By Goodwin Ginger

If we take a look at the graph below, the Canadian economy does seem as though it is perched for a sharp downturn. As it stands, Canadian labour force participation rates are at around 67% which is very close to their all time high. This is important because it points to the fact that we are nearing the upper limit on domestic labour supply.

In the graph below we have presented two measures of unemployment. The first (green) is what we have called the standard unemployment rate and the second (blue) is what is labelled as the labour force adjusted unemployment rate. Our adjusted measure is constructed by using the underlying rate of growth in the age 15+ population to estimate what size the labour force would be independent of the economic cycle. A couple interesting things are revealed by plotting these two measures together. The first is that the crossover of the two measures presages a downturn. The second is that the lag-time between the crossover in the unemployment measures is quite tight.

Canadian Labour Market and Productivity Trends

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We have also graphed two measures of productivity growth. The first divides total real GDP by the total number of persons in the labour force the second measure divides total real GDP by total number of employed persons. Here again we notice crossover points which prefigure downturns although the lag is less tight but is nonetheless persistent.

Both of these sets of indicators suggest that we are indeed perched at the point of a downturn and given the tightness of labour markets it could indeed be more than just a soft couple of quarters.

However, as was pointed a couple of days ago despite the tight labour markets there is little sign of robust wage growth and this is the key difference between historical scenario A and B in the chart above. Also as mentioned a couple of days ago is that the major central banks seemed to have reached consensus that they are going to fight inflation at all cost regardless of whether or not such fears are warranted. And this zeal to fight inflation through peremptorily high interest rates will have the effect of cooling commodity prices in general and energy prices in particular.

Analysis continued in part three.

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