Employment fell 11K in August according to the Labour Force Survey

Week in review

Canada – Employment fell 11K in August according to the Labour Force Survey. The jobless rate, however, managed to stay unchanged at 7% thanks to a one-tick decline in the participation rate to 66% (from 66.1%). Employment declines in the private sector (-112K is the worst decline on records) dwarfed small gains in government (+14K), while self employment jumped 87K. All in all, paid employment i.e. total employment excluding self-employeds, slumped 98K, the worst since January 2009 when Canada was in recession. The losses were entirely in the services sector where employment was down 21K, with declines for education and trade among others. The only piece of good news from this report was that the goods sector added 10K jobs, the first increase in six months, as sharp gains in construction more than offset declines in manufacturing, utilities and resources. Full-time employment fell 2K, while part-time employment fell 9K. Hours worked dropped 0.2%. All told, August’s LFS was awful and it extends the survey’s volatility ― we haven’t had back-to-back monthly gains (or losses) in employment this year. Amidst that volatility, it’s best to look at the longer term trend. On a 12- month moving average basis, Canada is creating 7K jobs per month, none in the private sector.

That’s a pretty dismal record for an economy that is growing above potential. But given the LFS’s up and down track record, expect a quick rebound in September employment. Statistical adjustment aside, employment should also find support later this year from better corporate profits and an improving economic outlook.

Labour productivity jumped 1.8% in Q2, as real GDP (+1% unannualized) grew while hours worked fell (-0.8% unannualized). Hourly compensation was up 2%, while unit labour costs increased just 0.3% unannualized.

The merchandise trade surplus rose to C$2.6 bn in July (from $1.83 bn in the prior month), the highest since October 2008. The improvement in July was due to rising nominal exports (+1.4%) and falling nominal imports (-0.3%). The export increase was driven by autos, electronics, agriculture, forestry, aircraft equipment and industrial machinery, which more than offset declines for energy, metal ores, and consumer goods. The energy trade surplus fell to C$7.8 bn but the non-energy trade deficit narrowed to C$5.2 bn, the best/smallest since December 2012. In real terms, Canada’s exports rose 1.8% to reach an all-time high, while imports were up just 0.6%. With July’s results, and assuming no change in the subsequent two months, real exports are tracking growth of nearly 14% annualized, much higher than import growth. So, trade is likely to contribute again to Canadian GDP growth in the third quarter.

As expected, the Bank of Canada left the overnight rate unchanged at 1.00% and maintained its neutral stance with respect to the policy rate, i.e. “its timing and direction will depend on how new information influences the outlook and assessment of risks”. The BoC believes inflation is evolving as expected and acknowledged the strong Q2 GDP rebound. However, the central bank cautioned that the pickup in exports will need to be sustained before that translates into better investment and employment. The central bank now says that the excess capacity will be absorbed “during the next two years”, i.e. more vague than the July statement which pointed to mid-2016 as the time when the output gap closes. The central bank left open the door for a more hawkish stance later on by noting that the risks associated with household imbalances have not diminished.

United States – Non-farm payrolls grew only 142K in August, the first sub-200K print since last January. The deceleration was concentrated in the private sector where the gains were restricted to just 134K, the weakest showing since December. Hourly earnings were up 0.2% on the month and 2.1% on a year-on-year basis. The household survey confirmed the deceleration with a gain on only 16K jobs (though full-time employment rose 127K). Still, the jobless rate managed to ease one tick to 6.1% thanks to a decline in the participation rate. Given the generally strong economic data in the U.S., we expect payrolls to firm up over the coming months.

The ADP employment report showed a 204K increase in private sector jobs in August. July was revised down to 212K (from 218K), putting it a bit more in line with the private nonfarm payrolls in that month. The ADP’s job gains in August were mostly in small firms, i.e. those employing less than 50 employees, which added 78K to payrolls. Medium-sized firms added 75K while large firms increased payrolls by a net 52K.

Weekly jobless claims data for the week of August 30th showed initial claims rising marginally to 302K, from an unrevised 298K. Consensus was looking for 300K. The more reliable 4-week moving average rose slightly to 303K. Continuing claims for the prior week fell 64K to 2.46 million.

The ISM manufacturing index rose to 59 in August (from 57.1 in the prior month). That’s the highest ISM since March 2011. The production sub-index was up more than three points to 64.5 (from 61.2), while the new orders sub-index soared to 66.7 (from 63.4).The employment sub-index was little changed at 58.1. The non-manufacturing ISM index rose to a 9-year high of 59.6 in August (from 58.7 in the prior month). A reading above 50 implies the services sector is expanding. The business activity index soared to 65, and the employment subindex rose further in expansion territory to 57.1 (highest since February 2006). The new orders sub-index was down slightly but well in expansion territory at 63.8. The overall ISM, which takes into account both manufacturing and services, rose roughly a point to reach 59.1 in August.

The factory report showed a 10.5% increase in total orders in July, as a 22.6% jump for durable goods dwarfed the 0.9% drop for non-durables. Durable goods orders were driven by the transportation category, particularly civilian aircrafts. Excluding transportation, factory orders fell 0.8%, erasing part of the prior month’s 1.4% increase. Total factory shipments rose 1.2% as gains for durables more than offset a decline for non-durables. The trade deficit narrowed to $40.5bn in July, from a $40.8bn deficit in the prior month (revised from $41.5 bn deficit). The improvement in the trade balance was due exports (+0.9%) rising faster than imports (+0.7%) in nominal terms. In real terms, exports rose 1.3%, while real imports increased just 0.5%. Construction spending rose 1.8% in July more than erasing the prior month’s losses (the latter revised to -0.9% from an initial -1.8%). July’s increase, was mostly due to the non-residential sector (+2.5%) which more than reversed the prior month’s decline, but there was also a 0.7% gain in the residential sector. Overall, construction spending is up 8.2% compared to levels of July 2013 (+7.6% for residential and +8.6% for non-res).

The Fed's Beige Book provided the latest information about the US economy, covering the period to August 22nd. The report suggested that economic activity expanded since the previous Beige Book was released mid-July. Consumer spending grew in most districts, particularly on autos. Residential real estate activity expanded further as did loan demand. Trends in employment, wages and inflation were more or less unchanged from last July.

World – In China, the services purchasing manager index (both the government’s and the private sector’s respective measures) came in well above 50 and consensus expectations in August. The Bank of Japan and Bank of England left monetary policy unchanged this week. However, the European Central Bank loosened monetary policy even further. In addition to cutting interest rates further ―the rate on the main refinancing operations was cut 10 basis points to just 0.05% while the deposit rate was taken further into negative territory to -0.20% ― the Governing Council decided to start an Asset-Backed Securities purchase program and a new covered bond purchase programme in October. The ECB believes those measures support its forward guidance on rates and will improve the transmission mechanism of monetary policy so that inflation returns to levels closer to 2%. But the ECB warned that it isn’t done yet: “Should it become necessary to further address risks of too prolonged a period of low inflation, the Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate”. In the press conference, ECB President Draghi said that it is expected that the targeted longer-term refinancing operation (TLTRO starting in mid September) in conjunction with the asset purchase programme will have a sizable impact on the ECB’s balance sheet. The central bank revised its economic projections. It sees the eurozone economy growing 0.9% in 2014, 1.6% in 2015 and by 1.9% in 2016. The central bank foresees inflation in 2014 at 0.6%, and rising to 1.1% in 2015 and to 1.4% in 2016.