North American Job Reports Preview – February: The Focus Is On Wages
Sebastien Lavoie | Mar 08, 2018 15:14
The Canadian Labour Force Survey (LFS) and U.S. nonfarm payrolls (NFP) reports for the month of February will be released on Friday morning.
Canadian LFS: With virtually no slack in the labour market, the main focus of investors is on wages. The pace of growth in average hourly earnings (AHE) of all employees accelerated to a two-year high in January (3.3% year-over-year). This surge was broadly based among Canadian provinces rather than being only driven by the minimum-wage increase in Ontario. This being said, this wage measure tends to be volatile and subject to revisions, increasing the chances of a market surprise on Friday. Furthermore, other wage metrics tend to show a relatively more subdued pickup in work pay.
According to the latest Survey of Employment, Payrolls and Earnings (SEPH) report, the average hourly earnings slowed from 3.0% year-over-year in November to 1.9% in December, a pullback difficult to explain since the unemployment rate fell further at the end of 2017. Also, major wage settlements ratified in recent months indicate modest basic wage increases below the 2% mark (see chart). Altogether, the absence of higher wage increases despite ultra-low unemployment was highlighted in the March 7th Bank of Canada statement. Stronger wage growth on a sustained basis will be necessary to feed through CPI inflation and facilitate the removal of further monetary stimulus.
In addition, we expect a moderate rebound in total employment in February (+18K; consensus: +22K) after the 88K month-to-month decline observed the previous month. In contrast to most LFS reports released during the second half of 2017, the quality of job creation is unlikely to impress this time around. Part-time positions should rebound following the largest monthly pullback ever registered (-137K in January). Full-time employment is expected to rise at a softer pace after showing one of the best year-over-year increases in the current business cycle (+414K). First, the moderation in domestic economic momentum observed in late 2017 and the changes in the U.S. tax code likely contributed to slow hiring intentions in Canada. Second, targeted restrictive federal and provincial housing policies and higher interest rates have likely led to the beginning of a pullback in retail and construction employment. Third, the minimum wage hike in Ontario is expected to soften the pace of job creation in the province this year. Fourth, companies looking to hire have more difficulties to find staff according to various surveys, particularly in British Columbia and Quebec where job vacancies have skyrocketed during the last year.
US NFP: Volatility in financial markets surged on Feb. 2 after the January US NFP report indicated that wages of American workers advanced at the fastest pace in almost a decade (+2.9% year-over-year in AHE). Markets will pay attention to the February AHE number given Fed Chair Powell’s focus of not letting the U.S. economy moving into overheating territory. Similar to the LFS AHE, the NFP AHE data is highly subject to revisions.
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Finally, in a note published last week, staff from the Atlanta Fed concluded that the median wage growth is in reality much higher (closer to +3.5% year-over-year, see chart) to most wage metrics. The explanation is that young American workers tend to experience larger proportionate wage increases than older cohorts during periods of low unemployment, including the current one.
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