December divergence

The first major data releases of the new year told differing stories about the state of the Canadian and US economies.  While employment growth in Canada has clearly slowed in response to the recent stagnation in real GDP, the US economy continues to add jobs at a rapid pace.  In both countries, however, continuing wage gains are likely to work against early rate cuts. 

In Canada, Statistics Canada reported that employment in December was almost unchanged from the previous month, with the net addition of a scant 100 jobs. (The significance of this can perhaps best be judged by noting that the standard error of the estimate is over 30,000)!  The report was in fact slightly weaker than the headline figure suggests, as a gain of 23,600 in part-time employment was offset by a loss of 23,500 full-time positions. Despite this, and somewhat perplexingly, total hours worked actually rose 0.4 percent in the month.

After rising steadily for much of the year, the unemployment rate was unchanged at 5.8 percent in December.  This can be entirely attributed to a sudden slowdown in the previously rapid growth in the labour force, which grew by only 4,800 in the month, well below the monthly average of 52,000 posted over the course of the year.  Given that the population grew by 74,000 in December, this is almost certainly only a temporary reprieve. 

The slowdown in employment growth will no doubt heighten expectations of early Bank of Canada rate cuts, but there is one key element of the data that will give the Bank pause. The year-on-year rise in hourly earnings rose to 5.4 percent in December from 4.8 percent in November. Given Canada's generally weak productivity performance, this seems way too high to ensure that headline inflation moves sustainably towards the Bank's 2 percent CPI target.  In the absence of a sudden severe turndown in the real economy, it remains likely that the rate cutting cycle will not begin much before mid-year. 

Turning then to the US, where opinion pollsters continue to report that voters are overwhelmingly dissatisfied with the state of the economy, we find that the economy added 216,000 jobs in December. This left the unemployment rate unchanged at 3.7 percent. There was a slight uptick in wage growth, with a 0.4 percent monthly gain pushing the year-on-year increase in hourly earnings up to 4.1 percent from the 4.0 percent rise reported for November. This is well above the latest rise in CPI, not that voters seem to have noticed. 

Unsurprisingly, while President Biden has welcomed the latest data ("a great year for American workers"), financial markets have been less impressed.  Even as inflation heads lower, the strong job gains and persistent strength in earnings make it likely that the Federal Reserve will opt to hold off on rate cuts.  There is simply no reason for the Fed to start cutting until it is completely sure that inflation is heading back to the 2 percent target.  The 75 basis points in rate cuts implied by the most recent "dot plot" may indeed materialize, but as in Canada, they are unlikely to start before mid-2024.