CANADA: Employment rose 11K in July according to the Labour Force Survey

Week in review

CANADA: Employment rose 11K in July according to the Labour Force Survey. That result, combined with a two-tick decrease in the participation rate to 65.7%, led the unemployment rate from 6.5% to 6.3%, the lowest since October 2008. Job gains in July were concentrated in the socalled "self-employed" category (+13.2K). Meanwhile, public sector employment was roughly stable (+0.8K) and payrolls in the private sector shrank (-3K). Good sector employment was up just 2K as gains in manufacturing and resources were offset by declines in construction, agriculture and utilities. The services sector created a net 9K jobs, with strength in trade, health care, info/culture and transport more than offsetting sharp declines in education (-32K). Full-time employment jumped 35K while part-time employment was down 24K. That allowed total hours worked to rise 0.6%. On a regional basis, July job creation was driven by gains in Ontario (+25.5K, but largely outside of Toronto) and Quebec (+4.7K) which more than offset declines in British Columbia (-5.1K) and Alberta (- 14.4K). July's soft employment report has to be looked at in context, coming after massive job gains in earlier months. On a 12-month average basis, a more reliable measure, job creation is still running at a solid pace of 32K/month.

The merchandise trade deficit widened to C$3.60 bn in June, the worst since September last year. The deterioration was caused by a sharp decline in exports (-4.3%) combined with a slight expansion of imports ( +0.3%). Nine of the 11 export categories saw decreases in June, including metal and non- metallic minerals (-14.9%), energy (-9.2%), plastic and rubber products (-6.5%), and electronic equipment (-3.2%). On the other hand, imports were up in several categories, with aircrafts (+11.7%) and metal ores (+39.1%) posting the biggest gains. The sizeable drop in energy exports pulled the energy trade surplus down to C$4.5 bn from C$5.1 bn in the prior month. The non-energy trade deficit rose to C$8.1 bn, the largest in 9 months. Moreover, crude oil exports to the U.S. fell sharply, causing Canada's trade surplus with its southern neighbour to shrink to C$2.2 bn, the lowest in a year. Trade with the rest of the world fared no better; the deficit with non-U.S. countries increased C$0.9 bn to a total of C$5.8 bn. In real terms, Canada's exports slid 2.4% in June, while imports increased 1.1%. Looking at Q2 as a whole, goods trade may have provided a small lift to the economy as real exports ─ +11.1% annualized is the larg est quarterly increase since 2011 ─ grew slightly faster than imports.

Markit's manufacturing PMI jumped from 54.7 in June to 55.5 in July, marking the fastest rate of improvement in overall business conditions since April. The monthly bump was driven by a faster rate of expansion of three sub-indices: output, employment, and new orders. The overall index has stood above 50, the threshold indicating expansion in the manufacturing sector, for 17 consecutive months. It also improved sharply over its le vel 12 months earlier (51.9).

UNITED STATES: Non-farm payrolls rose 209K in July, higher than the 180K expected by consensus. Adding to the good news were upward revisions to the prior months. In July, the private sector added 205K jo bs. Goods sector employment was up 22K, with gains in manufacturing and construction. The private services sector created a net 183K jobs, with broad-based gains. Government also added jobs, albeit entirely at the state level. In addition, average hourly earnings rose 0.3%, leaving the year-on-year wage inflation rate unchanged at 2.5%. Released at the same time, the household survey showed an increase of 345K jobs, all part- time. That led the unemployment ra te to fall one tick to 4.3%, even as the participation rate rose one tick to 62.9%.

In July, the ISM manufacturing index sagged 1.5 points to 56.3 after jumping 2.9 points to a 35-month high in June. Several sub-indicators registered declines in the month, including production (60.6 from 62.4), new orders (60.4 from 63.5) and employment (55.2 from 57.2). Still, all of these components, as well as the overall index, were roughly in line with their respective 6-month moving average and continued to indicate robust expansion (>50). Supporting this positive state of affairs is the fact that no fewer than 15 of the 18 manufacturing industries covered in the Markit survey reported growth in July, proof that expansion in manufacturing is broad based.

The ISM non-manufacturing index sank from 57.4 in June to 53.9 in July, the steepest one-month drop since November 2008. The index was pulled down by slower reported expansion in terms of production (55.9 from 60.8), new orders (55.1 from 60.5), and employment (53.6 from 55.8). However, the sharp decline in the overall index should not be cause for too much concern. For one thing, the index remained in expansion territory (>50) for the 91 st month in a row and most of its components held at levels indicating healthy growth. In fact, the moderation observed in July arguably brought the index back to a level more consistent with the actual pace of economic activity after a larg ely unjustified bump following Donald Trump's election.

In June, the trade deficit narrowed 5.9% to an 8-month low of $43.6 bn as nominal exports expanded 1.2% to $194.4 bn (their highest mark since December 2014) and nominal imports retraced 0.2% to $238.0 bn. Exports were boosted by the automotive and food/beverages sectors. Alternatively, imports were weakened by a slump in the industrial supplies segment. The goods deficit shrank 3.2% on a monthly basis to $65.2 bn while the services surplus expanded 2.9% to $21.6 bn. Excluding the petroleum deficit, which shrank 13.8% in June, the overall trade shortfall narrowed 2.4% to $39.3 bn. In real terms, exports were up 1.6% in the month while imports notched up 0.1%. In Q2 as a whole, real exports (+1.9% annualized) rose slightly faster than real imports (+1.8%).

Construction spending was down 1.3% m/m in June as both the residential (-0.3%) and the non-residential segments (- 2.0%) retreated. Outlays in the private sector ticked down (- 0.1%) while public spending (-5.4%) fell the most since March 2002. In the 12 months to June , taxpayer-funded construction spending sank 9.5% to an annualized $265.1 bn, its lowest dollar value in more than three years. Public spending on infrastructure was hit particularly hard over this period (see chart below). The pullback in public outlays meant that, in June, government-funded construction projects represented only 22.0% of total construction spending, down from the cyclical peak of 39.2% reached in September 2010. This is certainly not good news in a country badly in need of infrastructure investment. The dismal performance in the public sector weighed heavily on overall construction spending, which grew only 1.6% y/y in June, down abruptly from 7.3% back in January. The private sector fared much better, recording a 5.3% expansion in construction spending in the year ended in June.

In June, nominal personal income was flat month on month after increasing 0.3% in May. The wage/salaries component of income gained 0.4% while disposable income was flat. Personal spending, for its part, inched up 0.1% after gaining 0.2% in May. Adjusted for inflation, disposable income slipped 0.1%, the first negative print since December, while spending was unchanged.

The savings rate dipped from 3.9% in May to 3.8% in June as nominal spending rose faster than nominal disposable income.

Still in June, the PCE deflator was up a meagre 1.4% y/y, compared with 1.5% in May and 2.2% back in February. Meanwhile, the core PCE deflator, which excludes food and energy, undershot the Fed's 2.0% target for a 60th consecutive month, rising 1.5% on a 12-month basis.

Pending sales of previously owned homes rose 1.5% in seasonally adjusted terms in June, the first m/m increase in four months. Despite the advance, the pending home sales index was up only 0.7% y/y. The poor 12-month figure could be explained in part by limited inventory. Indeed, the number of properties available on the market fell 7.1% y/y to 1.96 million. This represented only 4.3 months of sales, which is well below the measure's long-term average of 7.0.

Factory orders rose 3.0% m/m in June after falling 0.3% the prior month. Orders in the transportation segment spiked 19.0% on a 131.1% surge in orders for civilian aircraft thanks in large part to the Paris Air Show, which was held in June. Excluding transportation, factory orders edged down 0.2%. Year over year, factory orders were up 9.8%, their best reading since July 2014. For their part, total shipments were down 0.2% m/m. However, shipments of non-defence capital goods ex-aircraft, a proxy for business capital spending, notched up 0.1%. Finally, the inventory-to-shipments ratio moved up a tick to 1.38.

WORLD: In Q2, the Eurozone's GDP expanded for a 17th straight quarter, growing 0.6% q/q (unannualized). On a yearly basis, growth accelerated from 1.9% in Q1 to 2.1% in Q2, the steepest rate since 2011Q2. This is good news that should reassure the European Central Bank as it prepares to make an announcement this fall regarding the tapering of its asset purchase program. It is also worth noting that Spain recorded a 0.9% growth figure in the quarter (unannualized), a performance that lifted its GDP over its pre-crisis level for the first time. Among the big four European powerhouses, only Italy still has an economy smaller than it was before the recession.

Still in the Eurozone, the flash estimate of the consumer price index showed prices rose a meagre 1.3% y/y in July, unchanged from the previous month. Core prices, which exclude energy, food, alcohol and tobacco, were up 1.2% y/y, up one tick from June. Once again, inflation varied widely from one country to another. Headline prices were 1.7% and 1.5% higher year on year, respectively, in Spain and Germany. In France and Italy, however, prices advanced at more tepid 0.8% and 1.2%, respectively.

In June, the Eurozone's seasonally adjusted unemployment rate slipped one tick to an 8-year low of 9.1%. Youth unemployment in the single-currency area fell as well, dropping from 19.0% to 18.7%, a level last reached in January 2009. Nationally, the jobless rate stayed put in France at 9.6% and decreased two-tenths of a percentage point in both Spain (to 17.1%) and Italy (to 11.1%). In Germany, the unemployment rate slid one tick to a post-reunification low of 3.8%.

Japanese industrial production rebounded in June, expanding 1.6% m/m after contracting 3.6% in May. The transportation sector (+4.2% m/m) was the biggest contributor, adding 0.8 percentage point to overall growth. June's result means that, for Q2 as a whole, industrial output grew at a very respectable 7.7% annualized pace. This was the fifth consecutive positive quarterly gain for the indicator, the longest streak in more than three years. The report also showed shipments of capital goods excluding transportation equipment, a proxy for business investment, advancing an impressive 12.0% in annualized terms in Q2 after shrinking 1.25% in Q1.

In China, the Caixin/Markit Composite PMI climbed from 51.1 in June to 51.9 in July. The improvement was driven by the manufacturing sector, which saw its PMI rise from 50.4 to a four-month high of 51.1 on stronger output and new-orders growth. On a less positive note, the employment index continued to indicate lower manufacturing payrolls. The services tracker came in at 51.5, roughly unchanged from June (51.6). 

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