A 'now hiring' sign is displayed outside a business on May 30, 2023 in Montreal. May’s employment decline of 17,000 snapped eight consecutive months of increases.Christinne Muschi/The Canadian Press
It has taken more than a year, and 4½ percentage points of interest-rate hikes, but the unsinkable Canadian labour market is finally showing cracks in its hull.
They may not be the ones that the interest-rate hikers at the Bank of Canada have been waiting for. They’re not particularly deep, nor particularly wide. But they’re cracks nonetheless. And when you’ve been waiting this long for them, they’re too conspicuous to be ignored.
We may one day look back on Friday’s release of Statistics Canada’s labour force survey for May as the beginning of the end of the country’s until-now relentless hiring boom. Without a crystal ball, it’s impossible to say. But we definitely witnessed something we haven’t seen since the Bank of Canada’s rate hikes entered serious economy-slowing territory last fall: an actual drop in jobs.
May’s employment decline of 17,000 snapped eight consecutive months of increases – the longest job-creation winning streak since 2017. The rise in the unemployment rate, to 5.2 per cent from 5 per cent, was the first in six months.
To be clear, 17,000 doesn’t represent a particularly large decline. And it’s only a single month of data. But in context, it’s a big deal.
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This 17,000-job decrease didn’t occur in a bubble; it came during a time when the Bank of Canada has cranked up interest rates ever higher in a conscious attempt to take the wind out of the economy and quash inflation. The central bank’s policy rate has been in what it considers “restrictive” territory – high enough to restrain economic activity – since September. And yet, employment has grown by more than 400,000 in that time, defying a massive force of economic gravity.
In a different context, May’s employment decline might be shrugged off as a modest breather in a strong labour market. But not in the current environment of steep interest-rate hikes and eroding business confidence as those rate pressures have mounted. The labour slowdown that we saw last month shouldn’t be an anomaly – it’s what is supposed to happen.
The Bank of Canada was willing to shine this sort of contextual light on other key data in deciding last week to nudge interest rates still higher. April’s tiny uptick in inflation, at first glance, looked like a temporary hiccup in a declining trend – until the bank considered it in the context of the first-quarter gross domestic product (GDP) numbers, which showed surprisingly strong growth and consumer demand. In that light, it looked like less a hiccup than a storm cloud.
So we can expect the May employment data will warrant considerably more than a shrug from the Bank of Canada. It will be trying to assess whether the month was a blip or a symptom of a much more meaningful slowdown.
There are some details within the May jobs data that add weight to the “more meaningful” argument.
First, full-time jobs declined by 33,000. That’s the second straight month that full-time employment has shrunk – something that hasn’t happened in two years.
As a result, total hours worked in May fell 0.4 per cent from April, the biggest drop in more than a year. Hours worked correlates highly with overall economic activity, so a shrinkage in total hours is typically good evidence of slowing GDP in the month.
Importantly, the employment declines were also entirely in the services sector, which shed 40,000 jobs. (The goods-producing sector gained 23,000 jobs.) Services accounted for 94 per cent of the job gains during the surge of the previous eight months; that side of the economy has become a major preoccupation of the Bank of Canada, as it worries about persistent labour shortages and wage pressures.
On the other hand, the May job weakness was concentrated in the 15-to-24 age group, where seasonally adjusted employment tumbled by 77,000 from April. Given the timing – May is when most university and college students return to the labour force for the summer – this peculiarity raises eyebrows and questions.
Perhaps it’s a sign that the student summer job market, which tilts heavily to the services sector, is unusually soft; maybe the first manifestation of a weakening labour climate is a reluctance to hire summer help. On the other hand, we could be seeing some sort of quirk in the seasonal adjustments of the data, or in the timing of the monthly survey, that has temporarily distorted the youth hiring numbers.
Perhaps most importantly for the Bank of Canada, the May data show little slowdown in wage growth: Average hourly wages were up 5.1 per cent year over year, compared with April’s 5.2 per cent. The bank has specifically identified wage growth as one of the key indicators it is watching to determine the stickiness of inflation pressures. And while the wage pace has inched slightly downward over the past three months, it’s not enough to convince anyone that a significant slowing trend has taken hold.
Bottom line: Maybe there isn’t enough in the jobs data to change the mind of a central bank that was predisposed to raise rates just two days earlier. But there’s plenty there for it to think about. The labour market hasn’t necessarily turned a critical corner, but this could be the first clear sign of it entering the curve.