Rising Unemployment & Recession
Canada’s job report, released on Friday, December 7th, revealed a troubling labor market trend that could signal an impending recession. While the Canadian economy gained 51,000 jobs, far exceeding analyst expectations of 25,000, the unemployment rate rose to 6.8%. This increase in unemployment may seem counterintuitive given the job gains, but it can be explained by the rapidly growing population. Canada’s population is expanding at a rate three times faster than job growth, meaning that even though jobs are being created, there are not enough new positions to keep pace with the influx of people into the labor market.
Population Growth & Labour Imbalance
This imbalance between population growth and employment growth is a key concern because it suggests that Canada’s economy may be struggling to generate enough jobs to accommodate the increasing number of people seeking work. A growing workforce combined with sluggish job creation can lead to higher unemployment and underemployment, which are typical signs of an economic slowdown or recession.
The report also points to broader economic challenges. A population that is growing faster than job opportunities often results in more competition for available positions, driving up the unemployment rate. Moreover, the high unemployment rate in a context of relatively modest job growth signals that the economy may not be growing at a healthy pace. This could be a result of various factors, such as low business investment, high interest rates, or global economic pressures.
For policymakers, the rising unemployment rate could prompt concerns about economic stability. The Bank of Canada, which has already been tightening monetary policy in the last few years to combat inflation, might now face difficult decisions. If the economy continues to show signs of weakening, the central bank could adjust its policies to support job growth and stabilize the economy, which will continue to weaken the CDN dollar.
The fact that this trend is occurring against the backdrop of a growing population amplifies the potential risk of a recession. As more people enter the workforce without enough job opportunities to absorb them, the economy could experience reduced consumer confidence, lower spending, and stagnation in various sectors. This could ultimately lead to a slowdown in economic growth, or even a contraction, making the risk of a recession more likely in the coming months.
Stocks Likely to Be Affected Negatively:
Given the current job report and the broader economic implications, certain stocks in Canada could be affected by the rising unemployment rate and the potential for an economic slowdown or recession. The effects on individual stocks depend on the sector and how sensitive a company is to changes in economic conditions like consumer spending, business investment, and labor market trends. Here’s a breakdown:
- Retail Stocks:
- Lululemon Athletica (LULU) and Hudson’s Bay could face challenges as rising unemployment may lead to reduced consumer spending. During recessions or periods of uncertainty, consumers tend to cut back on discretionary spending, which could impact retail sales of non-essential goods, including athletic wear and luxury items.
- Canada Goose: As a premium brand, Canada Goose may see reduced demand during an economic slowdown as consumers prioritize more essential goods over luxury items.
- Housing and Real Estate Stocks:
- Brookfield Asset Management (BAM) and Choice Properties REIT: The real estate market often slows in a recession as demand for both residential and commercial properties tends to fall. Rising unemployment leads to reduced consumer confidence, meaning fewer people may buy homes or rent offices, which can hurt real estate companies.
- Condo developers and homebuilders: Companies like Tricon Residential or Toll Brothers may also see reduced demand for new homes, impacting sales and earnings.
- Banking Stocks:
- Toronto-Dominion Bank (TD), Royal Bank of Canada (RY), Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CM): While the Canadian banking sector has shown resilience in the past, rising unemployment typically leads to higher default rates on loans, lower demand for mortgages, and tighter lending standards. Banks may see squeezed margins and potential losses in consumer loans or mortgages.
- Energy Stocks:
- Suncor Energy (SU) and Enbridge (ENB): If the economy slows and demand for energy decreases, oil prices could drop, negatively affecting the profitability of energy companies. Unemployment and weaker consumer demand for energy could lead to reduced industrial activity, impacting the energy sector.
- Automotive Stocks:
- Magna International (MG): As a key supplier to the automotive industry, Magna could face reduced demand for vehicles if consumer confidence falters. People are less likely to purchase new cars during an economic downturn, which could hurt automakers and their suppliers.
Stocks Likely to Benefit:
- Consumer Staples:
- Loblaw Companies (L), Metro Inc. (MRU): Consumer staples such as groceries, personal care, and household products tend to perform better during periods of economic uncertainty because they are essential goods that people continue to buy, regardless of economic conditions. Both Loblaw and Metro are dominant players in the Canadian grocery sector and are likely to benefit from stable demand.
- Empire Company (EMP.A): Parent company of Sobeys, another key player in the grocery and pharmacy sectors, would also remain resilient.
- Utilities:
- Fortis Inc. (FTS), Hydro One (H): Utility stocks are often seen as defensive investments during economic slowdowns because people still require power, gas, and water services regardless of the economy. These stocks tend to offer stable dividends, which become more attractive when economic growth slows.
- WEC Energy Group (WEC): Another utility stock with a strong dividend history that may continue to benefit from stable demand.
- Telecommunications:
- Rogers Communications (RCI), Telus Corporation (T), BCE Inc. (BCE): Telecom stocks can also be resilient in a downturn as communications services are essential. Even in economic slowdowns, people and businesses still need internet, phone, and other connectivity services, making these companies less sensitive to economic shocks.
- Gold and Precious Metals:
- Barrick Gold Corp (ABX), Franco-Nevada (FNV): Gold tends to perform well in times of economic uncertainty as it is seen as a safe-haven investment. Rising unemployment and a potential recession could drive investors toward precious metals, benefiting companies like Barrick Gold and Franco-Nevada, which have significant exposure to gold mining.
- Wheaton Precious Metals (WPM): Similar to Barrick, Wheaton could see increased demand as a hedge against economic instability.
- Health Care Stocks:
- Baylis Medical and Sienna Senior Living: Health care stocks, particularly those involved in pharmaceuticals, medical devices, and senior care, tend to be less sensitive to economic cycles. Demand for healthcare services remains relatively steady, even in downturns. Companies involved in these sectors, like Baylis and Sienna, could continue to show steady performance.
- Teva Pharmaceutical Industries (TEVA): As a global leader in generics, Teva might also perform well as healthcare spending tends to be more inelastic during economic slowdowns.
- Discount Retailers:
- Dollarama (DOL): Discount retailers often benefit in recessionary times as consumers shift their purchasing behavior toward more cost-effective products. Dollarama, which offers a wide range of inexpensive consumer goods, could see an uptick in sales as shoppers look for bargains.
- Technology Companies (AI and Cloud):
- Hewlett Packard Enterprise (HPE): Demand for AI and cloud infrastructure could remain strong, even in a slowdown, as companies continue investing in technology to drive efficiency. HPE’s focus on AI-driven solutions and cloud computing could provide growth potential, making it more recession-resilient compared to other sectors.
Impact & Outlook:
Canada’s job market is facing a critical imbalance where population growth is significantly outpacing job creation. The resulting rise in unemployment, despite strong job gains, suggests that the economy may be faltering.
Canadian stocks in sectors such as consumer staples, utilities, telecommunications, and gold may benefit from a rising unemployment rate and the potential for an economic slowdown, as these sectors provide essential services or have stable demand even in tough times. On the other hand, stocks in sectors sensitive to economic cycles, such as retail, housing, and energy, are more likely to face challenges due to reduced consumer spending, lower demand, and higher defaults. As always, investors should carefully consider the broader macroeconomic factors and sector-specific dynamics when making investment decisions in these times.
STA Research (StockTargetAdvisor.com) is a independent Investment Research company that specializes in stock forecasting and analysis with integrated AI, based on our platform stocktargetadvisor.com, EST 2007.
