North American markets and mass media have been full of speculation about the timing of central bank rate cuts for months. After all, headline inflation readings have been heading lower for a year and more, with the target levels -- 2 percent for both the Fed and the Bank of Canada -- now coming into view. Central bankers have warned -- largely in vain, it would seem -- that they need to see lower inflation being sustained before they can contemplate easing monetary policy. The state of the two countries' job markets, both in terms of employment and wage growth, is evidently one of the indicators being followed most closely in both DC and Ottawa.
With that in mind we can turn to the February employment data for both countries, released before markets opened this morning. In the US, non-farm payrolls rose by 275,000, beating market expectations for a gain of 200,000. That's a strong headline number, albeit partly offset by the fact that the previously-reported employment gains for December and January were revised lower by an aggregate of 165,000 jobs.
Despite the headline strength, the details of the report convey a different impression: there is no real evidence that job market conditions are tightening. The employment rate (i.e. the ratio of employment to population) edged lower in the month, while the unemployment rate ticked up to 3.9 percent. Equally important, average hourly earnings rose only 0.1 percent in February, to stand 4.3 percent higher than a year earlier. This may still be a little too high for the Fed's comfort, but it does not suggest that wages will be the factor that keeps inflation from falling to the target level in the months ahead.
All in all, today's data suggest that the stars are coming into alignment for the Fed to star cutting rates some time this year. However, the continuing resilience of the labour market means policymakers need not be in any hurry. A mid-year start to the rate cutting cycle, with about 75 basis points of easing by year-end, still seems the likeliest outcome.
Turning to Canada, we find an equally hot, if not hotter headline number, but with some very different trends going on under the surface. The economy added 40,700 jobs in February, following on from the 37,000 gain posted in January. Moreover, while the January figure largely reflected the addition of part-time positions, in February the economy created 71,000 full-time jobs in February. Average hourly earnings rose 5.0 percent from a month earlier, slightly lower than the prior month's 5.3 percent gain but still too high for the Bank of Canada's comfort.
Despite the headline strength, there are plenty of reasons for concern over Canada's employment outlook. The unemployment rate continues to edge higher, reaching 5.8 percent in February, while the employment rate has now fallen for five consecutive months, something not seen since 2009. The culprit here is the continuing massive rise in the labour force as a result of unprecedented immigration rates. The working-age population rose by 83,400 in February alone and has risen by 1,030,000 or 3.2 percent in the last twelve months. It is just about inconceivable that the economy could ever produce jobs sufficiently quickly to keep pace with this,
Even Canadians who are pro-immigration -- a cohort includes your esteemed blogger, himself an immigrant -- are not sure exactly how this is going to pan out. The Federal government seems equally at a loss, announcing vague plans to reduce immigration after 2026. We have just learned that the Federal budget will be tabled in mid-April, and it seems likely that Finance Minister Chrystia Freeland will cite the immigration data as part of a case for still more public spending. Bank of Canada Governor Tiff Macklem has hinted in recent months that lax fiscal policy is making the Bank's job harder. The rate cutting cycle is still largely expected to start in June, but could a big-spending budget push that back? We will soon find out.
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