Royal Bank of Canada

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Canada's job market posts strong gain in January
February 4, 2011

Canada's labour market kicked off 2011 in high gear with 69,200 new jobs created in January, outpacing market forecasts for a 15,000 increase. This result followed a revised 30,400 gain recorded in December 2010. The unemployment rate, however, increased to 7.8% from December's 7.6% as 106,400 entered the labour force in the month.

Canada's labour market in January added 69,200 jobs, more than double the add in December. The increase was almost evenly split between full-time and part-time employment. Similarly, gains were widespread between private, public and self-employment.

Statistics Canada released an update a week ago that re-benchmarked Canada's labour force survey to reflect the 2006 Census rather than the 2001 Census distribution. This process resulted in changes in the level of employment such that a total of 428,000 jobs were lost during the recession, and the number of jobs created since the recovery began totalled 398,000. January's report now means that all jobs that were lost have been recovered.

Across industries, both goods-producers and service-sector employment rose; however, the gains were concentrated in the service sector. In the goods-producing industries, employment rose by 19,700 with manufacturers added an unexpected 4,000 jobs following a massive 66,400 add in December. The biggest gain in the goods-producing industries was in agriculture, which added 13,200 positions. Service-producing employment rose by 49,400, more than offsetting the 14,400 jobs lost in December. Within services, the largest increases were in business and other support services (33,700) and public administration (19,900).Transportation and warehousing jobs fell by 31,900, nearly offsetting December's 38,400 gain. Accommodation and food services also cut payrolls in January by 25,900.

Six of 10 provinces saw employment rise in January. Ontario added another 36,000 jobs marking the third consecutive monthly rise. Ontario's unemployment rate held at 8.1%. Alberta also posted a hefty 22,000 employment gain although the unemployment rate rose to 5.9% from 5.5% in December. Employment in British Columbia fell again in January and the unemployment rate jumped to 8.2% from 7.6% in December.

The year-over-year gain in average hourly wages for permanent workers inched higher to 2.3% from 2.2% in December. The pace of wage gains remained below 2010's 2.4% average increase.

Today's report played into our expectations that December's gain restarted a round of faster job increases in Canada. This accelerating trend corresponds with the results of the Bank of Canada's Business Outlook Survey, which showed a net 41% of respondents intended to increase their payrolls. Part of the rationale for our higher than consensus growth forecast for 2011 stems from our view that a strengthening in the pace of job gains will sustain consumer spending and will largely serve to offset the restraining effect of households' elevated debt burdens. The combination of job gains and firming income growth will go some distance to ensure that households' debt-to-income ratios do not move appreciably higher. The improved tone in the labour data in December and January will likely ease some of the Bank of Canada's concerns with respect to the outlook for consumer spending. Additionally, the round of unexpectedly strong U.S. data--including another solid month of car sales activity--sets exports up for to rise at an accelerating pace. While the recent data is consistent with Canada's economy emerging from a period of sluggish activity, the Bank of Canada's cautious tone in January suggests that, until there is evidence that these trends are being sustained, the 1.00% overnight rate will be maintained. Our expectation that December marked a turning point for growth and that this new found positive momentum will continue suggests that the Bank will be in a position to resume trimming the amount of policy stimulus via higher interest rates in the second quarter of 2011.

Dawn Desjardins, Assistant Chief Economist, RBC Economics

U.S. January payroll employment shows disappointing rise

Payroll employment in January rose a disappointing 36,000, which was considerably less than the 145,000 increase expected. Some offset was provided by gains being revised up in earlier months to 121,000 in December (103,000 previously) and 93,000 in November (71 previously). The household survey also implied greater strength in labour markets with the unemployment rate sinking for the second month in a row by 0.4 percentage points to 9.0% from 9.4% in December and 9.8% in November. The drop in January, however, reflected a massive 504,000 drop in individuals looking for work with employment, on a household survey basis, rising only 117,000.

The overall increase in payroll employment was once again held back by government employment dropping 14,000 in the month reflecting the tight fiscal situation, particularly at the state and local level. The 50,000 increase in private-sector employment was split between an 18,000 gain in goods-producing industries and a 32,000 increase in service-producing industries. The gain in the former was restrained by a 32,000 drop in construction where activity was likely hurt by inclement winter weather. This decline provided some offset to a solid 49,000 rise in manufacturing jobs. On the services side, there were strong gains in retail (27,000), and professional and business services (31,000). This result helped to offset a 38,000 drop in transportation and warehousing services that followed a 49,000 surge in December.

The overall workweek disappointingly dropped to 34.2 hours from 34.3 hours in December although some of this weakness may have been attributable to the adverse weather hitting many parts of the country. This drop in the face of the modest increase in employment resulted in the index of aggregate weekly hours dropping 0.2% in the month.

The index of average hourly earnings in January, the principal wage measure in the report, rose an unexpectedly strong 0.4% in the month; nevertheless, the year-over-year rate remains modest at 1.9% yet is up from 1.7% in December.

The disappointing employment gain will undoubtedly raise concerns within the Fed. Although the recent fiscal stimulus package has provided some support to growth near term, private-sector spending will increasingly need to supplement public-sector initiatives to sustain growth going forward. Rising household incomes are key to making this transition; therefore, the Fed will be disappointed by the modest job gains evident in today’s report. As well, although the unemployment rate dropped sharply, it largely reflected individuals moving out of the labour force. Thus, we expect the current range for fed funds of 0% to 0.25% to be maintained during this year and into 2012 to help sustain stronger job gains going forward.

Paul Ferley, Assistant Chief Economist, RBC Economics