Week in review: Employment dropped 6K

Week in review

Canada – Employment dropped 6K in June according to the Labour Force Survey, essentially in line with consensus which was expecting a 10K decline. The jobless rate remained unchanged at 6.8% as the participation rate dropped one tick to 65.8%. The decline in June employment was due to the private sector (-26.3K) and self-employment (-22K) which more than offset the increase in government (+42K). Part-time employment dropped 71K. The weakness was concentrated in the 15-24 age group with part-time jobs down 27K. On a better note, full time employment jumped 65K. Hours worked were up 0.6% for a third consecutive monthly increase. The goods sector was down 2K with losses in manufacturing (-7K), agriculture (-5K) and utilities (-2K) offsetting increases in construction (+8K) and resources (+4K). Services sector employment was down 5K. The most significant pullbacks were observed in other services (-17K) and business services (-14K) while public administration (+10K) and transportation & warehousing (+8K) posted the strongest gains. Looking at provinces, Quebec experienced a sharp drop of 33K jobs (all part-time) while BC posted a robust gain of 15 K (all full-time). Ontario employment was also strong (+14K but with a massive +34K on full-time). Alberta lost jobs for a second consecutive month (-5K) but the province still shows growth on a year-todate basis.

Despite fears of contagion from the oil-price shock to the rest of the economy, full-time employment in the first six months of 2015 is up a whopping 136K in Canada – the best showing in in three years. After stagnating early in 2014, private jobs are also showing strong momentum since last August. Back in January, Mr. Poloz opted to take insurance against a slowdown in order to protect households from deterioration in disposable income that would undermine their balance sheets. He argued that the negative impact of increased borrowing (in reaction to lower interest rates) was a side effect he was willing to live with given the uncertainty prevailing at the time. Fast forward to Q2, force is to admit that labour income is showing tremendous resilience with a 7% annualized gain in Q2, the best showing in 8 years. With interest-rate sensitive sectors (autos, housing) rebounding strongly in Q2 and with fiscal stimulus just around the corner, we do not see justification for a rate cut at this point in time.

According to Desrosiers Automotive , motor vehicle sales made a strong showing in Q2 as volume sales bounced back an annualized 22.3% over the period. After two consecutive quarterly declines, a rebound of the sort was certainly welcome. What’s more, 2015Q2 will go down in the record books as the best volume sales for a second quarter ever.

June housing starts surprised consensus on the upside by pegging in at an annualized rate of 202.8K units, 5.8K (+3.0%) above May’s downwardly revised mark. Multiple urban starts climbed 4.7K (+3.7%) to 130.9K, their highest level since October 2012, while single-detached urban starts inched up 1.1K (+2.0%) to 57.8K. At 14.1K, rural starts hardly budged. On a regional basis, starts were up in 8 of the 10 provinces. Though they dove 25.2K in Ontario, they sprang 10.9K in British Columbia, 8.6K in Alberta, and 8.0K in Quebec. Starts cleared the 200K bar for the first time in 11 months (May starts were revised down below that point) despite a return to normal in Toronto following a spike in May. The drop in Toronto was offset by a surprisingly high level of multiple starts in Vancouver, Montreal and Calgary. In Montreal, the increase was driven primarily by rental housing for the elderly. For Q2 as a whole, starts totalled an annualized 192.7K, up 46% from Q1. Looking ahead, we believe starts will settle down between 180K and 190K over the next few months in line with demographics and the performance of the labour market. This slowdown will nevertheless leave starts well above the level associated with recession-like conditions.

The merchandise trade deficit widened to C$3.34 billion in May from a slightly revised C$2.99 billion the prior month. The energy trade surplus was essentially unchanged at C$4.7 billion but the non-energy trade deficit grew from C$7.7 billion to C$8.0 billion, the largest on record. Total exports fell 0.6% owing mostly to declines in metal and non-metallic mineral products (-5.8%), metal ores and non-metallic minerals (-9.2%) and electronic and electrical equipment and parts (-4.8%) outweighing increases in motor vehicles and parts (+2.7%) and aircraft and other transportation equipment (+10.3%). Imports edged up 0.2% as advances in metal and non-metallic mineral products (+5.0%), chemicals (+9.5%) and consumer goods (+2.3%) more than offset pull-backs in industrial machinery, equipment and parts (-5.0%), electronic and electrical equipment and parts (-3.8%) and aircraft and other transportation equipment (-12.4%). The trade surplus with the United States narrowed from $2.3 billion to $2.1 billion while the deficit with other countries widened from $5.3 billion to $5.5 billion. In real terms, Canada’s exports sank 1.9% while imports rose 0.2%.

The Canadian trade report was once again disappointing, as the deficit recorded was greater than expected. Based on two months of data, volume trade is detracting from Q2 real GDP growth, with exports lower an annualized 5.2% (a drop exacerbated by wildfires in Alberta affecting oil production) and imports higher 0.2%. Adding to the disappointment was the continued slide in imports of machinery and equipment (excluding aircraft and other transportation equipment). Two months into the quarter, volumes have plunged close to 20% annualized, which suggests very weak business investment. The sole consolation was the jump in export prices due to energy, which helped improve the terms of trade. All in all, the report confirmed that if there was any growth at all in Q2, it was anemic.

The summer edition of the Bank of Canada's Business Outlook Survey showed that the business outlook edged up since the spring. While firms reported deterioration in sales growth over the past 12 months, they were slightly more optimistic about sales over the next year, the corresponding balance of opinion increasing to 8 from 4 (which was the lowest since 2012). Intentions to invest in machinery and equipment also increased to 7 from 4 (last spring was the worst reading since 2009). Capacity pressures rose from the spring survey, with 47% 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 19% (from 21% in the last survey). However, hiring intentions were slightly stronger with the related balance of opinion increasing to 26 from 20. Expectations of input price inflation are very low, with the corresponding balance of opinion at -26, its lowest since 2009, showing that much more respondents think input inflation will increase at a lesser rate than in the past year (fading impact of weaker CAD on input prices). The balance of opinion for firms’ expectations of output price inflation is also at a multi-year low at -13 from 5 in the last survey. That was also reflected in inflation expectations which were down slightly with 71% of firms expecting below 2% inflation compared to 66% in the spring. Firms reported a further easing in credit conditions compared to the previous three months. Though the BoC’s business outlook survey was slightly below expectations, the direction is consistent with modest economic expansion with a strong regional divide. Though developments in central Canada appear to be proceeding as one would have expected (better sales outlook with higher business invest) the energy-related sectors and provinces are actually reporting further curtailment in investment.

The separately-released BoC Senior Loan Officer's survey for Q2 showed lending conditions were broadly unchanged from the prior quarter, with the corresponding index moving to 1.4 from 6.7 in Q1, with both price (0.0) and non-price conditions (2.8) remaining essentially unchanged.

United States – In May, the trade deficit widened 2.9% to $41.9 billion from $40.7 billion in April. Imports dipped 0.1% to $230.5 billion, with the volume of petroleum imports falling 4.0% on the month. Exports sagged 0.8% to $188.6 billion. The weakness here was largely due to capital goods decreasing $2.4 billion (5.2%) to $44.9 billion. In real terms, exports retreated 1.9%, while imports progressed 0.5%. All in all, the report was better than expected and suggested that the trade data distortions derived from the labour conflict at West Coast ports were behind us. After being a significant drag on GDP growth in Q1, trade should not have much of an impact in Q2.

The Institute for Supply Management (ISM) Non- Manufacturing Index climbed to 56.0 in June. The new-orders and business-activity components gained 4 and 2 ticks, respectively, to 58.3 and 61.5. Of the 18 non-manufacturing industries surveyed, 15 reported a higher level of activity in June.

Inventories of wholesalers increased 0.8% in May to $581.9 billion from the previous month. Inventories of durable goods jumped 0.6% in the month while they were up 1.2% for nondurable goods. The May inventories/sales ratio was 1.29 as sales grew 0.3% in the month.

The Job Openings and Labor Turnover Survey (JOLTS) report for May surpassed expectations, showing that the number of job vacancies rose modestly to 5.36 million on the month. According to the report, there were about 1.6 unemployed persons for every opening. The quit rate (a sign of confidence in the labor market) slipped one tick to 1.9, compared to a low of 1.1 coming out of the recession.

The minutes of the June FOMC meeting were released this week. As we already knew from the dot plot and from Chair Yellen’s post-FOMC press conference, participants are looking for interest rates to lift off this year. However, many of them expressed concern over Greece and China and possible spillover effects of potential financial market disruptions on the U.S. economic outlook. This said, many participants expected labour market underutilization to be largely eliminated around year end if economic activity strengthened as expected. Yellen is scheduled to deliver her semi-annual monetary policy report to the House Financial Panel on July 15. Investors will get more up-to-date views from the Fed on that day as the last FOMC meeting took place before both the Greek referendum and the release of the labour market report that evidenced good nonfarm payroll growth despite the loss of full-time jobs and the lack of wage growth.

World – In China, the consumer price index for June came in at 1.4% year over year, a notch above expectations and the previous month’s print of 1.3%.

In Japan, machine orders increased 0.6% month over month in May, down from the previous month when orders grew 3.8%. This was nonetheless much better than what consensus had anticipated (-4.9%). Year over year, machine orders in May were up 19.3%. On a balance-of-payments basis, the current account balance stood at 1,880.9 billion yen, compared with 1,570.2 billion expected by consensus.

In Germany, a busy week in releases helped put the current situation into perspective. Industrial production was unchanged (0.0%) in May, whereas expectations were for an increase of at least 0.1%. Factory orders decreased 0.2% in May, which was not as bad as the 0.4% drop expected by those surveyed, though it nevertheless contrasted with this year’s growth. Imports and exports both grew in May, bringing the current account to 19.5 billion euro, which was slightly lower than expected.