The US economy continues to add jobs at a robust pace. Data released today by the BLS show that 272,000 new positions were added in May, well ahead of market expectations for a 180,000 print and above the year-to date average of just under 250,000. There were minor downward revisions to the March and April data, but there is no doubt that the resilience of the jobs market is now the main factor constraining the ability of the Federal Reserve to start cutting interest rates.
The May employment gains were concentrated in the services sector, with health care, government and hospitality leading the way. Despite the rise in employment, the unemployment rate ticked up to 4.0 percent, its highest level in more than two years, with some analysts suggesting that the BLS surveys are not fully accounting for immigration levels. One positive from a policymakers' standpoint is that hourly earnings remain reasonably in check, rising 4.1 percent in May from a year ago.
US equity markets sold off in response to the data, reflecting fears that the continuing strength in the economy will further delay the start of the Fed easing cycle. Markets now expect the first and only rate cut for 2024 to take place in December. The FOMC member who was recorded some months ago in the "dot plot" as looking for no cuts at all this year is looking increasingly prescient.
Canada also recorded higher employment in May, but the details of the report are very ambiguous. According to Statistics Canada, the economy added 26,700 jobs in the month after April's outsize gain of 90,000. However, full-time employment fell by 36,000 in the month, with the headline increase entirely the result of a 62,000 gain in part-time positions. For much of the recent business cycle, full-time job gains have been a big part of the employment story, but part-time employment is now supplying most of the growth. Part-time employment has risen 3.8 percent over the past twelve months, against a 1.6 percent rise in full-time positions.
Other elements of today's report also point to modestly deteriorating labour market conditions. The unemployment rate ticked up yet again, to stand at 6.2 percent. Once again it proved impossible for the economy to create enough jobs to absorb the rapid growth in the labour force, which rose a further 54,000 in May to stand over 650,000 higher than a year ago. Moreover, the employment rate -- the percentage of the working age population who are actually employed -- edged down to 61.3 percent, its seventh decline in the last eight months.
These figures all support the Bank of Canada's decision to start its easing cycle this week, but the wages data are somewhat less helpful for the Bank. Hourly wages rose 5.1 percent year-on-year in May, up from 4.7 percent in April. Given Canada's poor productivity record, it is hard to regard this wage growth as compatible with bringing inflation all the way down to the 2 percent target.
More rate cuts are undoubtedly coming in Canada, possibly as soon as the July 24 Governing Council meeting. With the Fed seemingly on hold sine die, the growing divergence between US and Canadian rates will have to factor into the Bank's decision. Governor Tiff Macklem says he has no target in mind for the exchange rate, but the strength of that conviction may be tested in the months ahead.
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