One of Canada’s largest banks warns the central bank’s rate decision won’t be easy this week. BMO economists wrote to investors to outline the difficulty the Bank of Canada (BoC) will have sifting through the noise. Following historical revisions, the Labor Force Survey (LFS) data shows employment is much stronger than previously believed. However, the LFS and payroll data gap is unusually wide, leaving questions about the size of the country’s formal employment sector. It’s the exact opposite of the data seen with our neighbors to the South.
Bank of Canada Will Have A Hard Time Separating Theoretical Economic Threats & Revised Data
Canada’s economy has been presented with a lot of theoretical threats in recent weeks. This discussion has overshadowed actual recent data, and the upward revisions. Filtering through the noise is going to be a tricky task, especially when it comes to one area in particular.
“The Bank of Canada has lots to concern itself with at the rate decision this week, including the tariff threat, a sagging loonie, and some firmness in core inflation… But it also has a small puzzle on the jobs front,” explains Douglas Porter, chief economist at BMO.
Canadian Job Data Got Major Upward Revisions, But They Aren’t Reflected In Hard Payroll Data
The LFS is one of the most important tools, producing key indicators like the unemployment rate. It recently got a huge revision, effectively re-writing Canada’s pandemic performance as much better than the stimulus indicated. Employment’s annual growth hits a whopping 1.8% in the latest data. Not phenomenal considering the population growth, but better than it has been.
However, the LFS isn’t the only employment indicator—there’s also payroll data. The LFS is largely survey-based, whereas payrolls tend to be a more formal indicator based on filings. Payrolls for public and private sector jobs, less self-employment, showed annual growth of just 0.8% over the same period as the LFS. These are different indicators, so the data won’t be the same, but the trend should be similar. Not the case—the bank observed one of the gaps between the two metrics on record.
“A full historic revision to the LFS late last week didn’t change an underlying story—there has been a big divergence between the widely followed LFS survey and the oft-overlooked payroll survey,” explains Porter.
Further adding, “That gap is no fluke; over the past five years (i.e., since just before the pandemic) the LFS has averaged 2.2% growth vs 1.3% for the payroll survey, almost 1 ppt spread for five years.”
The bank notes this is very different from the scene in the US, and its recent economic boom. The latest US payrolls show annual growth hit 1.4% vs 0.3% for the household survey. In Canada, the job survey looks much better than the hard data. South of the border, the survey fails to match the growth observed in the hard data. The latter is a much better scenario, especially when self-employment data has been filtered out.
“We suspect that Canada’s fiery population growth in recent years may be behind the gap, along with a rise in, shall we say, informal work—which may be captured in the LFS, but not the payroll survey,” the bank explains.
If the bank’s hunch is correct, that leaves the BoC between a rock and a hard place. Either it believes that strong employment and cheaper credit will help boost informal employment, which drove LFS job growth. Or it undermines the recent upward revision, much like it did with GDP before the last rate announcement.