Highlights of the United States
- The ISM manufacturing index has shown signs of easing supply chain conditions. Supplier delivery times have shortened while production, employment and new orders indices have all increased.
- This week’s payroll report left something to be desired, but an increase in household employment and an increase in the labor force participation rate are welcome signs of a pick-up in labor supply. artwork.
- As the first glimmers of a reduction in supply issues have appeared, the Omicron variant threatens to reverse the progress.
- Financial markets have been volatile this week amid uncertainty over the impact of the Omicron variant. Equity markets ended the week lower and oil prices remained under pressure.
- GDP and employment data released this week were bullish. After collapsing in the second quarter, GDP rebounded strongly in the third quarter, growing 5.4% on an annualized basis. The job market brought some cheer ahead of the holidays, with employment rising by 154,000 in November.
- The new Omicron variant has raised uncertainty, but with the labor market recovery almost over, there could be more hawkishness in store in next week’s Bank of Canada release.
United States – Supply issues abate, but Omicron looms
Volatility was the buzzword this week as markets began to whip up news of the identification of the Omicron variant in the United States and President Powell’s more hawkish stance. Inflation remains at the fore as President Powell removed the term “transient” to describe recent price gains. That said, November data offered signs that supply chain challenges have started to ease, offering some promise of inflation relief.
This week’s release of the November ISM Manufacturing Survey gave such a signal. The report showed growth accelerating as the expansion continued for its 18th consecutive month. The details provided further reasons for optimism. The supplier delivery time sub-index remained extremely high (we have to go back to the end of the 1970s to find a comparable time before the pandemic), but it fell for the first time in three months (graph 1). On its own, that move doesn’t mean much, but the output, employment and new orders indices all rose in November as well. An environment in which production, orders and job growth increase while supplier delivery times shrink is a signal that some of the bottlenecks we’ve seen are starting to disappear.
Sadly, not all the news was good. Client inventories continue to languish at low levels and the index fell over the month. This likely reflects the continued strong demand that has prompted producers to try to keep pace. Indeed, this month’s vehicle sales report reflected those tight conditions, as monthly sales were disappointing, falling to 12.9 million units (at a seasonally adjusted annualized rate). Auto production rose in October, but remains well below underlying demand, which is likely closer to 1.45 million per month. This means that stocks will remain scarce for the time being.
At the same time, this week’s payroll report showed a slowing in the pace of job growth. Markets expected 500,000 jobs in the north to be added to payroll, so November’s 210,000 missed the mark.
Despite the disappointing impression of the payroll report, there were several reassuring details in the household survey. Household employment increased by 1.1 million people, bringing the employment-to-population ratio to 59.2%, and continuing to improve steadily. An additional million people working is a good sign, but the increase in the participation rate is another welcome sign for the economy’s supply (graph 2). To alleviate reported labor shortages, the number of Americans in the workforce must increase, and nearly 600,000 added their names to the hat in November.
This year has been characterized by abundant demand and a virus-induced supply shock that has pushed inflation to decades-long highs. Data for November has started to show us signs that the supply side of the economy has started to recover. The data is reassuring for now, but the emergence of the Omicron variant could derail the fragile improvements that have been made. Even without lockdowns in the United States, restrictions in less vaccinated countries or fears of worker infection could restrict the supply of inputs and labor, pushing up prices.
Canada – The labor market takes a big step forward
Financial markets remained volatile this week amid uncertainty over the impact of the Omicron variant. New data seems to suggest that Omicron is more infectious and three times more likely to cause re-infections, but it is not known whether it causes more serious illness or is more likely to escape vaccines. Given the rapidly changing situation, equity markets have been wavering throughout the week, with the TSX falling 1.9% from last Friday (at time of writing). Omicron concerns also limited oil prices, with WTI trading below $ 70 a barrel throughout the week. Crude prices were further put under pressure by OPEC + ‘s decision to increase oil production by 400,000 barrels per day in January.
Thankfully, GDP and employment data released this week were bullish, providing respite from the Omicron-induced drama. After a fall in Q2, aggravated by negative revisions (-3.2% against -1.1% previously), GDP rebounded sharply in the third quarter, growing by 5.4% on an annualized basis (graph 1). This left production at just 1.4% of its pre-pandemic level. Growth was fueled by consumer spending, which rose 18% (annualized) as provinces lifted restrictions. Demand has been particularly strong in areas hardest hit by the restrictions, with consumers rushing to spend more on services (such as travel and restaurants) and semi-durable goods (such as clothing).
Growth would have been even stronger without the global supply chain issues, which have contributed to lower spending on durable goods (due to lower car sales) and business investment. Residential investment also fell due to the drop in new construction and renovations. Chart two shows the employment and participation rate in Canada for Canadians aged 15 to 64. In particular, employment in November 2021 was 1% above its level before the pandemic of February 2020. The participation rate in this age group was 80 basis points higher than in February 2020.
The job market also delivered some cheers ahead of the holidays this week (graph 2). The labor market has taken a big step forward, with an increase of 154,000 jobs in November. The gains were roughly evenly split between full-time and part-time positions, and were led by service sector industries, which created 127,000 new jobs. The rise left employment 1% above its pre-pandemic level and lowered the unemployment rate by 0.7 percentage point to 6.0%, with a notable drop in the number of unemployed long term. The good news didn’t end there. The total number of hours worked increased 0.7%, returning for the first time to its pre-pandemic level of February 2020.
The November jobs report will be impossible to ignore for the Bank of Canada. Throughout the pandemic, the Bank has stressed that it will keep the overnight rate low until the labor market recovery is complete. We’re almost there – the unemployment rate is almost back to where it was in February 2020. With tighter labor market conditions, stronger price pressures and strong housing market activity , we cannot rule out the possibility that the Bank will raise rates so soon. like january. Uncertainty over the new Omicron variant is high, but barring significant negative developments, there could be more hawkishness in next week’s Bank of Canada release.