2 Big Job Reports Land on Both Sides of the Border. Here's What They Say.

The governments of Canada and the United States recently released two eagerly awaited job reports, offering some key insights into what's happening with our interdependent economies. With central banks on both sides of the border battling rising inflation with a series of interest-rate hikes, which may or may not be over anytime soon, employment is one measure that's closely watched.

Inflation has shown recent signs of cooling off, but economists look at several economic indicators – including jobs numbers – to help confirm that the economy is slowing down just enough (or if the banks have overshot their mark into recession territory). The economy's strength, in turn, has a direct impact on your investments.

Here's a breakdown of the latest job reports, courtesy of RBC Economics' Claire Fan and Carrie Freestone.

These reports were first published by RBC Economics on August 4, 2023.

New Canadian jobs flatten slightly, but the real story's just under the surface

• July saw a 6,000 decline in new jobs after June's 60,000 job gains.
• While employment growth was largely flat, soaring population growth (+81.9K) meant not all new labour force entrants found work. The unemployment rate rose for a third consecutive month (to 5.5 per cent).
• The unemployment rate has risen by half a percent since April. Total job postings have fallen significantly from their December peak and vacancy rates were back at early 2021 levels as of May.
• Wage growth has slowed in prior months but was much stronger than anticipated, up five per cent year-over-year and 0.9 per cent from the month prior – the largest increase since last summer. The Bank of Canada will closely monitor wages for signs of additional inflationary pressures, but higher unemployment rates mean broader underlying wage pressures are easing.
• Actual hours worked were largely flat, up 0.1 per cent for a second straight month.

Bottom line: Job growth was largely flat in July, but controlling for a boost to the Canadian population, labour markets softened more significantly under the surface. The jobs report is one of a slew of indicators in advance of the BoC's next interest rate decision on Sept. 6, 2023, and the question remains whether interest rates are sufficiently restrictive to tame inflation. Today's jobs report is a point in favour of keeping the overnight rate at five per cent, but the BoC will closely monitor additional indicators – particularly upcoming inflation and consumer spending reports – to determine whether an additional hike is needed.

Early signs that the U.S. labour market is slowing from elevated levels

• Payroll added 187k jobs in July, below consensus and the average pace of ~225k in the second quarter. The separately released household survey showed the unemployment rate ticked down to 3.5 per cent, suggesting tight labour market conditions in the U.S. are seeing little reprieve.
• Excess demand for labour is resulting in persistently higher wage growth – yearly growth in average hourly earnings has been stuck around 4.5 per cent rate since January. In July wages were 4.4 per cent higher than last year, comparing to the 2.5 per cent run-rate during the decade pre-pandemic.
• Similar to prior months, services sectors accounted for most of the employment growth in July. Notable job gains were seen in health care (+63k), social assistance (+24k) and financial activities (+19k). Hours worked among private sectors ticked lower by 0.2 per cent.
• Still, early signs suggest that labour demand has been slowing from very elevated levels. Fed chair Powell during the post FOMC press conference in July referenced lower job openings and quits rates as signs that labour markets are losing steam.

Bottom line: It remains a question of when, not if, weaker labour demand will start to show up in the headline employment numbers. Inflation has been slowing to-date and that takes some pressure off the Fed to respond with further interest rate increases against a still-resilient macro backdrop. Slower inflation without a major pick-up in the unemployment rate has raised hopes for a “soft landing" in the U.S. We continue to see that as a possible but unlikely scenario, given signs and expectations that consumer spending will slow, keeping inflation low but at the cost of slower output growth and a weaker labour market.

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Claire Fan is an economist at RBC. She focuses on macroeconomic trends and is responsible for projecting key indicators on GDP, labour markets as well as inflation for both Canada and the U.S.

Carrie Freestone is an economist at RBC. She provides labour market analysis, and is a member of the regional analysis group, contributing to the provincial macro outlook.