United States – Non farm payrolls rose 161K in October

Week in review

Canada – Employment surged 44K in October according to the Labour Force Survey. However, the jobless rate remained unchanged at 7.0% with the participation rate rising to 65.8%. Private (+34K) and government (+10K) employment rose while self-employment remained essentially unchanged. Full-time employment dropped 23K and part-time jobs jumped 67K. The goods sector (+21K) was up with gains in construction and resources while agriculture, utilities and manufacturing were down. Services sector employment was also up (+23K) with significant gains in trade, education and other services while business services and accommodation & food were down. On a regional basis, employment jumped in Ontario (+25K), BC (+15K) and Alberta (+9K). Over the last three months, the Canadian labour market created a whopping 137K jobs, the biggest gain since 2012. However, that masks weakness in fulltime employment and hours worked.

The merchandise trade deficit widened to C$4.1 bn in September, the worst deficit on records, as nominal imports surged 4.7%, dwarfing the 0.1% increase in exports. The energy trade surplus increased to C$4.1 bn as exporters benefited from higher prices. However, the non-energy trade deficit deteriorated to C$8.2 bn, the worst ever recorded. In real terms, Canada’s exports fell 0.7% in September, while imports were up 3.6%. Looking beyond the record deficit, a more positive picture emerges. The major source of the import surge was industrial machinery and equipment (biggest monthly increase ever), the gain largely attributable to an imported module destined for the Hebron offshore oil project in Newfoundland and Labrador. That suggests a sharp rebound in investment spending in the third quarter. Trade is also set to be a contributor to Q3 growth despite soft exports in September. Goods exports grew 10.6% annualized in real terms in the quarter, while imports were up 4.5%. That’s the biggest quarterly contribution from trade to the economy since last year.

Real GDP rose 0.2% in August. Goods producing industries saw a 0.7% increase in output, with gains for manufacturing, mining, oil and gas, utilities and construction more than offsetting declines for agriculture. In contrast, the services sector's output was flat as gains in wholesaling, accommodation/food services, health care, info/culture, transport/warehousing were offset by declines elsewhere including retailing and finance/insurance. The data is consistent with a sharp rebound in Canadian economic activity in Q3 ─ even if output was flat in September, real GDP grew well over 3% annualized in the quarter.

The federal government’s fiscal update suggested the budget deficit will peak at $27.8 billion in 2017-2018. The debt-to-GDP ratio still looks quite favourable by advanced economy standards, peaking at less than 32% in 2018-19. Infrastructure investments are projected to total $81 billion over 11 years. A portion of those funds will be used to seed a new Canada Infrastructure Bank, which is meant to stretch/leverage the government’s infrastructure dollar.

In a speech this week in Vancouver, Bank of Canada Governor Stephen Poloz explained the benefits of inflation targeting and why it was renewed as the framework for monetary policy. This framework, which has been in place for 25 years, gave the Bank room to act aggressively during the global financial crisis “because inflation expectations were so well anchored.” The Governor said the BoC seriously considered the possibility of raising the inflation target but eventually decided against it: “A higher inflation target would mean higher nominal interest rates and more room to manoeuvre, on average, but also would entail imposing a higher inflation tax on the economy.” The Governor said other unconventional monetary policy tools are available such as “pushing interest rates below zero or buying longer-term bonds to compress long-term yields.” He welcomed the federal government’s tighter mortgage rules saying “macroprudential policies are best placed to deal with threats to financial stability”.

United States – Non farm payrolls rose 161K in October. There were upward revisions to prior months that added 44K to payrolls. In October, the private sector added 142K jobs, all in services. Goods sector employment was flat as gains in construction exactly offset declines in manufacturing and mining. The private services sector job gains were driven by education/health (+52K), leisure/hospitality (+10K), business services (+43K), and trade/transportation (+13K). Government added 19K positions with gains at both the federal and state/municipal levels. Average hourly earnings rose 0.4% in the month and up 2.8% on a year-on-year basis, the highest since 2009. Hours worked rose just 0.2%, possibly due to disruptions caused by Hurricane Matthew. The private sector employment diffusion index jumped to 59.2, the highest in three months. The other U.S. employment report, the household survey (similar methodology to Canada’s LFS) showed a loss of 43K jobs in October. But because of the one-tick drop in the participation rate to 62.8%, the jobless rate managed to fall to 4.9%.

The ADP employment report showed an increase of just 147K in October. Large firms (500+ employees) created 64K jobs. Small firms i.e. those employing less than 50 employees, added 34K to payrolls, while medium-sized firms added 48K jobs.

The ISM manufacturing index rose to 51.9 in October. The major sub-indices, namely production, new orders and employment were all in expansion mode. The employment subindex was actually above the 50 mark for the first time since June. So, after returning to growth in the third quarter, U.S. manufacturing output seems to have maintained some momentum in early Q4. The non-manufacturing ISM index fell to 54.8 in October after hitting a multi-month high the prior month. The business activity index as well as new orders and employment sub-indices all fell, albeit remaining comfortably in expansion territory, i.e. above 50.

Personal income rose 0.3% in September while personal spending jumped 0.5%. As a result, the savings rate fell one tick to 5.7%. In real terms, spending rose 0.3% while disposable income was flat. The PCE deflator rose 0.2% in September, pushing the year-on-year rate up to 1.2%, the highest in almost two years. The core PCE deflator was up just 0.1%, leaving the annual core rate unchanged at 1.7%.

Construction spending fell 0.4% in September, driven by the non-residential sector (-0.9%), which more than offset gains in residential sector construction (+0.4%).

The trade deficit narrowed to $36.4bn in September from the prior month’s revised deficit of $40.5 bn. The improvement in the trade balance was due to rising exports (+0.6%) and falling imports (-1.3%). In real terms, exports rose 0.3%, while imports fell 1.1%.

Business non-farm labor productivity rose 3.1% annualized in the third quarter as output (+3.4%) grew faster than hours worked (+0.3%). The prior quarter was revised up to -0.2% (from -0.6%). Real compensation grew 1.7% in Q3, while unit labour costs were up 0.3%. Productivity in the manufacturing sector rose 1%.

The Federal Reserve left monetary policy unchanged at its November meeting. The statement was little changed from last September. Near term risks to the economy are still “roughly balanced”. While the Fed acknowledged the moderation in consumption growth, it took comfort in “solid” job gains and the fact that market-based measures of inflation compensation had moved up. It said “the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives.”

World – The Bank of Japan left monetary policy unchanged this week despite pushing by one year to fiscal year 2018 the timing for when the annual inflation rate is expected to hit the 2% target. The central bank will continue to charge 0.1% to financial institutions on deposits held at the Bank. Also unchanged is the 0% target for the 10-year bond yield, which the Bank expects to meet by purchasing JGB’s. Still in Japan, September data showed industrial production and retail spending both remaining flat in the month. In China, Markit’s purchasing managers index for factories rose to 51.2 in October, the highest since mid-2014. Output rose at the fastest pace in five and a half years thanks to a rebound in domestic orders. Inflation accelerated at the fastest pace since 2011.

The Bank of England left monetary policy unchanged this week. The BoE was encouraged by a stronger near-term outlook than what was expected three months ago. However, because of the depreciation of its currency, inflation forecasts have been revised higher, peaking at 2.75% in 2018. In the Eurozone, the flash estimate of October’s consumer price index showed a onetick increase in the annual inflation rate to 0.5%. Excluding energy, food, alcohol and tobacco, the annual inflation rate was unchanged at 0.8%. The first estimate of Q3 real GDP growth came in at just 1.4% annualized, or 0.3% unannualized. Despite the increase, the zone’s output is only about 2% above levels reached eight years ago, contrasting sharply with the U.S. whose output is more than 12% above 2008 levels.

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