Another woeful jobs report in Canada for the month of July triggers further pessimism. Following three consecutive months of stagnant employment, payrolls fell by a much-worse-than-expected 31,000 in July as the unemployment rate increased 0.1 percentage point to 6.9 percent. Gloomily, all of the loss was in full-time employment, which fell by 71,000 from June to July, while part-time work was up 40,000. 

On a year-over-year basis, total employment in Canada increased by 71,000 or 0.4 percent, with all of the growth in part-time work. Hardest hit last month were young people aged 15 to 24 whose unemployment rate hit 13.3 percent. Youth unemployment in the summer months is often quite volatile, but compared to the same month one year ago, payrolls were down 2.7 percent. 

Employment fell in Ontario and Newfoundland and increased in British Columbia and New Brunswick. This was the first decline in Ontario since September 2015, where the unemployment rate currently stands at 6.4 percent. B.C.’s positive jobs performance extends an uptrend that began in the spring of last year. The unemployment rate in B.C. is the lowest in the country, at 5.6 percent, helping to explain–at least in part–the booming housing market in Vancouver and environs. 

In direct contrast, the jobless rate in Alberta increased sharply to 8.6 percent, its highest level since September 1994. Alberta’s economy has been brutalized by the oil price rout, which began in June 2014 and, more recently, the Fort McMurray wildfires. Oil prices have come under renewed downward pressure in recent weeks, largely reflecting seasonal forces.

From an industry perspective, all of the decline in Canadian employment last month was in the government sector.

In another piece of bad economic news released today, Canada’s trade deficit widened to $3.6 billion in June, hitting a record high. The Bank of Canada has long been hoping that non-energy exports would help offset the weakness in Canada’s energy sector. Clearly, the Bank of Canada will remain on the sidelines for an extended period. It is unlikely they will risk cutting interest rates again given the surge in household borrowing. 
 

A Very Welcome U.S. Employment Report–Welcome for Hillary

U.S. payrolls jumped in July for a second month and wages climbed, which is great news and portends  sustained growth in consumer spending in the second half of the year. Employment climbed in July by 255,000 well above the 180,000 expected job gain, which followed an upwardly revised increase of 292,00 in June.Gains in July payrolls were broad-based, including manufacturers, health-care and retailers.

The unemployment rate was unchanged at 4.9 percent as many formerly discouraged workers streamed back into the labour force. Even the broadest measure of unemployment, so-called U-6, which includes discouraged workers and those involuntarily working less than full-time, has moved down to 9.7 percent, compared to over 17 percent in late 2009. As well, the average duration of unemployment has fallen considerably. 

Other indicators of the labor market are sending clear, positive signals. Jobless claims have held below 300,000 for 74 straight weeks — the longest stretch since 1973 and a level economists say is typically consistent with a healthy labour market. Job vacancies are hovering near 15-year highs, with just 1.4 unemployed workers for every available role. And the quit rate, which measures voluntary job exits, has trended upward since early 2010 suggesting improved confidence.

The long-awaited wage growth showed promising signs of acceleration last month, with average hourly earnings rising a more-than-forecast 0.3 percent. Year-over year gains remain at 2.6 percent. Wage growth has been sluggish throughout the expansion even as unemployment has diminished. Normally, a tightening labor market prompts hiring managers to offer more pay to attract and retain skilled and experienced workers. However, a potentially more representative data series created by the Atlanta Fed. the Wage Growth Tracker, shows an uptrend in annual worker compensation growth to 3.6 percent. 

Last week, the Commerce Department  reported that the U.S. economy grew at a mere 1.2 percent annual rate in the second quarter, less than half the median projection of economists. It is obvious that potential noninflationary growth in the U.S. has slowed as labour force growth diminishes owing to demographic factors. In other words, judging from the payroll figures, the U.S. economy is at or near full-employment. Second-half GDP growth in the U.S. is likely to pick up to about a 2 percent pace.

Though many have judged the likelihood of a Fed tightening move this year to be relatively low, policy makers last week did affirm that risks to the U.S. economy have eased and the job market has continued to tighten. This suggests that a boost to borrowing costs at the Fed’s next meeting September 20-21 remains a real possibility.

Canadian and U.S. data gatherers posted GDP figures this morning.  The numbers looked pretty bad for both countries, but fortunately, digging deeper, they were not as bad as at first glance. 
 

Canadian GDP Data 

The May figure for Canadian Gross Domestic Product by Industry posted a decline of 0.6 percent, but the weakness was largely the result of the Fort McMurray wildfire and evacuation. The mining, quarrying, and oil and gas extraction sector fell 6.4 percent, as the output of the non-conventional oil extraction industry recorded a whopping 22 percent plunge. This took down the overall output of the goods-producing industries. Excluding the decline in oil extraction, real GDP edged down 0.1 percent in May–much better, but still no great shakes.  

Manufacturing activity declined 2.4 percent. About one-third of the decline was the result of a larger-than-expected 15 percent drop in output from oil refineries, reflecting the fall-off in oil sands production. In coming months, the recovery from the Fort McMurray disaster will boost the GDP figures as rebuilding commences and oil extraction resumes. The weakness in manufacturing was also the result of a drop in transportation equipment manufacturing that “resulted partly from supply interruptions associated with the earthquake in Japan.” This weakness should reverse going forward as well.

Construction activity was also weak in May, falling 0.7 percent following a flat number in April, taking the year-over-year figure down to a 3.7 percent decline. Statistics Canada reported that residential building construction fell 1.2 percent in May as fewer single-family dwellings were built. The real estate and rental and leasing sector edged up 0.1 percent, partly as a result of higher output from lessors of real estate. The sector’s rise was tempered by a 2.4 percent decline in the output of real estate agents and brokers, as home resale activity dropped in most markets, led by those in British Columbia and Ontario.

Many have pointed out the irony of the timing of this week’s introduction of a 15 percent land transfer tax on foreign purchases of residential real estate in Metro Vancouver. Home resales appear to have slowed in this region, although house prices continue to surge.

The output of service-producing companies rose 0.3 percent, led by wholesale trade and public administration. Finance and insurance as well as arts, entertainment and recreation also posted gains. Retail trade was also up in May, bringing the year-over-year increase in this sector to 4.3 percent. Regional data for wholesale and retail sales indicated weakness in Alberta related to the wildfires, although it was offset by strength elsewhere in the country.

Bottom Line: Today’s report was roughly consistent with the 1.0 percent GDP decline in Canada currently projected for the second quarter of 2016 by the Bank of Canada. With indications that oil sand production has returned to levels prevailing prior to the wildfires, this weakness should be fully reversed and is consistent with the Bank of Canada’s third-quarter 2016 growth projection of 3.5 percent. Expect the central bank to remain on the sidelines, maintaining the overnight rate at the current 0.50 percent awaiting confirmation of growth rebounding strongly in the current quarter.
 

U.S. Q2 GDP Disappoints 

The U.S. economy expanded less than forecast in the second quarter after a weaker start to the year than previously estimated as companies slimmed down inventories and remained wary of investing amid shaky global demand.

The second quarter growth in the U.S. economy came it at a less-than-forecast 1.2 percent gain despite a sizable 4.2 percent  jump in consumer spending as declines in business investment and inventories provided offset. Economists had expected a 2.5 percent second-quarter increase. The report raises the risk to the outlook at a time Federal Reserve policy makers are looking for sustained improvement, Where consumers were resilient last quarter, businesses were cautious — cutting back on investment and aggressively reducing stockpiles amid weak global markets, heightened uncertainty, and the lingering drag from a stronger dollar. On a positive note, leaner inventories could set the stage for a pickup in production later this year should demand hold up.

Weakness in business investment was highlighted in this week’s Federal Reserve statement. Corporate spending on equipment, structures and intellectual property, decreased an annualized 2.2 percent after a 3.4 percent fall in the first quarter. Outlays for equipment dropped for the fourth quarter in the last five. Spending on structures — everything from factories to shops to oil rigs — has increased in just one quarter since the end of 2014.

Also holding back U.S. economic growth in the second quarter was a decrease in residential investment, which fell at a 6.1 percent pace. That was the most since the third quarter of 2010 and marked the first decrease in two years.

Government spending also shrank last quarter, declining 0.9 percent, the most in more than two years as outlays for the military fell. States and municipalities also cut back. 

The GDP report also showed price pressures remain limited–another factor keeping the Fed on the sidelines. The Fed’s preferred measure of inflation, which is tied to consumer spending and strips out food and energy costs, climbed at a 1.7 percent annualized pace compared with 2.1 percent in the prior quarter. 

Bottom Line: Inventories and the trade gap are two of the most volatile components in GDP calculations. To get a better sense of demand in the U.S., economists look at final sales to domestic purchasers, or GDP excluding inventories and net exports. That measure increased 2.1 percent last quarter after a 1.2 percent gain in the first quarter. The strengthening in consumer spending was encouraging, and  households should  continue to contribute to growth amid an improving labour market and low interest rates. 

In this contentious political season, there is no doubt the Trump forces will highlight the negatives in this morning’s report to support their erroneous assertion that the U.S. economy is in dire straits.