The ISM non-manufacturing index fell to 53.5 in January

Week in review

Canada – Employment was down 6K in January according to the Labour Force Survey, worse than consensus which was expecting an increase of 6K. The jobless rate rose one tick to 7.2% as the participation rate remained unchanged at 65.9%. The employment decline was due to selfemployment (-20.2K) and the private sector (-4K) which more than offset the increase in government (+19K). Part-time employment was down 11K, while full time employment rose 6K. Total hours worked were up 0.3%. Goods sector employment was down sharply (-25K) with losses in agriculture, manufacturing and construction more than offsetting small gains in utilities and resources. Services sector employment rose 20K driven by health care, Information/recreation and trade among others, although there were some weakness in public administration, transportation/warehousing and professional services. Ontario (+20K) and BC (+1K) were the only provinces showing gains.

While the LFS report was softer than expected, there are nonetheless encouraging signs given the increase in full-time employment and continued resilience for services sector employment. We also take comfort that Central Canada (particularly Ontario) and BC are compensating for weakness in other provinces.

The merchandise trade deficit narrowed to C$585 million in December, the smallest deficit in five months. The improvement in the trade balance was due to nominal exports (+3.9%) rising faster than nominal imports (+1.6%). There were widespread gains for exports, with even energy seeing a small 0.2% increase as higher volumes offset weaker prices. Sales of autos and aircrafts/parts bounced back after struggling earlier. Imports were driven by energy which soared 7.9%. As a result, the energy trade surplus fell to C$3.9 bn, the lowest since July 2012. The non-energy trade deficit narrowed to C$4.5 bn, the smallest deficit in four years. In real terms, Canada’s exports jumped 3.1% in December, while imports increased 0.7%.

Overall, December’s trade report was much better than expected. Non-energy exports are ramping up helped by better demand stateside (trade surplus with the US is the highest in months) and a cheap Canadian dollar. Energy exporters are also cushioning the blow of plunging prices on revenues by increasing volumes. For Q4 as a whole, trade is set to be a contributor to Canada’s GDP but for the wrong reasons, i.e. slumping imports ─ 9.6% annualized decline is bigger than the 1.5% drop for exports. Imports of machinery and equipment continue to fall, suggesting the investment slump extended to Q4. In other words the contribution from trade will be offset by an expected drag from investment. We remain comfortable with our view that Q4 Canadian GDP growth was close to flat.

United States – Non farm payrolls rose just 151K in January, much lower than the 190K expected by consensus. The private sector added 158K jobs thanks to gains in services (+118K) and the goods sector (+40K). The increase in goods sector employment was due to construction (+18K) and even manufacturing (+29K) which dwarfed an 11th consecutive drop in mining. The private services sector job gains were driven by health care, retailing, business services, leisure/hospitality. Government cut 7K positions. Average hourly earnings rose 0.5%. The employment diffusion index fell to 59.5, the lowest in three months. The other US employment report, the household survey (similar methodology to Canada’s LFS) showed 615K new jobs being created, allowing the jobless rate to fall to 4.9% even as the participation rate moved up one tick to 62.7%.

The US employment reports were mixed, with a decent household survey and a weaker-than-expected NFP. There were also downward revisions to prior months meaning that jobs gains totalled 5.6 million in the last couple of years instead of 5.8 million as previously thought. Mining continues to see declines in the aftermath of the oil price collapse and now even the once-buoyant services sector is starting to slow. The first decline in government employment in months is also disappointing. The worst diffusion index in months is bad news as the few jobs being created seem rather concentrated to few sectors. The deceleration in employment creation shouldn’t be surprising given the productivity slump in the prior quarter. While the jobless rate is now the lowest in years, the Fed will nonetheless exercise utmost caution in the current tightening cycle because the US outlook for both inflation and growth has darkened in recent months.

The ADP employment report showed a 205K increase in January. The job gains were mostly in medium-sized firms (+82K), although small firms i.e. those employing less than 50 employees, added a strong 79K to payrolls. Large firms (500+ employees) added 44K new positions.

The ISM manufacturing index rose marginally from 48 to 48.2 in January. A sub-50 print means factory activity is contracting. While the production and new orders sub-indices were in expansion mode (just barely above 50), the employment subindex dropped even deeper in contraction territory. The ISM non-manufacturing index fell to 53.5 in January, the lowest since March 2014. The business activity, new orders and employment sub-indices all declined but remained into expansion territory.

Personal income rose 0.3% while personal spending was flat in December. With income rising faster than spending, the savings rate jumped to 5.5%, the highest since July. In real terms, disposable income rose 0.4% while spending was up 0.1%, albeit after a gain of 0.4% the prior month. The PCE deflator was up slightly to 0.6% on a year-on-year basis, while the core rate was unchanged at 1.4% in December.

Construction spending rose 0.1% in December as gains in the residential sector (+0.7%) more than offset the 0.4% decline in the non-residential sector. Factory orders fell 2.9% in December driven by a slump in durable goods. The trade deficit widened to $43.4 bn in December from the prior month’s deficit of $42.2 bn. The deterioration in the trade balance was due to exports falling faster than imports.

Business non-farm labor productivity fell 3% annualized in the fourth quarter of 2015. That more than erased the prior quarter’s 2.1% increase. The drop in Q4 productivity was a result of hours worked (+3.3%) growing faster than output (+0.1%). Unit labour costs rose 4.5% as a result.

World – The Bank of England left monetary policy unchanged at its meeting this week. The decision was unanimous with the sole member previously arguing for a rate hike deciding to join with the majority for the first time in months. In the Eurozone, the unemployment rate fell one tick to 10.4% in December. The producer price index fell again in December, taking the annual PPI inflation rate to -3%. Retail spending, also for the month of December, rose 0.3%.

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