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Hiring in Consumer-Driven Sectors Pushed Canada’s Unemployment Down to 7.1% in May

Canada’s employers continued hiring in May. The economy created 95,000 new mostly full-time jobs.And while Canada’s unemployment rate is still 0.1% higher than the 7% reached at the first months of this year, there are more Canadians working now than there have been at any time in the past 5 years.

The hiring demand levels monitored by remained strong in May as well, providing some comfort that the dip in hiring demand that we recorded early this year and in late 2012 was only temporary and is now behind us (it produced the unemployment increase in March and April).

There is no denying that the job market has shown a remarkable resilience in the past 3 months, despite of the impact of Canada’s high levels of consumer debt and slowing real estate market.

I would have expected the increase to be largely thanks to the decent performance of the US economy. With the United States being by far the largest buyer for Canada’s export, the fact that the US economy grew by 0.6% in the first quarter of 2013 matters (this is 2.4% on an annualized basis). 0.6% growth would not be very impressive in a normal quarter: It is below the long-term annual average of 3.2%. But Q1 of 2013 was not quite normal, given the continuing economic headwinds: government spending cuts, a payroll tax increase, and a continuing European crisis.

But my guess that Canada’s employment growth would have been fueled by strong economic performance South of the border would have been wrong. Well, to a degree… Canada’s economy did grow at the same rate as the US economy in the first quarter of this year, and the growth was fueled by a 1.5% increase in exports. Yet it is a paradox that manufacturing has failed to create a significant number of jobs so far this year. And in May, the number of jobs declined both in the Manufacturing industry, as well as in the business investment driven Professional, Scientific, and Technical services industry. In fact, the number of manufacturing jobs is now 5.5% below the levels from May 2012. The Professional, Scientific, and Technical services industry is doing better: Even though it shed 17,600 jobs in May, it still employs 33,800 more Canadian than it did a year ago.

The job creation in May was driven mostly by the construction industry, accommodation and food industry (hotels and restaurants), and trade (retail and wholesale). All of these are primarily consumer-driven sectors. Combined, they created 84,200 of the new 95,000 jobs. They hire when consumers spend and lay off when consumers stop spending. So it is fair to say that May’s strong job market performance was driven primarily by Canadians opening up their wallets – and spending more on their homes, on restaurant meals, and in the mall.

This is a problem because a consumer-driven growth in Canada cannot last. Income growth in Canada has been stagnant for years, and Canadians already carry some of the highest consumer debt burdens in the developed world. The real estate market is overpriced measured by a number of criteria and is not growing in real terms in most of the country (in Vancouver, it is even declining). And interest rates are at a historic low and are bound to start rising eventually. Once interest rates start increasing, Canada’s indebted households will have to tighten their belts, stop spending, and start paying more on servicing teh debt racked up by today’s spending. So the jobs created in consumer-driven sectors might evaporate very quickly.

Hopefully, by the time this happens, export and investment driven sectors – such as manufacturing and professional/technical services – will be growing and will pick up the slack.

Written by Strac Ivanov, MBA, President of Vicinity Jobs Inc