Employment reports for January in Canada and the United States could scarcely have been more divergent...
Statistics Canada reported that employment fell by 200,000 in the month, far higher than the 100,000 job losses expected by the market. This pushed the unemployment rate up by 0.5 percentage points to 6.5 percent. The decline ended a run of seven consecutive gains in employment and was the first time the unemployment rate has ticked higher since April 2021, the peak of the long-forgotten delta wave of COVID. Increases in employee absences and in the number of employees working fewer than their usual number of hours offered further evidence of the weakness in the jobs market during the month.
The job losses were entirely the result of fresh restrictions imposed by Provinces in response to the emergence of the omicron variant of COVID. This is clearly shown by the sectoral distribution of those losses. As in previous COVID waves, the worst-hit sectors included accommodation and food services (down 113,000), retail (down 26,000) and culture and recreation (down 48,000). These losses in the service sectors were only marginally offset by a gain of 23,000 jobs in the good producing sector.
The good news here is that the fall in employment is expected to be very short-lived indeed. Ontario and Quebec, which shed 146,000 and 63,000 jobs respectively in January, were the first Provinces to feel the effects of omicron and the first to reimpose lockdown measures. Both have already eased some of those measures as omicron begins to wane, and other Provinces are following suit. It is unlikely that all the jobs lost in January will be recovered in February, but if plans to continue easing restrictions move ahead as planned then the positive trend seen since mid-2021 should be fully restored by March.
Non-farm payrolls data released by the BLS today provide a remarkable contrast, in terms of both the headline number and the composition of the data. Total employment rose by 467,000 in January, far exceeding market expectations for a gain of about 150,000. The BLS reports that strong employment gains were seen in leisure and hospitality (+ 151,000) and retail trade (+ 61,000), precisely the sectors that saw the worst declines in Canada. The US effectively chose to tough out the omicron wave, imposing few new restrictions; the fact that it is now seeing COVID cases decline in every state except Alabama might suggest that Canada's more draconian approach to the virus was misguided on this occasion.
Just to add to the impression of a strong US labour market, the BLS also released its annual seasonal adjustment adjustments (so to speak) for 2021. Some of the extraordinary increases initially reported around mid-year have been revised sharply lower, but this is offset by an upward revision totalling almost 700,000 for the November and December figures. This is a technical change rather than a fundamental reassessment, but it does underline how strong the US jobs market is as the end of the pandemic phase of COVID comes faintly into view.
As for the policy implications, the outlook for the Fed is straightforward: rates will start moving higher in March, leaving only the lingering question of why the tightening did not begin in January. The fall in the stock market as soon as today's numbers were released is evidence that the markets are expecting not just one rate hike but a series of them.
It may be a little trickier for the Bank of Canada, despite its recent rhetoric. Any employment rebound in February will not be reported until after the Bank's March 2 rate setting date, and raising rates in the wake of such a weak employment number will not be a good look. The expected weak December GDP data (due on March 1) would complicate the issue further. A rate hike is still overwhelmingly likely, but the accompanying press release will require some careful drafting.
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