Canada - Jump in unemployment rate supports larger BofC rate cut

Summary - Despite stronger-than-expected job growth, the national unemployment rate rose to its highest level in over seven years outside the pandemic period. With inflation at 2%, today’s jobs report does not change our view that the Bank of Canada will keep cutting its policy interest rate to 2.5% by mid next year.

The question for next week is will it be a 25 or 50-basis point cut? It’s close, but we think this report, which points to more slack in the labour market and easing wage pressures, now tips the scale to a 50-basis point cut.

The Details - Employment rose a solid 50,500 (+0.2%) in Canada last month following a tepid 14,500 (+0.1%) gain in October, driven by gains in Alberta and Quebec. The job gains were highly concentrated in the public sector (+45K) and entirely comprised of new full-time positions (+54.2K)

While the job gain is welcome, it was not enough to prevent the unemployment rate from rising. Indeed, the jobless rate rose from 6.5% to 6.8%—the highest level since January 2017 outside the pandemic period.

The challenge as of late is creating enough jobs to absorb new entrants into the job market. The labour force surged 137.8K, driven by an increase in the participation rate and another sizable gain in the 15+ population. While population growth is expected to slow dramatically next year, it hasn’t happened yet.

The job slowdown points to an economy with plenty of slack in the labour market. Put another way, the economy is not growing fast enough to absorb still-rapid population and labour force growth.

On a more upbeat note, the employment rate—the share of the population 15+ with a job—stopped declining last month, though it sits at a multi-decade low (again, outside the pandemic) of 60.6%.

One thing that the Bank of Canada seems a little less concerned about these days is wages. Wage growth can be inflationary if not matched by productivity gains and labour productivity has been falling in Canada. Today’s jobs report shows that wage pressures are showing signs of easing, with a key metric (average hourly earnings of permanent employees) rising 3.9% y/y—the slowest pace since June 2023.

Alberta - Largest job gain in over a year

Summary - In the last jobs report before the holidays, Alberta posted its largest monthly job gain since October 2023. It led all provinces in absolute job growth for the second straight month. And yet, the unemployment rate rose due to more people entering the labour market in search of work as the population continues to boom.

The Details - Alberta employment maintained its fourth quarter momentum, rising 24.3K last month and building on a 13.2K gain in October. Alberta posted the largest absolute job gain among provinces for the second straight month.

Digging deeper, job gains were concentrated in self-employment  (+18.0K) and were entirely in full time positions (+28.5K).

The services-producing sector led the charge with gains across all but one of the major service industry categories (education). The goods-producing sector took a step back, partly reversing October’s gain, with a dip in forestry, mining, and oil and gas extraction (i.e. natural resource) employment. We’ll note, however, that the trend in resource sector employment has been generally positive and this category is up 11.5% year to date. The employment uptick corresponds to the oil production boom in the province, with TMX coming online earlier this year. This matters, as oil and gas is closely integrated with other industries and tends to drive gains in related service and manufacturing sectors.

We still think there’s more room to run on construction employment, which has improved slightly this year, but is lagging the surge in home building. We suspect ongoing labour shortages are at play, holding back construction payrolls.

It’s natural to think that such a large job gain would lower the unemployment rate. But these aren’t normal times. Alberta is in the midst of a population boom, and that means even more jobs need to be added here to prevent the unemployment rate from rising.

Last month’s job gain was more than offset by faster growth in the labour force, as more people searched for work. Both population and the labour force participation rate (the share of the 15+ population working or looking for work) posted strong gains. As a result, the unemployment rate rose by 0.2 points to 7.5% as labour force growth outpaced job gains.

Forecast implications - Our October forecast is on track for 2024. With only one month remaining, Alberta’s job growth so far this year is 2.9%—exactly in line with our forecast. The unemployment rate has averaged 7% (vs. our forecast of 7.1%).

We see the unemployment rate in Alberta staying above 7% into early next year, but then falling amid slower population growth in light of new federal targets.

For the daily trivia question and answer, please see this week’s edition of The Seven.