A Honda manufacturing plant in Alliston, Ont., on Apr. 5.Cole Burston/The Canadian Press
Another Canadian jobs report has come out. Another set of employment numbers has defied expectations. Another month of rock-solid employment growth is in the books.
And economists despair.
What a strange place, this postpandemic world.
Last Thursday’s labour force survey from Statistics Canada showed that employment rose by another 35,000 jobs in March, defying forecasters’ expectations that the labour market would at least take a breather after adding a ridiculous 172,000 jobs in the first two months of the year. It marked the seventh consecutive month of growth, during which the economy has added nearly 400,000 jobs.
What else was happening over those seven months? Oh, only a near doubling of the Bank of Canada’s policy interest rate – an aggressive monetary tightening specifically designed to cool the economy and apply the brakes, hard, on overheated inflationary pressures.
Other indicators of inflationary pressures have, indeed, slowed. The inflation rate itself has retreated to 5.2 per cent, from more than 8 per cent in the middle of last year. Gross domestic product was flat in the fourth quarter. Retail sales are essentially unchanged since the middle of last year.
Growth of money supply – historically, a tell-tale indicator of the direction of both inflation and the overall economy – has slumped severely. The Bank of Canada’s M1++ measure – the go-to gauge of the amount of money in circulation and in Canadians’ bank accounts – has actually been shrinking on a year-over-year basis since last August.
Yet the current job market – which, by pretty much any measure, is extraordinarily tight – seems oblivious to the rate hikes and the signs of a slowdown. Or immune. Or some sort of Roadrunner-like cartoon character, on whom the forces of gravity don’t seem to apply.
Maybe we should be happy. Maybe demand for workers is so healthy that even in a slowing economy, we don’t need a painful spike in unemployment. (It was 5 per cent in March, close to a five-decade low.)
But an extraordinarily tight labour market is a notorious inflationary pressure. The nagging concern is that the persistent strength in jobs will keep wage growth unusually high – tossing more fuel on the inflation fire even as the Bank of Canada and its high interest rates are tying to snuff out the blaze.
A little weakness in the employment trend – not necessarily a lot, but just a little – would make everyone feel a lot better about the progress of the inflation fight. And for consumers and businesses who have felt the squeeze from rising interest rates, it would bring that much closer the prospect of rate cuts.
So, we are left sifting through Statscan’s discouragingly upbeat labour data for evidence that, maybe, things aren’t so great in the job market after all. And there is some.
For instance, manufacturing jobs haven’t grown in the past year. Wholesale and retail hiring has similarly stalled. Year-over-year hourly wage growth remains high, at 5.3 per cent, but seems to have plateaued; average wages actually dipped a bit in March. Job vacancies, while still historically high, were down nearly 20 per cent in the fourth quarter from their peak.
None of these numbers are a canary in the coal mine for the labour market, but they do show pockets of sustained slowing within the overall resilient labour trend. These may hint at a soft landing to come for jobs, but a landing nonetheless.
The March labour data were, notably, the last major economic indicator that the Bank of Canada will receive before its rate decision on Wednesday. And they remain the conspicuous fly in the central bank’s policy ointment.
These aren’t job numbers that are strong enough to move the needle on the bank’s policy stance; it’s pretty committed to staying on hold while it watches its rate hikes of the past year play out. But the data are a reminder that the quest to bring inflation back to the central bank’s 2-per-cent target – which is the bank’s clearly stated measure of success in this battle – will face some tough slogging as that target comes into view, likely later this year. Unless there’s an about-face in the labour market, some serious underlying pressures will push against the bank’s efforts.
The bank will certainly say as much in its rate announcement and accompanying quarterly Monetary Policy Report on Wednesday. The ingredients for an inflation slowdown are largely in place. The relentlessly strong job picture is blocking the path to 2 per cent.
For forecasters trying to predict the timing of Bank of Canada rate cuts, the persistence of the job strength remains the critical wild card. Cuts aren’t even part of the conversation until we see more concrete evidence of a softening labour market. And that means a deterioration in the bottom line – the employment count. For the central bank to be convinced, it will want to see some blood.