Employment data for October were released in both the US and Canada this morning. In both countries, the data were much stronger than analysts had expected. In the US, this is seen as cementing the possibility that the Fed will start hiking rates next month; in Canada, however, the gains may be attributable to a one-off event -- the election -- meaning that there is a real risk of a decline in employment when the November data appear.
The US numbers are unambiguously strong, and should put to rest the fears of a renewed economic slowdown that were voiced after the tepid September employment report. The economy added 271,000 jobs in the month, almost twice the number reported for September, and well above the market consensus of 150,000. Although the slowdown in global growth seems to be weighing on US exports, and hence on the manufacturing sector, continued strength in final domestic demand is supporting the rest of the economy. Strong job gains were reported in the retail, construction and health care sectors, and the unemployment rate dipped to a seven-year low of 5.0%.
It seems certain that Fed Chair Janet Yellen had some advance knowledge of the data when she remarked earlier this week that a rate hike in December was a "live possibility". The Fed will certainly take note of the fact that the gradual tightening in the labour market is starting to have an impact on wage growth: the average hourly wage is now 2.5% higher than a year ago, the largest year-on-year increase since 2009. The December jobs report will be released before next month's FOMC session: unless it contains a totally unexpected setback for the job market, it seems all but certain that the Fed will finally start to move rates off their rock-bottom levels at the conclusion of that meeting.
In Canada things are less clear -- and the overall unemployment rate, at 7 percent, is still much too high for anyone's liking. The headline employment number of 44,000 jobs added was far above the market consensus of 10,000, but StatsCan was quick to point out that this largely reflected a 32,000 gain in public sector employment, much of it temporary. (StatsCan has noted similar increases around past elections, but evidently nobody told the analysts as they were preparing their estimates).
If you assume that many of those jobs will disappear in November, and if you further assume that the underlying rate of job creation in Canada is less than 20,000 per month (the extreme volatility in the data make it hard to be precise about that), then the early best guess for the December report would be for no net job gains, or even a small loss. If this happens we will no doubt see a fresh round of unwarranted handwringing in certain sections of the media, where calm analysis of trends always takes a back seat to the writing of doom-laden headlines.
However the December data come out, it's inevitable that the Bank of Canada will look to delay following any rate moves by the US for as long as it possibly can. A weak exchange rate is one of the Bank's favoured instruments for getting the economy moving again. It's far from certain that this will be enough: a report from CIBC this week suggested that the weak currency might be a hindrance rater than a help for the small business sector, so beloved of politicians of all stripes. However, the rebalancing of policy implied by the new Liberal government's plans to run small budget deficits may start to set the stage for some reduction in monetary stimulus, possibly in the second half of 2016.
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