Keeping North American Labor Market Data in Perspective

Labor markets are bustling in North America. US job growth handily beat expectations in April, while Canada is enjoying its longest run of monthly jobs gains since 2017. The reports are great, but there is no need to read more into them—backward-looking labor data tell you little about future economic conditions or inflation.   

In the US, April nonfarm payrolls rose by 253,000 following March’s 165,000 gain, while the unemployment rate ticked down from 3.5% to 3.4%.^[i] Hourly earnings—widely watched due to wages’ purported (and misperceived, in our view) connection to inflation—accelerated from March’s 0.3% m/m growth rate to 0.5%, the fastest since March 2022.^[ii] North of the border, Canada’s April Labour Force Survey told a similar story: Total employment rose by 41,000 after March’s 34,000 addition, holding the unemployment rate at 5.0%—unchanged since last December.^[iii]

April’s numbers extend recent trends in both nations: Employment levels and the unemployment rate have recovered from the COVID lockdown hit and continue to improve. (Exhibits 1 – 2)

Exhibit 1: A 10-Year Snapshot of the US Labor Market 

Source: FactSet, as of 5/8/2023. Private employees on nonfarm payrolls and unemployment rate, monthly, May 2013 – April 2023.

Exhibit 2: A 10-Year Snapshot of the Canadian Labor Market 

Source: FactSet, as of 5/8/2023. Total employment and unemployment rate, monthly, May 2013 – April 2023.

Healthy job markets are a positive, no question about that. But they are a positive that derives from economic conditions. Said another way, jobs trail growth, so the labor market won’t tell you where the economy is going. Hiring costs significant time and money, so a company will add headcount only when it makes business sense to do so (i.e., firms have maxed output and need more workers to meet customer demand). The time and cost it takes for workers to ramp up also means companies typically won’t reduce headcount unless absolutely necessary. Accordingly, unemployment tends to pick up well after an economic downturn begins. (Exhibits 3 – 4) 

April hiring in America and Canada confirms past economic growth, but it doesn’t—and can’t—say recession is off the table. Look again at Exhibits 3 and 4. Low unemployment preceded every recession. It didn’t forestall a downturn.

Exhibit 3: US Unemployment Rate, January 1990 – April 2023

Source: FactSet and National Bureau of Economic Research, as of 5/8/2023. Recession dating from the National Bureau of Economic Research.

Exhibit 4: Canadian Unemployment Rate, January 1990 – April 2023

Source: FactSet and C.D. Howe Institute, as of 5/8/2023. Recession dating from the C.D. Howe Institute Business Cycle Council.

Experts in America and Canada speculate about how strong jobs data may influence monetary policy, especially since wages in both countries keep rising. Some central bankers worry businesses will pass higher labor costs to customers, keeping inflation elevated—and necessitating further interest rate hikes. But the critical error in this “wage-price spiral” theory—as we have written about recently and seen play out in Japan—is that wage growth follows inflation, not the other way around.

Moreover, central bankers’ actions aren’t predictable. Entering the year, many worried ongoing rate hikes would weigh on the economy and markets. Then March’s US regional bank scare caused experts to change their tune, and they now expect a pause in rate increases. As we wrote last week, maybe that happens—but maybe they keep hiking, too. Central banks can pause and resume raising rates later, as the Reserve Bank of Australia did recently. Consider, too, the Labor Department will release the May jobs report before the Fed’s next meeting in mid-June. How will those figures influence Jerome Powell and co.? Canada won’t have another jobs report before the Bank of Canada’s June 7 meeting, but April’s inflation report comes out next week—and who knows how the latest consumer price data will impact Governor Tiff Macklem and friends?

Rather than getting into the weeds about the potential trickle-down effects of April labor data, we suggest keeping it simple: The latest jobs numbers confirm some past economic growth. We see no need to look for deeper meaning than that.