Following last Friday’s release of the LFS employment report, economists and market participants have been discussing about data reliability. Some expressed concerns about the fast pace of improvement in labour market conditions observed at the end of 2017.
First, seasonally adjusted (sa) LFS employment increased by 79K in December from the previous month. The non-seasonally number (nsa) indicates a tiny 7K month-over-month decline (see chart). Let us start by saying nsa employment always declines during the month of December, reflecting the pre-determined end of temporary jobs and holidays. Furthermore, the 7K raw decline in nsa employment registered in December 2017 was the smallest month-over-month decline for the specific month of December since 2006. More specifically, fewer temporary workers lost their jobs this year. Greater labour retention should be seen as a positive development.
Also, we have not identified anomalies relative to Statistics Canada’s seasonal adjustment. The 7K raw decline and the 79K sa increase in employment imply a 86K seasonal adjustment. This 86K tweak, necessary to remove seasonal fluctuations, is within the 60K-95K range observed during the last decade for the month of December (see chart).
In November, employment on a seasonally adjusted basis rose by 80K and nsa employment rose by a modest 5K. The seasonal adjustment of +75K is undeniably at the top of the range observed since 2005 (see chart). Still, sa employment would have still increased with the utilization of a smaller seasonal factor. Thus, the general view of improving labour market conditions would have stayed intact in November as well.
Granted, a few details of the LFS report raise some eyebrows. The plunge in Quebec’s unemployment rate observed between October (6.1%) and December (4.9%) was driven by a record-high decline in youth unemployment. Usually, a 1.2pp decline in the unemployment rate occurs over 12-18 months when an economy performs very well. In addition, the pace of hiring in the Canadian manufacturing sector (+86K or +5% year-over-year) is slightly above the recent strengthening observed in manufacturing real GDP and manufacturing shipments data.
Nevertheless, these details are insufficient to change our view that labour market conditions have improved at the end of 2017. One of the most positive developments underway is the acceleration in average hourly earnings (AHE) growth. The 2.7% year-over-year increase in AHE is in line with last Monday’s Business Outlook Survey showing a tighter labour market. Notably, Canadian companies citing labour shortages is near a 4-year high. Also, these labour shortages are generally more intense than before.
Bottom Line: The LFS report and the BOS are both encouraging for the Canadian economic outlook. The positive economic momentum is likely to slightly weigh more in the balance than the downside risks to the outlook (NAFTA uncertainty, the role of digitalization and globalization on CPI inflation, elevated household debt). Altogether, we make a last-minute adjustment. We expect the BoC to raise the overnight rate target by 25 basis points on Jan. 17th instead of March 7th. But given the considerable risks still surrounding the economic outlook, the BoC is unlikely to engage in an aggressive normalization process.
