Interest Rates Respond to Unemployment: A Currency War in Sheep’s Clothing

05/10/2013 by Alex Carrick

After a substantial drop in total employment in March (-54,000 jobs), the labor market picked up slightly in April (+12,000 jobs), according to Statistics Canada.

The nation’s unemployment rate remained the same at 7.2%.

Through April of last year, Canada gained 135,000 net new jobs. During the same time frame this year, the labour market has seen a reduction in employment of 14,000 jobs.

In the latest month, the number of workers in manufacturing rose by 20,000 jobs, helping to offset some of the 71,000-decline in the first three months of this year.

Construction employment in April was flat, leaving the year-to-date figure at +25,000.

Services employment (78% of the total) was -12,000 month to month and +17,000 year to date.

The most mystifying figure, however, appears in a private-versus-public-sector comparison. Politicians would have us believe they are engaged in some serious staff reductions.

Instead, the private sector shed 22,000 jobs in the latest month, while the public sector added 34,000.

On a year-over-year basis, public sector employment in Canada is +2.6%, much stronger than the private sector’s +0.5%.

Lately, the U.S. economy has been showing more signs of life than Canada’s.

Job creation south of the border was +165,000 in April and the unemployment rate fell to 7.5%.

Furthermore, the latest quite-low initial jobless claims figure for the week ending May 4 was only 323,000, indicating the U.S. is likely to show further improvement in the months ahead.

In April, the U.S. beat Canada in all four key measures of year-over-year employment change. Total jobs growth was +1.6% in the former versus +0.9% in the latter, while service sector employment was +2.1% versus +1.6% respectively.

Manufacturing positions in the U.S. in April were +0.6% year over year whereas in Canada, they were -2.9%. Even in construction, the U.S. outperformed us +2.7% compared to +0.8%.

When the U.S. unemployment rate drops below Canada’s again, Ottawa will have some “splainin” to do. (If you were ever a fan of “I Love Lucy”, you’ll know the reference. Think of the voting public as Ricky Ricardo and Stephen Harper as Lucille Ball.)

The Conservatives are trying to get out front of this issue. Jason Kenney, Minister of Citizenship, Immigration and Multiculturalism, has proposed a number of changes to rules governing the use of temporary foreign staff. The intent is to ensure that the crop of potential domestic workers is harvested first before employers seek help from outside the country. (Back-room work being done for the Royal Bank was a catalyst in launching this “corrective” action.)

At the other end of the jobs pool, Ottawa has been successful in bringing into the country sought-after highly-skilled individuals. The media south of the border has taken notice. For example, there have been several articles written about out-of-work U.S. professionals being courted and convinced to come north for full-time positions at high rates of pay.

How are employment prospects stacking up in some other countries? There’s considerable evidence that labour market conditions are having an impact on central bank interest rates. For comparison purposes, keep in mind that the federal funds rate in the U.S. is near zero and the overnight rate in Canada is 1.00%. 

The third member of the North American Free Trade Agreement (NAFTA) – Mexico – may have a nasty drug-related crime problem, but huge investments in the manufacturing sector (especially autos and parts) have lowered the current unemployment rate to only 5.0%.

Just the same, on May 8, Mexico’s central bank saw fit to drop its reserve rate from 4.50% to 4.00%.

Australia is a country with similar resource-sector endowments as our own. Due to its closer trade ties with China, however, the unemployment rate is a low 5.6%. Nevertheless, to deal with a weakening economy, the Reserve Bank of Australia (RBA) on May 7 lowered its official interest rate from 3.00% to 2.75%.

The Euro-zone has a record-high 12.1% jobless rate. Greece (27.2%) and Spain (26.7%) are struggling with the two worst labour markets. Italy (11.5%) and France (11.0%) are doing somewhat better, but social strains are still mounting.

Guess what?  On May 2, the European Central Bank (ECB) dropped its inter-bank lending rate by 25 basis points to 0.50% (i.e., where 100 basis points = 1.00%).

Before leaving Europe, let’s note that only country drives Europe’s economic bus – Germany. The unemployment rate in that nation is 6.9%, below the levels in both the U.S. and Canada.

Mark Carney is about to take over as Governor of the Bank of England (BOE) at a time when its “official” interest rate is 0.50% and Britain’s unemployment rate is 7.9%. 

Across the Pacific, China claims to have a 4.1% unemployment rate, the same as in Japan. But there’s a marked difference in their official interest rates. Beijing is holding at 6.00% while the Bank of Japan has a nearly invisible interest rate (i.e., similar to the U.S.), 0.10%.

Given the spate of recent cuts, it’s apparent that unemployment concerns are often trumping inflation fears when it comes to central bank interest rate policies. Or, and this is important, central banks are lowering their rates to debase their currencies in hopes this will help exporters win foreign sales. All denials to the contrary, this is verging on what’s known as a currency war.  

I’ll leave you with three more unemployment rates. South Korea has a low 3.5% figure. Taiwan (4.2%) is similarly blessed. But the true champ is Singapore with a jobless rate of only 1.9%.

U.S.: month-to-month total job creation
U.S.: month-to-month total job creation
Over the past 20 years, the U.S. economy has generated, on average, 100,000 new jobs per month or 1.2 million new jobs per year.
Source: Payroll Survey, U.S. Bureau of Labor Statistics (Department of Labor)./Chart: Reed Construction Data - CanaData.
Canada: month-to-month total job creation
Canada: month-to-month total job creation
Over the past 20 years, the Canadian economy has generated, on average, 17,000 new jobs per month or 200,000 new jobs per year.
Data Source: Household Survey, Statistics Canada./Chart: Reed Construction Data - CanaData.
Canada vs. U.S. monthly unemployment rate (per cent)
seasonally adjusted data
Canada vs. U.S. monthly unemployment rate (per cent)
Data sources (seasonally adjusted): Statistics Canada and U.S. Bureau of Labor Statistics/Chart: Reed Construction Data - CanaData.
Change in total employment - Canada vs. U.S.
Change in total employment - Canada vs. U.S.
"Year over year" is the monthly figure versus the same month of the previous year.
Data sources (seasonally adjusted): Statistics Canada and U.S. Bureau of Labor Statistics/Chart: Reed Construction Data - CanaData.
Change in service sector employment - Canada vs. U.S.
Change in service sector employment - Canada vs. U.S.
"Year over year" is the monthly figure versus the same month of the previous year.
Data Source: Household Survey, Statistics Canada./Chart: Reed Construction Data - CanaData.
Change in construction employment - Canada vs. U.S.
Change in construction employment - Canada vs. U.S.
"Year over year" is the monthly figure versus the same month of the previous year.
Data sources (seasonally adjusted): Statistics Canada and U.S. Bureau of Labor Statistics/Chart: Reed Construction Data - CanaData.
Change in manufacturing employment - Canada vs. U.S.
Change in manufacturing employment - Canada vs. U.S.
"Year over year" is the monthly figure versus the same month of the previous year.
Data sources (seasonally adjusted): Statistics Canada and U.S. Bureau of Labor Statistics/Chart: Reed Construction Data - CanaData.