National Bank Says A Decline in Canada's Unemployment Rate Hides Weakness Under The Hood

10:13 AM EST, 02/09/2026 (MT Newswires) -- Canadian employment decreased by 24,800 in January, below the consensus expectation calling for a 5,000 increase, said National Bank of Canada after Friday's Labour Force Survey (LFS).

The participation rate, meanwhile, fell four ticks to 65.0%. As a result, the unemployment rate dipped 3 ticks to 6.5%, below the consensus estimate of 6.8%. The employment rate slid one tick to 60.8%

The labor market is starting the year as it ended the last one, with extreme volatility, particularly in the unemployment rate, which fell significantly from 6.8% to 6.5%, noted the bank.

It would be wrong to conclude that the labor market is no longer fragile, given that this decline is due to a huge 0.4 percentage point (pp) fall in the participation rate, stated National Bank. A drop of this magnitude hasn't been seen since the COVID-19 pandemic.

Without this decline, the unemployment rate would be closer to 7.0%, given the 25,000 job losses in January, including a 52,000 plunge in private employment. One reason the bank is skeptical about the sustainability of the decline in the labor force participation rate is that it mainly affects the working-age population, with a 0.7 pp decline among young people (15-24) and a 0.6 pp decline among those in their prime working years (25-54).

As a consequence, there is a significant risk that this trend could reverse, as these individuals may resume their efforts to find employment in the coming months, pointed out National Bank. When such fluctuations in participation rates cloud the picture, it's preferable to look at employment rates to assess the situation, especially in an extremely volatile demographic context such as that seen in recent quarters.

For the population as a whole, it fell by 0.1 pp in January due to declines among 15-24 year olds (-0.2pp) and 25-54 year olds (-0.1 pp). Looking at the evolution of the labor market since tensions with the United States (February 2025) have escalated, the employment rate has fallen by 0.2, representing a slight deterioration.

The manufacturing sector definitely contributed to this weakness, with the poorest performance among sectors during this period (-43,000 jobs).

In conclusion, Friday's data shows a deterioration in the Canadian labor market, and it would, as such, be wrong to assert based on the unemployment rate that the negative impact of uncertainty is behind, according to National Bank. The other employment survey (SEPH) continues to show weak job creation, and hiring intentions remain sluggish with no visibility on Canadian companies' access to the U.S. market.

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