Canada’s job gains suggest the economy is still hot

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Canadian employers added thousands more jobs than expected in October, and wage gains continued to accelerate, a sign of growth that could complicate the central bank’s efforts to cool the economy.

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Employment rose by 108,000 last month, offsetting summer losses, while the unemployment rate remained unchanged from the previous month at 5.2 per cent, Statistics Canada reported Friday. A Bloomberg survey showed economists had expected an increase of 10,000 jobs as the unemployment rate ticked up 0.1 percentage point.

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“The rise in employment in October makes a mockery of claims that the economy is on the brink of recession,” Stephen Brown, senior economist at Capital Economics, wrote in a client note after the data was released. “As wage growth accelerates sharply despite favorable fundamentals, the Bank of Canada may need to raise interest rates more than it has recently suggested.”

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Numbers

Most of the job gains came in private sector industries, which came in the form of full-time jobs, and the number of private sector workers increased for the first time since March, Statistics Canada said. Construction, manufacturing, professional, scientific and technical services, and the food and hospitality industries led the gains, indicating that job growth was broadly distributed across the economy.

Construction added 25,000 jobs in October, but employment remained virtually unchanged due to losses in the industry over the summer. Manufacturing jobs increased by 24,000, which compensated for the decrease of 28,000 jobs in September. The professional, scientific and technical sectors and food and accommodation each added 18,000 workers.

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The number of people working in wholesale and retail trade decreased by 20,000, and the sector last grew in May. “It probably reflects a shift in spending to services after the pandemic,” Brown wrote.

Total employment added to the labor force, which rose by 110,000 from September, while the total number of unemployed people was little changed, the agency said. The labor force share rose by 0.2 percentage points to 64.9 percent in October.

Employment of immigrants, which Statistics Canada counts as having or previously held immigrant or permanent resident status, rose to a record high last month based on data collected since 2006. The employment rate of immigrants was 62.2 percent.

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“As a result of immigration, population growth accelerated, which gave companies more opportunities to alleviate the labor shortage. As a result, despite the hiring, the unemployment rate remained stable at 5.2 percent,” Royce Mendes, head of macro strategy at Desjardins Capital Markets, wrote in a note.

The increase in wages continued to accelerate in October, the data show. Average hourly wages rose by 5.6 percent from the previous year and have remained above five percent since June.

“While average wages have risen more than five per cent annually in each of the past five months, they have not kept pace with inflation, which was 6.9 per cent in September, raising concerns about affordability and the cost of living for many Canadians,” the agency said in its report.

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A greater number of Canadians aged 15 and older who lived in a household reported having “difficult” or “very difficult” meeting financial needs such as paying for transportation, housing, food and other necessities. More than a third, or 35.3 percent, of employees reported difficulties in October, while the corresponding figure in October 2020 was more than a fifth, 20.4 percent.

Background

The surprise figures upend forecasters’ assumptions about the cooling of the Canadian economy, especially the tight labor market. However, economists view the labor force survey as a more volatile measure of the labor market and are often cautious about the numbers.

“There is clearly still some steam left in the Canadian labor market,” Toronto-Dominion Bank economist Rishi Sondhi wrote in a note to clients. “And the increase in hours worked suggests that economic growth got off to a good start in the fourth quarter after slowing in the third quarter.”

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Working hours are an indication of productivity, which can speed up or slow down economic growth. Complete data for the third quarter is not yet available, but Statistics Canada’s preliminary estimates show GDP growth slowed to 1.5 per cent year-on-year in the second quarter, down from 3.3 per cent year-on-year. Economists have taken this as a sign of rate hikes by the Bank of Canada cooling the economy.

According to the October jobs report, hours worked increased 0.7 percent after a 0.6 percent decline in September, and on an annual basis, hours worked increased 2.2 percent compared to the same month last year. That suggests the fourth quarter got off to a “strong start,” Bank of Montreal chief economist Douglas Porter wrote in a note. “The big increase in working hours in October puts them up 1.3 percent year-over-year from Q3, which equates to at least moderate GDP growth this quarter.”

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Bottom line for central bank watchers

Canada’s tight labor market has strengthened after a summer of weaker growth, according to Friday’s employment report. Wages also continue to rise, although they are still in line with the inflation gauge, the Consumer Price Index (CPI).

“Strength in employment and wage growth could undermine the Bank of Canada’s belief that it has done enough to ensure that CPI inflation returns to target levels, fueling speculation that the bank will need to raise 50 basis points in December.” Brown wrote.

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