Employment trends diverging?

After the Canadian economy added a record 106,500 jobs in April, most analysts expected a significantly softer outcome in May.  Going into yesterday's announcement, the consensus expectation was for just 5000 new jobs in the month.

In the event, the actual number was significantly stronger than that -- 27,000 additional jobs, with the unemployment rate falling to 5.4 percent, the lowest level since the series began in 1976.  In the past twelve months the economy has added 453,000 jobs, a 2.4 percent increase, with two-thirds of the new positions being full-time. That marks the strongest 12-month rise in employment since 2003.  Moreover, after seeming to stagnate around the turn of the year, wages have started to move higher again, rising 2.8 percent in the year to May, well above the rate of CPI inflation.

Some of the details of the report are puzzling.  Paid employment in the public and private sectors actually fell by more than 30,000 in the month, with the overall employment gain entirely driven by a surge of 62,000 in the number of self-employed workers.  This series has shown surprising month-to-month volatility in the past, and no trend can be extrapolated from the latest data.  In addition, the fall in the headline unemployment rate was heavily influenced by a surprising drop of 50,000 in the labour force, something that would not be expected to happen when job opportunities appear to be so abundant. Although the overall employment picture remains strong, the details of the report mean that the possible impact of the data on the direction of interest rates remains unclear.

By way of contrast, the Bureau of Labor Statistics non-farm payrolls report for May was unexpectedly weak.  The US economy added only 75,000 jobs in the month, well below the market expectation of a 185,000 increase.  There were also significant downward revisions to the originally-reported employment gains for the preceding two months, which makes it unlikely that the May number is a one-off anomaly.  May also saw some further slowing in the pace of wage growth, with the 12-month rise in earnings slipping to 3.1 percent from a post-crisis high of 3.4 percent set in March.

Some analysts are suggesting that the slowing trend of employment growth is evidence that the Trump tariff wars and threats are taking their toll on the domestic economy.  A direct causal link is hard to establish, especially as manufacturing employment, presumably the most likely to be affected by tariffs, has continued to increase.  However, there is no doubt that the data will add to the slowly mounting pressure on the Fed to consider easing policy -- something that Trump himself has regularly demanded.

A couple of months ago the Bank of Canada could feel relatively comfortable about its policy options.  With the domestic economy lagging behind its US counterpart, it seemed likely that the Bank would be able to stand pat even as the Fed continued to edge US rates higher.  That's no longer the case.  If the Fed succumbs to the demand for lower rates, the Bank will find it hard to justify a matching move, given rising wage pressures and maybe some signs of upward pressure on inflation.  It's an interesting and unexpected conundrum,  especially with a federal election campaign underway, a time when the Bank prefers not to make policy changes.