‘Keeping everyone guessing’: What economists say about surprise jobs numbers

Canada’s jobs numbers for August surprised economists — again.

“The job market is keeping everyone guessing,” James Orlando, director and senior economist at TD Economics, said in note on Sept. 8.

Economists teased out signs of slowing.

Despite August’s net gain, the jobs market is “easing,” noted Stephen Brown, deputy chief North America economist at Capital Economics, basing his assessment on the fact that the number of people looking for work rose by 54,200, outstripping jobs added.

Economists at National Bank of Canada predicted in their jobs note they expect the unemployment rate to rise as more people look for work due to the historic increase in immigration. Meanwhile, businesses signal that the “hiring spree” of the past few years might be winding down.

“The latest CFIB (Canadian Federation of Independent Business) survey indicated that labour shortages are easing and concerns about weak domestic demand rose sharply in August, which does not suggest a hiring spree in the coming months,” Matthieu Arseneau and Alexandra Ducharme of National Bank wrote.

However, the increase in average hourly wages may be of concern to the Bank of Canada.

They rose 23 cents to $33.47, surpassing the high in April of $33.38, said Jay Zhao-Murray, a currency analyst at Monex Canada, in a note.

“Wages are now 4.9 per cent higher on average than a year ago, a rate that is still inconsistent with two per cent inflation,” he said.

Further, the August jobs report tracked an increase in hours worked of 0.5 per cent from July suggesting “a rebound in economic activity in August,” wrote Charles St-Arnaud, chief economist with Alberta Central.

The Bank of Canada’s inflation target is two per cent. Headline inflation currently stand at 3.3 per cent.

The unexpected strength of the August jobs report prompted markets to raise the odds of a Bank of Canada rate increase to 30 per cent from almost 25 per cent on Sept. 7, according to Bloomberg data.

Here’s what economists are saying about the latest jobs report and what it means for the central bank.

Matthieu Arseneau and Alexandra Ducharme, National Bank of Canada

“The number of jobs rose sharply in August, an increase that would normally lead to a tightening of the labour market. But with the largest increase of population aged 15 and over on record (+103K in the month), the unemployment rate has remained steady even though the participation rate has fallen by a tenth. It is therefore necessary to raise the bar to establish what is now a solid employment report in terms of headcount.

“Given the current demographic boom, the pace of hiring would have to average around August’s level to prevent the unemployment rate from rising in the coming months. This has not been the case over the past four months (the unemployment rate has risen by five tenths since April), and we doubt it will be in the coming months. According to the latest report on GDP, profits are down 26 per cent annualized since the beginning of the year, a trend that is inconsistent with the increase in employee compensation (plus eight per cent). This could mean difficult decisions ahead for companies.

“The latest CFIB (Canadian Federation of Independent Business) survey also indicated that labour shortages are easing and concerns about weak domestic demand rose sharply in August, which does not suggest a hiring spree in the coming months. Consistent with those developments, we note that private employment has been down over the last two months (-40,000), the sharpest drop since June 2022. Hourly earnings according to the Labour Force Survey remained on a strong upward trend in August, but it should be remembered that this series is very volatile and probably reflects market conditions of a few months ago. On this note, firms surveyed by the CFIB indicate lower wage growth intentions in the coming year. Given the clear signs of easing in the labour market in recent months, we expect a moderation in wages sooner rather than later.”

Nathan Janzen, RBC Economics

“Employment is still rising, but so is the unemployment rate with job demand no longer strong enough to keep up with a rising supply of workers from surging population growth. The Bank of Canada will continue to watch wage growth (still well-above pre-pandemic levels) closely and is clearly willing to re-start rate hikes again if inflation doesn’t slow and broader economic conditions don’t soften further. But the central bank’s move to leave the overnight rate unchanged earlier this week was based on signs that the balance of labour supply and demand was improving — and the unemployment rate holding steady after three months of increases is still likely consistent with that view for now.”

Charles St-Arnaud, Alberta Central

“The Bank of Canada is likely to be slightly concerned by the continued strong wage gains, especially the disconnect to productivity growth, and the unchanged unemployment rate, as they both suggest the labour market remains very tight.

“While little progress was made in August to create some slack in the labour market and that growth may be stronger, we do not believe it will change the BoC’s view of the economy meaningfully nor will it push the central bank to hike. The BoC has made it clear that the path for monetary policy depends on the outlook for inflation and whether we see some easing momentum in core measures of inflation.

“We believe that the BoC will leave its policy rate unchanged for the rest of the year, as some time is needed for higher interest rates to fully impact the economy. As we have shown, monetary policy entered restrictive territory in late 2022 or early 2023, depending on the measure. Historical patterns suggest that a downturn usually follows five to seven quarters later, suggesting very weak growth late this year and early next year.”

Stephen Brown, Capital Economics

Jay Zhao-Murray, currency analyst, Monex Canada

“Markets have raised the odds of an October hike from the Bank of Canada, inviting the loonie to post its strongest intraday gain in a week. But with those odds now sitting at 30 per cent, it’s clear that markets are still unconvinced that the bank will be spurred into action, especially since Macklem’s speech yesterday sounded like he wants the hiking cycle to be over.
We share the market’s view for the next meeting, as signs of economic resilience will need to be confirmed in the next string of data releases for the BoC to shift stances once more. We have previously argued that job gains are now slower and less consistent than they used to be at the start of the year, and today’s print isn’t enough to change our minds.”

James Orlando, TD Economics

“The job market is keeping everyone guessing. While the positive job gain provided an offset to weakness in prior months, the population boom (+103k!) is causing labour force growth (+54k) to outpace hiring. The number of unemployed workers has now grown by 137,600 over 2023. As we highlighted in our recent job market outlook, there are many ways the once high-flying labour market can come back down to earth. So far, it has been a smooth transition. But this will be no easy task, and we expect turbulence in the months ahead.”

“Bank of Canada governor Tiff Macklem spoke yesterday about the clear evidence that past interest rate hikes are working to slow the economy. While the evidence became a little less clear today, when we look under the surface, the story still holds. Consumer spending is slowing under the weight of 475 basis points in rate hikes over the last 18 months, and the real estate market is rolling over again after the BoC’s June/July rate hikes. Given that markets are pricing a 50/50 chance of another BoC hike this year, it is clear that market participants are still looking for more evidence of an economic slowdown.”