Canada’s economy has been lucky enough to buck recession forecasts, but its luck may be running out. The country’s latest job report showed huge job gains in June. However, it’s the rising unemployment rate that caught the attention of BMO’s chief economist. In a note to investors, they warned the rising rate has a near-foolproof record of forecasting a recession.
Canada Is Adding Jobs, But More People Are Unemployed
As mentioned last week, Canada added a significant number of jobs last month. The 60,000 jobs added in June weren’t enough to stop the unemployment rate from climbing to 5.4% over the same period. Most of the market reaction focused on the gains, and how it reinforces the chances of a rate hike.
“While we won’t quibble with that conclusion, let’s also not forget that the jobless rate is steadily grinding higher,” said Douglas Porter, chief economist at BMO.
He notes the 5.4% unemployment rate is now up 0.5 points from the cycle low. It was hit twice in the past year, he reminds investors.
Canada’s Rising Unemployment Signals A Recession Is Approaching
Canadian unemployment is close to showing a recession, according to the Sahm Rule, warned the bank. Those following the US economy might have heard this term in the past few days. In short, it’s a US rule that predicts the start of a recession by looking at the 3-month moving average of the unemployment rate. If the moving average rises 0.5 points from the 12-month low, it’s begun.
Porter’s calculations show Canada’s moving average is at 5.2% in June, up 0.3 points from the 12-month low. “We’re not quite there yet in Canada, but we will be if June’s rate holds in the summer,” he said.
It’s Different This Time… Until It Isn’t
Analysts generally shrugged off rising unemployment due to the population boom. The rise in population outpaced job gains, which many feel is an unusual circumstance that’s not typical of rising unemployment. Afterall, people aren’t losing their jobs, so it’s totally different, right?
The issue is this isn’t an exception—Canada typically sees large population booms before recession. Porter points to the population booms in the 70s and 80s, which produce a “near foolproof” recession signal chart.
Source: BMO Capital Markets.
“There have been episodes where a move similar to the 0.5 ppt rise in the past year have not translated to a full-blown recession, but they were near-misses (e.g. 1995, 2001),” he said in relation to the above data.
Rising unemployment also happens to be the necessary ingredient for a housing correction. While 2020 proved to be a big exception due to the record stimulus, most experts agree that scale of unprecedented stimulus is unlikely for a typical recession expected at the end of a business cycle.
