September Employment Surges Implications for Canadian and US Economies
The September employment report in Canada surprised many with its robust performance, exceeding consensus expectations. However, beneath the surface, there are underlying weaknesses that temper its significance for the Bank of Canada’s upcoming rate decision. We maintain our anticipation of no interest rate adjustment due to dwindling job opportunities and a slowing economy following previous rate hikes.
In September, employment surged impressively by 64,000 jobs, far surpassing the consensus projection of just 20,000. This growth was in line with the expansion of the labour force, resulting in a stable unemployment rate of 5.5%. However, this job surge was largely driven by a 66,000 increase in the education sector, which tends to be volatile at this time of year. This partially offset declines in sectors like finance, real estate, and leasing, despite modest gains in transportation and warehousing.
The composition of employment in September showed signs of fragility, with part-time roles (+48,000) outweighing full-time positions (+16,000). The private sector saw minimal growth, increasing by just 1,000 jobs after two consecutive months of decline. Public sector employment saw more substantial gains, while self-employment increased for the second consecutive month but still lagged pre-pandemic levels.
Hours worked in September were relatively weak, dropping by 0.2%, in contrast to the 0.3% rise in headline employment. The information, culture, and recreation sector experienced a significant decline in hours worked, mirroring the decrease in job numbers.
Wage growth continued to exceed policymakers’ preferences, with a slight uptick for permanent employees at 5.3% year-on-year, compared to the consensus forecast of 5.1%. However, this increase reflects some of the labour market’s prior tightness and wage adjustments following last year’s inflation surge. With the unemployment rate expected to rise as job vacancies decline, wage inflation may ease soon.
Regarding the economic forecast, despite the unexpected surge in employment figures, the underlying weaknesses and the decline in hours worked suggest that the Canadian economy remains sluggish as we approach the end of Q3. With GDP essentially stalled in both Q2 and Q3, and no clear signs of acceleration as we enter the final quarter, we anticipate the Bank of Canada will maintain its current stance, despite recent stronger-than-anticipated inflation readings.
In the markets, Canadian bond yields initially experienced an uptick following the release of the better-than-expected employment figures. However, this move partially reversed as investors scrutinized the less robust underlying details. Interestingly, even though US payroll figures also exceeded consensus expectations, the Canadian dollar managed to strengthen against the US dollar.
Much like a resilient ship navigating through challenging headwinds, the September US jobs report surpassed expectations and underscored the strength of the US economy. Job gains surged to 336,000, a significant increase from the previous month’s 227,000. Additionally, substantial net positive revisions totalling +455,000 rendered the consensus expectation of 170,000 job gains obsolete. However, the report also contained some mixed elements:
- The unemployment rate remained steady at 3.8%, slightly above consensus projections.
- Nominal wage growth remained subdued at 0.2% month-on-month, falling short of the expected 0.3% increase.
- The participation rate held firm at 62.8%, indicating that the significant rise in the labour supply observed last month is likely to persist.
Nevertheless, the surge in job gains is likely to put pressure on the Federal Reserve (the Fed), increasing the likelihood of a rate hike in November. If the Consumer Price Index (CPI) remains soft, driven by ongoing supply-side improvements, the Federal Open Market Committee (FOMC) may opt to stay on the sidelines. However, if inflation exceeds a pace consistent with 2% annualized inflation, we anticipate the Fed will raise interest rates in November.
Job gains in the US were primarily driven by the private services sector, accounting for nearly 70% of new hires in the month. Government hiring also saw an uptick, contributing to about 20% of the job gains. Notable employment growth was observed in leisure and hospitality, health care, social assistance, business services, and the retail sector. Health care has been a key driver of employment growth, likely due to prior job gains enabling access to employer-linked health care plans, increasing the demand for health care services.
However, the latest data indicated a somewhat slower pace of growth in the health care sector, warranting attention in the future. The upward revisions to previous months’ data, showcasing larger and more widespread job gains, help explain the surge in consumer spending witnessed during the quarter.
In contrast, the payroll survey revealed that wage growth remained soft, marking the second consecutive reading of 0.2%, and average weekly hours worked remained unchanged. Weak wage growth was concentrated in the service sector, with six sectors experiencing weaker wage growth momentum, including those with substantial job gains, such as leisure and hospitality and the health care sector. Average weekly hours worked have remained around their pre-pandemic levels since April 2023.
On the other hand, the household survey painted a less optimistic picture of the labour market. Hiring increased by only 86,000, a significant slowdown from the previous three months’ average pace of over 250,000. Modest hiring and ongoing increases in the labour force kept the unemployment rate and participation rate unchanged.
The September labour market data challenges our earlier prediction of the Federal Reserve (the Fed) maintaining its current stance in November. Our new assessment is that if the upcoming Consumer Price Index (CPI) reading aligns with a 2% annualized pace, the Fed is likely to maintain its position. However, should inflation exceed this threshold, we anticipate a rate hike by the Fed in November.
In response to the surge in job gains, both bond yields and the broader dollar experienced an increase and sustained these gains.
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