Global equity markets had been trading near all-time highs, benefitting from reduced tariff controversies. Some volatility resurfaced in the wake of an escalating conflict in the Middle East between Israel and Iran. It is difficult to assess the longer-term implications at this juncture. In the meantime, we discuss an issue that was concerning a month or two ago: weak sentiment among businesses and consumers. The key question is whether this will lead to any real economic weakness. In our view, the answer is no, not yet.
Soft data turns down
Some of the early damage from tariff threats emerged 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 increase in business pessimism. Sentiment readings in the U.S. also showed a notable decline in optimism among businesses and consumers.
Recent readings suggest that there has been modest improvement, but sentiment readings remain 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: trade flows, new orders, prices, new employment, unemployment and retail sales, among many other things. None is as important as job statistics, 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 maintained strength 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. Unemployment levels in southern Ontario are noticeably higher than the 7.0% average in the rest of the country.
South of the border, employment numbers 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 that 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 higher than normal.
If you have any questions, please do not hesitate to contact us.
Drew M. Pallett LL.B.
Senior Portfolio Manager and Investment Advisor
RBC Dominion Securities
Email: drew.pallett@rbc.com