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October 10th, 2012

 

Title: Job gains signal economy could be picking up

Subtitle:  Continued employment growth could ease a housing correction.

 

Economists have been relatively downcast in the recent months. European sovereign debt concerns, slower growth in China and US “fiscal cliff,” tax increases and spending cuts scheduled for the yearend, have kept growth forecasts moderate.

 

However the job market doesn’t seem to be noticing any of that. Both the Canadian and US employment pictures have improved considerably in recent months, which experts say could be a signal that activity is picking up. Furthermore, if the trend continues, it could attenuate the correction which many expect the residential real estate market is currently going through.

 

In all the Canadian economy created an impressive 86,000 jobs during the past two months, including 52,000 in September alone. Although the unemployment rate rose slightly to 7.4 percent, this was only because many increasingly confident workers reentered the workforce, following a period on the sidelines.

 

“After being stuck at a neutral pace, recent employment gains could be an encouraging sign that momentum may be picking up heading into the end of the year,” notes Dina Ignjatovic, an economist at TD Economics, who says that increased confidence and positive near-term hiring intensions among small business owners bode well for employment in coming months. Benoit Durocher, an analyst at Desjardins agrees, noting the positive effect that job gains and recent increases in corporate earnings could have on consumer spending.

 

Attenuating a housing market correction

The strong employment numbers, if they continue, could have substantial spinoff effects, notably on the residential real estate correction that many believe is in the offing. As Adrienne Warren, an economist at Scotiabank notes, much of the housing sector’s weakness relates to the fact that potential buyers have been squeezed by declining affordability and slower job growth.

 

Although Canadian mortgage interest costs remain exceptionally low by historical standards, the low rates have gradually driven up house prices and consumer borrowing to unprecedented levels. The federal government has been taking increasingly bold steps to engineer a soft landing, which judging from recent weakness in the Vancouver and Toronto markets appears to be working.

 

However if strong job growth continues, the picture could change. That’s because one of the key drivers (along with immigration) of housing sector demand is household formation. The pattern tends to be familiar: the kid brings home a paycheck and soon after (or not so soon after), he or she wants to spread their wings and get their own place.

 

If job growth continues, it could speed that trend, which in turn would ease the correction that experts, ranging from the Canadian Real Estate Association, the Canada Mortgage Housing Corporation and many others, say will hit residential real estate in coming months. This week for example the International Monetary Fund warned that housing market weakness and consumer debt both threatened other sectors of the economy.

 

Ironically, in the United States things appear to be working the other way around. The country’s residential real estate market, which has been in a five year downward spiral, has seen excellent news lately. Housing starts rose by 2.3 percent in August, to 750,000 units, and existing home sales spiked by 7.8 percent. This led the US Federal Reserve to note that the sector, for a long time a laggard, is now an overall contributor to economy.

 

Not surprisingly the housing sector’s strength has come at a time when the US employment picture is gradually picking up. The economy there has created jobs month after month for more than two years, and in its most recent report the unemployment rate fell below 8.0 percent for the first time in recent memory.

 

Here in Canada the picture remains murky, with most forecasters calling for sluggish growth between now and year end. Whether and to what degree that would affect a potential housing correction remains anybody’s guess.

 

All we can be sure of is that job growth continues at a faster pace than the labor force is increasing, housing sector demand will likely to shrink less than existing forecasts are predicting.

 

peter@peterdiekmeyer.com

 

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