Nice timing, Christine Lagarde! Just a day after the IMF boss tried to bitch-slap Fed Chair Janet Yellen into keeping US interest rates on hold until next year, we get news that the US economy added 280,000 jobs in May, significantly above the market consensus. As CNN notes here, the US economy has now added a million jobs in 2015 to date. The slower rate of job growth seen in the winter months, and the decline in GDP during Q1, can now be safely attributed to harsh weather conditions and not to a deterioration in the underlying trend.
The May numbers were strong across the board, with the predictable exception of the energy sector. Even the slight uptick in the unemployment rate can be seen in a favourable light: the labour force rose by almost 400,000 in the month -- call it the encouraged worker effect, as improving job prospects induce more Americans to try to secure jobs.
Janet Yellen has been clear for some time that the labour market is key to the Fed's timing in terms of rate hikes. In particular, the Fed can be expected to act as soon as it sees signs that tightening in the labour market is starting to lead to wage cost pressures. Not much sign of that yet, though the number of companies voluntarily raising their employees' wages in recent months is something the Fed must be keeping an eye on -- WalMart is not known for its philanthropy, and is presumably acting because it sees a rising risk of a higher quit rate.
That aside, however, it will surely not take many labour reports like May's to jolt the Fed into action. Ms Yellen will not want to validate the criticism leveled by some of her Republican critics that she needs to act before wage and other cost pressures appear, not wait until it is too late.
Here in Canada, of course, we do not need two grandes dames like Christine Lagarde and Janet Yellen to give us two perspectives on monetary policy. Bank of Canada Governor Stephen Poloz can do the job all by himself. The Bank of Canada's most recent pronouncements had started to convince at least a few commentators that the next policy move on this side of the border would be a further rate cut.
What, then, will the Bank make of Canada's May job data, which are in relative terms even stronger than those posted by the United States? Canada added 59,000 jobs in the month, far exceeding the market consensus for a 10,000 gain. As in the US, the unemployment rate did not decline, thanks to a significant increase in the labour force participation rate. The job gains were well diversified across most sectors of the economy, with a gain of 22,000 in manufacturing jobs offering some hope that the weakness in the exchange rate might be starting to have a positive impact on the non-oil economy.
As in the US, there are still few signs of incipient inflation to trouble the central bank, and the overall economy is still in worse shape than its neighbour to the south: witness Canada's unemployment rate of 6.8 percent, against the US rate of 5.5 percent. As a result, there's no doubt that the Bank of Canada will hold off on raising rates until after the Fed begins its tightening cycle. Even with today's strong US data, the Fed is unlikely to act until late summer or even the fourth quarter; here in Canada, today's numbers may have weakened the already tenuous case for more easing, but no move toward tightening is likely until early 2016. At least, that's my view until we next hear from Governor Poloz.
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