Monthly employment reports should be closely monitored by anyone keeping an eye
on mortgage rates because they provide a wealth of specific information about an
We learn whether average incomes are rising or falling (which ties into many
other parts of the economy such as the cost of labour and consumer spending
rates). We learn where jobs are being created and lost (this tells us which
sectors and industries are strengthening and which are weakening). We learn
whether people are working more or less (which helps us gauge whether our
economy is gaining or losing momentum – expressed as the change in our GDP
output). We also learn, on an overall basis, what percentage of our total
available labour force is currently employed (this tells us how much more room
our economy has to grow before it reaches full capacity - a key threshold in our
economic cycle beyond which adding incremental production becomes more expensive
and as such, can lead to significantly higher rates of inflation).
In today’s environment, both the U.S. and Canadian employment reports have
taken on even more significance. U.S. Fed Chairman Ben Bernanke has made it
clear that the Fed’s monetary policy will be geared toward promoting employment
growth, even at the expense of above-target inflation for an extended period.
Meanwhile, Bank of Canada (BoC) Governor Mark Carney has predicted that Canadian
interest rates will rise faster than most are expecting in large part because he
believes that the Canadian economy will return to full capacity more quickly
than the consensus is forecasting.
On Friday of last week we received the latest Canadian and U.S. employment
reports for September and given their elevated importance, today’s Update will
take a look at both in detail.
The U.S. Employment
The latest U.S. employment data was weaker than expected, although some
optimists argue that the numbers show a positive trend when compared to
employment growth in the early summer. (In my view the optimists are reaching
for a pretty thin silver lining here because the data still barely clears
today’s ultra-low bar of expectations for U.S .employment.)
Here were the highlights from the report:
- Overall employment increased by 114,000 new jobs and the previous two job
reports were revised upwards by a total of 86,000. The upward revisions created
a mixed reaction because while they raised the most recent three-month average
for monthly new-job creation to 146,000, these revisions also mean that the
current month, at 114,000, now shows waning momentum. (To give 114,000 new jobs
some context, the U.S. economy needs to create about 150,000 new jobs each month
just to keep pace with its population growth and most experts agree that it
needs to average about 200,000 new jobs per month, for several years, to get
anywhere close to the U.S. Fed’s long-range target of 5.5%
(Side note: David Rosenberg recently pointed out that only about half of
the eight million U.S. jobs that have been lost since the start of the Great
Recession have been recovered, despite rampant and unsustainable levels of
government stimulus. He also offered a surprising statistic: there are now more
Americans enrolling in the federal food stamp program each month than there are
new jobs being created).
- Average hours worked increased slightly from 34.4 in August to 34.5 in
September, which is a trend in the right direction but also the first uptick
since the June report.
- Average incomes rose an impressive 0.6% for the month but the experts I read
expect the September consumer price index (CPI) to increase by almost the same
amount as a result of higher food and energy prices. As such, this increase in
earnings is not expected to expand the purchasing power of the average American
over the short term.
- Most of the new jobs were created in the service sector and these are often
of a lower-paying variety.
- Factory payrolls fell by 16,000 for the month after a 22,000 slide in
August. This may be a signal that a significant slowdown in U.S. export demand
is now taking root.
- Two-thirds of the new jobs created in September were in part-time work and
most of these were taken for what are deemed to be “economic reasons”. In other
words, people took part-time work because they could not find full-time work
(this group is often referred to as “the under-employed”). The 582,000 new jobs
created in this category marked its largest single monthly gain ever.
- On an overall basis the U.S. unemployment rate fell to 7.8%, which is a
happy political coincidence for President Obama because it is now back to the
same level it was at when he first took office in January of 2009. In reality
though, the sub-8% unemployment rate was really just the bi-product of a lower
participation rate (which measures only those people who are either working or
actively looking for work). One U.S. analyst reported that if the participation
rate was the same as it was 19 months ago, the U.S. unemployment rate would
actually be 8.6%.
- Meanwhile the U6 unemployment rate, which many experts feel is a more
accurate and meaningful measure of the U.S. employment picture (because it
counts people who have not actively looked for work in the past month as well as
those who are under-employed), held steady at 14.7%, or about double the
“official” unemployment rate.
The Canadian Employment
The latest Canadian employment report came in much higher than expected. But
while the overall Canadian employment picture is far rosier than the one south
of the 49th parallel, the details in our September employment data
still showed some areas of concern.
First, the positives:
- Overall employment increased by a whopping 52,000 new jobs in September,
which was more than five times what the market was expecting. Better still,
Canadian employment levels are now at an all-time high.
- Full-time jobs accounted for 85% of the total gain and the private sector
expanded by 30,000 new jobs.
- While the unemployment rate increased slightly from 7.3% to 7.4%, that was
only because 73,000 more Canadians began actively looking for work. Without this
change in our participation rate, unemployment would have actually fallen to
(Side note: By comparison, if we use the same methodology that the U.S.
uses to calculate its unemployment rate of 7.8%, ours would be 5.8%.)
- Average hours worked jumped by 0.4% and average earnings increased by 1.5%
on a month-over-month basis, and by 3.5% on a year-over-year basis. This means
that, unlike our southern neighbours, the average Canadian’s earnings are rising
more quickly than our rate of inflation (as measured by our CPI).
Now you’re probably wondering: If we have record employment levels, if most
of our new jobs are full-time and in the private sector, and if our incomes are
outpacing our rate of inflation, what’s not to like?
Consider the following:
- Of the 52,000 new jobs created last month, 33,800 of them were for newly
self-employed workers. This is considered a ‘soft’ employment category because
people who are actually in a job transition or who are unable to find more
traditional employment will often categorize themselves as self-employed. As
such, a spike in newly self-employed workers is treated with a dose of
scepticism and is not normally considered a strong employment indicator.
- The September report showed 34,000 new retail positions, which can tend to
be lower-paying jobs, and 29,000 new jobs in construction, which many experts
consider to be tenuous given the consensus outlook for most of our regional
- Youth unemployment rose to 15% and that sub-group holds 70,000 fewer jobs
than it did only a year ago.
- Of greatest concern was the loss of another 6,200 manufacturing jobs,
marking the fourth month in a row that jobs in this sector have contracted. The
strong Loonie combined with slowing economic growth in most of the world’s
largest economies continues to hurt demand for Canadian exports. While a strong
surge in service-related jobs is a welcome short-term development, manufacturing
jobs still form the bedrock of our economy, particularly in Ontario and Quebec,
and this sector continues to shrink.
Five-year Government of Canada (GoC) bond yields drifted lower through most
of last week before surging higher after our latest employment report was
released. When the dust settled the GoC five-year yield finished the week 3
basis points higher, closing at 1.33% on Friday. That momentum carried through
to yesterday with the five-year yield rising another 4 basis points to close at
1.37%. But despite this continued volatility, the GoC five-year continues to
fluctuate in a fairly tight range between 1.25% to 1.50%. Five-year
fixed-mortgage rates can still be found in the 3.00% range and a few lenders
dropped their shorter-term fixed rates last week, bringing them more in line
with the market.
Variable rate discounts can be found in the prime minus 0.40% range (which
translates to 2.60% using today’s prime rate) and that is tweaking the curiosity
of borrowers who are looking to take advantage of the savings offered at the
short-end of the yield curve. To that group of borrowers I still suggest that a
one-year fixed rate may prove a better bet. Consider that my best one-year fixed
rate (2.49%) is currently lower than my best five-year variable rate (2.60%) and
that BoC Governor Mark Carney has made it very clear that he has no intention of
lowering the BoC’s overnight rate (on which variable mortgage rates are based)
any time soon.
The bottom line: The latest U.S. jobs report basically confirmed
that U.S. employment remains “stuck in the mud” (to use U.S. Fed Chairman Ben
Bernanke’s words). While the Canadian employment picture is more encouraging by
comparison, there is still plenty of slack in our economy and we’re a long way
from reaching full capacity. On balance then, these reports did not alter my
long-standing view that GoC bond yields (and our fixed-mortgage rates by
association), should remain at ultra-low levels for the foreseeable future.
David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog integratedmortgageplanners.com/blog). Email Dave