Wage growth decelerated to 3.1% in February, after hitting 3.3% a month earlier, its fastest pace since 2015. Salary gains were boosted last month by the Ontario hike in minimum wages.

Ontario recorded the most substantial monthly drop in employment in January (down 50,900) on the heels of the wage hike. The province led job growth in February but made up only a small part of January’s loss with only 15,700 net new jobs. Employment was also up in New Brunswick and Nova Scotia, while it decreased in Saskatchewan and was little changed in B.C. Of note, Alberta’s unemployment rate fell to 6.7%, a 1.5 percentage point decline over the past year, as the provincial participation rate fell slightly in February.

The bulk of the gains were in the public sector (+50,300), while the private sector added 8,400 net jobs. Holding back the overall pace of gains was a decline in self-employment, down 43,300 in February after four months of net increases.

The gain last month was driven by services-producing industries, particularly health care and education. Manufacturing recorded a loss of 16,500 workers during the month. The number of people working in natural resources rose 7,600 in February, bringing the year-over-year employment growth to 3.4%. Employment in this industry has been trending higher since the second half of 2016.

The finance, insurance, real estate, rental and leasing industry–heavily impacted by the slowdown in housing–experienced a drop in employment of 12,000 last month, posting no growth on a year-over-year basis. 

Today’s employment release is consistent with Canadian growth of roughly 2.0%. The February net gain of 15,400 is probably about what we can expect on average this year as the economy bumps up against full capacity. At 3.1% in February, wage growth posted a fourth consecutive month above its longer-term average of 2.6%. This will not set off inflation warnings at the central bank as the Bank of Canada reported this week that it still assesses wage growth to be below what is normal in an economy without labour market slack. This suggests the Bank will maintain its cautious stance.

U.S. nonfarm payrolls surged 313,000 in February compared to an expectation of a 200,000 net gain. Gains were mainly in the private sector and upward revisions to the prior two months added another 54,000 jobs. The jobless rate held at 4.1%–the fifth straight month at that level–as increased numbers of new workers entered the labour force. Rising labour force participation rates–reflecting the reentry of discouraged workers–might be one factor holding down wage gains.

Wage growth, which rose a moderate 0.2% month-over-month in February, dipped on a year-over-year basis to 2.6% from a level of 2.8% the prior month. Still, wages have risen at a 3.0% annualized pace over the past three months. The sharp pay gains spooked the markets last month but are apparently not yet taking hold.

Today’s jobs release signals the U.S. labour market remains strong and will keep driving economic growth, while the wage figures show some cooling from a pace that spurred financial turbulence last month on concern that the Federal Reserve could raise interest rates faster. The unemployment rate remains well below Fed estimates of levels sustainable in the long run.

The new Federal Reserve Chairman Jerome Powell will debut at his first Federal Open Market Committee Meeting March 20-21. The question market participants are mulling over is whether central bank officials will hold to projections of a total of three rate hikes this year, or boost the outlook to four.

President Donald Trump has said the tax-cut legislation he signed in December would spur economic growth and boost jobs and wages. At the same time, his tariffs on steel and aluminum imports may become a headwind depending on how extensively they’re implemented and how other nations retaliate. Canada can breathe a sigh of relief for now as Trump made a last-minute turnabout to exempt US NAFTA partners from the tariffs. The president struck an unusually optimistic tone on the fate of NAFTA but repeated his threat to quit the pact if the talks fall short.

“Today is a step forward,” Chrystia Freeland, Canada’s foreign minister, told Bloomberg News in Toronto Thursday. She said Canada would push “until the prospect of these duties is fully and permanently lifted,” and said it would be inconceivable to apply tariffs to a close military ally like Canada on national security grounds.

As the seventh round of NAFTA negotiations commenced in Mexico City, President Trump dropped a bombshell late last week, threatening to impose a 25% tariff on imported steel and a 10% tariff on imported aluminum for national security reasons. The news reverberated around the world, causing U.S. trading partners in Europe to announce potential retaliatory actions quickly. The European Union raised the stakes for Trump by aiming levies on the GOP heartland, saying it would slap tariffs on products like Harley-Davidsons, Kentucky bourbon and Levi, bluejeans if President Trump goes ahead with his plan. Paul Ryan, Speaker of the House, is the Republican Representative from Wisconsin, headquarters of Harley-Davidsons. He immediately urged the President to stand down or ‘to be more surgical’ on tariffs. Hardliners such as Secretary of Commerce Wilbur Ross argued that any retribution would be trivial.

Well-known Republican economic advisors to the president warned that the tariff plan would do more harm than good, having adverse effects on consumers and many companies that use imported metals in the production of their products. The number of jobs lost in the auto sector and construction, for example, could be far more significant than the positive impact on the comparatively few jobs in the steel industry mainly in Pennsylvania. Prices of many products would rise including infrastructure costs, energy and food products.

Canada is ground zero in this maelstrom as the number-one exporter of steel and aluminum to the U.S., supplying $7.2 billion of aluminum and $4.3 billion of steel to the United States last year. Trump has often accused China of forcing U.S. steel and aluminum companies to fold by inundating the market with cheaper materials, but Trump thus far has refused to exclude Canada from the tariff proposal, holding Canada hostage to a favourable NAFTA deal.

Canada and the rest of the world are hoping that reasonable voices are going to prevail, but the resignation of Gary Cohen, White House Economic Adviser and formerly President of Goldman Sachs, is a victory for the protectionists (and immigration hawks). A registered Democrat, Cohn was regarded as one the few political moderates close to the president. His absence will amplify voices like Commerce Secretary Wilbur Ross and trade adviser Peter Navarro who back the president’s impulses to buck convention and pick trade fights on a global stage.

Housing Another Factor Postponing Rate Hikes

Even before the escalating trade tensions, the Bank of Canada was concerned about the impact of rising mortgage rates and new mortgage guidelines on housing, a significant contributor to the 3% growth in the economy last year. “Strong housing data in late 2017, and softer data at the beginning of this year, indicate some pulling forward of demand,” according to the Bank of Canada press release. The central bank is monitoring the economy’s sensitivity to higher interest rates, pointing out that “household credit growth has decelerated for three consecutive months.”

Inflation has edged upward to close to the 2% target. Wage growth has firmed, but even with the hike in minimum wages, the rise in compensation remains smaller than usual at full-employment.

The Bank of Canada commented once again that the economic outlook is expected to warrant higher interest rates over time, but some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential with inflation on target. The next scheduled Bank of Canada policy announcement is April 18 when the full economic outlook will be updated in the quarterly Monetary Policy Report.

To be sure, if the Trump administration goes ahead with the tariffs, the Bank will keep rates steady in April as well. Investors have pared bets on rate hikes after weaker-than-expected fourth-quarter growth, turmoil in global equity markets and the sharp decline in the Canadian dollar. Traders are not pricing in another rate hike until July according to Bloomberg News calculation on overnight index swaps. A month ago, expectations pointed to at least one increase by May. By the Bank of Canada’s measure, interest rates are still about two percentage points below what it would consider “neutral” for the economy.

The 2.9% expansion in the Canadian economy in 2017 was the fastest pace since 2011 following the tepid 1.4% growth pace of 2016. The unexpected strength allowed the federal government to post significantly smaller budget deficits for fiscal years 2017 and 2018 as announced in the October budgetary update. This week’s federal budget, however, showed that Ottawa chose to increase spending to offset these improvements, maintaining a double-digit deficit trajectory over the next five years. Rapid growth last year pushed the economy to full employment as labour markets improved dramatically. Now is not the time, therefore, for additional fiscal stimulus. Instead, it would have been more prudent to return the federal budget to a balanced position, particularly in light of potential risks to the economy in the future. As another round of NAFTA negotiations commence in Mexico city, we cannot help but be concerned about threats to Canada’s trade outlook.

Just yesterday, President Trump announced he intended to slap tariffs of 25% on steel imports and 10% on aluminium imports. Canada is the most significant supplier of foreign steel to the U.S. This announcement was roundly condemned by the international community. As always with Trump, details are uncertain, but according to Bloomberg News, the implications rippled through the seventh round of talks on the North American Free Trade Agreement in Mexico City.

Canada threatened to fire back if the U.S. makes good on this pledge, but held out hope that it could be exempt. The Canadian dollar is tied with the Mexican peso as the worst performing major currencies over the past month and is one of the worst performing over the past six months. The Canadian dollar was little changed after the GDP report.

London-based Rio Tinto, which ships more than 1.4 million metric tons of aluminium to the U.S. annually from Canada, said it would continue to lobby Washington for an exemption given the highly integrated Canada-U.S. market for autos and other manufactured goods.

“Aluminum from Canada has long been a reliable and secure input for U.S. manufacturers – including the defence sector,” Rio Tinto spokesman Matthew Klar said by email according to a report from Bloomberg News. “We will continue to engage with U.S. officials to underscore the benefits of the integrated North American aluminium supply chain, including the jobs it supports on each side of the border.” Also, shares of Canadian steel producer Stelco Holdings fell as much as 6.1%. The U.S. accounted for about 14% of Stelco’s sales in the last six months of 2017. Chief Executive Officer Alan Kestenbaum said on the company’s earnings call last week that he was hopeful Canada would be exempt from the tariffs.

Canadian Foreign Minister Chrystia Freeland fired back that, “it is entirely inappropriate to view any trade with Canada as a national security threat to the United States. Should restrictions be imposed on Canadian steel and aluminium products, Canada will take responsive measures to defend its trade interests and workers.”

Trump tweeted early this morning that, ‘trade wars are good and easy to win.’ There is not an economist in the world who agrees with this sentiment. What’s more, when U.S. prices for goods containing metals start to rise, inflation spikes and other countries start retaliating, President Trump will say “nobody knew that trade could be so complicated.” Hopefully, this is just more Trump nonsense, and cooler heads will prevail. But our government needs to have the ammo to cushion the economic effects of any such actions if NAFTA were to fall apart or Canadian businesses were hit with additional punitive tariffs. The Bank of Canada will indeed be very slow to raise rates in this environment, but fiscal stimulus should not be wasted on ineffective programs now when real stimulus might be needed as a counter-cyclical measure in the future.

The slowdown in the second half of last year was somewhat more than expected amid signs that indebted consumers have tamped down their spending sprees. Consumption growth in the fourth quarter was at its slowest pace since 2016. The deceleration in household spending was due in part to a higher savings rate, which increased to 4.2% in Q4, from 4.0% in Q3.

The underlying growth pace might be even slower than the fourth quarter figure suggests because of temporary strength in housing. Spending on residential structures surged to an annualized 13.4% in the final three months of last year, the most robust pace since 2012. The gain was led by unexpectedly strong new home construction, and the buyers rush to close home purchases before tighter mortgage qualification rules came into effect. We have already seen a marked slowdown in housing activity in the new year.

The jump in residential spending accounted for one percentage point of the 1.7% growth pace according to Statistics Canada. Residential investment had been a drag on growth in Q2 and Q3.

Exports recovered in Q4 after plunging in the third quarter, but it wasn’t enough to keep the trade sector from being a drag on growth as imports rose considerably. On a positive note, nonresidential business investment accelerated in Q4.