December brought a wave of surprising employment gains in both the US and Canada, setting the stage for debates around inflation and interest rates. While job growth exceeded expectations in both countries, the implications for monetary policy and broader economic conditions differ for these two economies.
US Overview: Strong Jobs, Persistent Inflation, and Market Jitters
December delivered strong employment gains in the US, with non-farm payrolls surging by 256,000—up from 212,000 in November and far exceeding the 155,000 forecast. The unemployment rate edged down to 4.1 per cent, while average hourly earnings increased by 0.3 per cent, in line with expectations. However, despite the favourable labour market data, financial markets reacted negatively. The stock market fell, and Treasury yields rose as investors recalibrated expectations for Federal Reserve rate cuts this year.
Looking ahead, the focus shifts to this week’s inflation data. Even if inflation comes in below expectations, it’s unlikely to sway the Fed into cutting rates any time soon. The Fed has recently expressed concerns about the pace of inflation, which remains above its 2 per cent target, driven largely by elevated goods prices and persistently high housing costs.
This narrative poses challenges for the incoming President. A weaker stock market and higher for longer interest rates will not align with President-elect Trump’s messaging. While rental rates have weakened slightly, housing costs remain under pressure due to a combination of factors: a high 30-year mortgage rate, potential softwood lumber tariffs, rebuilding needs in Los Angeles, and the risk of a construction worker shortage if deportation threats are carried out. Given that housing represents roughly one-third of the value of the market basket of goods and services used to track inflation in the Consumer Price Index (CPI), this could create a major challenge for the Fed and the federal government’s policy agenda.
Canada Overview: Job Growth Surges Amid Slowing Wage Gains
Canada also saw strong employment gains in December, with 90,000 jobs added—far exceeding the forecast of 25,000. The unemployment rate fell slightly to 6.7 per cent, after reaching its highest level since 2021 in November. Total hours worked rose in December, up 2.1 percent year-over-year—the strongest gain since mid-2023. However, average hourly wage growth slowed to 3.8 per cent, marking the slowest pace since May 2022.
Economists are calling for a rate cut this quarter, but opinions are divided on whether the strong employment data will prompt the Bank of Canada to pause its rate cuts in January. With population growth slowing, per capita real GDP and labour productivity should stabilize and begin to rise. Real GDP for Q4 2024 is tracking higher than the Bank’s projections, but potential tariffs, slower population growth, and higher mortgage refinancing costs will weigh on the economy. Since the Bank is likely to cut rates more than once this year, we expect another 25 basis point cut in the overnight rate, followed by a pause until March.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
Development charges are designed to reduce the burden of infrastructure costs on current residents. However, these charges are typically passed on to buyers of new homes, driving up the price of not only new development but also existing properties – a phenomenon driven by the use of comparable homes to determine house values. Could shifting the focus from development charges to property taxes help solve our housing affordability crisis?
Read more in our latest Housing Affordability Watch: Should We Replace Development Charges with Property Taxes?
Independent Opinion
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