United States – Nonfarm payrolls rose 178K in November

Week in review

Canada – GDP expanded at an annualized pace of 3.5% in 2016Q3 after an upward revision to the first half of the year. In light of these results, we raised our 2016 Canadian GDP growth forecast one tick to 1.3%. The GDP growth figures for the previous three years were revised as well, up from 2.2% to 2.5% for 2013, up from 2.5% to 2.6% for 2014, and down from 1.1% to 0.9% for 2015. Overall, there was a net upgrade for the three-year period. Back to 2016Q3, trade contributed to GDP growth as expected, with exports rising faster than imports. Domestic demand added to growth as well, but less so than in the prior quarter, as a swell in consumption was offset by contractions in government spending and residential construction. Business investment was not a drag on growth for the first time in two years. Inventories made a positive contribution for a second consecutive quarter. Nominal GDP jumped 6.1% annualized, its largest increase since 2013Q1. The GDP data for September showed a consensus-topping monthly advance of 0.3% (unannualized), as both the goods sector and the services sector registered gains. For Q3 as a whole, goods sector output sprang almost 10% annualized, making up for the prior quarter’s slump.

Consumption was given a boost by the federal government’s enhanced Child Benefit program. Real household income rose 7.1% in Q3, its steepest jump since 2010. Such a strong gain allowed Canadians to both spend more and save more (the savings rate shot to 5.8% in Q3, its highest level since 2001), which will help support consumption this quarter and into 2017. The excellent hand-off from September (+0.3% increase in output) is another reason to be pleased, as it sets the economy in fine stead to grow further in Q4. However, the picture is not all rosy. Though encouraging, the gains from trade did not entirely reverse the prior quarter’s losses. This is why inventories keep growing, which does not augur well for future production.

Employment rose in November (+11K) according to the Labour Force Survey. This better than expected report follows the strongest 3-month gain since 2012. As a result, the monthly average gain in 2016 stands at 15K, its fastest pace in 4 years. Without a doubt, the Canadian labor market continues to surprise despite the terms of trade shock. However, all is not rosy in this report as job gains continue to be tilted towards parttimers. That being said, we are taking comfort by the hours worked in November rising at its fastest rate since 2010 after a couple months of weakness. In November, the jobless rate dropped two ticks to 6.8% with the participation rate dropping to 65.6% from 65.8%. Private (+30K) and government (+12K) employment rose while self-employment (-31K) declined. Fulltime employment dropped 9K and part-time jobs jumped 19K. The goods sector (-21K) was down with gains in agriculture and utilities being more than offset by losses in manufacturing, construction and resources. Services sector employment was up (31K) with significant gains in finance/insurance, information/recreation and other services while transportation/warehousing, educational services and healthcare were down. On a regional basis, employment jumped in Ontario (+19K) and Quebec (+9K) while pullbacks occurred in Alberta (-13K) and BC (-9K). The jobless rate in November was at a cyclical low in Ontario and at a record low in Quebec. The employment drop in Alberta after three consecutive monthly gains is disappointing. Even if we expect economic growth to speed up in 2017 (1.9% from 1.3%), this does not mean that employment gains will be stellar next year as Canadian firms will want to restore profit margins.

Separately, labour productivity increased 1.2% unannualized in Q3 as real GDP rose 1.0%, faster than hours worked (-0.2%). Hourly compensation was up 0.5%, while unit labour costs dropped 0.7% unannualized. The rebound in productivity in Q3 is welcome but it comes after several years of weakness.

Although the current account deficit narrowed slightly thanks to improvements in both the goods and the services trade balance, the Q3 deficit was nevertheless considerable at C$18.3 billion or roughly 3.6% of GDP. Of even greater concern is how the massive deficit is being financed. Net foreign direct investment was negative, which means Canadians invested more abroad than foreigners did in Canada. For a fourth consecutive quarter the deficit was financed entirely by shortterm foreign capital such as portfolio inflows and deposits. This growing dependence on potentially volatile flows is not good news for an already beleaguered Canadian dollar.

United States – Nonfarm payrolls rose 178K in November. The private sector added 156K jobs, with gain in both goods and services. Goods sector employment jumped 17K as gains in construction and mining more than offset declines in manufacturing. The private services sector job gains were driven by education/health (+44K), leisure/hospitality (+29K), business services (+63K), and trade/transportation (+3K despite declines in retailing) which more than offset declines in the information sector. Government added 22K positions with gains mostly at state/municipal levels. Average hourly earnings fell 0.1% in the month but were up 2.5% on a year-on-year basis. Hours worked rose 0.1%. The private sector employment diffusion index fell to 55.5, the lowest since May. The other U.S. employment report, the household survey (similar methodology to Canada’s LFS) showed an increase of 160K jobs in November with increases for both full-time and part-time positions. Those gains, coupled with the one-tick decline in the participation rate to 62.7%, caused the jobless rate to fall to 4.6%, the lowest since May 2007. The solid job gains overall and the decline in the jobless rate to the lowest since mid-2007 will reinforce expectations of the Fed resuming its tightening cycle at its December meeting. However, not all is rosy in the U.S. labour market. The drop of the diffusion index to a six-month low is disappointing because that suggest job gains were not as widespread as in recent months. Wage inflation also relapsed after outsized gains the prior month. So, don’t expect an overly hawkish message as the Fed resumes rate hikes in two weeks.

In October, personal income jumped 0.6% while personal spending rose 0.3%. As a result, the savings rate climbed three ticks to 6.0%. In real terms, spending was up 0.1% while disposable income progressed 0.4%. At first glance, the belowconsensus increase in real personal spending might seem disappointing. However, it is actually not bad at all if we consider that it comes on the heels of an upwardly revised 0.5% increase the previous month. Moreover, real incomes were particularly strong, gaining 0.4% in the month. This should support consumption to the end of the quarter.

Also in October, the PCE deflator rose 0.2% month over month, pushing the year-over-year rate up to 1.4%, its highest mark in two years. The core PCE deflator was up just 0.1% month over month, leaving the year-over-year rate unchanged at 1.7%.

In November, the ISM Manufacturing Index rose to a consensus-topping 53.2, its highest mark since June. The improvement was due to increases in the new-orders and production sub-indices more than offsetting a decrease in the employment sub-index, which nevertheless remained above 50.

Separately, construction spending grew 0.5% in October after the prior month was revised up from -0.4% to flat. October’s upturn was entirely due to a 1.8% increase in residential construction, which dwarfed a 0.3% decrease in the nonresidential sector.

Q3 GDP growth was upgraded to 3.2% annualized from the BEA’s advance estimate of 2.9%. The upgrade was driven primarily by larger contributions from personal consumption and trade, which more than offset smaller contributions from government consumption and inventories. In this last regard, real final sales grew 2.7% annualized, four ticks higher than in the advance estimate.

This second GDP estimate is clearly better than last month’s advance estimate. Not only was overall growth revised upward, but the contribution from inventories was lowered as final sales proved stronger than first thought. In fact, following the upward revision, final sales growth in Q3 was the best in over a year. In addition, demand is strengthening, which bodes well for the final quarter of 2016 and next year. We continue to expect Q4 GDP growth in the United States to be north of 2% annualized.

Consumer confidence rose in November to levels not seen since the summer of 2007. The Conference Board’s measure jumped 6.3 points to 107.1 in the month. The present situation index sprang 7.2 points to 130.3, while confidence about the future gained 5.7 points to 91.7.

World – In China, the November NBS Manufacturing PMI came in at 51.7, up 0.5 of a point from the month before. The Non-Manufacturing Index climbed to 54.7 from 54.0 the previous month.

 

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