Fifty from the Fed?

How you view the August non-farm payrolls report, released this morning by the Bureau of Labor Statistics,  depends on whether you're a glass half empty or a glass half full type of person. Glass half empty?  Well, the employment gain of 142,000 was lower than market expectations (which had looked for 160,000) and way lower than the 202,000 average posted over the past twelve months.  Glass half full?  The monthly gain was significantly higher than the July result, which was revised lower to a gain of 89,000 from the 114,000 originally reported, and the unemployment rate actually ticked lower, to stand at 4.2 percent.  

The reaction in markets suggests that most investors think the Fed is in the glass half full camp. In recent days expectations had been building that the Fed might front-load its easing cycle with a 50 basis point cut at the FOMC meeting on September 18, but that expectation has now been scaled back, with a 25 basis point cut seen as more likely. 

Fed Chair Powell never seems to be in a hurry. Arguably, both the post-COVID tightening cycle and the still-pending easing cycle should have started sooner. It would be un-Powell-like to start the easing cycle with an oversized cut. That could be interpreted as a sign that the Fed thinks it has fallen behind the curve, and could also create expectations for further large rate cuts. The Fed would undoubtedly prefer to avoid both of those possibilities. Expect a 25 basis point cut this month, with the FOMC statement indicating more of the same to come, while emphasizing that the Fed has flexibility to act more vigorously should the need arise. 

Meanwhile in Canada, where the easing cycle is, as hockey commentators sometimes like to say, nicely under way, the August employment data leave the way clear for further rate cuts. After three months with almost no gain in employment, the economy created 22,000 jobs in August -- but that headline figure hides the fact that 44,000 full time jobs were lost in the month, with the overall gain entirely attributable to a surge in part-time employment.

The unemployment rate continued its inexorable rise, increasing by 0.2 percentage points in the month to stand at 6.6 percent. As has been the case for many months now, the rise in unemployment is almost entirely the result of relentless growth in population. After taking a surprising pause in July, the labour force surged by 82,500 in August, on the back of a 96,000 increase in the national population. 

It helps to look at some of these figures over a slightly longer time frame. Over the past year, the economy has added 316,000 jobs, an increase of about 1.6 percent. In more normal times, this would represent a very respectable performance. However, over the same time period Canada's population has risen by 1,150,000 and the labour force has grown by 588,000. There is no imaginable set of economic policies that would allow the economy to absorb this many new workers. 

Today's data do not change the outlook for Bank of Canada policy. Further 25 basis point rate cuts will come at the two remaining fixed announcement dates this year and the cycle will no doubt continue well into 2025.  However, the Bank will be well aware that it can do little or nothing to prevent the  unemployment rate from edging ever higher.