Key Takeaways

  • The Canadian labor market saw a spurt in job gains after back-to-back declines.
  • The unemployment rate remained unchanged but elevated.
  • The report eases the odds of an interest rate cut at the central bank’s meeting later this month.

Canada’s labor market jolted back to life in September, adding 60,000 jobs, after shedding 66,400 jobs in August and 41,000 jobs the month before. That’s substantially better than the FactSet consensus estimate of 22,500 gains and likely dampens the odds of an interest rate cut from the Bank of Canada at its meeting later this month.

The labor market appears to have shrugged off the ongoing trade war, even though the unemployment rate remained unchanged at a stubbornly elevated rate of 7.1%, matching the estimate. Concerningly, the unemployment rate has climbed by 0.5 percentage points since the start of the year, its highest level since May 2016 (excluding the pandemic period).

According to Statistics Canada’s August Labor Force Survey, the strength was driven primarily by 28,000 gains in employment in manufacturing, followed by health care and social assistance (14,000) and agriculture (13,000).

The jobless rate has inched higher over the year, as the impact of tariffs has spread across the Canadian economy. The unexpected September reversal outlook has lowered expectations for a Bank of Canada interest rate cut. Following the report, market odds of a cut at the bank’s Oct. 29 meeting sank from 50% to 25%.

The two-year government of Canada bond yield slipped 2 basis points to 2.49%, while the Canadian dollar edged slightly higher to 1.39942 against the US dollar, or 0.71451 US cents. The S&P/TSX Composite Index remained unchanged at 30,280.32.

Most observers agree the economy isn’t out of the woods, and that more interest rate cuts are needed to support growth. Below are excerpts from economist commentary on the September jobs report.

Declining Hours Worked Suggest Weak Economic Activity

Charles St-Arnaud, chief economist at Alberta Central

“Today’s data shows the labor market in Canada may have started to stabilize. However, one month of data does not create a trend, as the strong gains in June this year have shown [having been] followed by two consecutive months of decline.

“Nevertheless, the rebound in employment reduces the likelihood that the Bank of Canada will cut at the October meeting. However, the lack of strong rebound in activity and of reduction in the amount of slack in the economy in the coming months means that we continue to believe the Bank of Canada will cut its policy rate again this year, especially as its measures of core inflation are expected to ease further in the coming months.”

September Report Tilts the Balance Toward an October Cut Pause

Doug Porter, chief economist at BMO Economics

“Today’s strong report is certainly welcome after the big declines in the prior two months. Canada’s economy continues to hang in there, treading water as it awaits more certainty on trade. For the Bank of Canada, the soft labor market over the summer was one of the key drivers of the September rate cut. That factor is no longer front and center, so unless CPI (on Oct. 21) slows materially, the solid jobs figures lean toward a pause at the October meeting.”

CPI Report Holds Key to Rate Cut

Andrew Grantham, senior economist at CIBC Economics

“The stronger-than-expected headline print and underlying details suggests that the Canadian labor market is stabilizing. However, the still-sluggish three and six-month averages, combined with the elevated unemployment rate, suggests that the economy still isn’t strong enough to reduce the amount of labor market slack already present. Because of that we continue to forecast a further interest rate cut from the Bank of Canada later this month, although upcoming CPI data remain important to that view.”

The Bank of Canada Will Lower Interest Rates to 2%

Royce Mendez, managing director and head of macro strategy at Desjardins Capital Markets

“The employment by industry numbers, along with the sharp increase in full-time paid positions reverses earlier weakness. But such volatility may simply represent statistical noise inherent in the Labor Force Survey.

“The unemployment rate remains the best arbiter of supply and demand conditions in the labor market. Despite the sharp rise in employment reported, the unemployment rate didn’t budge. Given the persistently-elevated unemployment rate, we still believe the Bank of Canada needs to lower rates to get the economy back on track. Our latest tracking suggests that GDP is on track for growth somewhere between 0% and 1% in Q3. Fiscal stimulus is on the horizon, but won’t hit the economy until well into 2026. Should Canadian central bankers move back onto the sidelines, there would be no policy support for the economy in the months to come. As a result, we maintain our view that the Bank of Canada will cut rates to 2%.”

Persistent Labor Market Weakness Justifies Another Rate Cut

Michael Davenport, senior economist at Oxford Economics

“September’s jobs rebound is more likely a feature of monthly volatility in the Labor Force Survey than a signal that the job market has turned a corner. The underlying trend in the labor market is still weak, and a large degree of slack persists.

“Canada may avoid a technical recession this year, but we expect the economy will struggle to grow in the near term, and recession risks remain high. September’s job rebound is unlikely to be repeated in October, and we think more layoffs to come in the fourth quarter will lift the unemployment rate to the mid-7% range by year-end.

“The labor market and economy are weak enough for the Bank of Canada to justify another 25-basis-points cut on Oct. 29. However, that’s likely as low as the overnight rate will go this cycle.”

Inflation Data Remains in Play for Policymakers’ Rate Decision

Nathan Janzen, assistant chief economist at Royal Bank of Canada

“The Canadian employment counts are notoriously volatile, but the September job gain is a welcome reprieve after outsized declines over July and August were worrying enough to push the Bank of Canada to cut interest rates in September. “Labor markets are still softer than they were a year ago. The unemployment rate held steady at 7.1% in September but is still up half a percent from a year ago. International trade data softened in August, and US tariffs remain a significant threat to the economic outlook.

“It is highly unlikely that Bank of Canada policymakers thought in September that just one cut in the overnight rate would be enough to address economic weakness, and the labor force data today probably isn’t positive enough alone to derail another cut in October. Still, the Bank of Canada will also have to take into account the next round of inflation data, and future cuts beyond October would be less likely if government deficit spending ramps up as expected to help address tariff related economic weakness.”

The Bank’s October Decision Might Still Be Live

Derek Holt, vice-president and head of capital markets economics at Scotiabank

“There are few—but meaningful—holes to poke in a very strong Canadian employment report that adds to evidence in favor of a hold by the Bank of Canada on Oct. 29.

“That’s more probable now, but not assured. We still need to see CPI on Oct. 21 and the Bank of Canada’s quarterly surveys the day before, but at this point the odds of skipping the meeting have gone up. The economy is still weak and building spare capacity which could motivate the Bank of Canada to opt in favor of additional insurance. The Bank of Canada looks at job market trends that are still weak, and there is a strong reason to be careful interpreting this round of jobs numbers.”

The Outlook for a Rate Cut Deteriorated After September Jobs Report

Andrew Hencic, director and senior economist at TD Bank

“Canada’s job market looks like it recovered all of August’s losses in September. Importantly, even for a noisy data series, this is a strong result. That said, it’s important to note that the unemployment rate remained unchanged as the labor force jumped by an even greater amount. Considering population growth slowed to 28k people, the biggest surprise was a large influx of new workers despite a weak job market.

“The Bank of Canada’s next decision is due at the end of the month and this surprise from the labor market could change the calculus on the decision. However, underlying inflation continues to hover within the target range and the unemployment rate suggests that the labor market still has excess slack. The next inflation report is due on the 21st and the bar will be even higher for inflation to underperform and bring the Bank of Canada onside for another rate cut. Markets seem to agree as the pricing for a rate cut materially deteriorated this morning.”

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