00:00:06:13 - 00:01:03:20

Hello and welcome to our latest monthly economic webcast. My name is Eric Lascelles, I'm the chief economist for RBC Global Asset Management. I’m very pleased to share with you, as always, our latest economic thinking. I can say that the title of this presentation is the U.S. economy is hanging on and that is a fair description of where we are right now.

There is, of course, a great deal of anxiety still about tariffs in particular, but also some other headwinds out there. But it has to be acknowledged that the U.S. economy – and I would say to some extent, the global economy – is still growing, still moving forward, doing at least a little bit better than conventional economic theory would suggest, and than many of us would have forecast.

And so, I guess, a dose of optimism there, even as we are still grappling with some very real policy challenges and some other sources of concern as well.

Okay, let's jump in as we always do.

Report card: We’ll start with a report card of sorts, and we'll go through some positive and negative and interesting things. On the positive side of the ledger, let's celebrate a few things here.

00:01:03:20 - 00:02:10:18

And so as per, implicitly at least, the title I mentioned a moment ago, we are seeing economic damage from tariffs that are a bit lighter than feared, in particular for the U.S. Now, that's not the final word on the subject, as I'll get to later, but so far so good.

I can say that on the other side of the ledger, tax cuts and fiscal impulses are turning somewhat more positive. That big beautiful bill in the U.S. has unleashed some accelerated depreciation for CapEx and some tax cuts and some other things, in a way that should add a little bit to 2025 growth – and could add actually somewhat more profoundly to 2026 growth. And so, it’s not enough, I don't think, to offset tariff damage in the near term, but helping a little bit and set to help a little bit more later. And putting a fiscal hat on, of course, it will add to the U.S. deficit in a less-than-ideal way from that standpoint.

We still think a U.S. recession and indeed a global recession is likely avoided. The risk is not zero. Nevertheless, we don't believe it's the most likely outcome. It's not our base case forecast.

From a monetary policy perspective, we've been getting bits and pieces of rate cuts around the world. That's likely still the order of the day.

00:02:10:18 - 00:03:18:07

The U.S. has been on hold really since 2024 at this point, and so really has not been participating very much in that. It does look from this vantage point – I should mention this vantage point is September 2nd – and so fairly early in the month of September, it looks reasonably likely that there will be a Fed (U.S. Federal Reserve) rate cut toward the end of September, as per some comments from Fed Chair Powell at the annual Jackson Hole meeting that took place a few weeks ago. He did seem to open both the window and the door to that kind of outcome, so a little bit of a helping hand for the economy and a bit of a reason for short-term bonds to rally on that basis.

I can say as well, turning to inflation, of course tariffs do increase inflation all else equal, but there are some offsetting forces right now. And one of them is that oil prices have trended down, not up, over the last year.

And so that is imposing a deflationary force. It’s not completely neutralizing – we don't think – the effect of tariffs, in particular over the coming months, but nevertheless it has been helping, has been keeping inflation somewhat in check.

And then from a Canadian standpoint, Canada made some tweaks, some adjustments to its own tariff regimes. These are, of course, primarily retaliatory tariffs to U.S. tariffs.

00:03:18:07 - 00:04:15:11

And so Canada pulled back somewhat and you might say is a little bit more in alignment with the U.S. itself. That's not to say the tariffs are now equal going in both directions. They are still significantly smaller from the U.S. onto Canadian products.

Nevertheless, one of the U.S. approaches in recent months has really been to let free USMCA-compliant products (under the U.S.-Mexica-Canada Agreement) -- so if it's USMCA-compliant and not one of several critical sectors like steel, aluminum, autos, and so on and copper – there are no tariffs on Canadian products. And so Canada has sort of matched that. So functionally it has reduced its tariff rate a little bit.

It should be noted that, in the end, most of the rest of the world never did retaliate against U.S. tariffs, just China and Canada, really.

And so this does bring Canada a bit more in step with the rest of the world and a little bit less, perhaps, in focus for the White House, which might not be such a bad thing.

Let's shift over to the negative side of things and what's not so good in terms of the economy and themes and so on.

00:04:15:11 - 00:05:21:20

And so one would be that we think there is still some lagged tariff damage coming. We're still budgeting for fairly modest growth over the next few quarters, though. Not, again, a decline. We are seeing some fairly subtle, slight softening of the U.S. economy. And so it's not like the economy is unperturbed. It is slowing a little bit, but it really is just a little bit.

I should emphasize that the tariff story has not been completely static. Even over the last month, we've seen tariffs on India doubled from 25% to 50%. That may or may not stick. I'd be inclined to think it might not, but nevertheless, that's very real for the moment.

The U.S. eliminated in the end it's de minimis tariff exemption. That is to say that products entering the U.S. worth less than $800 were previously exempt from tariffs. They removed that exemption on Chinese and Hong Kong goods a number of months ago. They've now removed it on everything else, so that is a functional tariff increase.

Also some talk and the beginning of action in terms of investigating possible furniture tariffs. So unfortunately, tariff rates are still rising, not falling, as I'll show in just a moment.

00:05:21:20 - 00:06:08:08

And then just more generally – and we'll speak to this in a slide in a few minutes – ongoing politicization of U.S. economic data, perhaps, and decisions and so on. And so just thinking through that and where the risk lies and what's happened so far. So we'll get into that. But it's maybe not ideal.

And then looking elsewhere, we are getting very much political turmoil in France, a non-confidence vote and some fiscal concerns in particular that have not yet been resolved.

And then in Germany, there's been great talk, quite rightly, about German fiscal impulses turning positive, increasing its military spending, perhaps, to great effect. But actually, the latest economic data has been pretty uniformly weak for the German economy. So let's not suggest it's turning over a completely new leaf from that perspective. So some challenges there.

00:06:08:08 - 00:07:01:20

And then lastly, the last column here in the interesting file, may be the most interesting of all, as per the title. Quite recently, this is now just a few days old as I'm speaking to this, some tariffs in the U.S. were just struck down by a court ruling.

That's not the final word, though, and I'll get into that a little bit more later. But I think maybe the summary would be this is actually the second time that the White House's IEEPA tariffs (issued under the International Emergency Economic Powers Act), that's an acronym, and really refers to most of the tariffs that are applied at a country wide level. So a 20% tariff on this country, a 15% tariff on that country.

The conclusion was that these were not legal in terms of how they were implemented. Do note that sector tariffs are not affected by this. They continue. Do note that the countrywide IEEPA tariffs are still in effect until about mid-October. So, there is an appeal and the Supreme Court will probably hear this. It's not quite clear what that judgment will be.

00:07:01:20 - 00:07:37:16

I'll just say, in a scenario in which these remain overturned, in which these countrywide tariffs are still not allowed as of mid-October, we continue to think there are enough other tariff tools in the White House toolkit that they can probably get pretty close to where they'd like to go, with some other pieces of existing legislation.

So really, the story is you could have a messy few months. Uncertainty could go up. Tariffs could even go down a little bit temporarily. But the bottom line is, we suspect that the White House will be able to get more or less where it wants to go in the coming months with tariffs, even if it needs to use some different laws.

00:07:37:16 - 00:08:29:19

And then the corporate focus has arguably shifted a little bit back from tariffs, which were the dominant theme and concern over the last maybe 6-8 months. And shifting back a little bit more to the tech sector and tech dominance and whether those tech companies can continue to lead, and so on. I'll speak to that as well.

I’ll also speak to whether tariffs will persist past 2028. We're so focused in on tariffs right now and what they're doing. It is a very important question: will these be around four years from now or not? So I'll just give you some perspective on that a little bit later.

And we'll also do something else I think kind of fun, which is we'll do a quarter century in review, because we are now a quarter of the way through the century.

And we'll also do a quarter century and preview as we think about 2025 to 2049. And so let's think about that as well. Okay. So lots to cover, let's jump our way in.

00:08:29:19 - 00:09:13:17

U.S. theoretical tariff rate rises again: We’ll start on tariffs. That dark blue line is likely a familiar one to you, but perhaps with some extra thoughts there on the right side.

This is the average, U.S. tariff rate as it has progressed over time. It started very low. Just a 2% tariff rate started this year. It is now averaging closer to 19%. And so that's a little bit higher than we had budgeted for.

We've talked a lot about a 15-percentage point tariff increase, which would have been from 2 to 17%. That's where we were as of early August. When you stack on a slight expansion of the steel and aluminum tariffs, when you add on this bigger tariff on India, some other things like that, you do get up closer to 19%. So we’re running a little bit ahead of schedule.

The counterpoint is that of course the damage from the tariff seems to have been a bit lighter.

00:09:13:17 - 00:10:05:29

It's not that we're on the net more pessimistic about the economy right now, because one of these forces is somewhat neutralizing the other. There's another reason, though, that the economy has held up fairly well. And it's important to try to understand this. That is because the line in gold is the actual collected tariffs.

This is the actual money being collected by the U.S. government. And you will note that there is a significant difference between the blue line and the gold line. So the blue line is this theoretical tariff rate that the U.S. should be collecting. And they've been collecting less.

Now the data is old unfortunately and so we can only speak to June. I wouldn't say that 9% is the current tariff rate that's being collected. I would strongly guess it's higher now. But nevertheless, the point stands that there was a five-percentage point gap between the theoretical and the actual collected tariff rate back in June. And I suspect that's probably narrowed, too, since then, but I bet there is still something of a gap.

00:10:05:29 - 00:10:05:29

So, let's try to talk about why that might exist, even now in early September. As you can see on the right here, we have a couple of themes, and one would be substitution effects. So the blue line basically says let's look at the trade mix as of the end of 2024 and presume that remains the same.

Of course, that's not entirely fair. Because the goods and the countries that have seen their tariffs increase the most, you would think that there would just be less trade with those entities, right? You put 1,000,000% tariff on something, and people aren't going to buy any of it. What do you know? The tariff revenue collected is nothing.

Again, I don't think that the blue line is inappropriate then, because you do want to capture, what it would have been absent all of that, but nevertheless there is some substitution going on. It's doing its own economic damage, but nevertheless, there's just less money being collected. People aren't buying as many Chinese products because China is more expensive now, as an example.

00:10:55:15 - 00:11:32:05

You then have lags. These, you would think, would go away with time. And so there was a little bit of frontloading before tariffs. If you could see that a big tariff was coming on a certain country or a certain product, businesses and people stockpiled some of that. So they bought it before. Now that the tariff is on, they're buying less. There's a bit of an air pocket.

Therefore, the tariff revenue was even lower than you would think and lower than you might settle on as a steady state at a later date.

With goods in transit, if a tariff is announced, at least in many cases, products that are already on the way can take in some cases, you know, 4 to 8 weeks to make their way all the way to a consumer.

00:11:32:05 - 00:12:20:27

Those products are exempt from the new tariff. And so that has also meant a significant lag just in terms of the gold line rising to the blue line. There's a bit of messy math with bonded warehouses. You've imported a product and it might show up in the customs import data, but you don't collect the tariff till it actually leaves the bonded warehouse.

So there's a bit of a lag there, too, in some cases.

And then this is purely speculative, but we would strongly suspect that there's probably some confusion or just overwhelming paperwork on the part of customs officers. So many things have changed, and their capacity to do all this extra work probably isn't perfect. And it does feel as though some things are making their way across the border that maybe theoretically shouldn't without tariff, but they are, without a tariff. I would think that that gap would shrink as well over time, as customs officers sort of catch up with what's going on.

00:12:20:27 - 00:12:58:08

And then the last bucket of reasons for that gap would be just loopholes. And so there was the de minimis exemption for quite some time. Of course, that wasn't a loophole so much as it seemed, as though maybe more that businesses were chopping up their imports into $800 units and perhaps pushing them through, taking advantage of that exemption.

That exemption has just gone away. So that's why that's crossed out on the slide.

With transshipment, in theory, products from China that go through Vietnam to the U.S. are meant to be tariffed at the China rate. But in practice it doesn't seem like they've quite figured out how to do that. And so, products are perhaps coming in from the likes of Vietnam or Mexico or somewhere else at a lower tariff rate than the theory would say they should.

00:12:58:08 - 00:13:32:08

And then this is also quite speculative, but not unusual in circumstances like this. But conceivably you have some invoice undervaluation as well. You're declaring the value of something. You're sort of incented to say it costs less or something like this. And so that might be reducing the collected tariffs as well. Not all that goes away.

The substitution effects remain, as you would think. The gold line stays below the blue line. But you could imagine the gap shrinking to some extent. And so on the net I'm not convinced the tariff burden on the economy will be a whole lot less than the theory says, but it could be a little bit less based on some of these factors.

00:13:32:08 - 00:14:31:08

Maybe less of a tariff air-pocket coming than feared: Let's keep talking about tariffs in a bit of a different context. And so one of the narratives over the last nine months has been that perhaps a tariff air pocket is coming. And the idea being that because there was some front loading, there will therefore be a period of time when perhaps the purchasing and the importing of certain products will vanish because it's already been imported ahead of schedule to avoid the tariffs.

And I can say that when we actually dig into the data – that’s what this chart shows, it’s the inventory-to-sales ratios for manufacturing and wholesale and retail sectors in the U.S. The point here is on the right side of the chart, we're not really seeing a spike higher. We did not see a huge surge in inventory. There's been little bits and pieces of this here and there, but on the aggregate there's not that much evidence.

The point is, therefore, there doesn't have to be that much of an air pocket later. In other words, they didn't import way more than they needed. And so the imports don't have to dry up later, at least beyond what tariffs would suggest. So there's less distortions at work there than you might think. Let's move along here.

00:14:31:08 - 00:15:29:10

Tariffs as sales tax? And here’s just another slightly random tariff subject but fitting to keep all these together: tariffs have often been described as being somewhat akin to a sales tax. And it has to be said there are some pretty important similarities here, right? A tariff does generate revenue for the government, levying it like a sales tax.

Tariffs raise prices and of course a sales tax does too. You're paying that extra x percent on the product after tax. And a lot of a tariff tax is paid by the U.S. consumer, just like a sales tax would be. So there are some pretty significant similarities.

I mention this in part because if you look at this chart, which is a very busy, exciting chart, the point here would be the dark blue bars, the U.S. is the far-left country here. The U.S. actually collects a very small share of its revenue via sales tax compared to other countries. In fact, every other country on this list right across the OECD (Organisation for Economic Co-operation and Development) had higher sales taxes. And the reality has been that sales taxes have been something of a third rail.

00:15:29:10 - 00:16:42:02

People haven't wanted them. It's unpopular to propose them. And so the U.S. just really doesn't have a whole lot of sales tax, certainly not at the federal level. But, sales taxes do have certain attractive qualities. And economists would say, if you have to raise taxes, not to say that that general idea is endorsed, but if you have to, actually a sales tax is a pretty efficient way to do it. It doesn't discourage CapEx, doesn't discourage investing in the sorts of things that happen when you levy a tax maybe earlier on income instead of on spending, and so has some attractive qualities.

To what extent then can we say, hey, tariffs are pretty good here, because they're filling this hole that the U.S. has in terms of sales taxes. So to some extent, yes that is what's happening.

There are some differences though. One would be in fact a couple of good reasons and a couple of not so attractive reasons.

First would be that tariffs have proven in this context with this administration at this moment in time, to be politically expedient. They've been able to deliver them, notwithstanding some legal judgments recently. It would have been a no-go to say, hey, everybody, let's put a big sales tax on everybody. But it's proven possible to put a tariff on that does something loosely similar in some ways.

Of course tariffs also, unlike a sales tax, discriminate against foreign goods and advantage domestic goods.

00:16:42:02 - 00:17:23:16

And it's not clear you want that, because it does create some distortions and gets rid of some competition. And there are some other undesirable elements to that.

But, if you're hoping to help out some domestic businesses, it's not the worst way of going about doing that. So that's certainly a difference from a sales tax, which would equally apply to a product sold in the U.S., whether it was made abroad or at home.

Less attractively, tariffs, unlike sales taxes, narrow the tax base. Keep in mind, it's like a sales tax, except it's only being applied to goods and only being applied to imported goods. And so you're applying this tax and it's really heavily hitting this one subset of imported goods. And ideally you'd want a tax spread across imported goods and not imported and services as well – so it would less damaging, with less distortion, on any one product.

00:17:23:16 - 00:18:23:11

So tariffs can be more regressive than sales taxes. Both are regressive to an extent. That means they hurt poor people more than they hurt rich people, you might say. But tariffs are particularly regressive because lower income households tend to spend not just a disproportionate share of their income period, which is why sales taxes are regressive, but specifically because they are also explicitly applied to goods.

And so lower income households tend to have a bigger share of their spending on goods than on services. So that's not very attractive.

And then on the net, you would say tariffs hurt the economy more than a sales tax, just because they do distort things. Consumers lose access to certain goods and businesses spend less, and productivity goes down, and this sort of thing.

So by no means exactly the same as a sales tax. But there are some pretty important parallels.

And of course, at a bare minimum these tariffs are set to raise a couple of hundred billion dollars a year for the U.S. government, which is handy at a time when there's a pretty big deficit running. But tariffs do distort more.

00:18:23:11 - 00:19:37:11

I think economists would still say if you had to do this, you'd still rather do a sales tax than a tariff. But, it's worth flagging how these are similar and different. And there are some significant similarities, for what it's worth.

Tariffs down the road? Continuing on the tariff file and just thinking long term here, or trying to think a little further down the road really from two perspectives:

1. Some court rulings are striking down certain tariffs. We will see whether that is enduring. In other words, we're going to see what the Supreme Court says. And it's not at all clear what happens. You've had two levels of courts that have so far struck down these IEEPA tariffs. That would suggest it wouldn't be a shock if a third court, the final definitive court, also struck it down.

So that's a real possibility, of course. Conversely, the Supreme Court has something of a rightward tilt. Maybe it will be more sympathetic to a rightward government's policy goals. And so it's not clear, it's uncertain how that goes. I would just say, as mentioned earlier, even if these are enduringly struck down there are some other delivery mechanisms.

And so we think probably the White House does get where it wants to go. Probably you do have notable tariffs a year from now is the initial comment.

00:19:37:11 - 00:20:47:03

2. The second thought, this is the one that maps out really to 2029 and beyond. Presumably there’s a new president's new administration in 2029. Is it automatic that tariffs will go away?

It's tempting to say it's automatic because of course, modern presidents other than President Trump haven't generally gone after tariffs in a big way. You might think the next president, their first order of business could be to reverse some of these things which do some economic damage and do increase prices, I think undesirably.

But actually, despite that it’s not at all clear that tariffs will quickly go away in 2029 and beyond. So, a couple of thoughts here as written down in front of you.

One would be don't underestimate policy inertia. In other words, you know, it's much harder to change a policy than to keep the existing one in place. That is a very relevant consideration. It is often very hard to enact policy. And so don't underestimate that tariffs could just stick around because they're already there. Much as no tariffs might have not stuck around if they hadn't been there.

Number two is the longer tariffs are in place, the harder they are to remove, right? People get used to them. Businesses get used to them. The companies that are hurt by the tariffs maybe don't exist in 2029, so they're not lobbying to get rid of the tariffs. They don't exist anymore. Foreign brands are forgotten or downplayed. The companies that benefit from tariffs may even become dependent on them. So they're lobbying to keep them.

00:20:47:03 - 00:21:47:10

Politicians will fear losing some factories and warehouses and stores if tariffs are removed, even if the economy on the net would be bigger without the tariffs. You could have a very loud contingent, who are hurt by the removal of the tariffs, screaming very loudly. So that makes it harder to remove. And, you know, 3 or 4 years starts to be a pretty significant period of time and makes it harder to remove.

Also, the government may become more reliant on that tariff revenue. It's potentially a few hundred billion dollars a year. That is quite significant. I'd be surprised if the U.S. fiscal position was in a strong enough spot that they could say we don't need the $200B or $300B a year. So that that could be a reason to keep some fraction as well.

And then you try and think politically. This is where it gets hard, because no one knows who the next president will be or what party even will be in power, and how that will interrelate between the White House and Congress, for that matter. But just very broadly speaking, if there is a Republican government the next go round, they might understandably be reluctant to reverse the signature Trump initiative, someone from their own party.

00:21:47:10 - 00:22:04:06

Conversely, the Democratic Party has not exactly been a big fan of free trade. They've been fairly skeptical over the last 15 years or so, and so it’s not a certainty that they would remove all of these things as well, particularly given some of the lobbying considerations at play. So, not to say therefore tariffs are forever. We're not sure at all.

But I would say that don't assume automatically they'll be gone in 2029. There's a real scenario where they remain for some period thereafter, or some fraction of them remain for some period thereafter.

So we're not budgeting for a boom in economic growth in 2029, I guess is the other takeaway. Okay.

00:22:20:28 - 00:23:16:05

Shift in market focus from tariffs to tech: Let us begin to shift away from tariffs and actually in quite a handy way here, which is one thing we do is every quarter, we scour the earnings calls of major American corporations and try to get a sense for what the key themes are from their perspective.

And so lots of exciting colors and numbers in this table. But I can say a couple of things here. One would be, in the second quarter just concluded, relative to the first quarter there was a significant reduction in references to tariffs and trade wars, so very much less on the mind.

Let's talk about pricing strategies, which you might think would also be linked to tariffs and higher input prices and the like. Less talk about economic slowdowns and unemployment and job cuts and the like. Less talk about supply chains and disruptions and this sort of thing. Less talk about material costs. So really all very much consistent of the theme that, listen, tariffs aren't gone, but they are proving a little bit less disruptive than feared.

00:23:16:05 - 00:24:22:17

They are much less on the mind of companies right now than they were even just three months ago. So that's the big takeaway there. But let the record show, just to complicate this, tariffs are still being discussed more than they were at the end of last year. That's the final column here. So still very much being discussed and thought about, but less so –much less so – than a quarter ago.

Conversely you can maybe flag a couple of things. We see an increase in the latest quarter – this is back to the leftmost column, the green bars – an increase in thinking and talking about artificial intelligence and machine learning and cryptocurrencies and blockchain. And so it’s a shift back to tech to some extent, which has been, of course, the dominant driver of markets, and you might even say the economy, in recent years.

The other thing I would note here, right in the middle there, is more talking about tax policy and tax rates. We saw some tax cuts and so on. And so that's on the mind as well. And so really some negative things being thought about and talked about less, some positive things being talked about and thought about more, is maybe the takeaway.

Not to say that's how things stick forever, but that's certainly been the way we've seen it as well. That's the way I think financial markets have been performing as well.

00:24:22:17 - 00:24:31:26

Okay. Let's talk a little bit just about the economic data here.

Tariffs to lift inflation, but not seeing an overwhelming effect: One thought would be we are still budgeting for some moderate increase in inflation over the next six months to a year.

A big part of that is of course tariffs. But I don't want to overestimate that. And we've been consistent here.

But just to continue to drive home the point that what we're talking about is an inflation rate that goes from the mid- to high-2% range to perhaps 3.5% range temporarily, before settling back down. This is not a 2022 and 9% inflation kind of situation.

At least we don't think it is. And I think this chart speaks to that. So this is a survey question. The fraction of U.S. businesses that are planning on raising prices. Is it up? It sure is. You can see that increase recently. But it does put things into perspective, which is it's not up like it was in 2021/2022.

It's a different order of magnitude. And so it speaks to a different inflation outcome.

Higher prices, we’re still budgeting for that over the next few months in particular. But moderately higher, not extravagantly higher. Similarly when we talk about inflation, just recognizing some of the helpful forces that are keeping it down. One not shown here would be shelter costs.

00:25:25:19 - 00:26:03:06

And so there’s a housing market that's relatively cool. One of the positives is that home prices aren't doing a whole lot. And so not pushing prices higher from that standpoint for inflation. The other one here is oil prices.

Meanwhile, lower oil prices helping to buffer inflation elsewhere: So this is the West Texas price of oil over the last several years. And you can see a very clear downward trend over multiple years, including over the last year, so this has been a deflationary force as well. And it's been a nice buffer.

So even as we have started, we think, to see a little bit of higher inflation from tariffs showing up in the last two months of data (and probably in the next several months as well), actually, the overall numbers have barely inched higher, just because we're getting this helping hand from oil and from shelter costs as well.

00:26:03:06 - 00:26:57:18

So that's been very useful.

Hard U.S. economic data is moderating but not crashing: And then looking at the economic data, some deceleration, we think, is visible. You can see from early 2024, but even from the end of 2024, we can see that there has been a net deceleration. This data change index has gone from being slightly positive to being, as it stands now, slightly negative. It’s reviving, it would seem. Nevertheless, on the net, it's slightly negative.

So that's more or less where we think we are. We think it's going to be an underwhelming couple of quarters, but not a recessionary kind of blow.

U.S. employment is weakening, but it isn’t as bad as it looks: When we look at the labor market again for the U.S., these are two different measures of monthly job growth.

It's a three-month moving average, but nevertheless, the number of thousands of jobs created per month in the U.S. on average is certainly in a very real deceleration.

By the way, the official numbers are gold in terms of payroll and job creation. So quite a significant deceleration. Yet I would say it's not quite as bad as it looks for a couple of reasons.

00:26:57:18 - 00:27:54:14

One would be, we think that the official payroll numbers can be quite choppy. And so, we prefer to look at the line in blue, which we've made, and it's actually just a combination of 3 or 4 job numbers, including the payroll figures. And so they suggest that the deceleration is not quite as extreme.

We think that's probably a truer sense, though. We are going to find out a lot, actually three days from now as I'm recording this. So we'll see if I'm correct or not, at least for the month of August.

And so it’s maybe not declining quite as much as thought. More important, though, is that if you were to look at the unemployment rate, you would see it's really only rising very slightly.

The secret here is U.S. population growth has really slowed. Immigration has been curtailed. It was slowing, I should say, at the very end of the Biden administration. It's slowed materially further under the Trump administration. And so the number of jobs that you need just to employ the graduating 22-year-olds and so on, just to keep pace with population growth, is a lot different.

00:27:54:14 - 00:28:22:12

You know, it was probably 150,000 people a month as of a year ago. It might only be something like 50,000 people a month right now. And so even though job creation has slowed, and probably is now running a little bit below what you steady state need, most of the deceleration is really just population growth. There's less there so job creation is less.

And that's a fairly benign combination, if that makes sense. So again, some deceleration visible. Not quite as bad as it superficially looks.

00:28:22:12 - 00:29:23:04

Recession risk has fallen somewhat: Maybe in line with that – and not to suggest whatsoever that this is a magic chart that tells us everything we need to know – this is one of quite a number of recession models we run.

And it would say that the recession risk had been pretty real a quarter or two ago. At one point, it was actually claiming the risk was as high as about 60% as those tariffs were initially coming on. It has sort of happily declined. It's now pointing to a 29% risk of recession over the next year. It's probably not far from truth.

I'm not quite sure if I'd say it's 25 or 35 or 30%, but something in that realm, which is not a zero risk when you have these tariffs swirling and all sorts of unusual policy changes happening all at the same time. But all the same, our best guess is that there doesn't have to be a recession.

And this would say that risk has indeed fallen to some extent without completely vanishing. Okay.

Incremental politicization of U.S. economic realm: I mentioned before, very briefly just this notion of politicization, of incremental politicization in the economic realm, for lack of a better term. And so let's just talk through a few of these things. So one would be there are some real challenges right now to Fed (Federal Reserve) independence.

00:29:23:04 - 00:31:11:13

And so by that we mean, of course, the White House has argued that the fed funds rate should be 2 or 3 percentage points lower than it is. There’s been lots of advocacy for that, which is unusual. Normally, monetary policy gets to do its own thing and politicians don't seek to intervene too much.

We're in a position where the White House and President Trump have already appointed two voters to the Federal Open Market Committee, and so that’s two out of 12 voters. It should be noted, the president (Trump) is in the works of adding a third, and conceivably gets a fourth or fifth, depending on whether Fed Chair Powell, whose chair term is up in May, resigns as per tradition or actually serves out the rest of his governor position. So probably he does resign. That would be a fourth spot.

You may be aware there are attempts to fire another Fed (Federal Reserve) governor. And so it's unclear whether all those things happen or not. But it seems pretty reasonable to say by next spring, President Trump probably has 4 or 5 out of the 12 voters that he has appointed.

Do note that there are seven Fed governors and five Fed district presidents who get to vote. And so the president only has a direct say over the seven governors. And so conceivably he would have 4 or 5 out of the seven. That's significant because the Fed presidents who reflect and respond to the needs of the different districts around the country, there is a scenario in which the majority of Fed governors, which he (Trump) would have, could actually recall some of the district presidents.

And so you could imagine a way where there was actually an absolute majority out of the 12 voters, perhaps, being influenced, by the White House. And so we'll see where this goes.

But I would say right now, our view is not that monetary policy goes in a direction completely different from what the economy calls for, but that you may end up with monetary policy that's more dovish than otherwise, with a bit more rate cutting than you would otherwise have expected.

00:31:11:13 - 00:31:55:24

Maybe the way to frame it is towards the maybe extreme dovish end of what current economic conditions would demand. There's always uncertainty. What's the perfect level of interest rates right now? You might say the current fed funds rate is maybe even a little bit higher than you would normally even think. It could work its way, maybe, to the lower end of what you would normally think would be appropriate, given this combination of an economy that might weaken a little bit versus inflation that's a little bit higher than it should be.

And so, you know, net net, maybe a bit more rate cutting and slightly lower short-term rates, but also a bit of a bit of concern about the credibility of the Fed. And that might be a longer lasting concern.

On data quality, well, it was really two thoughts here. One is the quality of official economic data probably has gone down on average in recent years, and that is for a few reasons.

00:31:55:24 - 00:33:05:09 I

It seems like the Bureau of Labor Statistics (BLS) in the U.S. and others have been underfunded in a way that just makes it harder to collect the data. They're not able to collect as much price data as an example. And there are likely similar effects in other surveys.

And then equally just the response rate, the percentage of people answering their phone to answer a survey, is down much as it is with political polls. And so it's just a harder job to do. And the data quality is probably a little bit lower as well.

Compounded on top of that, you might be aware that the head of the Bureau of Labor Statistics in the U.S. was fired recently after the last set of job numbers came in differently than what the White House had hoped for. So there is some concern of politicization there as well.

Really all I can say is, for the moment, we think those numbers are still the best estimates coming out of the BLS and other U.S. governmental institutions. We're going to keep a close eye on this to see if there are any material changes to how it's collected, in a way that might alter the interpretation.

In the meantime, though, we do take some solace in the fact that there are an increasing number of what I would describe as alternative indicators that we think will let us have a reasonable sense for what's happening in employment or in inflation, or in some of the other official numbers, even if we were to lose a little bit of confidence in the official data. But certainly worth watching that as well.

00:33:05:09 - 00:34:04:19

Lastly – and I don't know if it fits precisely into the bucket these other two fit into or not – but recently fairly prominently, the U.S. government took a 10% stake in Intel. So sort of acquiring bits of companies without really putting money directly up.

The notion is that it was for subsidies and so on, already paid in some cases unattached to equity ownership. And so not to say this is completely unprecedented. There are other countries that do this sometimes. The U.S. has done this perhaps in its history on occasion, but it is a pretty unusual thing.

Interestingly, the Intel stock rose, not fell, on this news, even though there was a dilution of 10% for the existing owners. So that must be that they think they now have this regulatory advantage. They are a strategic company and might get preferential treatment from the U.S. government – and so on the net, I suppose, they're happy enough. An open question is whether this happens elsewhere. There's been some murmuring about maybe the military industry and some of the companies there as well could end up in a similar situation.

00:34:04:19 - 00:34:22:08

To try and combine all these three things together:

• This is to some extent to begin the politicization of the Fed.

• It might be the beginning of some politicization of data.

• It might be a little bit more interference of politics into corporate life and corporate affairs.

On the net you would think these are maybe slightly dangerous things to be doing. There is a risk of some loss of trust. And there is the risk that economies might move a little bit less smoothly, if these sorts of things proceed. So, it’s very much worth watching, and it’s moving, so far, in a direction we haven't seen in a number of decades. Okay.

00:34:37:05 - 00:35:25:08

Federal Reserve expectations continue to look for modest near-term easing: To continue on the story of the Fed, the U.S. central bank, this is a measure showing the expected level of the fed funds rate, after this upcoming September rate decision.

So the way to interpret this is that line, which has been pretty reliably below the horizontal dashed line, that line means the market's been pricing rate cuts by September for quite some time. It's actually a little bit less rate cutting than might have been imagined a year ago. Nevertheless, yhe market is pricing most of a rate cut, a 25 basis point cut, in for the end of September. And that's what we think is reasonable as well.

Conceivably another rate cut will come not too long after that. Arguably, it’s loosely appropriate just in the context of the U.S. economy, but it also may be motivated a little bit by this extra political pressure that is trying to encourage additional rate cuts.

Okay. I'm going to finish with this.

00:35:25:08 - 00:36:25:15

Quarter century review / preview: Leave it to me to finish with a big busy table here. But I think this is interesting and it's kind of fun to think about.

As I mentioned, you know, here we are. It's the second half of 2025, I'll let you decide whether the first quarter of the century was 2000 to 2024 or for those who think they're clever, 2001 to 2025, depending on there was no year zero and all of that business.

But nevertheless, you know, we're more or less through that first quarter of the 20th century, we’re more or less on the cusp or starting the second quarter of the 21st century. Let's think a little bit about some of the key macro themes that prevailed and could prevail going forward.

Looking backwards, which is the first column, the rise of China surely is the biggest of all developments. China went from being this very poor, relatively small economy, to being so central to the world and a geopolitical power and a military power and so on.

Emerging market growth, maybe more generally, was pretty remarkable. We're now in a position where over half of global growth and by some metrics over half of global economic output is from developing countries.

00:36:25:15 - 00:37:25:22

They have hit the big time over the last quarter century. It was a quarter century in which I would say up until the last few years, globalization broadly prevailed as per China's rise. It was for the most part, a hegemonic world. The U.S. was the dominant, undisputed entity as much as that did start to fade over the latter half.

It was a period in which the rule-based order dominated the World Trade Organization, United Nations, all these international entities and people got along fairly well. The early phase of the quarter century, there was a lot of talk and Francis Fukuyama's end of history, with the idea being that there was this convergence toward all countries becoming democracies and capitalist and wars were going away.

And a not a whole lot was happening, which was lovely, frankly, in many regards. But of course, it's now proving maybe not quite to be correct, but for a period of time that thought was dominating.

Speaking of domination, of tech domination, tech companies drove economies. They certainly drove markets as well. They changed how we all lived quite significantly over that quarter century as well.

00:37:25:22 - 00:38:45:00

Demographics were souring. They've been souring for a while, but they really turned around 2007 and have been getting worse ever since.

With U.S. economic exceptionalism, the U.S. was the best economy, at least in the developed world. It grew more quickly, was special, the stock market particularly over the second half of that quarter century certainly outperformed everyone else.

There was rising leverage, a lot of private-sector leveraging in the first decade, a lot of public-sector leveraging or government borrowing over the remainder of the period. We had a commodity supercycle. Commodity prices went up a whole heck of a lot from the year 2000.

And we had the European project. It's amazing to think the euro, at least officially, did not exist as of the year 2000.

They locked, they pegged the currencies together in the late 90s, but the physical euro wasn't introduced until a couple of years into this quarter century. And as much as that project has been imperfect and there have been sovereign debt crises and the like, it has survived. And you've seen this integration and you've seen banking regulation tied together more and bailouts tied together and the mutualization of some debt issuance.

They are stitching themselves somewhat more tightly together and their existence is not in doubt right now, despite, of course, the exit of the UK from the European Union.

What might the next quarter century bring? Well, I'm sure this is a failure of the imagination, and I'm sure there'll be all sorts of things that we can't conceive of.

00:38:45:00 - 00:39:41:04

That's the honest truth. A lot of this is projecting existing trends forward, or just observing recent inflection points and projecting those forward. But let's just do our best here.

Probably we’ll still see the ascent of China. If China is going to become even more important globally, it would appear, if less incredibly than over the last quarter century. We’ll see a rising global middle class as developing countries get richer and achieve the ability to consume and buy vehicles and this sort of thing.

Maybe we’ll see the rise of India and of Southeast Asia as the next big wave of highly populated countries going from poor to middle income type status. We've gone from globalization seemingly to globalization that may persist for a while. It often does in a multipolar world, which is where we are now given China's ascent and maybe given Russia's belligerence as well.

It is no longer a rule-based order. It seems to be a power-based order. Big countries bullying smaller countries and so military spending goes up and this sort of thing. It's a big advantage to be a big, strong country.

00:39:41:04 - 00:40:53:28

And it's a big disadvantage to be a smaller country. And so that's a major change.

Probably we’ll see the tech sector still dominating. That's not me predicting the stock price of any one stock next year versus this year or in 2050 versus 2025. It’s just in terms of playing a very central role in lives and being a driver of productivity and artificial intelligence perhaps being a key critical technology going forward.

And so, you know, we are optimistic. We think this could be a quarter century of somewhat faster productivity growth than we've seen in the past.

Demographics probably don't get a lot better. In fact, they've gotten a fair bit worse in recent years. We're projecting a global peak population in 2066, which is outside of the scope of this next quarter century. But we’re getting closer to that. So it’s still very challenging there.

We think the U.S. economy will still be somewhat exceptional versus its peers, but maybe a bit less so, with a bit less of a growth advantage with less immigration, with some policy decisions that are not quite as good, with some fiscal excesses and so on.

With fiscal concerns, it’s not to say that countries necessarily have to borrow a lot more than they are right now, but that we are going to have to see some countries do some austerity and the bond market might become a bit pickier about where it invests on the basis of all these countries with big debt loads going forward in an environment in which interest rates aren't quite as low as before.

00:40:53:28 - 00:41:17:18

I'm not sure where commodity prices go exactly from here, but I would say that in that broad theme, climate change will be becoming more palpable, I would say maybe more consequential to markets and economies going forward. Oil demand peaking seemingly in the late 2020s or early 2030s based on several credible forecasts as well.

And then maybe lastly, non-U.S. developed nations gaining some traction. It seems like many had been slumbering for years, and they're starting to wake up and realize they need to increase their military spending, perhaps do some fiscal stimulus, get their productivity going again. We'll see how well they do this. They may not succeed, but I think they have a fighting chance of making some progress in that direction. We might see them moving a bit more nimbly over the next quarter century.

Okay, that was a lot for me. If for some reason you want more, here is our website where we keep a whole lot of insights, including from my economics team. Or check us out on LinkedIn, or on X as well.

And so I'll say, as usual, thank you so much for your time. I hope you found this interesting and useful, and please consider tuning in again next month.