Labour productivity dropped 0.3% in Q1 after rising 0.2% the prior quarter

Week in review

CANADA: Employment fell by 7.5K in May according to the Labour Force Survey, much weaker that consensus which was expecting a 24K gain. However, thanks to a one-tick drop in the participation rate to 65.3%, the unemployment rate stayed put at 5.8%. A retreat in the number of jobs in the private sector (-5K) and for self-employed (-15.6K) overshadowed a rise in the public sector (+12.9K). Full time employment dropped 31K, offsetting a 24K rise for parttimers. The soft report doesn't necessarily mean Canada's labour market is experiencing difficulties. Despite the weakness in the first half of 2018, job gains are still averaging an impressive 20K a month since May of last year. What's more, with the unemployment rate standing at a record low, hourly earnings are now increasing at their fastest pace since 2009 (+3.9% y/y, compared with 3.6% in the prior month). All in all, the LFS report does not change our view that the labour market remains tight and will continue to fuel inflation pressures this year. As such we continue to call for a July interest rate hike from the Bank of Canada.

The merchandise trade deficit narrowed from C$3.9 billion in March to a six-month low of C$1.9 billion in April. The smaller deficit was the result of a 1.6% jump in nominal exports and a 2.5% retreat in nominal imports. The energy trade surplus stayed roughly unchanged at C$5.9 billion while the nonenergy trade deficit improved the most in 18 months, shrinking C$2.1 billion to C$7.8 billion. The goods trade surplus with the United States, meanwhile, rebounded to C$3.6 billion after sinking to C$2.0 billion in March, its lowest point in four months. Alternatively, Canada's trade deficit with the European Union deteriorated from C$1.3 billion to C$1.5 billion. In real terms, exports rose 1.2% while imports fell 2.4%, which suggests merchandise trade may contribute to quarterly growth in Q2 for the first time since 2016Q4. Looking ahead though, the outlook on international commerce remain quite hazy as uncertainties continue to plague our trade relationship with the U.S.. Up to now, the vagaries of the U.S. administration don't seem to have overly impacted bilateral trade with our southern neighbor. Quite to the contrary, total merchandise trade with the U.S., i.e. exports plus imports, reached an all-time high of C$68.6bn in April. But the situation could quickly take a turn for the worse, especially following the recent imposition of tariffs on Canadian steel and aluminum exports to the U.S. which do not make things easier for negotiators of a revamped NAFTA.

Housing starts were down in May, coming in at an annualized 195.6K compared with the 216.8K figure registered in April. Urban starts slipped 22.3K (to 178.2K) as a decline in groundbreakings for multiples (-23.4K to 119.8K) eclipsed a small increase in the single unit category (+1.1K to 58.4K). At the provincial level, starts fell 17.7K in Quebec (to 35.5K) and 14.4K in Ontario (to 52.4K) but rose 6.8K in Alberta (to 34.5K), 2.3K in Saskatchewan (to 4.1K) and 1.2K in British Columbia (to 40.9K). Although starts at the national level disappointed consensus in May, we don't expect that relative weakness to be the beginning of a downward trend. Looking ahead, we can expect starts for urban multiples to be stimulated by sustained demand for more affordable housing, especially in an environment of stricter mortgage requirements. In the meantime, residential construction may act as a drag on growth in Q2 as housing starts are on pace to drop an annualized 27.2% in the quarter (assuming no change in June).

In April, the value of building permit applications slid 4.6% m/m to C$7.8 billion in seasonally adjusted terms. Construction intentions fell in the residential segment (-4.3%) as in the non-residential segment (-5.2%). Within the residential category, the value of permit applications fell for both singles (-3.3%) and multis (-5.2%). On a 12-month basis, the total value of permit applications was up 6.5%.

Labour productivity dropped 0.3% in Q1 after rising 0.2% the prior quarter. The decrease was due to the fact that real GDP grew at a slower pace than did hours worked (+0.2% vs. +0.5%). Despite the decline in productivity, compensation per hour continued to trend up, gaining 0.4% q/q. As a result, unit labour costs rose 0.7%, capping the indicator's largest increase over three quarters since late 2012.

Capacity utillization rose for a seventh consecutive quarter, reaching a 12-year high of 86.1% in Q1. Among nonmanufacturing industries, pressure on capacity appeared particularly acute in the construction sector, where utilization reached its highest point since 1990 at 92.4%. Manufacturing industries, for their part, operated at 86.1% of their capacity, an 18-year peak. Utilization rates stood at cyclical highs in several sectors including food (86.9%), plastic and rubber (93.7%) and machinery (90.2%). Such high levels of utilization should continue to stimulate business investment in the country going forward.

UNITED STATES: Since reaching a cyclical high of $55.5 billion in February, the trade deficit improved for the second consecutive month in April, contracting $1.0 billion to $46.2 billion. Exports grew $0.6 billion to an all-time high of $211.2 billion while imports receded $0.4 billion to $257.4 billion. The goods trade deficit continued to narrow, coming in at $68.3 billion. Meanwhile, the services surplus was roughly unchanged month on month at $22.1 billion. In real terms, exports (-0.2%) fell at a slower pace than imports did (-0.4%). The improvement in the trade balance in March and April bodes well for a stronger contribution to growth from trade in Q2 (it added just 0.1 percentage point to growth in Q1). However, we do not see this as the beginning of a positive trend. Indeed, stronger consumer demand and the recent appreciation of the trade-weighted USD should buoy imports in the second half of 2018 and thus impact the overall trade balance negatively.

In May, the ISM Non-Manufacturing Index heated up 1.8 points to 58.6 on higher readings for business activity (61.3 vs. 59.1 the prior month), new orders (60.5 vs. 60.0), and payrolls (54.1 vs. 53.6). Prices (64.3 vs. 61.8), for their part, saw their most widespread increase since last September, spurred by the imposition of tariffs on various goods and by mounting capacity constraints. As an indication of just how strained capacities have become, the order backlog sub-index (60.5 vs. 52.0) jumped to its highest level in the survey's 21-year history while the gauge tracking suppliers' delivery time (58.5 vs. 54.5) surged up to a 13-year high. Overall, the ISM report for May continued to reflect a very healthy pace of expansion in the U.S. services sector, where no fewer than 14 of the 18 industries surveyed reported growth (PMI>50).

According to the Job Openings and Labor Turnover Survey (JOLTS), positions waiting to be filled in the United States increased 65K in April to an all-time high of 6,698K. As a result, the ratio of job openings to unemployed persons climbed five ticks to 1.06, which means there were more unfilled jobs in the United States in April than there were people looking for work. In response to the high number of vacancies, hires rose 92K to 5,578K, their second highest level in this economic cycle. The report also showed that the quit rate (quits as a percentage of total employment) stayed put at a cyclical high of 2.3%, suggesting that workers were confident about their job prospects. Given that job switchers tend to see their compensation rise at a faster pace than job stayers do, the uptrend in quits could translate into faster wage growth.

Factory orders retreated 0.8% m/m in April after advancing 1.7% the prior month. Orders in the transportation segment fell 6.0% on declines in two main categories: civilian aircraft (-28.9%) and ships and boats (-5.4%). Excluding transportation, orders swelled 0.4% for a tenth consecutive increase, matching the longest streak since 2005. Meanwhile, total shipments were flat in the month but rose a healthy 7.2% over their level a year ago.

Consumer credit expanded just $9.3 billion in April to an annualized $3,882.5 billion. Non-revolving credit grew $7.0 billion to $2,851.8 billion. Meanwhile, revolving credit, which consists mainly of credit card loans, expanded $2.3 billion to $1,030.7 billion.

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