The Larger Half Is Shrinking

Canada's service sector slid back into contraction in June, dragging the whole private economy down with it. Yet services employers kept hiring, and that contradiction is the story staffing should be watching.

Manufacturing has been getting the good headlines, but manufacturing is the smaller story. Services employ the clear majority of Canadian workers, and in June the sector went backward. The S&P Global Canada Services PMI Business Activity Index, released July 6, fell to 47.1 from 50.6 in May, dropping below the 50.0 line that separates growth from decline and reaching its lowest level since February. The retreat was sharp enough to pull the country's composite PMI, which blends services and manufacturing, down to 47.9 from 50.8. The private-sector economy as a whole, in other words, contracted, and services were the reason.

The cause, in S&P Global's account, was not a collapse in capacity but a loss of nerve. "Canada's service sector returned to contraction territory during June as worries related to geopolitics and government policies resurfaced, weighing heavily on activity and sales," said Paul Smith, economics director at S&P Global Market Intelligence. New business fell to 47.5 from 49.8 as clients, unsettled by geopolitical uncertainty and stubbornly high prices, held back on spending. Business confidence about the year ahead dropped to a seven-month low.

The number that does not fit

Even as activity contracted and sentiment soured, services employment rose slightly in June, the second increase in three months, as firms added staff to bolster capacity despite their cost concerns.

That is a genuinely unusual pairing, and it is worth sitting with rather than smoothing over. A sector losing business does not normally add workers. When it does, it usually means one of two things. Either employers believe the downturn is temporary and are staffing for the recovery they expect, or they are struggling to find and keep the people they need so acutely that they hire whenever a candidate is available, regardless of the month's demand. Both readings point the same way for staffing firms: the appetite for services talent has not evaporated with the activity numbers. The demand for workers and the demand for the sector's output have, at least for now, come partly unglued.

This echoes a pattern visible elsewhere in the Canadian labour data this summer, where employers report wanting to hire while unfilled openings keep climbing. A soft services PMI does not automatically translate into a soft services hiring market. In June, it did the opposite.