'Flattered by massive population gains': Economists on the February jobs data

Nothing in data to force Bank of Canada’s hand on interest rates

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The Canadian economy produced double the number of jobs forecasted by analysts, but the unemployment rate rose to 5.8 per cent in February from 5.7 per cent in January as population growth continued to outpace the employment market, according to Statistics Canada’s latest Labour Force Survey.

Here’s what economists are saying about what the figures mean for the economy, the Bank of Canada and interest rates.

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‘Some comfort’: Bryan Yu, Central 1

“For inflation and interest rate watchers, comfort could be found in signs of rising labour market slack and moderation in wage growth as population growth swamped hiring,” Bryan Yu, chief economist at Central 1 Credit Union said.

Wage growth slowed to five per cent year over year in February from 5.3 per cent in January, while the number of people looking for work rose by 76,400, much more than the 41,000 new jobs created.

The employment rate fell in February to 61.5 per cent, a fifth consecutive drop and the rate is now at its lowest level since October 2021, Yu said in a note.

“Mixed signals from the labour market of robust employment growth and softening labour market conditions will be challenging for the Bank of Canada, but signs persist of a cooling market driven by the swelling labour supply,” he said. “This should moderate wage growth and inflation pressures, and we maintain a call for a June rate cut.”

Signs of slack: Olivia Cross, Capital Economics

The Bank of Canada should be “relieved” by the latest jobs report, said Olivia Cross, North America economist at Capital Economics Ltd.

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The report pointed to signs of slack in the workforce, meaning more people are looking for work than jobs available, and the continued slowdown in wage increases.

Average hourly wages grew five per cent year over year in February, slowing from 5.3 per cent the month before.

However, that is still too high to bring inflation down to the bank’s two per cent target, Cross said.

The central bank’s statement accompanying its interest rate hold this week indicated wage growth is still on its radar.

“While the bank will need to see wage growth soften further before it pivots to rate cuts, we suspect that weaker labour demand and renewed gains in labour supply will keep wage growth on that downward trend,” she said in a note.

February jobs net change chart

‘Remaining steam’: Tu Nguyen, RSM Canada

“The job market is tipping into an employer’s market,” Tu Nguyen, an economist at accounting firm RSM Canada LLP, said in a note.

He said hourly wage growth for permanent employees — a different measure from the one cited by Statistics Canada — slowed to 4.9 per cent, falling below five per cent for the first time in a year.

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That, coupled with a climbing unemployment rate, shows more disinflation is on the way, he said, something the Bank of Canada has made clear it needs to see before it feels confident it can start cutting interest rates.

Still, the economy added thousands of new jobs, “a sign of remaining steam that could keep the economy afloat for a few more months,” Nguyen said, but, ultimately, the jobs report didn’t move the rate-cut needle.

“February’s job report did little to sway the Bank of Canada’s likelihood to begin cutting rates in June,” he said.

Look to June: Andrew Grantham, CIBC Capital Markets

There was nothing in the jobs data that will push the Bank of Canada to act sooner on cutting interest rates, said Andrew Grantham, an economist at CIBC Capital Markets.

“The Bank of Canada appeared in no rush to start cutting interest rates earlier in this week, and today’s data will do little to speed the process up,” he said in a note, adding that the economy doubled the number of positions forecast with all the hiring coming in the form of full-time jobs.

Grantham said the rising unemployment rate is simply offsetting an “unexpected” drop to 5.7 per cent in January. But wage growth is still too high for central bank officials’ liking, he said.

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“Overall, there is still evidence from today’s data that labour market conditions are loosening, but only very gradually and not in a way that demands an imminent reduction in interest rates,” Grantham said. “We continue to forecast a first reduction at the June meeting.”

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‘Shifting bargaining power’: Nathan Janzen, Royal Bank of Canada

The gain in jobs during February provides proof the Canadian economy continued to expand in the first quarter of 2024, said Nathan Janzen, assistant chief economist at the Royal Bank of Canada, as full-time positions and hours worked grew, although the bank estimates per-person output shrank for the seventh consecutive quarter.

Still, he thinks there are plenty of signs that the job market is “rebalancing” away from employees to employers, including data showing permanent layoffs rose 32 per cent. He also said job vacancies are down 25 per cent from levels a year ago.

“The rebalancing is shifting bargaining power in wage negotiations away from workers,” Janzen said in a note.

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He thinks the unemployment rate will continue to climb in the first half of the year in tandem with slowing growth per capita. Based on this data, he thinks a first rate cut in June still makes sense.

“We continue to expect the combination of a softening economic backdrop and slowing inflation pressures will allow the BoC to pivot to gradual interest rate cuts starting in June,” Janzen said.

‘Impressive at first blush’: Douglas Porter, Bank of Montreal

February’s jobs report looks good on the surface, but digging into the numbers is another story, said Douglas Porter, chief economist at Bank of Montreal, in a note.

“Today’s report is certainly impressive at first blush, particularly the towering rise in full-time jobs,” Porter said. “However, it’s staggeringly clear that the results are flattered by ongoing massive population gains, and the labour market is thus actually gradually cooling.”

The 41,000 jobs the economy added in February were all full-time positions, but self-employment and the public sector accounted for all of the increase, Porter said.

The jobs market is on the back foot in other ways.

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In the past year, the number of people looking for work has risen by more than 550,000 due mainly to immigration, well ahead of an increase in jobs of 368,000.

“The main point is that even seemingly solid job increases are not keeping pace with torrid population growth,” the economist said.

Looking ahead, Porter expects the unemployment rate to rise and wage growth to continue slowing given the rising number of people looking for work.

Despite the seemingly deteriorating conditions in the jobs market, Porter doesn’t think February’s report tips the scales for central bankers.

“On balance, this will not change the Bank of Canada’s worldview.”

• Email: [email protected]

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