July’s Unemployment Growth May Signal More Trouble Ahead

Canada’s economy lost 30,000 jobs in in July 2012, pushing the unemployment rate up 0.1% to 7.3%. The Statistics Canada labour survey report for July shows that most of the jobs lost were part-time, and among women aged 55 and over. The losses were concentrated in a handful of provinces, including BC, Quebec, and Manitoba, while employment remained unchanged in most other provinces, including Ontario and Nova Scotia.

Over the past 12 months, Canada’s economy created 139,000 jobs. This amounts for a 0.8% growth. July`s decline is important, however, because it seems to signal a reversal of a favourable trend that had started late last year. Growth appeared to be fairly stable until now. July is the first month in 2012 in which employment recorded a decline. In fact, job market growth had been quite solid in March and April of 2012, but slowed down in   May and June. In July, it evaporated completely.

Even though Ontario`s employment levels remained unchanged in July, unemployment edged up 0.2 percentage points to 7%, as more people started looking for work. Employment has increased by 0.7% (47,000 jobs) in Ontario over the past 12 montrhs.

British Columbia`s economy lost 15,000 jobs after two months of little change. July’s losses pushed the unemployment rate up sharply to 7% (from 6.6%). But since British Columbia had experienced solid employment gains before May of this year, the number of jobs in the province is still up 1.5% compared to July of 2011.

In our articles from previous months, we warned against expecting solid long-term hiring growth yet, due to the presence of many risks. Many of these risks originate outside of Canada. There is still a fair amount of uncertainty in the global economy, and this is bound to take its toll on Canada as well. The prospects for the European economies continue to worsen, as even strong European economies (including Germany) are now showing signs of trouble. Growth also slowed down in China, India, and Brazil (this contributed to Germany`s problems). The direction of the US economy remains uncertain as well. All this weakens Canada’s export prospects and deters Canadian employers from undertaking expansions – and hiring more workers.

But blaming the decline on international factors alone is unfair. Canada’s economy has its fair share of imbalances as well. Consumer debt remains at one of its highest levels in living memory, driven partially by an unsustainably high home parices in Canada’s major cities. In the past couple of months, the home markets in Toronto and Vancouver have been showing early signs of overheating (as documented in the resale market reports issued by the Toronto and Greater Vancouver Real Estate Boards). This matters. The main cause of the world’s current economic issues are unsustainable debt levels: Consumer debt in the US and government debt in European economies. The problems started in 2008 with the burst of the real estate bubble in several developed economies, including the United States. If the same happened in Canada, our economy – and, by extension, the job market, will not be spared.

A closer look at the numbers released by Statistics Canada supports the view that the   primary reasons for the employment market weakness are domestic.

Employment in Canada’s primarily export-oriented manufacturing industries did not change much in July and has grown over the past 12 months. At the same time, the retail and wholesale sectors shed 30,000 jobs in July and 88,000 in the past 12 months – amounting to a significant 3.3% annual decline. This seems to indicate that retailers and wholesalers are struggling: Canadians are tightening their belts and buying less. Cross-border shopping (Canadians making shopping trips to the US) may be partly to blame. But as Canadians are spending more of their income on housing and on servicing their debt, they are not likely to start buying more soon. So the retail and wholesale industries weakness is likely to persist.

Employment in the professional, scientific, and technical services industries declined by 22,000 jobs in July as well, continuing declines that started in January. These declines wiped out the effect of employment growth in this industry over the last 5 months of 2011, so employment in the sector is at its level from July of last year.

Employment in the natural resources industries declined by 8,900. This sector still remains one of Canada`s high flyers – with 11.4% employment growth over the past 12 months. But the growth occurred in the first 9 of the past 12 month, and has disappeared in the past 3 months. Since the resource industries are very much export-oriented and dependant on demand from foreign manufacturers, these declines were likely driven by the economic troubles abroad (which caused demand for Canadian resources to decline). This too is unlikely to change much in the coming months.

One bright spot was the finance, insurance, real estate and leasing industries, where employment increased by 19,000 jobs in July and has been growing since January (after several months of decline late last year). So far, the finance and real estate industries seem to have benefited from the higher debt levels in Canada and hotter home market. The major risks for this industry are that the real estate market may continue to softens or Canadians may start experiencing more difficulties servicing their record high debt.

Hiring demand data that Vicinity Jobs analyzes in Ontario`s York Region suggests that hiring demand peaked in June of 2011 but declined in July as well.

Overall, Canada`s job market is unlikely to experience significant growth in the coming months. It simply faces too many risks. If the economies of the United States and of the developing world start growing at a faster pace, this will help. But the existing domestic imbalances will limit the expansion possibilities.