Week in review: Expect a moderation in Canadian job growth in 2015

Week in review

Canada – Employment jumped 35K in January according to the Labour Force Survey, easily topping consensus which was looking for an increase of just 5K. The gains, coupled with an unchanged participation rate at 65.7%, allowed the jobless rate to drop one tick to 6.6%. The increase in January employment was entirely due to self-employment which soared 41K, more than offsetting declines in paid jobs (- 6K). The decline in paid jobs was entirely in the public sector (- 7K), which dwarfed the 1K increase in the private sector. The goods sector added 10K jobs as gains in manufacturing, agriculture, utilities and construction more than offset the 9K decline in resources. Services sector employment rose 26K with gains in professional services, health care and education among others, more than offsetting declines in trade, transport/warehousing and finance/insurance/real estate. Fulltime employment fell 12K, while part-time employment was up 47K. Hours worked rose 0.1%.

All told, the employment report was good on the headline but less so in the details since the job gains were entirely due to part-time and self-employment. The decline in the resources sector shouldn’t be surprising considering the headwinds blowing over the oil patch. It is encouraging, however, that employment increased in cyclical sectors like manufacturing and construction. Despite the consensus-topping job gains in January, we remain cautious about the Canadian jobs outlook. Considering that 84% of the employment gains last year were in Western Canada, something that will likely not be repeated in light of the oil slump, we continue to expect a moderation in overall job growth this year.

Building permits rose 7.7% in dollar terms in December, much better than the 5% increase expected by consensus. There was a 23% increase in the value of non-residential permits, but the residential sector was roughly flat as a 9.5% decline for multis offset an 8% advance for singles. In real terms, residential permits fell 5.6% with declines for multis (- 11.9%) dwarfing the 5.5% increase for singles.

The merchandise trade deficit widened to C$0.65 bn in December. The deterioration in the trade balance was due to nominal imports (+2.3%) rising faster than nominal exports (+1.6%). Nominal exports could have been better were it not for the energy slump (-10.3%, entirely due to prices) and weaker sales of aircrafts/parts, which offset increases in other categories including autos/parts (+3.4%) and machinery. Imports were driven by energy which soared 9.3%. As a result, the energy trade surplus fell to C$5.1 bn, the lowest in two years. The non-energy trade deficit narrowed to C$5.7 bn, the smallest deficit in five months. In real terms, Canada’s exports jumped 3.8% in December, while imports increased 2.3%. The overall quarterly picture, however, wasn’t that great given the poor start to Q4. Export volumes contracted at an annualized pace of 3% in Q4, while imports were up 0.5%. So, on net, trade was a drag on the economy in Q4.

United States – Non farm payrolls rose 257K in January, blowing past consensus which was expecting just a 228K increase. The icing on the cake was the upward revisions to the prior months to reflect more complete data. The private sector added 267K jobs in January. Goods sector employment rose 58K thanks to gains in manufacturing and construction which offset declines in mining. The private services sector created a net 209K jobs with broad based gains. Government lost 10K jobs, a first decline in twelve months. Average hourly earnings rose 0.5% 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 435K jobs after removing the population control effect. However, the jobless rate rose one tick to 5.7% because the participation rate jumped two ticks to 62.9%. The revised nonfarm payrolls show that the U.S. created 3.1 million jobs last year, the best performance since 1999. The 3 million private sector jobs created in 2014 are the best since 1997. It’s encouraging that factories continue to increase payrolls despite the headwinds (particularly to exporters of manufacturing goods) brought by the appreciating U.S. dollar. We expect overall employment to remain strong this year in synch with a strengthening U.S. economy. That’s not to say the Fed will get aggressive with rate hikes. Despite the solid labour market, wage inflation generally remains tame, and that explains in part why overall PCE core inflation remains weak and well below the Fed’s target.

The ADP employment report, a gauge of the private sector component of the U.S. non-farm payrolls, showed a 213K increase in January. The prior month was revised up to 253K (from 241K). The ADP’s job gains in January were mostly in medium-sized firms which added 95K to payrolls, while small firms i.e. those employing less than 50 employees added 78K. Large firms (500+ employees) increased payrolls by just 40K.

Weekly jobless claims data for the week of January 31st showed initial claims rising to 278K (from an upwardly revised 267K in the prior week). That was better than the 290K expected by consensus. The more reliable 4-week moving average fell to 293K. Continuing claims for the prior week rose 6K to 2.4million.

The ISM manufacturing index fell to 53.5 in January (from a downwardly revised 55.1 in the prior month) disappointing consensus. That was the lowest ISM in a year. The production, new orders and employment indices all fell a bit but, more importantly, all those major sub-indices remained comfortably above 50, i.e. in expansion territory.

The non-manufacturing ISM index rose to 56.7 in January from an upwardly revised 56.5 in the prior month. That was a bit higher than consensus which was expecting a print of 56.4. After the prior month’s plunge, the business activity index bounced back to 61.5. Ditto for the new orders sub-index which rose to 59.5. However, the employment sub-index fell again to reach 51.6, the lowest since February last year.

Personal income rose 0.3% while personal spending fell 0.3% in December. With income rising faster than spending, the savings rate rose to 4.9%, the highest since July. In real terms, disposable income jumped 0.5% while spending was down 0.1%, albeit after a gain of 0.7% in the prior month. The PCE deflator fell 0.2% in December, allowing the year-on-year rate to fall to just 0.7%, the lowest since October 2009. The core PCE deflator was flat, pushing the annual core rate down one tick to 1.3% (from 1.4%).

Construction spending rose 0.4% in December (versus expectations of a 0.7% increase) due to gains in both the nonresidential sector (+0.4%) and residential sector (+0.4%).

The factory report showed a 3.4% drop in orders in December, after a 1.7% drop in the prior month (the latter was revised from -0.7%). Transportation orders fell 9.1%. Excluding transportation, new factory orders fell 2.3% due to declines for both non-durables (-3.4%) and durables (-0.8%). Total factory shipments dropped 1.1%, as declines for non-durables (-3.4%) dwarfed the 1.3% increase for durables.

The trade deficit widened to $46.6 bn in December from the prior month’s deficit of $39.8 bn. The deterioration in the trade balance was due to rising imports (+2.2%) and falling exports (- 0.8%) in nominal terms. In real terms, exports were flat, while imports rose 3.5%. For Q4 as a whole, real exports grew 5% annualized while real imports were up 9.5%. So the report confirms that trade was a net drag on the economy in Q4. The drag was a bit larger than estimated by the BEA in its advance estimate, meaning that there could be some downward revisions to Q4 GDP.

Business non-farm labor productivity fell 1.8% annualized in the fourth quarter of the year, worse than the 0.1% expansion expected by consensus. That came after an upwardly revised Q3 productivity expansion of 3.7% (previously reported as +2.3%). The decrease in Q4 productivity was a result of hours worked (+5.1%) growing faster than output (+3.2%). Unit labour costs rose 2.7% in the quarter.

World – The Bank of England left monetary policy unchanged at its meeting this week. In contrast, the Reserve Bank of Australia decided to lower its target interest rate by 25 basis points to just 2.25%. In the Eurozone, the producer price index fell again in December, taking the annual PPI inflation rate to -2.7%. Retail spending, also for the month of December, rose 0.3%.