ACTV - Canada's Job Market: Still Resilient But Showing Signs Of Cooling

2023-09-13 13:56:00 ET

Summary

• What strong jobs data may mean for the Bank of Canada.
• The impact of robust immigration could mean for Canada's economy in the long term.
• A hike may not be likely, but the BOC's inflation fight isn't over yet.

Canada's latest jobs data easily blew past expectations for the month of August. Even so, Leslie Preston, Senior Economist at TD, tells Greg Bonnell if you dig a little deeper into the results, there are signs jobs growth is starting to slow.

Transcript

Greg Bonnell: The Bank of Canada is back on pause, but are there enough signs of the economy cooling to keep it from hiking rates again? Joining us now to discuss, Leslie Preston, Senior Economist at TD. Lesley, great to have you back on the program.

Leslie Preston: My pleasure.

Greg Bonnell: It's a great day to have you on because I sort of want to take the temperature. A lot happened last week in terms of not only hearing from the Bank of Canada, getting the pause, but then we had labor market information come out just two days later -- more jobs than expected. How do we run this all through the calculus to try to figure out where we're headed?

Leslie Preston: Well, I think I'll start with the last thing you mentioned there on the job market -- more jobs than were expected. But I think when you dig a little deeper under the hood, you see a lot of those jobs were self-employment, which can be great for an individual to be self-employed, but we generally don't think of that as a sign of economic strength. When we look at private sector jobs, that trend continues to slow.

So we would characterize the job market as job growth is slowing. And the fact that the unemployment rate remained at 5.5%, which is an uptick from the pandemic rebound low as consistent with a labor market that's cooling gradually.

Greg Bonnell: A lot's been said, too, about if you get a month of labor market gains, which we did, so there's very good reasons to dig beneath that headline number. Also, immigration, right? The rate at which the population is growing compared to what we're growing the labor force, then we start to get a little more color on that number.

Leslie Preston: Yeah, exactly. And I think market watchers and forecasters need to adjust their expectations of thinking a typical month, 15,000 to 20,000 jobs -- that number is higher now. That said, I think economists and forecasters who forecast this number a month ahead were looking for a bigger slowdown than they saw. So 40,000 new jobs was sort of just keeping pace with growth in the population, but forecasters had expected it to be more like 15,000 to 20,000.

So that was the upside surprise there. But still on net, I think when we look at the characteristic of the job gains underneath, and that Canada's labor market data is always volatile, and the unemployment rate has ticked up in recent months. So I think the fact, to my mind, that it didn't give back shows that this cooling we've seen in recent months in the labor market is a bit more persistent.

Greg Bonnell: So that was Friday. I feel like we're going to roll back in time because we got the rate decision on Wednesday. But we didn't hear from the bank, really, apart from the statement, until Thursday, and that speech in Calgary that the Governor Tiff Macklem gave. Any more color on that as to what they're thinking? I felt like it was one of those days whatever you wanted the headline to say, you could find something in that speech.

Leslie Preston: Yeah, that's certainly the case. The Bank of Canada is at a tricky point in terms of setting monetary policy. They know they've raised interest rates a lot. They know that the impact of all that monetary tightening is still working through the system.

At the same time, they don't want markets to get ahead of themselves and start pricing in cuts too aggressively, because inflation still needs to come down. They want to keep market interest rates elevated to help enable that to slow. But overall, I think it's interesting you used the word "pause" in your first questions. And I think Governor Macklem was very careful not to use the word "pause" in any of his remarks.

Greg Bonnell: It just didn't go. But don't call it a pause.

Leslie Preston: Don't call it -- we had that situation earlier in the year when they were on pause and the housing reignited momentum in the housing market, which the bank does not want to see. Things started to pick up. But I think they are in "wait and see" mode, definitely.

The next couple of data releases, particularly on inflation, very important to confirm that we're continuing to see that gradual slowdown in inflation. Frankly, the bank would prefer, perhaps more rapid slowdown in inflation. But we're expecting inflation to continue to come down as economic growth slows. So TD Economics' view is that the Bank of Canada is at the height of the rate hiking cycle, but they're going to maintain this hawkish stance and rhetoric until they're more convinced on inflation.

We have a forecast for growth to slow quite a bit in the second half of the year and into next year. And we think that will be enough to turn the temperature down on inflation and enable the Bank of Canada to stay on hold for a prolonged period of time.

Greg Bonnell: We're going to get another inflation print in the coming days out of Canada. The thing I found interesting about the statement that came with the rate decision last week is that they said don't expect it to be -- and I don't think they ever told us this could be a straight glide path from up high to down low -- you get a bit of a bump. We got back above 3% in the summer. A bit of a warning on gasoline prices. Could it be a bit of a bumpy ride here?

Leslie Preston: Definitely. And the bank was wise to warn about that because we are expecting headline inflation in August to tick up to 3.7%. You mentioned being back above 3%, so set to get a little further above 3%. And that's exactly as you mentioned on those higher gasoline prices -- we've been seeing at the pump reflecting higher oil prices in international markets.

So that's headline inflation. The bank focuses, when they're setting monetary policy, on their core measures of underlying inflation, because oil and gasoline are one of those prices that they swing up, they swing down and could provide a misleading signal on where inflation is headed. So we do expect that the core inflation measures will continue to decelerate slightly, but on a year-on-year basis, to remain above 3%. So sort of what we have been seeing, which is core inflation is coming down, but it's very slow.

The easy gains in weaker inflation are really in the rearview mirror. And it's those services prices that have been quite hot that we need to see those gains cool. And it's only happening very slowly. So that's our view.

If we see a much different outcome -- as I say, the Bank of Canada is kind of at a critical juncture -- if the report comes in a lot hotter than we're expecting, then we would likely be starting to consider whether we would see the bank hike again. So, us and the Bank of Canada are very much in data-dependent mode right now.

Greg Bonnell: My next question for you, it's going to feel like jumping the gun if we're talking about hotter-than-expected economic data, which, of course, the bank has warned us they could go again if they have to. But the question we get a lot is, when are they going to start cutting, right? It's one thing to be, perhaps, on a pause that doesn't see any more hikes, but when do we get the cuts?

Leslie Preston: Well, I think those are a long way away. And I think the governor was right to say it's way too early to be talking about that, given the last question you and I were just discussing -- the potential that they could hike again. We don't think the Bank will be ready to cut rates until the middle of next year once we really see a more convincing slowing in inflation and inflation kind of on a three-month annualized basis getting much closer, or that they can see that inflation is headed closer to their 2% target.

Greg Bonnell: We're going to get the Fed later this month too and their interest rate decision, obviously, it is a huge market mover globally. Are they sort of in the same camp as the Bank of Canada? Or do they have sort of a different path ahead?

Leslie Preston: Well, from the perspective of our forecast, actually, it's a very similar path. We also expect that, in line with our economic forecast, for the US economy to slow not so much in the third quarter, but come the fourth quarter of this year -- for economic growth to slow, that the Fed is on hold. But again, in data-dependent mode.

We have seen some more encouraging slowing in the inflation metrics on the US side. Now, US inflation got to a higher point than Canada. So they've kind of had further to come down. But there, too, we've seen labor market gains slow in the United States. So we do think that there is a path to weaker inflation. But the Fed is certainly on high alert for renewed inflation pressures or if they don't see the cooling they're expecting in the labor market.

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