Global equity markets had been trading near all-time highs, benefitting from a relatively quiet period on the trade front. But some volatility resurfaced in the wake of an escalating conflict in the Middle East between Israel and Iran. It is difficult to assess the implications at this juncture and it will depend on whether any retaliation creates risk of a broader conflict. We will be watching closely. In the meantime, we discuss an issue that was concerning a month or two ago: weak sentiment among businesses and consumers. The key question was whether this would lead to any real economic weakness. In short, the answer is no, not yet.

 

Soft data turns down

Some of the early damage from tariff threats emerged back in March and April in the form of significant deterioration in what is often referred to as “soft data”. The Bank of Canada’s quarterly business outlook survey revealed a sharp drop-off in how businesses were feeling. Sentiment readings in the U.S. also showed a notable decline among businesses and consumers. Recent readings suggest there has been modest improvement, but sentiment readings still sit at levels well-below historical averages. While concerning, poor sentiment has not always been a reliable precursor to weaker economic activity.

 

Hard data more important

When it comes to so-called “hard data” (tangible, quantifiable, objective economic metrics), there is no shortage of things to look at: trade flows, new orders, prices, and retail sales, among many other things. But none may be as important as jobs given the importance of the consumer and the direct impact labour markets have on economic activity. Employment figures for the month of May suggest overall employment trends have hung in so far, despite some weakening at the margin.

 

Employment picture in North America has been resilient so far

Canada has been the weaker of the two countries with respect to job growth. Nevertheless, the Canadian economy added a modest number of jobs in the month of May, demonstrating some resilience in the face of a volatile trade environment. Not surprisingly, areas more vulnerable to trade headwinds like manufacturing, transport, and warehousing saw job losses. Regions across southern Ontario have borne the brunt of job losses brought on by the threat or imposition of tariffs on motor vehicle and parts exports. As a result, unemployment levels in the region are noticeably higher than the 7.0% average in the rest of the country.

 

South of the border, the employment picture revealed a relatively resilient job market. Similar to Canada, there was weakness in goods-producing sectors that are more impacted by trade. Services sectors like health care, leisure, and hospitality drove most of the job gains. Prior months were revised downwards, suggesting job growth this year has not been as strong as first reported. Moreover, the labour force participation rate (the number of people in the workforce) has declined, driven by a rise in retirements and an exodus of undocumented immigrants. In summary, U.S. job growth has been slowing but has not experienced any notable signs of worsening in recent months.

 

Only time will tell whether prevailing uncertainty and weak sentiment will translate into more meaningful layoffs and broader economic deterioration, or whether the resilience of businesses and consumers to date will persevere. Markets seem to concur with the latter view given the strong rally in stock prices since the lows reached just a few months ago. While reassuring, we remain mindful that risks to the economic outlook remain a bit higher than normal.