TL;DR

The Canadian job market is cooling down, with the unemployment rate reaching 5.5% from a low of 4.9% set in June 2022. July marks the third consecutive monthly increase in the unemployment rate, raising concerns about economic deceleration. Some sectors experienced job losses, while others saw gains. Geographically, six provinces reported weak employment figures. Coupled with the recent favourable CPI report, the rising unemployment rate could influence the Bank of Canada's interest rate decisions in September.

Canada’s Unemployment Rate Rises to 5.5%; the Sahm Rule

The Canadian job market appears to be cooling down after a strong start to the year. The latest report shows the unemployment rate has risen to 5.5%, a significant increase of 0.6 percentage points from the multi-decade low recorded a year ago, and the third consecutive monthly increase. Some attribute the rise in joblessness to rapid population growth - from January to July, population growth (+1.4%) has outpaced employment growth (+0.7%) . However, it’s entirely possible that this rise in the jobless rate serves as an early indication of an economic deceleration, signifying a loss of momentum.

Looking at specific industries, construction experienced the largest decline, losing 45,000 jobs. There were also drops in public administration, culture & recreation, transportation, and the tech sector. However, these losses were partially offset by notable job gains in health care (+25,000), education (+19,000), and finance (+15,000).

Geographically, the weakness in employment was spread across six provinces in July. Quebec reported the largest drop of 8,500 jobs, although it still boasts the lowest unemployment rate in the country at 4.5%. Manitoba's rate increased significantly by 0.6 percentage points to 4.9%. In contrast, Alberta saw a sizable gain of 11,800 jobs, but its unemployment rate rose by 0.4 percentage points to 6.1%, the highest among the major provinces.

A noteworthy observation is that the unemployment rate has risen to 5.5% in the past three months, up from the low of 4.9% recorded in the past year. The "Sahm Rule" in the U.S. - coined by Fed economist Claudia Sahm - suggests that when the 3-month average unemployment rate rises a half percentage point above the low of the prior 12 months, the economy is in recession, or is about to be. Now, the threshold may be slightly higher in Canada, possibly around 0.6 or 0.7 percentage points. Therefore, the steady increase in Canada's unemployment rate is concerning, and if it rises further in the next month, it could raise serious concerns.

In summary, the soft July employment report adds to the mounting evidence that the Canadian economy is losing momentum. Coupled with the recent favourable CPI result, it is likely that, after the September interest rate decision, the Bank of Canada will move to the sidelines and allow the rate increases to work their way through the economy. Strong wage and core price growth suggest that interest rates will remain relatively high for the foreseeable future.

The Week Ahead

It’s another quiet week for Canadian reporting. Most notably:

• Tuesday (8:30 AM) - June’s Merchandise Trade Balance