Whose recession is it anyway?

With the media full of recession talk in both the United States and Canada, and US GDP marginally lower in each of the past two quarters, today's July employment reports in both countries took on added importance. So what we actually saw on both sides of the border came as a complete surprise, with significant implications for monetary policy in the months ahead. .

Start with the US, where the reported falls in GDP might have been expected to translate by now into a weaker jobs market, given that employment is generally a lagging indicator. So much for that. Employment rose by 528,000 in July, twice the market expectation, with the unemployment rate edging down to 3.5 percent. Data for both May and June -- a period, recall, when the economy was supposedly contracting -- were revised moderately higher. 

Both total employment and the unemployment rate are finally back to their pre-pandemic levels. However, some after-effects of the "great resignation" can still be detected in the data, with the participation rate still below its February 2020 level. Wages rose 5.2 percent year-on-year and continue to lag well behind the pace of consumer price inflation. The only real note of caution comes from the separate weekly jobless claims dats, which have been ticking higher for the past three months.

The data may well indicate that the technical factors cited to explain the weak GDP numbers, including quirks in trade and inventory data, are in fact the key to understanding those numbers, with the underlying economy still in good shape. Calls for the Fed to rein in its tightening plans, which have come from a variety of sources ranging from Larry Summers to Bitcoin maximalists, look to be badly misplaced. There may not be any more 75 basis point hikes, but there is more tightening to come. 

Canada has reported modest GDP growth so far in 2022, with the pace even accelerating marginally in Q2. On this basis, consensus expectations had been for a rise of 15,000 jobs in July. Instead, today's report from Statistics Canada showed the loss of 31,000 jobs in July, following on from the loss of 43,000 in the prior month. The unemployment rate held steady at an all-time low of 4.9 percent. 

The remarkable volatility of Canadian employment data has been a regular topic for this blog over many years, and there are features in today's numbers that warrant caution. The fall in overall employment was entirely explained by a 51,000 job loss in the public sector. Private sector employment rose marginally, while there was a 34,000 gain in the most volatile component of all, the number of persons reporting themselves as self-employed.  

If we count those self-employed positions as being effectively part of the private sector, it is fair to suggest that the underlying economy remains solid.  The loss of public sector positions may well turn out to be a one-off development, with the number bouncing back in August. Still, the decline in employment in two consecutive months is not something the Bank of Canada can reasonably ignore. It may be too soon to call for the Bank to decouple its policy from the Federal Reserve, but the pressure for the Bank to maintain a robust approach to tightening has certainly eased just a little.