Canada sheds 42,000 jobs in August while U.S. sees burst of hiring

The Canadian economy’s labour market lost its steam in August, breaking a string of upbeat job reports ahead of the latest escalation of the trade war with the United States.

Canada lost a net 42,000 jobs in August, falling short of economists’ expectations of a gain of 15,000 positions, Statistics Canada reported on Friday. The unemployment rate held steady at 6.4 per cent.

It was a different story in the U.S., where employers added 162,000 jobs in August, coming in hotter than expectations of 55,000 jobs, the U.S. Bureau of Labour Statistics also reported on Friday. The U.S. unemployment rate held steady at 4.1 per cent.

The previous two months of U.S. labour results were revised higher, which meant that July saw a gain of 21,000 jobs. The bureau had previously recorded an unexpected net decline in positions that month.

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The three-month average for employment growth, a metric that economists use to smooth out volatility in the month-to-month numbers, fell from more than 60,000 in July to around 17,000 in August.

In late August, trade talks between the U.S. and Canada collapsed and new 50-per-cent U.S. duties were applied against $28-billion in Canadian goods. Ottawa is set to impose countertariffs on American products on Sept. 8, a move that could prompt even more escalation from the White House that undermines growth in Canada.

The weak jobs report suggests the job market could have been struggling before the latest tariff hit, said Royce Mendes, head of macro strategy at Desjardins Securities, in a client note. “That said, the headline underperformance could just be a normalization after a period of outsized hiring,” he added.

Employment declined across 11 of 16 sectors, with roles in public administration, natural resources and the management of companies and support services leading the losses over the month. However, employment in those industries was little changed compared to last August.

The number of public sector employees fell in August by 20,000 positions, down for the third consecutive month. The public sector has shed 78,000 jobs since May, as Prime Minister Mark Carney has made a push to cut costs and reduce the size of the federal public service.

Despite a challenging trade environment, manufacturing led the gains among industries in August with a net 22,000 new jobs. Hours worked were also stronger in manufacturing, which could be evidence of efforts by some companies ramping up production before U.S. tariffs took effect, said Andrew Grantham, senior economist at CIBC Capital Markets, in a note to clients.

Mr. Grantham also said the new Section 338 tariffs imposed by the U.S. are hitting more labour-intensive sectors, compared to the sectoral Section 232 tariffs already in place, which affect industries such as steel, aluminum and autos.

“Because of that, and because heightened uncertainty could also impact hiring decisions in other sectors, it is likely that the general downward trend in unemployment since April stalls or partially reverses in the months ahead,” he said in the note.

While the jobs report won’t affect the Bank of Canada’s outlook, the central bank will remain focused on monitoring inflationary pressures. Because of slack in the labour market, companies have limited ability to pass on higher costs to consumers. And wage growth isn’t particularly concerning from an inflation standpoint: Average hourly wages grew 2 per cent year-over-year in August, down from 2.8 per cent in July.

Earlier this week, the central bank held its benchmark interest rate at 2.25 per cent for the seventh consecutive time, as widely expected. But Governor Tiff Macklem pointed to the upside risks to inflation from the Middle East war, which were interpreted as hawkish; investors and Bay Street analysts are expecting several rate hikes from the central bank next year.

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While the U.S. report is pointing at signs of a healthy labour market, that means all eyes will be on next week’s CPI report, before the U.S. Federal Reserve’s interest rate decision on Sept. 16.

On Friday morning, the U.S. two-year treasury yield – which reacts in line with short-term Fed decisions – rose to 4.425 per cent on news of the jobs report, its highest level since January, 2025. Traders are currently pricing in a 60-per-cent chance of a hike for the upcoming meeting.

Meanwhile, Friday’s weaker-than-expected Canadian jobs report had traders dial back odds of a rate hike by the end of the year, and the Canadian two-year bond yield fell from the day’s open of 3.117 per cent to 3.062 per cent midday.

The Canadian dollar marginally depreciated against the greenback, trading at roughly 72.3 US cents midday on Friday.