When Headline Numbers Mask Underlying Weakness

By Ari Charney • September 10, 2013 • Canadian Edge Weekly

After Canada’s dismal employment report in July, the country’s job growth came roaring back in August, with 59,200 jobs created last month, according to Statistics Canada. That trounced the consensus forecast, which according to Bloomberg had projected just 20,000 new jobs.

Of course, month-to-month data are notoriously volatile. Nevertheless, August’s headline number was also well ahead of the pace of monthly job creation over the past year, which has averaged 20,500 jobs. On a nearer-term basis, however, job growth has been decelerating, with an average of just 12,000 new jobs per month over the past six months.

Still, the August number more than offsets the declines of the prior two months, though one area that somewhat undermines this report is the fact that new part-time jobs dwarfed full-time jobs at 41,800 and 17,400, respectively.

That might sound similar to what’s happening with job creation in the US so far this year. When examining these figures over the trailing year, however, the dynamic appears somewhat healthier: On average, the Canadian economy has created 14,600 new full-time jobs each month versus 5,900 part-time jobs.

Another area of concern is also reminiscent of US employment data: a decidedly lackluster labor force participation rate. Although the labor force rose by one-tenth of a percentage point to 66.6 percent of the total population, that’s coming off a five-year low of 66.5 percent, which this rate has hit three times over the past year and a half, first in February 2012, then in April and July of this year.

One of the paradoxes in employment statistics is that a declining labor force participation rate can actually help lower the unemployment rate by shrinking the size of the labor market. For example, the potential size of the labor force can fall when the unemployed become so discouraged by the job market, or other factors, that they stop actively seeking employment.

This means that the headline numbers in media reports about the latest unemployment data often mask underlying weakness in the job market. That’s certainly been the case in the US, where the unemployment rate has been ticking lower in tandem with the labor force participation rate.

And this dynamic appears to be in play in Canada as well, where the unemployment rate has been falling along with the labor force participation rate. Canada’s unemployment rate fell one-tenth of a percentage point in August, to 7.1 percent, beating the consensus forecast of 7.2 percent. The unemployment rate is now near its lowest level since the beginning of 2009, with the two-month stretch of January and February earlier this year coming in at the absolute low for this period, at 7 percent.

At the same time, the average hours worked rose 0.4 percent in August, following July’s gain of 0.3 percent, which suggests that demand for additional labor is present, even if it doesn’t always translate into job growth. Beyond that, economists at CIBC World Markets believe that this augurs well for third-quarter economic growth.

To help support hiring, Finance Minister Jim Flaherty announced a three-year freeze on planned increases to employment insurance premiums. This policy will take effect at the beginning of 2014, and will help reduce employers’ overall payments by CAD660 million next year.

Flaherty expects job creation will continue at a modest pace this year. That comports with workforce consultancy Manpower Canada’s recent fourth-quarter employment outlook survey. The results showed that of the 1,900 firms that were polled, 74 percent plan to keep staffing at current levels, 8 percent plan reductions, 16 percent intend to hire, while 2 percent remain undecided.

The Bank of Canada’s (BoC) hopes for the country’s economic resurgence hinge upon a rise in exports and a corresponding increase in business investment. But until the nascent US recovery becomes more fully evident, the economy up north will likely continue to muddle along.

Here’s where to find our analyses for Portfolio Holdings that have reported earnings for the second quarter of 2013:

Conservative Holdings

Aggressive Holdings

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