Canadian Unemployment Weakness Might Be Overstated

The Canadian labor market is slowing but it may not be as slow as many have concluded. Statistics Canada (Stat Can) data shows the country added thousands of jobs in October. It just wasn’t enough to prevent unemployment from rising. Labor market erosion is almost a certainty, but post-recession seasonal adjustments amplify movements. As a result, Canada may be looking to set policy based on a picture worse than it seems, reinforcing elevated inflation.

Post-Recession Consumption Is Not Seasonal, Leading To Bad Adjustments

First, a quick note on why people should be looking at both seasonal and unadjusted data right now. Seasonal adjustments are data filters used to eliminate predictable seasonal variation in consumption. This helps to reduce noise and clarify a trend, a.k.a. smoothing the chart. Generally, it’s considered an important tool to avoid bad short-term decisions.

Predictable variations are the key to the issue. Post-recession business activity isn’t predictable, especially when hyper-dependent on stimulus. As observed post-Global Financial Crisis, the shift won’t be clear until much later. In the meantime, seasonal adjustments are likely to over- and under-state the data. 

Researchers from the US Federal Reserve warned it would happen right about now. Experts have also long criticized the usefulness when setting policymaking. Understanding this won’t change policy, since it’s cutting edge central bank research. However, investors may find it useful to understand resulting headwinds from failure to acknowledge this issue.

Canada Added Jobs, But How Many Is Enough?

Canada added jobs no matter how the data is viewed—just not enough. Seasonally adjusted employment grew by 18k jobs (+0.1%), but the market was expecting 25k. It’s estimated the country needs to add at least 50k jobs per month to keep up with population growth. That used to be a blow out job report a few months ago, now it’s the minimum needed. Needless to say, the forecast expected weak growth at best. Reality shows we’re actually worse off.  

Unadjusted job data wasn’t as bad as the market had expected. The country added 56.6k jobs (+0.3%) in October, against a labor force that grew by 82.1k people. Still some erosion in the employment market, but it’s a very different picture from the adjusted data. 

Canada’s Unemployment Rate May Be Lower Than Thought

It gets sticky when trying to figure out what’s happening with the unemployment rate. The seasonally adjusted rate rose 0.2 points to 5.7% in October. Since April, the rate has increased 4 of the 6 months, adding 0.7 points over that time. For context, a 0.5 point increase is traditionally enough to be considered a recession sign. 

Unadjusted employment tells a different story. The unadjusted unemployment rate climbed 0.1 points to 5.3% in October. Yes, it climbed but it’s still much lower than it needs to be. There’s also been a 1 point decline since August, when the rate had previously spiked. An erosion is still observed but things are still fairly robust. At least the way Canada measures unemployment. 

What’s the takeaway? Canada’s employment market is seeing erosion but not to the extent that it may appear. Affordability concerns persist, but those aren’t factors considered when it comes to employment data. International students are also a major demographic in those long job lines, but aren’t considered unemployed. Those factors aside, the weakness of the labor market may be overstated.

The Bank of Canada (BoC) is unlikely to consider this data in decisions, but that doesn’t mean it has no impact. A narrative detached from reality doesn’t mean reality stops. Failing to properly assess labor conditions can lead to excess demand persisting. As a result, it would reinforce elevated inflation. Whether that can be accurately measured post-CPI model changes is debatable. How it impacts your budget is still a problem to deal with.