Week in Review: Canadian employment jumps higher

Week in review

Canada – Employment jumped 28.7K in March according to the Labour Force Survey, easily topping consensus which was looking for no change. The impact of the job gains was offset, however, by a one-tick increase in the participation rate to 65.9%, leaving the jobless rate unchanged at 6.8%. The increase in March employment was due to government (+26.5K) and the private sector (+19.3K) which more than offset declines in self-employment (-17K). But the job gains were entirely part-time (+56.8K), which offset declines in full-time positions (-28.2K). Hours worked fell 0.3% as a result. The goods sector cut 16.5K jobs with declines in manufacturing, agriculture, utilities and construction offsetting surprising gains in resources. Services sector employment rose 45.3K with decent gains in health care, education, finance/insurance/real estate among others, more than offsetting declines in public administration.

All told, the employment report was much better than consensus expectations. Unexpected resilience in energy-rich provinces like Alberta and Saskatchewan complemented expected gains in Central Canada. That said, not all is rosy. All of the job gains in March were part-time. The decline in employment in cyclical sectors like manufacturing and construction is also disappointing. Moreover, job creation was tilted towards government, with the private sector not making up for the prior month’s loss. Hours worked grew just 0.3% annualized in Q1, the lowest in a year. That’s consistent with a sharp moderation in GDP growth in the quarter.

Housing starts jumped 25.4% to 189.7K in March (from a downwardly revised 151.2K in the prior month). That was well above the 175K expected by consensus. The increase in starts was due to gains in urban areas (+28.1%) which dwarfed the 3.5% drop in rural areas. The increase in urban starts was driven by multis (+48.2%), which more than offset declines for single family homes (-3.4%). On a regional basis in urban areas, there were gains in Ontario (+49.3%), BC (+40.3%), Quebec (+15.8%) and even the Prairies (+12.9%) which offset declines in Atlantic Canada (-12.6%).

Building permits fell 0.9% in dollar terms in February, as a 5.4% decrease in the value of non-residential permits dwarfed the 1.5% increase for the residential sector. In real terms, residential permits rose 2.7% due to a 9.4% jump for multis, which more than offset the 6.6% decrease for singles, the latter falling to 1-year low.

The Spring edition of the Bank of Canada's Business Outlook Survey (conducted between February 17th and March 12th) showed that the business outlook weakened significantly since the winter. While firms reported an improvement in sales growth over the past 12 months, they were less optimistic about sales over the next year, the corresponding balance of opinion sinking to just 4, the lowest since 2012. Intentions to invest in machinery and equipment remained positive, but the related balance of opinion dropped to 4, the lowest since 2009. Capacity pressures rose slightly from the Winter survey, with 43% of respondents stating either some or significant difficulty in meeting an unexpected increase in demand. But the proportion of respondents facing labour shortages fell to 21% (from 22% in the last survey), and that’s reflected in hiring intentions which were much weaker than in the winter, with the related balance of opinion falling to 20, the lowest since 2009. Inflation expectations remained low, with roughly two-thirds of firms expecting inflation to be in the bottom half of the BoC’s 1- 3% target range.

The Bank of Canada's Senior Loan Officer's survey for Q1 (conducted between March 9th and 13th) showed lending conditions tightening from the prior quarter, with the corresponding index moving to 6.7 i.e. the first positive (i.e. tightening conditions) since 2009Q3. With price conditions remaining unchanged, the overall tightening was entirely due to non-price conditions for corporate and commercial borrowers, particularly in the oil and gas sector. The survey reported that lending conditions remained “highly accommodative” for other sectors.

Overall, while the Spring survey showed the lowest balance of opinion with regards to hiring and investment since the last recession, most of the weakness is due to the energy patch. In fact, outside of the energy patch, firms are reportedly benefitting from improving U.S. demand and the more competitive Canadian dollar. The BoC says that investment intentions increased and are more widespread in Central Canada and in the services sector.

United States – The non-manufacturing ISM index fell to 56.5 in March, from an unrevised 56.9 in the prior month. The business activity index fell again to reach 57.5, a multimonth low. However, both employment and new orders subindices rose in the month. More importantly, all of the major sub-indices remained well in expansion territory, i.e. above 50.

Weekly jobless claims data for the week of April 4th showed initial claims rising to 281K (from 267K in the prior week). The more reliable 4-week moving average fell to 282K. Continuing claims for the prior week fell 23K to 2.3 million. The rate of layoffs, based on the 4-week moving average initial claims, is the lowest since mid-2000. That suggests the labour market remains in good shape despite the soft non farm payrolls for March. Hiring potential is also good considering the 5.1 million job openings according to the latest JOLTS report and the expected rebound for GDP growth in Q2. All told, non farm payrolls could return to the 200K+ territory sooner rather than later.

The Fed minutes of last March’s meeting were released this week. The downgrades to participants’ forecasts for real GDP were mostly because of the stronger dollar. But the Fed remains confident the economy will grow above potential both this year and next. Participants saw broad-based improvements in the labour market, although many thought that some degree of slack remained, as evidenced by the declining participation rate, the wide measure of the jobless rate, and tepid wage growth. However, a few participants noted that the absence of wage growth may not be a useful yardstick for evaluating slack because of uncertainty regarding trend productivity and long lags between declining jobless rates and the wage response. They added that there may also be compositional changes that could be masking underlying wage pressures.

The decision to remove the word “patient” from the forward guidance was supported by the large majority of the participants. Yet there was no consensus about the timing of the rate liftoff. “Several” participants thought that normalization should begin in June, while others, concerned about the negative impact of the strong dollar and low energy prices on inflation, preferred delaying rate hikes to later this year. A couple even thought that rate hikes should be delayed to 2016. Participants thought that it would be helpful to convey to the public a “data-dependent approach” to monetary policy. They thought that normalization could be initiated prior to seeing increases in core or wage inflation. For example, a further improvement in the labour market, a stabilization of energy prices, or a leveling of the dollar would make the FOMC more confident that the 2% inflation target would be achieved.

World – The Bank of Japan left monetary policy unchanged at its meeting. With an 8 to 1 majority vote, the central bank decided to continue purchasing Japanese government bonds at a pace of around ¥ 80 trillion/year.