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by  Eric Lascelles Nov 22, 2023

What's in this article:

Short-term headwinds fade

Over the past few months we flagged several new headwinds that, while mostly temporary, could create a speedbump for economic growth. These included a leap in bond yields, the possibility of a U.S. government shutdown and the Big Three auto strike in North America.

Fortunately, all three of these issues have since improved, lessening or even eliminating these drags.

Lower yields

The U.S. 10-year yield peaked at 5.00% on October 19, but has since retreated to a materially diminished 4.42% (see next chart).

U.S. yields fall as inflation slows and end of hiking cycle draws near

As of 11/16/2023. Shaded area represents recession. Sources: U.S. Treasury, Macrobond, RBC GAM

The motivation has been a combination of factors, including:

  • a more dovish Federal Reserve

  • a tamer-than-expected inflation print in October

  • the continued retreat of oil prices (now below $80 per barrel for West Texas Intermediate oil)

  • the hope of a soft landing as recent economic data has showed evidence of decelerating without collapsing.

We are not sold on the soft-landing narrative, and so question the stock market’s recent enthusiasm.

Still, the main point is that after we highlighted the manner in which rising bond yields could damage economic growth, it is only fair to highlight that the partial retreat of those yields incrementally reduces that damage. We still anticipate a recession (and see some concerning developments in the economic data – discussed shortly), but this is good news for the economy.

No U.S. government shutdown

U.S. House Republicans have selected a new speaker, Mike Johnson of Louisiana. This took time given the ideological divide between Republicans and Democrats, the factions that exist within the Republican Party, the recent ouster of prior Speaker Kevin McCarthy, and several earlier unsuccessful efforts to select a new speaker over the past month.

The new speaker immediately got to work, and Congress managed to secure another temporary budget deal just before the November 17 expiry of the prior extension. The bill funds the federal government until January 19 for some line items, and until February 2 for the rest.

As such, the feared government shutdown was averted for a second time this fall, avoiding the significant economic damage that could have resulted. There is still the real risk of a shutdown in early 2024. However, the successful deferral of a shutdown twice in the past two months argues that the risk has diminished somewhat as political disfunction is not as great as imagined. Constructively, the budget deal saw support from both Republicans and Democrats in each of the House and the Senate.

Auto strikes resolved

After a six-week strike, U.S. and Canadian auto workers have struck deals with the Big Three automakers. A modest amount of economic damage was inflicted, but this can now be reversed.

In the U.S., the autoworkers managed a 25% wage increase over 4.5 years – the largest increase secured in decades. A cost-of-living clause has been reinserted into the contracts, meaning that the actual wage increase over the timeframe will probably be more like +33%. The companies will pay more into defined contribution plans but will not create defined benefit plans for new workers. The unions can now strike over any planned plant closures.

The new deal is obviously good for the auto workers. Indeed, union leadership has described it as the best deal since the 1960s. At the margin, household wealth can increase and consumer spending can rise.

The deal could also increase the price of vehicles, though it is unlikely that the full increase will be passed along given competitive pressures. For context, Ford estimates that the cost of making a car will rise by US$850-900 over the lifetime of the contract.

At the same time, rapidly rising wages could have a negative effect on inflation, especially if other workers are able to extract similar concessions. The autoworkers directly affected by the deal represent just 0.1% of the U.S. workforce, but the effect could well be broader than that.

To be sure, it is far from automatic that higher wages equal more inflation. Gains could be paid for via productivity gains (though it isn’t clear why the workers would suddenly become more productive) or by falling profit margins (this is more plausible, especially given the way that profit margins soared over the past several years). Still, it is fair to assume that resilient wage growth will at least modestly complicate the effort to tame inflation.

The deal comes at a complicated moment for the traditional U.S. automakers, putting them at a further competitive disadvantage. The Big Three already have more expensive labour costs than their Japanese, German or new electric competitors.

The deal could also increase the price of vehicles, though it is unlikely that the full increase will be passed along given competitive pressures. For context, Ford estimates that the cost of making a car will rise by US$850-900 over the lifetime of the contract. This also has a small bearing on the inflation outlook.

Economic data worsens

There has been more bad than good economic data lately. Global trade is now in significant decline, both in nominal and real terms (see next chart). There are no cases in the last three decades when inflation-adjusted trade declined this notably without a recession resulting.

Global trade is contracting

As of August 2023. Shaded area represents U.S. recession. Sources: CPB Netherlands Bureau for Economic Policy Analysis, Macrobond,RBC GAM

In the U.S., the Institute for Supply Management (ISM) Manufacturing Index for October descended sharply, from 49.0 to 46.7 – clearly contracting territory. The employment and new orders components also fell substantially. In fairness, the bulk of the drop was simply unwinding unusual strength in the prior month. But the fact remains that all three metrics are below the key 50 threshold. The ISM Services Index also fell considerably, from 53.6 to 51.8 – its lowest reading in five months.

October U.S. Payrolls managed a moderate 150,000 new jobs. This was notably weaker than the recent trend, with revisions subtracting 101,000 jobs from the prior two months. But the story beneath the surface was worse. The alternative ADP survey reported a softer 113,000 new jobs, while the household survey announced the outright net loss of 201,000 jobs. The unemployment rate accordingly rose from 3.8% to 3.9%, making for a cumulative upward journey of 0.5 percentage points so far. The three-month average hasn’t quite yet increased by the amount historically needed to signal a recession, but it is getting close.

For the longest time, weekly initial jobless claims had refused to cooperate with this tale of gradual labour market decay. That is to say, jobless claims had remained very low, and even continued to improve. But now – albeit tentatively – initial claims are starting to rise (see next chart). Time will tell whether it is another false signal or not.

U.S. initial jobless claims are creeping higher again

As of the week ending 11/11/2023. Sources: U.S. Department of Labor, Macrobond, RBC GAM

Conversely, U.S. lending standards recently turned in a more favourable direction (see next chart). This constitutes a key positive economic development but requires some unpacking.

Technically, any reading above the zero mark refers to further tightening – in this case, just at a diminished clip. But, in practice, a pivot toward diminished tightening is often a precursor to further improvements down the line. Although the signal has occasionally improved while a recession is still underway, it is much less characteristic for the signal to improve and then for a recession to begin. This timing mismatch argues against a near-term recession.

U.S. business lending standards are tightening, but turning

October 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices. Sources: Federal Reserve Board, Macrobond, RBC GAM

Developed world weakens (ex-U.S.)

Even as leading indicators mostly argue that the U.S. economy will weaken from here, it is indisputable that the country’s GDP expanded by a remarkable 4.9% annualized in the third quarter. In contrast, most of the rest of the developed world has already been stumbling for the better part of a year.

In Canada, the unemployment rate is now 0.8 percentage points higher than its low, and we are tracking a slightly negative third-quarter GDP performance. This comes on the heels of declining output (albeit marginally) in two of the past three quarters. The Bank of Canada’s latest consumer survey found that almost 60% of respondents are reducing their spending – consistent with recent retail sales data.

UK Purchasing Managers’ Indices (PMIs) remain sub-50. Third-quarter GDP growth was slightly negative and the economy has been sputtering since the second quarter of 2022. It achieved just 0.6% cumulative growth over the past 12 months (see next chart).

UK economy stumbled in latest quarter

As of Q3 2023. Sources: Office for National Statistics, Macrobond, RBC GAM

In the Eurozone, PMIs also continue to fall and are well below the 50 threshold dividing expansion from contraction. Third-quarter economic output shrank slightly, following a quarter of tepid growth and two more of stagnation. Eurozone exports are down 9% year-over-year (see next chart) and the bloc’s industrial production has shrunk by 7% (see subsequent chart).

Euro area exports have plunged

As of September 2023. Shaded area represents recession. Sources: Eurostat, Macrobond, RBC GAM

Eurozone industrial production has been shrinking

As of September 2023. Shaded area represents recession. Sources: Eurostat, Macrobond, RBC GAM

The picture is rather more mixed in Japan, which somehow pairs contracting housing starts, imports and industrial production with an advancing Tankan business conditions survey (see next chart).

Business conditions have improved for Japanese non-manufacturing sectors, but deteriorated for manufacturing enterprises

As of Q3 2023. Sources: Bank of Japan, Macrobond, RBC GAM

Setting Japan’s ambiguity aside, the point is that as we sit debating recession or no recession, a number of developed regions have already succumbed to a sufficiently deep funk that their output and financial prosperity is already well below what a period of normal growth would have delivered.

Why was the U.S. the main exception in 2023, defying the darkening clouds? Surely the answer lies in part with the fiscal stimulus delivered in 2023, in part because U.S. households opted to continue spending by running down their pandemic savings, and in part because the U.S. economy is less interest rate sensitive. The first two of those advantages are unlikely to be repeated in 2024, while the third may be a smaller advantage than commonly imagined, as discussed in a prior MacroMemo.

Consumer outlook is shifting

Consumer spending has been a particular source of economic resilience over the past few years. The combination of government stimulus, accumulated wealth (not just from government stimulus, but also from the multi-year appreciation in home prices and equities), pent-up demand after pandemic lockdowns, robust hiring and robust wage growth have all surely contributed to this.

Some of positive forces remain intact. Hiring remains no worse than average, and wage growth in the U.S. currently outpaces inflation by a whopping 2 percentage points.

However, we believe that these and other variables may become less friendly for consumer spending going forward:

  • Unemployment is starting to rise, reducing the pool of households that can spend with enthusiasm.

  • Higher interest rates are consuming a growing share of household budgets.

  • Tighter lending standards restrict the availability of credit that might otherwise support spending.

  • The U.S. household savings rate is already unusually low, limiting this lever as a driver of further spending.

  • American households have already spent down the bulk of their accumulated pandemic savings.

  • More than 43 million U.S. households began repaying student loans in October.

  • Wealth effects are unlikely to be especially friendly in the immediate future – we budget for soft home prices and an underwhelming stock market performance.

  • Our forecast for a recession should result in a further increase in unemployment, diminished wage growth and greater generalized risk aversion.

At the risk of exaggerating the early signs that this trend is playing out, U.S. consumer confidence appears be declining after exhibiting strength over the first half of 2023. At the same time, credit card delinquencies are mounting, and the latest retail sales print was -0.1% (albeit after strength). Real consumer spending growth is decelerating (see next chart). The Black Friday shopping patterns will reveal more.

Real personal income growth consistently lags nominal growth

As of September 2023. Shaded area represents. Sources: U.S. Bureau of Economic Analysis, Macrobond, RBC GAM

In Canada, the economy is already weaker, home prices have more downside and rising interest rates have a more immediate effect. On the other hand, Canadian household pandemic savings remain largely intact, the household savings rate isn’t as low, student loan payments have not abruptly restarted, and the rate of population growth is remarkable.

For the moment, the negatives appear to be outweighing the positives, as Canada has a palpably weaker retail sales profile (see next chart). Consumer bankruptcy proposals are also rising, and the share of mortgages in arrears is starting to inch higher (see subsequent chart).

Canada’s real retail sales per capita have been declining

As of August 2023. Sources: Statistics Canada, Haver Analytics, RBC GAM

Canadian consumer insolvencies have been rising

Bankruptcies and proposals as of September 2023, mortgages in arrears as of August 2023. Shaded area represents recession. Sources: Haver Analytics, Macrobond, RBC GAM

China’s tepid recovery continues

We continue to flag China and its tepid economic recovery as a mild good news story amid the threat of an economic deceleration elsewhere. Policymakers have maintained their 5% growth target, and recently announced a larger fiscal deficit for next year of 3.9%, up from 3.0% in 2023. This should boost growth over the first half of next year in particular. It is also notable that Chinese equity valuations are quite cheap.

Among supportive policy changes, China loosened its property rules in late August, cut rates again in mid-September, and has provided a smattering of business-friendly regulatory tweaks since then. A one trillion renminbi infrastructure investment plan has been announced. And, as of mid-November, there were reports of a further one trillion renminbi plan to help the housing construction industry, which continues to struggle under the weight of insolvent builders among other factors.

China is not Japan

As China’s property market has struggled, many have noted the similarities with Japan’s early 1990s struggles. Like Japan of 30 years ago, China has:

  • Experienced an asset bubble.

  • Suffered a housing bust.

  • Accumulated a significant amount of debt.

  • Suffered from bad demographics.

  • Been threatened by the possibility of deflation.

Both Japan and China have experienced considerable friction with the U.S. after having run large trade surpluses against the U.S. for an extended period of time.

Worryingly, Japan went on to suffer a multi-decade economic malaise, with sharply curtailed economic growth. Its housing market took two decades to start reviving (see next chart). And the country accumulated an unprecedented amount of government debt.

Home prices in Japan fell for two decades

As of July 2023. 3-month moving average of monthly data from April 2009 onward. Shaded area represents recession. Sources: The Bank for International Settlements (BIS), Japanese Ministry of Land, Infrastructure, Transport & Tourism, Macrobond, RBC GAM

Might this also be China’s fate? In a narrow sense, yes: we expect slower economic growth ahead and a more muted housing market for an extended period of time. But the scale of the problem doesn’t appear as great for China as it was in Japan. As such the consequences should be considerably more muted for several reasons:

  • China’s asset bubble does not appear to be as large as Japan’s was. Japan’s cumulative land value was worth 560% of GDP in 1990, versus 260% of GDP for China’s property value today. The Tokyo Stock Exchange’s market cap was 142% of GDP in 1989, whereas China’s stock market is worth just 67% of GDP today.

  • China still has a considerable amount of “easy” growth ahead of it: Japanese productivity had almost caught up to the U.S. by the early 1990s and so would have experienced a material economic deceleration even without housing and debt excesses. The same cannot be said for China today (see next chart), which presently has a GDP per capita that is just 28% of the U.S. level. For context, Japan had ascended to 81% of the U.S. level in 1990 (see subsequent chart)

China still has a long way to go before it becomes a developed country

Country real GDP per capita at various points in time. Sources: Haver Analytics, Macrobond, RBC GAM

Drawing parallels between China and Japan

Country real GDP per capita at various points in time. Sources: Haver Analytics, Macrobond, RBC GAM

  • China remains substantially less urbanized than Japan was three decades ago. Japan reached an urbanization rate of 77% in 1988, versus 65% in China today. That means China could continue to enjoy the tailwinds of urbanization for another decade or longer as rural workers migrate to cities and become more educated and productive in the process. A recent turn toward Hukou reform in China signals that the country may be on the cusp of accelerating urbanization again. Hukou is a system that assigns individuals as either a rural or urban resident and determines where each type of resident can live, work, and access rights and entitlements such as education, healthcare, and other social services.

Smaller advantages include the fact that China’s political model is more capable of abrupt and difficult policy decisions should the need arise; the country has a long history of fixing debt excesses; and China’s capital account is not fully open. This reduces the risk of money flooding out of China as it did from Japan.

On the other hand, China has less room for aggressive fiscal stimulus today than Japan had in the early 1990s. All-in, China’s government debt approaches 100% of GDP when local government and off-balance-sheet debt is included. By contrast, Japan had a government debt-to-GDP ratio of just 62% in 1991.

Inflation cooperates

As we had predicted, inflation is now cooperating again. October Consumer Price Index (CPI) prints have largely resumed the declining trend after August and September bumped higher on oil prices (see next chart).

Inflation declining in major economies, but remains elevated

Eurozone and U.S. as of October 2023, Canada and UK as of September 2023. Sources: U.S. Bureau of Labor Statistics, Office for National Statistics, Statistics Canada, Statistical Office of the European Communities, Haver Analytics, RBC GAM

Goods inflation remains subdued, and service-sector inflation is starting to descend (see next chart).

Goods inflation falling, services inflation has turned

As of September 2023. Shaded area represents recession. Sources: U.S. Bureau of Economic Analysis (BEA), Macrobond, RBC GAM

For October, the bulk of the month’s mild increase in prices came from a single category: housing costs (see next chart). Indeed, housing is now the main driver of U.S. inflation even when measured on a year-over-year basis (see next chart). It is a similar story in Canada.

Housing contributes most to latest U.S. monthly inflation rate

As of October 2023. Sources: U.S. Bureau of Labor Statistics, Macrobond, RBC GAM

Housing is now the main driver of U.S. inflation

As of October 2023. Sources: U.S. BLS, Macrobond, RBC GAM

Fortunately, even dwelling costs are starting to decelerate (see next chart). It is reasonable to think that this process will continue given the lags intentionally built into the CPI calculation and the trend for housing costs and rent in recent months (see subsequent chart).

U.S. dwelling costs start to decelerate within Consumer Price Index

As of October 2023. Shaded area represents recession. Sources: U.S. BLS, Macrobond, RBC GAM

Market data signal further decline in U.S. shelter inflation

As of October 2023. Zillow Observed Rent Index includes rent prices for single-family and multi-family structures and leads by 12 months. Sources: U.S. Census Bureau, Zillow, Haver Analytics, Macroobond, RBC GAM

Happily, the breadth of high inflation continues to narrow (see next chart).  The fraction of the price basket rising at a rate of 10% or more per year has collapsed from around one-third of the total to virtually nil. Further, the fraction of the price basket for which prices are rising by 2% per year or less has skyrocketed to nearly 50%.

High inflation in the U.S. has become much less broad

As of October 2023. Share of CPI components with year-over-year % change falling within the ranges specified. Sources: Haver Analytics, RBC GAM

Looking forward, the inflation prints in the near future should remain cooperative: oil prices have continued to fall, the Cleveland Fed nowcast points to a soft November inflation number, and the PriceStats real-time inflation index similarly argues that inflation continues to retreat (see next chart).

U.S. Daily PriceStats Inflation Index

PriceStats Inflation Index as of 11/13/2023, CPI as of October 2023. Sources: State Street Global Markets Research, RBC GAM

Despite prominent wage settlements, overall wage growth and wage expectations are decelerating (see next chart). This means a potential source of inflation stickiness is starting to ease.

Wage pressure in U.S. is easing

As of October 2023. Wage Pressure Composite constructed using business intentions to raise wages. Shaded area represents recession. Sources: Macrobond, RBC GAM

Eurozone food inflation

Let us engage in a quick aside on Eurozone inflation, which has a rather different composition than in the U.S. Due to a weaker economy, a rather different manner of calculating dwelling costs and energy costs that have faded nicely, food inflation is actually the main remaining inflation driver in the Eurozone (see next chart).

Food is the largest driver of European inflation

As of September 2023. Sources: Eurostat, Macrobond, RBC GAM

There are obvious question marks with regard to whether the war in Ukraine might pivot in a way that restricts the availability of food. However, the more likely scenario is that food inflation continues to decline as conditions normalize.

Meanwhile, European energy prices have begun to rise as concerns about winter shortages mount once again. But any shortfall is likely to be less intense than a year ago (see next chart). In short, there is room for inflation to continue to improve in the Eurozone.

German natural gas prices have gone up lately due to supply risks

As of 11/15/2023. Sources: Intercontinental Exchange (ICE), RBC GAM, Macrobond

U.S. fiscal burden may create drag

Moody’s downgraded the U.S. credit outlook from “stable” to “negative,” possibly presaging a debt rating downgrade from AAA to AA+. The two other major ratings agencies already did this, making any such step by Moody’s largely moot – the country’s functional debt rating is already AA+. However, it would still be a symbolically negative development.

The U.S. deficit grew significantly in 2023 but is now starting to shrink again as the greatest burst of infrastructure-oriented stimulus and special factors on the revenue side ebb (see next chart). We anticipate a moderate fiscal drag in 2024 as this fiscal picture changes (see subsequent chart).

U.S. fiscal deficit has shrunk recently

As of October 2023. Sources: Macrobond, RBC GAM

U.S. fiscal policy to become a drag on growth in 2024

Fiscal impulse is defined as the change in general government structural balance as percentage of potential GDP from the previous year multiplied by minus one. Sources: IMF WEO October 2023, OECD Global Economic Outlook, June 2023, Macrobond, RBC GAM

Ominously, in the absence of significant fiscal austerity, the enormous U.S. fiscal deficit is not expected to shrink on its own. The Congressional Budget Office (CBO) projects that it will remain roughly steady in the realm of 6% of GDP, before starting to deepen towards the end of the next decade (see next chart).

Despite that, it is a mildly pleasant discovery that large and persistent deficits such as these only result in a moderate increase in the federal debt-to-GDP ratio over the coming decade, albeit from a high 123% of GDP in 2022 to an even higher 133% of GDP in 2023. Still, Japan it is not.

U.S. fiscal projections predict deficit will deepen

As of 2023. Sources: U.S. Congressional Budget Office (CBO), Macrobond, RBC GAM

What keeps the deficit so large? Even as the tax base grows, adding to the revenue side of the equation, the cost of servicing all of that debt is expected to mount quickly as government bonds mature and the debt is refreshed at higher interest rates (see next chart). The CBO estimates that the cost of servicing federal debt has already doubled from 1.2% of GDP to 2.5% in 2023. It then forecasts that this sum will rise to a colossal 6.7% of GDP in a decade (see next chart). This is unprecedented in the post-World War II era. It’s a lot of money being deployed unproductively.

U.S. debt servicing cost rising quickly on rising rates and high debt load

Sources: CBO Long-term Budget Ourlook, June 2023, Macrobond, RBC GAM

Perhaps the main point is one applicable well beyond the U.S. (see next chart). The central economic themes right now have to do with inflation, higher interest rates and recession predictions. However, these fiscal excesses and the austerity required to remedy them could become the next big theme once those have been settled. This will likely cast a shadow over medium-term economic growth.

Significant structural fiscal deficits persist

IMF projections for year 2023. Sources: IMF WEO, October 2023, Macrobond RBC GAM

Who drives global growth?

It is worth spending a moment contemplating where global economic growth is likely to come from in the future. Using five-year projections from the International Monetary Fund, some of the answers are surprising (see next chart).

China to remain the top driver of world growth

Based on International Monetary Fund (IMF) forecast from 2023 to 2026. Sources: IMF World Economic Outlook, October 2023, Macrobond, RBC GAM

Although the U.S. still has the largest economy in the world by conventional metrics, this does not mean it contributes the most to economic growth. After all, in an extreme scenario, an enormous but stagnating economy doesn’t contribute anything to growth. In practice, the U.S. is expected to be the third largest national driver of global growth, contributing 9.5% of the total.

Even as the Chinese economy slows, it is set to remain in first place, generating a remarkable 24.9% of all economic growth. However, that’s a smaller share than China generated over the past decade, when it frequently produced a third of global growth or more.

Remarkably, India is predicted to be the second largest driver of global growth, with 16.1% of the total. Perhaps this shouldn’t be a surprise given that India has long been a darling of investors. It just claimed the mantle of the world’s largest population, and it has been growing rapidly for a number of years. But economic output per person had long been so low that for a long time it just didn’t factor despite all of these merits. That’s now changed. India now matters more than the U.S. for global growth.

The remaining members of the top 20 all contribute markedly less to global growth than do the top three. However, a few observations may still be valuable. Fourth-place Indonesia is well behind the U.S., but it is also well ahead of any of the remaining countries – it is a genuine economic powerhouse on the global stage.

Of the other countries on the list, some are entirely expected, such as Bangladesh, Vietnam, Brazil and Mexico. But some come as a surprise, including the fact that Turkey occupies fifth place and Egypt is in ninth place.

Finally, the list is extremely emerging-market (EM) heavy. Incredibly, EM countries are forecast to generate more than 80% of global growth over the next five years. Developed nations are less than a quarter as important and the U.S. is responsible for roughly half of that growth. EM investments have not always fully lived up to their promise. And yet it is hard to fathom excluding them from an investment portfolio if it means being shut out from four-fifths of the world’s prospective economic growth – especially at a time when EM currencies are undervalued and equity valuations are low.

Unions ascending?

We are of the view that workers are gaining additional clout – not just cyclically, but also structurally. This is for a number of reasons, including the prospect of labour shortages as baby boomers retire, greater political attention to the plight of workers, more negative attitudes toward businesses, minimum wages that are advancing more quickly than in the past (and reaching a higher fraction of the median wage), and perhaps also as unions revive.

The implications of more powerful workers include wage growth that can run slightly faster than otherwise, and – of relevance to investors – profit margins that may fail to advance as easily as in the past as workers claim a greater share of the economic pie.

But are unions actually advancing?

Anecdotally, unions are enjoying a moment right now. Some unions have managed big wins in recent months, though one cannot rule out the possibility that these are merely due to temporary cyclical forces: the fact that unemployment is low, profit margins are high and because workers are motivated to claw back diminished purchasing power. Some unions appear to be gaining a tentative foothold in lower-skill service industries, whereas previously they were primarily the domain of manufacturing and the public service. One might imagine that de-globalization could also help unions, both as certain manufacturing industries return, and as diminished global competition reduces the downward pressure on developed-world wages.

But for all of that, the rate of unionization continued its precipitous decline through 2022 in the U.S. (see next chart). Perhaps fresher data will reveal the beginning of a reversal, but that is still speculative at this point.

U.S. union members as a share of total employed remains in decline

As of 2022. Sources: U.S. BLS, Macrobond, RBC GAM

Support for unions is becoming somewhat more bi-partisan in the U.S. – as evidenced by the fact that the leading Republican candidate for the 2024 election (Trump) offered his support to striking auto workers, just as Democratic President Biden did. However, it is fair to say that the average Republican remains fairly skeptical about unions (see next chart). Not everyone favours greater unionization.

American opinions divided on declining unionization trend

Views on the large reduction in percentage of workers represented by unions. No answer responses omitted. Survey of U.S. adults conducted March 27-April 2,2023. Source: Pew Research Centre

That said, attitudes toward unionization are definitely improving (see next chart). The slight majority of Americans were against unions at the time of the global financial crisis, whereas 67% now approve. That significantly reverses a long, gradual decline since the 1950s.

Americans’ approval of labor unions has risen since the Global Financial Crisis

As of August 1, 2023. Source: Gallup, RBC GAM

There are certainly still headwinds given the mounting popularity of “right to work” laws (and the greater economic success of states with such laws in recent years). The rise of subcontracting for workers may also make it more difficult for unions to gain a foothold.

Overall, and despite conflicting evidence, it seems reasonable to believe that some sort of union inflection point is taking place. Whether that means the beginning of a cautious rise in unionization, a halt to its decline, or merely a more gradual rate of decline is an open question.

It is also an open question whether the economy will enjoy a net benefit (as wealth is distributed more broadly) or a net drag (as labour flexibility declines and seniority supplants merit in some cases). These are subjects worth watching closely in the coming years.

-With contributions from Vivien Lee and Aaron Ma

Interested in more insights from Eric Lascelles and other RBC GAM thought leaders? Read more insights now.


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Past performance is not indicative of future results. With all investments there is a risk of loss of all or a portion of the amount invested. Where return estimates are shown, these are provided for illustrative purposes only and should not be construed as a prediction of returns; actual returns may be higher or lower than those shown and may vary substantially, especially over shorter time periods. It is not possible to invest directly in an index.

Some of the statements contained in this document may be considered forward-looking statements which provide current expectations or forecasts of future results or events. Forward-looking statements are not guarantees of future performance or events and involve risks and uncertainties. Do not place undue reliance on these statements because actual results or events may differ materially from those described in such forward-looking statements as a result of various factors. Before making any investment decisions, we encourage you to consider all relevant factors carefully.
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