Canada – employment in December jumped 54K

Week in review

Canada – According to the Labour Force Survey (LFS), employment in December jumped 54K, easily topping consensus which was looking for a decline.

Despite those massive gains, the jobless rate increased one tick to 6.9% because of the two-tick increase in the participation rate to 65.8%. The surge in December employment was entirely due to paid jobs (+72K) which dwarfed the 18K decline in selfemployment. Paid employment gains were split between the private sector (+44K) and government (+29K). The goods sector added just 2K jobs as gains in manufacturing, utilities and construction offset declines in agriculture and forestry. Services sector employment jumped 52K with strength in most sectors. Full-time employment soared 81K, while part-time employment was down 28K. But interestingly, hours worked fell 0.8%. The Labour Force Survey continues to surprise. December's surge in employment was the fifth consecutive month of gains in Canada's labour market. The strength in cyclical sectors such as construction and manufacturing points to resilience in the economy. Particularly encouraging is the further increase in employment for the 25-54 age group, a positive for household formation and hence a source of support for the housing market. For 2016 as a whole, LFS employment rose 214K or 18K/month, not spectacular (considering most were part-time) but a positive result nonetheless considering real GDP growth last year was a meagre 1.3% or so.

The merchandise trade balance moved into surplus territory at +C$0.5 billion in November, as nominal exports rose 4.3%, dwarfing the 0.7% increase in imports. The energy trade surplus fell to C$4.4 billion as energy imports rose faster than exports. But the non-energy trade deficit narrowed to C$3.9 billion, the best in 5 years. In real terms, Canada's exports jumped 3.9% in November, while imports were flat. The merchandise trade report for November was surprisingly good considering the unexpected surplus. The gains for goods exports now mean real exports are on track to rise about 3.5% annualized in Q4, while imports are falling 18% in the quarter. In other words, trade seems to be have contributed to Q4 Canadian GDP growth.

United States – In December, nonfarm payrolls increased 156K in December, slightly below consensus expectations calling for a gain of 175K. Revisions to the previous two months, however, added 19K to the previously published numbers. Job creation in December was concentrated in services (+132K) on the back of a huge gain of 70K in education & health services. Goods producing employment was up 12K in December as manufacturing posted its biggest monthly increase in eleven months (+18K). Turning to the household survey, the headline number was rather soft with gain of 63K in December (35K of which were full-time positions). This development combined with a rise in labour force participation pushed the jobless rate marginally higher: from 4.6% to 4.7%. However, the wide measure of unemployment (which accounts for discouraged workers) edged lower to 9.2% (from 9.3%). You have to go back to March 2008 to find a lower rate than that. Job creation in the U.S. continues to chug along at a relatively good pace, i.e., strong enough to entice people to re-integrate the labour force (hence the fall in discouraged workers). At the same time, the quit-rate (% of unemployed that voluntarily leave their jobs) remains near a decade high of 12%, a development normally associated with tight labour markets. Under these circumstances, a pick-up in wage inflation should not come as a surprise. Hourly earnings rebounded 0.4% in December. This propelled 12-month wage inflation to 2.9%, a new postrecession high. Against this backdrop, the Federal Reserve is set to hike at least twice in 2017 and perhaps more depending on the timing (and nature) of the upcoming fiscal stimulus. At this juncture, a hike in March should not be ruled out.

In November, the trade deficit in goods and services was US$45.2 billion, compared to US$42.4 in the previous month. Exports were down in the month by US$0.4 billion to US$185. 8 billion. In November imports rose US$2.4 billion to $231.1. In real term, the trade deficit widened by more than US$3 billion in the month and suggests net exports are likely to be a significant headwinds to growth in Q4.

In December, the ISM Manufacturing Index climbed to a consensus-topping 54.7, its top mark since December 2014. Impetus was provided by new orders, which jumped more than 7 points to 60.2, production, which sprang 4.3 points to 60.3, and employment, which gained 0.8 point to 53.1. New orders received a boost from an unlikely source: The exports sub-index reached its highest point since mid-2014. Clearly, factory momentum from Q3 carried over to the last quarter of 2016.

For its part, the ISM Non-Manufacturing Index was unchanged at 57.2, which suggested that activity in the service sector continued to expand at a strong pace as 2016 came to a close.

In November, construction spending increased 0.9% after the prior month's growth was revised up slightly to 0.6%. November's advance was driven by both the residential and the non-residential sectors (+1.0% and +0.8%, respectively).

Factory orders fell 2.4% in November, following a 2.8% jump in October. Core capital goods order, an indicator of business confidence, rose 0.9% in the month. Shipments of non-defense capital goods excluding aircraft gained 0.2% in November, following a 0.3% decline in October.

The minutes of the Fed's Dec. 13-14 policy meeting show that, in their discussion, participants expressed "considerable uncertainty" about the impact future fiscal and other economic initiatives might have on the economic outlook. Yet, almost all indicated that prospects for more expansionary fiscal policies had tilted the risks to their economic growth forecast to the upside. Many participants felt that the situation made it "more challenging to communicate to the public about the likely path of the federal funds rate." Moreover, they judged that since the risks of significantly under-shooting the longer-run normal unemployment rate increased somewhat, it might be necessary to normalize monetary policy at a faster pace than currently anticipated. According to several participants, this could have implications for the reinvestment of proceeds from maturing Treasuries and principal payments from agency debt and mortgage-backed securities. Still, participants agreed that it was too early to know what policy changes would be implemented by the incoming Administration. FOMC's voting members judged that near-term risks to the economic outlook were roughly balanced and with sufficient evidence of continued progress towards the Committee's dual mandate, the FOMC raised the target fed funds rate by a quarter-point.

World – In December, the Caixin China Services PMI progressed to 53.4 from 53.1 the previous month. With the Manufacturing PMI up one point to 51.9, the composite index moved 0.6 point higher to 53.5.