Labor Market Weakness Signals Potential Rate Cut

Recent data from Statistics Canada's Survey of Employment, Payrolls, and Hours (SEPH) for June reveals a contraction of 32,500 jobs, indicating a spreading weakness in the Canadian labor market beyond sectors directly impacted by tariffs. This development has caught the attention of economists and analysts, particularly at CIBC Capital Markets, where the odds of a Bank of Canada interest rate cut have risen to 50-50 for the upcoming September meeting.

Key Insights from the Data

The SEPH report, considered less volatile than the Labour Force Survey (LFS), helps clarify underlying trends amid recent fluctuations. For instance, employment surged by 83,000 positions in June but plummeted by 41,000 in July, creating uncertainty. According to Noah Buffam of CIBC, the weakness is now evident in non-tariff-affected sectors such as retail, construction, and health care and social assistance.

Bank of Canada Governor Tiff Macklem has previously emphasized that further monetary easing depends on economic weakness spreading to less tariff-sensitive areas. The current data aligns with this condition, suggesting that spillover effects from tariff-affected sectors are materializing.

Sector-Specific Impacts

• Manufacturing: Lost approximately 8,300 jobs in June, with a cumulative decline of 26,600 jobs since January, primarily in transportation equipment, chemical, and machinery manufacturing.
• Retail: Shed over 8,000 positions.
• Construction: Declined by nearly 5,200 jobs.

These losses contribute to a broader trend of increasing labor market slack, with the unemployment rate at 6.9%, up from 6.6% at the start of the year and significantly higher than the 2022 low of 4.8%. Additionally, there are now 3.2 unemployed persons per job vacancy, reflecting a tighter job market.

Economic Context and Future Outlook

The ongoing trade disputes and tariffs have exacerbated these trends, leading to Canada's current account deficit reaching a record $21.16 billion in the second quarter due to reduced exports to the U.S. Economists like Shelly Kaushik of BMO Capital Markets advise monitoring upcoming data, including second-quarter GDP, August's Consumer Price Index, and Labor Force Survey results, for clearer signals on the Bank of Canada's next moves.

Bank of Canada governor Tiff Macklem during a news conference in Ottawa on June 4. Photo by Adrian Wyld/THE CANADIAN PRESS files