Employment soared 107,000 in September, which was well above an expected rise of 10,000. However, the unemployment rate remained unchanged at 6.1%. The increase in jobs was largely a reflection of the 97,000 jump in part-time employment with full-time jobs up a much more modest 10,000.

The labour force numbers showed unexpected weakness in July with part-time employment plummeting 48,000. This may have been the result of weak hiring of part-time workers for the summer months. Thus, September's strength may simply reflect fewer layoffs compared to previous years that, when seasonally adjusted, contributed to the spike reported this morning. However, it is unlikely that this factor can explain away all of the strength.

The rise in employment was relatively broadly based, with goods-producing industries up 46,000 and service-producing industries up 61,000. Within the former, manufacturing rose 20,000 while construction was up 14,000. The gain in services was led by health care (+40,000), business building and support services (+20,000) and other services (+17,000). The strength in the latter may have in part been related to hiring for the federal election, which was called September 7.

Strength in labour markets was also conveyed by the key wage measure in the report, average hourly wages for permanent workers, which rose to 4.3% from 3.3% in August. This is still down from a recent peak at the start of the year of 4.9%.

This robust hiring is encouraging in the face of the rising credit tightening playing out in financial markets globally. However, our view is that the pressures from financial markets will start to have a more dampening impact on the Canadian economy and labour markets going forward, both directly and via a weakening U.S. economy that has likely gone into recession.

Although the Bank of Canada will take some encouragement from these numbers, it will remain wary about the growing downside risks to growth coming from credit markets. We expect that this will contribute to the Bank of Canada maintaining the overnight rate at its current, and still stimulative, 2.50% in the near-term.

Canada's merchandise trade surplus rises
The merchandise trade surplus came in stronger than expected in August, rising to C$5.8 billion, although the surplus in July was revised down to C$4.2 billion (from an initially estimated C$4.9 billion). Expectations for August had been for a much smaller surplus of C$4.4 billion. The improvement in the August surplus occurred despite exports falling 1.6% as imports dropped an even greater 5.8%.

The decrease in imports was led by a 24.9% drop in the energy component. This was solely a reflection of volumes moving lower as prices were relatively flat, rising only 1.6%. Significant declines also occurred in the automotive component which fell 14.2% as a result of weakening sales.

The decline in exports was also mainly due to weakness in the energy component, which fell 9.7% and reflected the combination of declining volumes (-3.2%) and prices (-6.6%). The automotive component also fell in the month, although by a relatively modest 2.6%. Increases were recorded in other consumer goods (+4.9%), industrial goods (+2.8%) and machinery and equipment (+1.7%).

On a constant dollar basis, imports dropped 9.3% in the month reflecting the weakness in the energy component. Exports were down as well, but by a more modest 0.8%. As a result, the net export deficit on a volumes basis in August improved to $4.1 billion from a sizeable $7.8 billion in July.

The improvement in the August trade numbers on a constant dollar basis is encouraging. The average net export deficit so far in the third quarter remains considerably higher than the average deficit in the second. This implies that net exports remained a significant drag on growth in the third quarter because of the impact of a high Canadian dollar and weakening U.S. growth. These factors are expected to continue to weigh on growth given expected declining U.S. growth.

However, we are assuming that the domestic economy will continue to benefit from historically high commodity prices boosting income, which is expected to be sufficiently strong to keep overall GDP growth in the positive column.

Despite narrowing trade gap, U.S. trend growth shows signs of faltering
The U.S. trade balance improved in August broadly in line with market expectations. The trade gap narrowed to -US$59.1 billion following the prior month's -US$61.3 billion (revised from -US$62.2 billion), while the market was expecting a -US$59.0 reading. Excluding petroleum, however, the trade gap widened.

The improvement in the trade gap stemmed largely from a fall in petroleum as imports of crude oil fell 15.5% month-over-month. The price per barrel fell from US$124.7 in July to US$120.0 in August. Crude imports were also down on a volume basis falling to 308 million in August from 342 million in July.

The 2% fall in exports was dominated by a 13.8% fall in the automotive component, a 5.9% fall in consumer goods and a 3.2% fall in industrial supplies. Overall imports fell 2.4%, although ex-petroleum imports were up 0.9%. Automotive imports fell 6%, although pharmaceuticals, apparel and services were up 23.4%, 10.2% and 2.5%, respectively.

Excluding petroleum, the trade deficit actually widened to US$23.5 billion from the US$18.3 billion deficit recorded for July. The real goods deficit ex-petroleum similarly deteriorated to US$35.6 billion from the prior month's US$32.7 billion deficit.

The Fed's latest statement expressed the expectation that net exports would not be as supportive of growth as it has been in recent quarters. The deterioration of the ex-petroleum balance gives credence to that belief and is likely to reinforce the Fed's concern about faltering U.S. growth. We expect the Fed to cut rates by an additional 50 basis points to 1.00% by the end of this year.