Since the global recession began, Canada has been posting some of the world’s best employment numbers. Despite a slight increase in unemployment in July, 394,000 jobs have been created since July 2009, resulting in a net loss of just 20,000 jobs since the recession began, according to the July 2010 Labour Force Survey published by Statistics Canada. The drop in July employment brought the national unemployment rate back up one-tenth of a percentage point to an even 8 percent. While this still remains a marked improvement from the August 2009 high of 8.7 percent, it is a long way off from the pre-recessionary lows that hovered at 6 percent or less.

In similar fashion, the Canadian housing market has bounced back from the recessionary doldrums with strong sales, increasing prices, and improved starts. Rising out of the ashes of an April 2009 low of  119,000 starts — as a seasonally adjusted annualized rate — the Canadian housing market edged toward 200,000 starts in early 2010 before settling in at a still healthy189,200 starts as of July, according to the most recent report issued by Canadian Mortgage and Housing. Similar to employment, housing activity has clawed its way back, though it remains well shy of the boom days of 250,000 or more starts.

There is a powerful correlation between Canada’s employment recovery and building permit values since 2009. Indeed, construction has been a key factor in the country’s job growth and overall economic recovery. However, some industry observers don’t think the country’s strong dependence on housing for jobs is either healthy or sustainable.

According to the July 2010 Labour Force Survey, since employment started trending upward in July 2009, the industry with the fastest rate of growth has been the construction industry, at an impressive 8.6 percent. A recent commentary by David Rosenberg, chief economist and strategist at Gluskin Sheff in Toronto, captures the essence of the Canadian recovery. He writes: “This begs the question as to what has been the principal factor underpinning this impressive Canadian economic revival, especially in relation to what is happening in the United States. We can answer this in one word: housing.”

The Canadian housing industry is an essential contributor to the national economy and national employment. According to research by the Canadian Home Builders’ Association, approximately 907,800 jobs are currently provided by new home construction, renovation, and related fields. Every housing start generates approximately three people years of employment — three full-time jobs for one year. A new detached home will, on average, have 109 different trades-people performing an on-site job function, and the residential construction industry provides $45.2 billion in wages for Canadians.

Rosenberg indicates that every dollar increase in housing wealth translates into 7–9 cents of incremental spending in GDP. Essentially, without the revival of the housing sector, the Canadian economy would have remained stagnant since the second quarter of 2009.

As one of Canada’s the largest employers, however, the housing sector could have a devastating impact on employment if construction activity loses some its current momentum. As housing news turns increasingly negative, corresponding employment numbers seem to be following suit. The loss of 139,000 full-time jobs in Canada in July was fortunately offset by the gain of 129,700 part-time jobs, according to Statistics Canada. However, this still resulted in the first net decline in employment in seven months. Housing creates jobs and jobs fuel housing activity, but housing momentum is not sustainable if it must fuel itself. The concept of a self-sustaining reaction may work well when splitting atoms in a nuclear reactor, but it is not a principle that works to maintain a healthy housing industry, some economists point out. They say that job growth from other sectors is now needed to fuel housing performance and to ensure an organic, sustainable economic recovery that’s not reliant on stimulus programs.

The U.S. Comparison

The Canadian economy has been outperforming the United States and other countries during the recovery, mainly due to a solid housing and construction sector, strength in public sector hiring, and growth in resources and energy industries out West. In comparison, the United States posted a record streak of four straight losing quarters before growth began again in the third quarter of 2009 — following the worst recession since the Great Depression, according to a recent article in The Globe and Mail. By the fourth quarter of 2009 this growth surged to 5 percent as the $862 billion in stimulus began to take hold. Unfortunately, to date that appears to be the high-water mark of the recovery, which dims in comparison to the five quarters of 7 percent growth that followed the recession of the ’80s.

The United States is not benefiting from the traditional period of pent-up consumer demand that usually drives post-recession growth, economists point out. In fact, according to the Commerce Department in Washington, consumer spending slowed to a feeble 1.6 percent pace for the second quarter of 2010, compared to traditional post-recession spending that is in the 3– 5 percent range. As home values — which are often the single biggest asset for Americans — remain weak, consumers are just not stepping up to the “spending plate.”

In comparison to Canada, the U.S. Labor Department reported 131,000 jobs lost in July with an unemployment rate that remains stuck at 9.5 percent. Alistair Bentley, an economist with TD Economics, suggests that even when employment conditions in the U.S. improve, “more people will start searching for work again and it will take the creation of more than 121,000 jobs a month to begin to lower the unemployment rate.”

Unfortunately, the U.S. Commerce Department reported that second quarter growth, which slowed down to 2.4 percent (the worst performance in nearly a year), is too weak to drive down U.S. unemployment. It takes about 3 percent growth in GDP just to create enough jobs to keep pace with the population increase, and growth would have to be 5 percent for a full year to drive down the unemployment rate by 1 percentage point, according to a recent report in The Globe and Mail.

The current U.S. snapshot seems to indicate that a mid-cycle slowdown is well-entrenched. Companies are sitting on record piles of cash and are just not jumping to hire employees or expand their operations. The bank balance sheets remain fragile and sensitive to weakened demand, credit quality in commercial real estate, and housing prices. In short, the current jobless recovery is creating decreased consumer spending and lower corporate profits, and we may not see a return to average U.S. employment for several years. This has many Canadian observers wondering if a U.S. slowdown would spill over into Canada.

Crystal Ball Canada

A healthy U.S. neighbor has always been key to positive economic performance in Canada, and the Canadian economy will undergo its own stress test as stimulus programs begin to expire in the spring of 2011.

As of now, however, the Canadian housing market “is not being supported by sustainable underlying demand, but rather mostly from pulled forward sales,” says Peter Norman, senior director of economic consulting at Altus Group.

To avoid higher consumer taxes in Ontario and B.C. (with the HST), as well as higher interest rates and tighter lending rules, many Canadians were prompted to buy homes in early 2010. The Canadian housing market now faces a slowdown due to these pulled-forward sales and higher consumer taxes.

“The housing sector is the quintessential leading indicator of the economy, and true to form, it caught fire well before the overall economy did,” notes Rosenberg.

Now, as housing begins to take a breather, what is this leading indicator saying about the ongoing economic recovery? Statistics Canada reported on July 30 that Canada’s economy expanded by a mere 0.1 percent in May, which was the second month of virtually no growth. Construction activity fell by 1.6 percent, which was driven by a drop of 3.8 percent in home building.

Revised projections are now calling for an annualized growth in GDP of around 2.6 percent for 2010, as Canada’s economic momentum appears to be ebbing. The lagging indicator of employment — as employers are slow to incur the expense of lay-offs and equally slow to re-hire — is now showing some signs of stress, as well.

A recent commentary by Leith Moore, chairman of the Building Industry and Land Development Association in Toronto, also provides a pointed perspective on the foggy future the Canadian housing industry faces.. He notes that the “cruel irony of the rapid turnaround is that as soon as soon as we built back up to pre-recession levels of activity, government has stopped looking at us as job creators and has started looking at us once again as regulatory targets.”

Tim Bailey is general manager of AVID Canada, the leading provider of customer loyalty research and consulting to the home-building industry. Through the AVID system, home builders improve referrals, reduce warranty costs, and strengthen their brands. He can be reached at tim.bailey@avidglobal.ca.