Douglas Porter, CFA, Chief Economist, BMO Financial Group

Friday, October 8, 2021

Amid two mini-dramas—the U.S. debt ceiling and raging European natural gas
prices—the September jobs reports seemingly took a back seat for market
attention through much of the week. However, with said dramas temporarily
resolved, thanks to separate interventions by Messrs. McConnell and Putin, the
spotlight swung back to payrolls. And while the headline U.S. tally was well shy
of expectations, the details had enough redeeming features to meet Mr. Powell’s
low bar for tapering at the next FOMC meeting. As a result, the big underlying
moves in financial markets held up—yields up across the board, energy prices
strong (with oil hitting $80), the Canadian dollar above 80 cents, and stocks
riding a typical October roller coaster.

On the U.S. payroll report, the headline 194,000 gain was far below consensus for a
second consecutive month. But bonds barely blinked because it was distorted lower
by a funky 123,000 drop in government jobs, while there were big upward revisions to
earlier months. Hours worked were sturdy both for the month (+0.8%) and the quarter
(5.0% a.r.). Moreover, the quirky household survey again printed much stronger job
growth (+526,000), slashing the jobless rate four ticks to 4.8%. That’s within shouting
distance of where the FOMC sees long-term sustainable joblessness (4.0%). And,
wages continue to march higher, rising well above expected at +0.6%, boosting the
yearly tally to 4.6%—but still short of the current 5.3% headline inflation rate.

Canada’s jobs report provided much more drama, with headline employment
blowing the doors down on consensus with a rollicking rise of 157,100 (and nearly
matching the U.S. payroll gain with a labour force 1/8th the size). This neatly lifted
total employment above its pre-pandemic high (by all of 900 jobs), a milestone
achievement to be sure. After losing nearly 3 million jobs during the harrowing two
months of March and April 2020, the Canadian economy took just 17 months to get
back to quasi-normal, for a full cycle of 19 months. In the 2008 downturn, the job
losses lasted 8 months, and the recovery took 19 months, for a full cycle of 27 months.
Even with the full reversal in Canadian job losses, there is little debate that the labour
market is still far from full health. Total hours worked remain 1.5% below pre-
pandemic highs and the jobless rate is still 1.2 ppts above the Feb/20 level. However,
Canadians are re-engaged in the job market, with the participation rate bouncing
4 ticks in September and now right back at pre-pandemic levels at 65.5%. This is a
staggering difference versus the U.S., where the part rate dipped last month to 61.6%,
and is both well below Feb/20 (when it was 63.3%) and almost four full points below
Canada’s rate.

The gap in participation rates between the two economies highlights a key theme
which seems to be emerging. Simply put, Canadians seem much more willing to
re-engage in the job market than their U.S. counterparts. This is also reflected in
the fact that while employment losses have been fully recouped in Canada, job totals remain more than 3% shy of that measure stateside. Another piece of evidence is
that while job openings are no doubt higher than normal in Canada, they are not in
the same league on a per capita basis as the U.S., where openings are now nearing 11
million (versus reported unemployment of 7.7 million).

But perhaps the clearest sign of U.S. reluctance to return to the job market versus
Canada can be found in diverging wage trends. Throughout the pandemic, it has been
extraordinarily difficult to properly assess wage trends, largely due to the enormous
shifts among sectors. However, some key underlying trends are becoming a bit clearer,
even if the results still need to be treated with care. The 4.6% y/y rise in U.S. average
hourly earnings is running at almost triple the 1.7% y/y rise in Canada’s average hourly
wages. The latter result is restrained by a rebound in lower-paying positions in the past
year, but even a fixed-weight two-year metric is running at an exceedingly tame 2.3%
clip. That’s less than half the U.S. pace of 4.7%, albeit that measure is likely inflated
somewhat by a slow comeback in low-wage jobs. The reliable employment cost index
suggested that wages & salaries were up 3.2% y/y in Q2 (Q3 is out at the end of the
month, and well worth watching for signs of further strength).

The big gap in labour force engagement between Canada and the U.S. stands in stark
contrast to how underlying growth has performed in both economies. That is, the
U.S. suffered a less deep decline last year and enjoyed a faster bounce this year. As of
Q2, U.S. real GDP was up 0.9% from its pre-pandemic high (in 2019 Q4), while Canada
was still down 2.0% from the same period, nearly a 3 ppt gap in overall performance.
We expect no huge difference in Q3 growth between the two economies—if anything,
the U.S. may have slightly outpaced Canada in the past quarter (our official calls are
4.5% for U.S. and 3.5% for Canada)—so the gap will remain at nearly 3 percentage
points. Curiously, to say the least, that is almost the polar opposite of the job market
performance, where Canada is now all square while U.S. jobs are 3% below pre-
pandemic highs.

Summing up, the U.S. economy had a much quicker recovery in overall activity
than Canada, yet Canada had a much quicker recovery in employment. How to
square this conundrum, and what does it mean for policy? In a nutshell, it suggests
that Americans were more willing and able to get out and spend, but were more
reluctant to get back and work (for a variety of reasons). For policymakers, the end
result is surprisingly similar. Both economies are now seeing tightness, but perhaps
in different ways—groaning labour shortages are driving U.S. wages hard, even as job
tallies are further from normal, while Canada’s housing market continues to rage.
For both central banks, there is plenty of justification for reining in hyper-stimulative
policies, and coming tapering announcements from both are simply setting the stage
for inevitable rate hikes. While we believe both will remain incredibly (and arguably
overly) patient before hiking rates, we now expect that when the hiking begins,
the pace will be faster than previously assumed. As outlined in our most recent
Rates Scenario, we still expect the Bank of Canada to begin hiking a year hence, but
the risks are rising rapidly that they begin earlier. And, we now look for rate hikes
to unfold at the pace of once per quarter (previously every six months). It’s a similar
story for the Fed, where we look for proceedings to begin in early 2023, and then
every three months at least until policy is close to neutral again (just below 2% for Fed
Funds).

Rate hikes may be the only thing that can finally bring Canada’s wild housing market
to heel. Most of the headlines on September’s sales activity pointed to some double-
digit drops from year-ago levels in the biggest cities. But probably much more telling
was the relentless upward march in prices, as well as indications that sales have
started firming again from a “lull” in the summer. Perhaps the only thing holding
back sales at this point is a lack of listings, and a variety of markets are reporting a
reheating of demand in recent weeks. However, with this week’s big sell-off in bonds,
yields are poised to begin biting. The 5-year GoC yield rose 13 bps this week to 1.20%,
up from just 0.40% at the start of the year. And, much like the jobs result, this key
yield is also now all the way back to levels last seen in February 2020.

Doug Porter is chief economist and managing director, BMO Financial Group. His weekly Talking Points memo is published by Policy Online with permission from BMO.