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Resilient job markets in both Canada and the U.S. could mean aggressive rate policies to tame inflation may be far from over. Greg Bonnell speaks with James Marple, Senior Economist at TD Bank, about labour market trends and what it may mean for interest rates going forward.
Transcript
Greg Bonnell: The recent strong jobs numbers we got in both the United States and Canada suggest that slowing economic growth the central bankers are hoping to see to tame that inflation perhaps not happening just yet. Joining us now for his take, James Marple, senior economist at TD Bank. James, great to have you here. Let’s dig in because obviously this is something we’ve heard from the central bankers. Until we see some taming of the economy, of the labor, market economy, they really can’t stop hiking rates. What’s the situation right now?
James Marple: Well, we certainly didn’t get it in October, especially in Canada — 108,000 jobs created. That more than offset some of the weakness we had in previous months where we’re positive on a five-month, six-month moving average basis. We see now the level of jobs the highest it’s been, so we’re way beyond recovering from the pandemic shock. The really gains across sectors, across regions, across age groups, there was really nothing– no weakness in that report. I mean, you see a lot of volatility in the labor force report, and you saw some weakness in prior months. But besides that, this was all go.
The one thing– even wages were up, 5.7%, accelerating, showing just how tight that job market is. So really, nothing not to like except that, as you said, we are hoping to see some gradual slowing. And the stronger it is in the here and now, perhaps the harder we have to step on the brakes later.
On the US side, a little bit more of a mixed story. You saw really good payroll growth, 266,000– again, strong across sectors, both services and goods sectors, creating jobs. Wage growth decelerated a little bit, and then on the unemployment side, that’s where things were a bit more mixed. The unemployment rate edged up. The household survey, which they use to calculate unemployment, showed job losses of around 350,000, and so you got a 0.2 percentage point uptick in the unemployment rate. At 3.7%, though, it’s still very low relative to history, and a lot of momentum there in job creation– I mean, 266,000. In 2019, prior to the pandemic, we were running around 160,000. So you’re creating jobs well in excess of what normal would be even, again, as we have levels of employment that are at all-time highs and unemployment basically at a historic low.
Greg Bonnell: On the back of those reports, particularly the American one, as you were laying out nicely some of the details there beneath the surface, saw some pundits opining about peak job creation. Just like everyone’s been asking the question for the last several months, have we reached peak inflation, saw a few people asking, have we reached peak job creation. What will we be looking for if we’re trying to gauge that?
James Marple: Well, we’d look at the monthly rate of job growth, and so far it hasn’t shown any signs of really slowing. I mean, we’d like to see it come down somewhere in the neighborhood of 160,000, maybe even a bit lower than that. I mean, would be nice. Anything above 160,000, you’re putting downward pressure on the unemployment rate, even if it doesn’t show up in that particular month, given the differences in surveys.
So yeah, I mean, we should be in terms of where we are with respect to the labor market and the unemployment rate. I would say the one caveat is that there is some scope for more people to return to the workforce in the US more so than we have in Canada. Unfortunately that didn’t happen in October. The participation rate had a modest tick down. So maybe, if you could get people coming into the labor market, you could maintain a rate of job growth above that 100,000, 150,000 a month. But if you’re not seeing signs of that, you definitely want to see job growth come to those levels.
Greg Bonnell: When we see trends like this in the labor market, is it suggesting that these are economies — whether it’s the Canadian economy or the US economy — that can handle higher borrowing costs? I mean, they were slashed to historic lows throughout the pandemic, and it’s been painful, the speed at which they’ve gone higher. But is the economy telling us we’re comfortable with rates at these levels?
James Marple: Well, certainly seeing continued resilience, especially in the job market. I mean, now we’ve had rate hikes starting in February, and we’re six months in. And we have job creation still pretty good. It’s as solid economic indicator as you can get.
I think it is a little bit difficult reading the lags and the leads in some of these things because we also, of course, are still opening up from the pandemic. We’re still having some of that shock in terms of the structure of spending that hasn’t moved back to normal. You still have a lot of jobs in service sectors that are not back to normal even in terms of the level of employment, even as others have moved well beyond it.
So it is difficult, but I think it certainly suggests that, overall, there is some economic resilience out there, even as we have seen interest rates have an effect on the housing market, to a lesser extent on auto sales and other interest rate-sensitive sectors of the economy. But it’s really hard to see an overall. Yeah, I mean, we’re not in recession now, and probably won’t be at least through the end of this year. The economy is showing some significant resilience.
Greg Bonnell: Now, the jobs, obviously very important, but then the latest read of inflation we’re going to get later this week. And this has been an important one, too, for investors to try to gauge, have we hit peak inflation. How quickly is it coming off? So far from what we’re seeing in the American economy, the job market is still strong. Can we expect to see inflation come back in a meaningful way, or is this sort of a long journey we’re on?
James Marple: Well, it probably is going to take some time, and you can see that in the difference between the headline and the core rate of inflation in the US. The headline did peak. It’s now likely even going to come down a little bit more in the next month, probably a reading around 8%. Some of that is just the energy price unwind after the Russia shock. But elsewhere, you see continued sources of strength. Food prices haven’t shown any signs of slowing, and then core prices, excluding food and energy, especially core service prices, were really strong last month and probably will be strong again this month. And some of that is really the way the CPI is constructed in the US. They have a large portion of the core measure that is shelter inflation. Shelter inflation really lags changes even in market rents and asking rents and likely hasn’t even peaked yet, so will continue to put upward pressure on that core measure.
So, I mean, our guess would be that we’re probably looking at these rates of core inflation, around the 6 and 1/2% mark, that are sustained through the end of this year. And that, of course, does present a challenge to the central bank because they’re really looking for inflation to start to come down, especially underlying measures of core inflation. Or the underlying inflation rate was a term that you heard the chairman talk about in his meeting.
Greg Bonnell: Yeah, with every rate decision, heading into the latest one from the Fed, there’s this idea that, OK, we were fully expecting the rate hike that we got. But then there’s going to be some acknowledgment that, hey, maybe we need to take the foot off the gas pedal a little bit. Maybe we need to reflect on what we’ve done. Jerome Powell was pretty stern after that decision. Even the decision itself perhaps was read a little dovish until he opened his mouth. It seems that they’ve still got a fight on their hands, and there’s not going to be a lot of relief anytime soon for people hoping for the magical pivot.
James Marple: Yeah. Yeah, exactly. So, I mean, the pivot was we’ve been raising rates by 75 basis points. Maybe now we don’t go 75. Next meeting we go 50. But his message was, we may be doing 50, and then 25, and then 25, and 25, and 25. The terminal–
Greg Bonnell: These are still hikes.
James Marple: Yes, these are still hikes, and we’re not at what we think the terminal rate will be. And, in fact, offsetting any notion of pivot, he said that rate is probably higher now than we even thought it was at our last meeting in September. So yeah, I mean, overall consistent with the economic data we’ve seen. This was even before– the statement was before the payrolls number, although highly anticipated to be strong. But yeah, I mean, seeing this stubbornness in inflation, continued strong labor markets means they’ve got to go a bit further if they want to be successful in bringing down inflation.
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