August 15, 2014


Jobs revision sheds light on conundrum

Interest rates likely to remain low for some time.   


Canadian housing sector stakeholders breathed a huge sigh of relief late last month following the release of US gross domestic product growth data. The American economy grew by 4.0 percent during the second quarter. That was a sharp turnaround from the revised 2.1 percent drop registered during the first three months of the year. A second consecutive drop would have signalled that the US was in a recession. This almost certainly would have eventually dragged the Canadian economy down with it.


The US positive results confirm what many had suspected based on the strong job creation numbers south of the border, where more 1.6 million posts have been added since the start of the year. “The US economy appears to be sustaining robust momentum,” wrote Ksenia Bushmeneva, an economist with TD Economics in a recent note to clients. “Labour market fundamentals continue to improve.”


Good news flows north

However the strong US GDP growth number contrasted sharply with the initial Canadian job creation totals released earlier this month, which showed essentially zero gains during July. America is the biggest customer of Canadian goods, accounting for $357.5 billion of our $471.4 billion in exports during 2013 alone. That is a huge number relative to the $1.89 trillion Canadian economy and to our total trade. However the strong US employment data and weak Canadian numbers presented a conundrum.


You would think that if the US economy was adding jobs and increasing productivity that would eventually morph into higher Canadian job totals, as exporters here geared up production and added to their payrolls. That mystery was solved last week when the folks at Statistics Canada revised their July job creation totals, from near zero to 41,700 posts created during the month. That brought the unemployment rate here to 7.0 percent.


Bank of Canada will likely stand pat

These new totals, which are more in line with the numbers coming out from south of the border, are good news for two reasons. For one, job growth, along with immigration, is the primary driver of Canadian housing sector demand. The more jobs that are created, the more houses are bought and built. This in turn creates a virtuous circle, through the creation of further jobs in the construction and durable goods industries. The cycle continues as these newly employed workers generate even more demand for housing…and the cycle repeats.


However as Benjamin Reitzes, a senior economist at BMO Financial Group notes, Canadian job creation while strong, is unlikely to be strong enough to convince the Bank of Canada to back away from its cheap money policies, which have been inflating asset prices throughout the system. While the latest Statscan numbers show on average the addition of 19,400 posts during the past three months, over the past six months the average monthly total drops to just 10,900 posts. The upshot is that the Bank of Canada is unlikely to want to cool off a merely moderately growing economy.


That means the low interest rates, which have been fuelling both existing home price increases and housing starts, are likely to be with us for some time to come.





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