS employment rose 186K or 15K/month, not spectacular but a positive result nonetheless.

Housing starts fell 6.5% to just 180.6K in December (from a downwardly revised 193K in the prior month), well below the 192K expected by consensus. December’s decline in starts was felt in both rural (-9.8%) and urban areas (-6.2%). The decrease in urban starts was driven by multis (-7%), but there were also declines for single family homes (-4.8%). On a regional basis in urban areas, there were declines in the Prairies (-10.2%), Quebec (-17.6%), and Atlantic Canada (-19.4%), which more than offset increases in Ontario (+2%) and BC (+1.9%).

The merchandise trade deficit widened to C$0.6 bn in November. The prior month’s surplus was revised down to a deficit of C$0.3 bn from the previously reported surplus of C$0.1 bn. The deterioration in November was due to nominal exports (-3.5%) falling faster than nominal imports (-2.8%). The decrease in exports was driven by energy (-7.8%), although there were also declines in most of the other categories including autos, aircrafts, electronics, industrial machinery and forestry products, which dwarfed gains for farming products and industrial chemicals. Imports were also hurt by energy (- 2.7%), but there were declines in several other categories including machinery and equipment. The energy trade surplus fell to C$6.3 bn, the lowest since December 2013. The nonenergy trade deficit narrowed to C$6.9 bn. The trade surplus with the U.S. fell to C$2.9 bn, the lowest since 2013. In real terms, Canada’s exports fell 2.2%, while imports were down 1.6% in November. Assuming no change in December, total export volumes are on track to contract at an annualized pace of 7.8% in Q4 while imports should contract just 0.7%. So, trade was likely a drag on the economy in the final quarter of 2014. The same can be said about business investment spending given the drop of imports of machinery and equipment in the quarter. Those results are consistent with our view that Canada’s GDP growth softened to around 2% annualized in Q4 after two strong quarters.

United States – Non farm payrolls rose 252K in December. That blew past consensus which was expecting a 240K increase. The icing on the cake was a 50K upward revision to the prior months to reflect more complete data. The private sector added 240K jobs in December. Gains were widespread with 63.4% of industries reporting higher headcounts. The goods sector employment rose 67K thanks to gains in manufacturing (+17K), construction (+48K, best showing since January), and even mining. The private services sector created a net 173K jobs with broad based gains. Government added 12K jobs, an 11th straight increase. Average hourly earnings, however, fell 0.2% while aggregate hours worked increased 0.2%. Released at the same time, the household survey (similar in methodology to Canada's LFS) showed a gain of 111K jobs. That, coupled with the two-tick drop in the participation rate to 62.7%, allowed the unemployment rate to fall to 5.6%, the lowest since June 2008. Full-time jobs rose 427K, after a sharp decline in the prior month. All told, job creation remains solid, a development that will help sustain a robust expansion in the coming months. In 2014, non farm payrolls were up nearly 3 million, the best performance since 1999. We are particularly impressed with full-time job creation (+2.7 million in 2014, the highest since 1984), meaning that the quality of employment is improving. Despite the surge, however, wage inflation remains tame.

The ADP employment report, a gauge of the private sector component of non-farm payrolls, showed a 241K increase in December. That was well above the 225K expected by consensus. While the prior month was revised up slightly to 227K (from 208K), that was still well below November’s gains for private sector non-farm payrolls. The ADP’s job gains in December were mostly in small firms i.e. those employing less than 50 employees, which added 106K, while medium-sized firms added 70K to payrolls. Large firms increased payrolls by 66K.

Weekly jobless claims data for the week of January 3rd showed initial claims falling to 294K, from an unrevised 298K in the prior week. The more reliable 4-week moving average was little changed at 290.5K. Continuing claims for the prior week rose 101K to 2.45 million.

The ISM non-manufacturing index fell to a six-month low of 56.2 in December (from 59.3 in the prior month). The business activity index dropped to 57.2, the new orders sub-index fell to 58.9, and the employment sub-index decreased slightly 56.0. However, all of the major sub-indices remained well in expansion territory, i.e. above 50.

The factory report showed a 0.7% drop in orders in November, after a similar unrevised 0.7% drop in the prior month. Transportation orders fell 1.3% largely because of defense. Excluding transportation, new factory orders fell 0.6% due to declines for both non-durables (-0.5%) and durables. Total factory shipments dropped 0.6%, with declines for both durables (-0.6%) and non-durables (-0.5%).

The trade deficit improved slightly to $39 bn in November. The improvement in the trade balance was due to imports (- 2.2%) falling faster than exports (-1%) in nominal terms. In real terms, exports fell 0.4%, while real imports fell 1.6%. Assuming no change in December, real export growth in Q4 (+6.1% annualized) should be stronger than import growth (+3.5%), suggesting that trade contributed to U.S. growth in the last quarter of 2014.

The minutes of last December’s Fed meeting showed general agreement within the FOMC about tweaking the forward guidance on the fed funds rate. Most participants agreed that the new language i.e. that the Committee judges that it can be patient in beginning to normalize the stance of monetary policy, would provide more flexibility in adjusting policy in response to incoming information. Most participants thought the reference to patience indicated that the FOMC “was unlikely to begin the normalization process for at least the next couple of meetings.” FOMC participants were generally upbeat about the U.S. economy and regarded the decline in energy prices as a net positive for economic activity and employment. There were concerns, however, about a deterioration in the foreign economic situation and potential impacts on financial markets of the oil price slump. While the increase in the employment cost index was acknowledged, most of the FOMC participants saw “no clear evidence of a broad-based acceleration in wages”. Participants expected inflation to decline further, albeit temporarily, due to lower oil prices and weaker import prices due to the appreciating dollar. The FOMC continued to struggle in interpreting the observed drop in market-based measures of inflation compensation. While model-based decompositions of inflation compensation supported the message from surveys that longer-term inflation expectations had remained stable, the results were sensitive to assumptions used in the models. In other words, the results were not very robust. Some participants were concerned that the declining inflation compensation may be a reflection of lower inflation expectations. That could be exacerbated by falling energy prices. Participants agreed that it would take time and more analysis before a conclusion is reached about the actual reason for the decline in the market-based measure of inflation compensation.

World – The Bank of England left monetary policy unchanged at its meeting this week. In the eurozone, the first estimate of December’s annual inflation rate came in at -0.2%, the lowest since 2009. The zone’s unemployment rate was unchanged at 11.5% in November. The jobless rate was unchanged in Germany at 5%, rose one tick in France (10.3%) and Italy (13.4%), but fell one tick in Spain to 23.9%. The zone’s youth unemployment rate was a massive 23.7%, with Spain (53.5%), Italy (43.9%) and Portugal (34.5%) the worst hit. In China, the CPI annual inflation rate was up slightly to a still-mild 1.5% in December. Producer prices, however, remained in deflation mode as evidenced by the PPI annual inflation rate of -3.3%.

World – The Bank of England left monetary policy unchanged at its meeting this week. In the eurozone, the first estimate of December’s annual inflation rate came in at -0.2%, the lowest since 2009. The zone’s unemployment rate was unchanged at 11.5% in November. The jobless rate was unchanged in Germany at 5%, rose one tick in France (10.3%) and Italy (13.4%), but fell one tick in Spain to 23.9%. The zone’s youth unemployment rate was a massive 23.7%, with Spain (53.5%), Italy (43.9%) and Portugal (34.5%) the worst hit. In China, the CPI annual inflation rate was up slightly to a still-mild 1.5% in December. Producer prices, however, remained in deflation mode as evidenced by the PPI annual inflation rate of -3.3%.