In this week’s ATB Economics Weekly Wrap…

• Canada labour market - more signs of softening
• Alberta employment roars back 
• Job vacancy rate now higher in Alberta
• U.S. Fed stands pat
• The Calgary Economic Development 2024 Outlook Event
• Chart of the week: Rising oil sands production 

In last week’s Wrap, we talked about the Bank of Canada’s ‘wait and see’, data dependent approach to rate setting. The Bank is looking for inflation to come down, and in particular evidence that rate hikes are dampening the economy and the related price pressures. More evidence of economic cooling arrived this week. August data on GDP point to weakness in Q3 and the labour data point to a softening labour market. In Alberta, jobs came roaring back after September’s shocker, and the longer-term trend has been positive.

Modest Canadian job gains and higher unemployment

Canada’s labour market is softening under the weight of higher interest rates. The unemployment rate climbed to its highest since January 2022 and job growth was modest. This strengthens the case for the Bank to keep its finger on the pause button (our current call is for rate cuts to start mid next year).

In another sign of strengthening economic headwinds, Canada churned out a relatively small employment gain of 17,500. Heading into the report, the Bloomberg consensus was 22,500.

Moreover, the unemployment rate rose 0.2 points to 5.7%—above consensus of 5.6%. It now stands 0.7 points higher than it did in April. As we’ve noted, job growth has to be stronger than normal to prevent the unemployment rate from rising amid strong labour force and population trends. Last month, the labour force grew by a solid 57,800.

One nagging concern for the Bank has been stubborn wage growth. The Bank has said 4-5% wage growth is not consistent with the 2% inflation target. Last month showed another solid increase of 4.8% year-over-year (y/y) in average hourly earnings—though down slightly from 5% in September. The other closely watched measure (permanent employees only) was up 5% y/y. That said, wage pressures should continue to ease with more slack in the labour market, and we don’t feel this wage stubbornness will be enough to pull the Bank off the sidelines.

Alberta job vacancy rate now above national rate

After an extended stretch of relative weakness going back to 2015, measures of labour market tightness in Alberta have been converging closer to the national average.

Alberta has, for some time now, been outpacing other provinces in job growth. But measures of labour market tightness have taken longer to catch up. This is changing. The unemployment rate is now roughly in line with the national average (5.8% vs. 5.7% nationally). Now the job vacancy rate—job openings as a share of jobs needed—has moved above the national rate for the first time since early 2016. In August, Alberta’s vacancy rate rose to 4.1%—exceeding the national rate of 3.8%.

Half dove, half hawk: The Fed decides to wait and see

The central bank of the U.S. announced on Wednesday that tighter monetary policy may or may not be doing enough to cool down the economy and inflation with it.

Monetary policy takes time to work so it is not a big surprise that, in the same vein as the Bank of Canada, the U.S. Federal Reserve has adopted a wait-and-see approach. Caught between not wanting to raise rates higher than necessary because it will unduly damage the economy and not wanting to keep rates lower than needed to ensure inflation returns to the 2% target, the Fed came out of its regularly scheduled meeting and said it was keeping the target range for the federal funds rate at 5.25 to 5% until it has more data.

In a nutshell, the Fed feels current interest rates will weigh on the economy and bring down inflation (a dovish perspective), but is also worried that the labour market and overall economy are still too strong and could “impede” the march back to 2% inflation (a hawkish perspective). Which symbolic bird will prevail? Like the Federal Reserve, we will have to wait and see, but for those doves out there, today’s labour report in the U.S. points to some early signs that the tight labour market may be loosening somewhat. The unemployment rose 0.1 points to 3.9% last month and the pace of non-farm payroll job growth cooled to 150,000.

Stephen Poloz on what’s ahead

Former Bank of Canada Governor Stephen Poloz identified a set of “tectonic” tensions that will “cascade through every dimension of our lives” at this year’s Calgary Economic Development Economic Outlook event.

Earlier this week, I had the pleasure of providing one of two keynote addresses at  Calgary Economic Development’s 2024 Economic Outlook. The other keynote was delivered by Stephen Poloz. The former Bank of Canada Governor stressed the rough economic ride that the global and Canadian economy can expect next year. “Even if we avoid a major recession at the global level, we can all expect economic weakness while inflation works its way down.” He did add in an interview before the event, however, that "with a robust resource sector, diverse industries and a talented workforce, [Alberta] is in an enviable position.”

Drawing from the themes of his recent book “The Next Age of Uncertainty: How the World Can Adapt to a Riskier Future,” Poloz argued that the world is becoming more volatile and less forecastable. He identified five “tectonic forces” that generated economic crises in the past and will do so again in the future: technological progress, rising income inequality, population aging, mounting debt, and climate change. According to Poloz, these forces are making it harder to forecast what’s ahead and will create both challenges and opportunities. The trick is to embrace uncertainty and actively manage risk.

In this regard, Poloz pointed out that “Calgary and Alberta have proven their mettle time and again” when it comes to the”hard work and ingenuity” needed to tackle these tectonic forces.

Key themes in my presentation:

Drafting through headwinds - Alberta's economy is expected to slow next year, but weather inflation and interest rate headwinds better than most (like a road cyclist in a peloton). The main reasons—a revitalized energy sector and faster population growth brought by record interprovincial migration.

Fitting more through the diversification door - Emerging growth areas including aerospace, food manufacturing, hydrogen, biofuels, carbon capture, critical minerals and tourism. In particular, I discussed the rapid growth in Calgary’s technology sector.

Build on strengths and adapt - An elite athlete uses the latest technology to gain a competitive edge. I drew on fascinating work by sports engineer Steve Haake on the role of technology in enhancing athletic performance. While Alberta’s economy is strong, it must continue to adapt to the shifting global landscape.

Plan for alternative outcomes - The ice conditions are questionable and uncertainty is elevated. Scenario planning is key, a view echoed in Stephen Poloz’s talk.

I also participated in a panel discussion with Stephen Poloz, moderated by Brad Parry, CEO of Calgary Economic Development.

Interested in more? Check out the full synopsis of this successful event.

Interesting fact…According to the latest edition of its Monetary Policy Report, the Bank of Canada’s approach to inflation targeting is both symmetric and flexible. The symmetric element “means the Bank is equally concerned about inflation rising above or falling below the 2% target.” The current problem is elevated inflation, but it is also a problem when inflation drops below the target. The flexible aspect means “the Bank seeks to return inflation to target over a horizon of six to eight quarters. However, the most appropriate horizon for returning inflation to target will vary depending on the nature and persistence of the shocks buffeting the economy.”

Chart of the Week:  Oil sands bitumen production in Alberta is forecast to grow in the years ahead, driven by optimization of existing assets and efficiency gains. The latest forecast from the Alberta Energy Regulator has production growing by 21% between 2022 and 2032 with average daily output reaching four million barrels or about twice as much as in 2012. At +10%, production from surface mining is forecast to increase less than in situ production at +33%. The arrival of TransMountain Expansion next year will provide much needed egress to Alberta’s rising production.

It’s normal for forecasts to vary, and S&P Global has a slightly different outlook in a forecast released around the same time. Directionally, the oil sands production forecasts are the same—higher—but S&P sees a larger gain in the next couple years driven by new era optimizations, followed by a flattening trend post 2025.

Both forecasts point to rising oil sands production pushing up Alberta’s exports over the next couple years.

Daily trivia

Answer to the previous trivia question: U.S. President Woodrow Wilson signed the Federal Reserve Act into law on December 23, 1913.

Today’s trivia question: What is the minimum number of consecutive days without work and without pay needed to qualify for regular Employment Insurance benefits?