Economists downplay positive January data

Word on the street has it that the Canadian economy is headed for a slowdown, so it may come as a surprise that January saw a big, positive jump in both employment and housing data.

Last month 46,000 net jobs were created, pushing the unemployment rate down to 5.8%, its lowest level in 33 years. Housing starts increased month over month by 38,000 units to 222,700, which was above expectations.

“Let’s hope this is a trend,” says Ken Georgetti, president of the Canadian Labour Congress. “This is an opportunity to plan for the future because, as good as these numbers are, they don’t provide the federal government with any reason for complacency.”

But economists aren’t sure that these numbers prove anything significant, besides the fact that Canada’s economy is faring far better than America’s.

“When you’re looking at the housing and employment statistics, you’ve got to realize that we came off as suspiciously weak in the previous month in both cases,” says Warren Jestin, Scotiabank’s chief economist.

Jestin points out that the average housing starts, using December and January’s data, is around 210,000, which falls in line with economists’ predictions.

James Marple, an economist with TD, agrees with Jestin. “In terms of housing, that was largely due to some weather-related weakness in December,” he says. “Now, we saw an offset in January. Put the two months together, and we’re on track to where we think we should be.”

Sector-wise, 95% of total job growth came from the goods-producing industries. Construction employment was up 1.7% over December, while manufacturing, which has been hit hard in recent years, saw a nearly 1% increase in jobs.

“After five consecutive months of net job losses in the manufacturing sector, the latter apparently added more than 17,000 jobs,” CIBC said in a report. “Economists will be scratching their heads at that number in an environment of exchange parity.”

The report continues to say that these numbers will make it hard for the Bank of Canada to cut interest rates by 50 basis points in March.

While Jestin can’t pinpoint why the manufacturing sector fared better in January, he says it would be foolish to get excited about month-to-month data. Year over year, the manufacturing sector has lost about 5.5% of its workforce, so things aren’t turning around just yet.

“The one-month wiggle can be caused by things like one manufacturer hiring people or survey data being temporarily skewed in one direction or another,” he says. “The underlying trends are very soft. Go out three or six months, and manufacturing is still going to be very weak.”

In fact, the good employment news overall is likely just temporary. “This is more of a blip than a sign of renewed strength in the labour market,” says Marple.

Still, the TD economist expects about 10,000 new jobs to be created a month, though that’s “nowhere near what we observed in the last year or two,” he says.

Housing is also expected to slow further over the next 12 months, but it won’t be as dramatic as what’s happening in the States. Marple explains that it will be a “soft landing,” meaning housing prices will rise, but at a much more sluggish pace than what many Canadians have become accustomed to.

Despite economists’ downplaying January’s numbers, the figures prove that our southern neighbours are in worse shape than we are.

“It shows that we aren’t seeing the same kind of negative news that’s come out of the U.S., in particular the loss in jobs they saw in January and the negative results from the Institute of Supply Management,” says Marple.

Jestin agrees, saying that the numbers are a “clear indication we’re in much better shape” than the U.S. He says even Ontario’s economy is more positive than America’s annual growth, on a year-over-year basis.

However, a slowdown in Canada’s economy is inevitable, especially since many other countries are suffering too. “If you look around the world, Japan has slowed down, and Europe is showing some signs of weakening,” says Jestin. “The U.S. economy is extraordinarily weak in housing areas, and consumer spending is going to weaken further. Canada is an open economy. We deal with the world, and as the global economy slows down, Canada’s not going to suddenly gear up its economy.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(02/08/08)

Bryan Borzykowski