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This episode, Chief Economist Eric Lascelles, reviews the latest jobs data out of Canada and U.S., noting contrasting trends in wage growth between the two countries. Eric also breaks down the potential economic implications as the Fed moves in a more hawkish direction. [16 minutes, 31 seconds] (Recorded November 5, 2021)


Hello, and welcome to The Download. I'm your host, Dave Richardson. And it is Jobs, Jobs, Jobs Friday; first Friday of every month, for the most part. That's when we bring in our expert chief economist at RBC Global Asset Management, the hardest working economist in economics, Eric Lascelles. Eric, welcome back.

Thank you very much. I heard there are some really hard-working economists outside of economics, Dave, but they don't count, right?

Yes that is kind of a fair positioning, but economics is not, I guess, known that much for hard work. But anyway, we'll fix that for next time. You have been working hard today because the U.S. and Canada both released their jobs reports for October. What's the big news out of that?

Okay, well, kind of reversal of last month, being honest. Canada generated a whole lot fewer jobs than last month. But the U.S. managed to put on the afterburners and went the other way. And maybe that teaches us a lesson which is, we shouldn't dwell too much on any single month. You look at the trends and maybe those trends aren't all that different between the two countries at the end of the day. But nevertheless, Canada is certainly still generating jobs. Still outpacing. Population growth still recovering, I suppose, is the main takeaway, but with only 31,000 jobs this month. For context, it was more than five times that last month with 157,000 jobs. I think everyone broadly knows this is a volatile series. I don't know if you could quite attribute all of that to volatility, but nevertheless a recovery, but a slower recovery. When you dug into the details, it was all full-time jobs. So that was good. And you let the record show that actually, as of last month, Canada had officially recovered all of the jobs that it had lost during the pandemic. And so we are out of the black on that front and adding net new jobs all the time. And so that's certainly a welcome thing. And the unemployment rate did come down. That was more than enough of a hiring number of jobs created rather to pull that unemployment rate down. So it fell from 6.9% to 6.7%, which is looking increasingly normal, if not maybe quite there. A couple of the things are interesting. So one, not a change, but nevertheless, it is notable that, for instance, Canadian employment, as I said, is above pre-pandemic levels; the U.S. still isn't. It's an interesting compare and contrast there. Similarly and really the opposite of what you’d think, based on what I just told you, wage growth in the U.S. is really flying now. And in Canada, still pretty tame, actually. We're still seeing hourly earnings growth of 2.0% year over year which— I don't want to make people too depressed—, but that's actually quite a real drop in wages when you compare it to the inflation rate we have right now. And so we're not seeing that kind of wage pressure, at least at this juncture. And so I suppose that's a takeaway as well. And we've said for a while, we think probably the Canadian economy decelerate somewhat into the fall and had a really good summer. And so maybe that's what we're seeing a little bit of, but I wouldn't overthink it. I'm not too distressed by it. I still think that we're broadly okay. And on the U.S. side, Dave, well, 531,000 jobs. That's a big number. Obviously, you need to do the times-ten trick to compare it to Canada. And so it's not that radically different. But still, that's a number bigger than the prior month. Prior month was a little under 200,000. But actually, no, it wasn't because they revised the prior month, and they added more than 100,000 jobs on to that as well. So this is one where there were just new jobs coming out of the corners, and it did beat consensus. And the U.S. unemployment rate just keeps falling. It's gone from 4.8% down to 4.6%. And I should say with wage growth that is now running 4.9% year over year, which is the quickest we've seen in quite some time equally, though, less than inflation. So everyone's a little bit poorer than they were last year, but nevertheless, nominally, at least the wage growth is quite significant. And maybe the other thought on this front is that, in both countries, we saw mostly service sector jobs being created here. To an extent that's logical because of course, the service sector has been the lagging part of the economy in terms of recovering. So I guess that makes sense. I am kind of intrigued by the good side, though, in the sense that, are we seeing the good side a bit softer because it's had its day and people are reallocating spending and things. And that would all be very consequential for unsticking supply chains and other things like that, or is it just happening because those supply chains are so bad that factories can't operate. And so it's a little unclear whether it's the demand constraint or a supply constraint, if that makes sense. But in any event, it is more on the service sector side right now. And so I guess that's the other defining characteristic. And certainly, this is more than enough to keep that U.S. recovery going. And we think the U.S. economy is actually accelerating a little bit, even as the Canadian economy decelerates a bit, mostly trading places because they did the opposite things over the summer. And maybe the last thought is that the U.S. labour force participation rate is pretty sticky. It hasn't fully recovered. So that was one of the things; a lot of people seemingly took early retirement or just aren't all that keen to get back into the labor force, and that still stands here. That's still an issue. It makes it hard to define just how far the labor market is from normal if we don't quite have a clear sense of why all these people are gone. And we thought we used to have a good set of reasons, and it was a lot of risk out there for people going to work. And there weren't schools and daycares for a while, and there were generous government support payments and so on. But those things have broadly gone away. And so the debate now is, well, people did accumulate some savings during the pandemic, and so maybe they're running through those savings before they're going back in. And a lot of people are maybe revisiting their career choices and things like that. And so, looking at going in a new direction, which takes some time, and maybe certainly some people did early retire. So they're probably not coming back. Of course, they would have retired normally, maybe two years from now anyway. So that'll cease to be a thing over a few years time. But then also people have moved away from downtown cores, and maybe the jobs are coming back in the cities. And maybe we just don't have quite as many people in the cities to take them. So a geographic mismatch might be an issue, too. So we're trying to sort through all of that. I do think in the end, we will see a pretty familiar looking level of employment. And actually, I would even argue we could see a higher than usual level of employment rate or participation rate, just because virtual working allows a lot of people a more flexible schedule or one that's not tied geographically. You could have a lot more people working actually over the long run because of the changes created by the pandemic. But we're not quite there yet.

Yes. I read a lot of articles this week about what some people are calling the great resignation. And of course, so many areas of the global economy have been dislocated by Covid. And so you had different reactions up, spikes up or spikes down, in activity. And now we're normalizing and coming back to perhaps different levels on a number of different things; that new normal that people talk about. And we're certainly seeing that reflected in different areas of the job market. Interesting as well, to see, as you mentioned, service jobs, that it's been a lot of the service sector in the stock market. The markets reacted positively overall to the numbers that were out this morning. But the service sector has been the area of strength in the markets today, right?

Yes. That's right. And, of course, keep in mind, at least from an employment perspective, this is a service sector that's scrambling to catch up to a good sector that has already largely restored its level of employment. But nevertheless, that point holds, to be sure. And I guess when I think about employment going forward, it is tricky in the sense that, for instance, in Canada, again, we already have more jobs than we had before the pandemic. They're not quite the same jobs. And I should say, hours worked aren't completely back. So there's plenty of room to recover. We should have seen more hiring over the last two years, not to suggest we are at a normal place for the labor market, but we're not that abnormal right now. And one of the questions is, it seems like a lot of people got jobs that were different from the jobs they had before. And as some of those lagging industries like entertainment, recreation, leisure, restaurants and accommodations, and things like that, come back with a lag, they may struggle. I mean, they are struggling significantly, but they may really have a hard time finding those workers. I think people have revisited in their mind those kinds of jobs. And they said, gee, previously there were various attributes of those jobs that I liked, and it was a good balance versus the compensation I was receiving. People now think these are may be dangerous jobs in a pandemic world. These are things that maybe I don't want to do and didn't factor in before the pandemic. And I think it's going to be hard. Some of these sectors are really going to struggle to bring things back. And we are seeing the wage growth in the U.S. I think we should see that in Canada at some point in time. We've been assuming we're going to get more wage growth with a lag, in part just because there's a mismatch, but in part just because, of course, we're also seeing a lot of inflation right now. People do want to be compensated for that as well. So I'm assuming that even as maybe inflation becomes a bit less intense over the coming year, that maybe the wage growth actually continues to pick up for a little bit longer.

The fact that we've seen the wage growth continue to fall below current levels of inflation, does that make you more optimistic? That this inflation wave is a little bit more of a passing fad that we'll work through in the not-too-distant future?

Yes, it's not a wage price spiral right now. I think that's certainly a fair statement. On the other hand, you can say, well, wages don't adjust as quickly as prices. A company can change its prices overnight. Wages? Maybe the next person who gets hired gets a different wage and they wait till the end of the year to adjust other people's wages, or they wait till someone threatens to quit or something. And so it's a bumpier process and a less quick process. I can say in general, you'd think maybe wages always follow inflation. It's not always the case. Actually, they do tend to be contemporaneous, but I just think they're not. Funny things are going on out there right now that it makes sense to me if the wages are responding with a bit of a lag.

I think we'd be remiss if we didn't just at least touch on the Fed’s announcement this week in terms of tapering their bond purchasing and even perhaps signaling that interest rate increases might be a little earlier than some people had expected. Do you take anything away from what you heard from the Federal Reserve this week?

Yes, well, we talked before about central banks having turned in a more hawkish direction. I don't know if this one was a big surprise, but nevertheless it was in a more hawkish direction. So the Fed essentially said quite clearly, later this month they will start buying fewer bonds. That is the beginning of the taper; pretty well signaled, I think, in recent months. They expect to be done buying bonds, at least done doing anything other than reinvesting maturing bonds by the middle of next year. So the taper is done. I guess you see QE is done, other than some reversal effort over subsequent years by the middle of next year and still a bit coy, specifically as to when rate hikes happen and so on. But if you look at dot plots and things like that, it does seem like second half of next year is when they're thinking hard about those things. Now, Dave, I actually spoke with Ben Bernanke earlier this week, believe it or not. Me and a few other people. But I did get to pepper with a few questions, and he seemed to think that the Fed would want a significant separation. They've been saying all along that QE and rate hikes and different things, they're probably going to want to finish neat and tidy the quantitative easing, have a nice little pause, then start doing some rate increases. He was arguing— and consistent with our view, as we've been arguing—, probably not quite as much rate increasing as the market thinks right now, and maybe closer to the end of the year or even possibly into early 2023. But nevertheless, I guess that is getting a bit closer. Then the other thing that the Fed really flagged was that they're very data dependent now. So for a long time we've had this guidance, and no, we're not going to do anything for a very long time. And so on. They're in a world where they recognize there are a lot of moving parts, and it's hard to predict. There was a high level of data dependency. We've been there many times in the past, but it simply is to say that there could be more volatility in terms of the bond market in the sense that it's just harder to predict exactly what they might do because they do not know yet. They're going to wait and see what the data tells them to do as well.

Yes, I'm interested just to get your perspective on something. So I remember back to the old days, back in the 90s with Alan Greenspan, and he would come running up the steps of the Federal Reserve, and depending on which briefcase he had, they would be forecasting whether he was raising rates or not. And Bernanke brought in— or intended to bring in— much more transparency and a better communication process with markets to telegraph or signal what's going on. That's been carried through the dot plots. Do you think the Fed is doing a better job? Do you think the market reaction yesterday is proof that the Fed is doing a better job of keeping market participants at least current with thinking and not surprised or shocked by what's coming down the pike?

I think so. It's been incremental. Let's start by saying that Bernanke deserves some credit for that. But it has been incremental over time. As you say, in the 90s, there weren't even, for quite a while, fixed announcement dates. They just did something, and oh my goodness, it was happening at nine in the morning or whatever the time was. They introduced fixed announcement dates. They started publishing statements whether a change happened or not. They started publishing minutes. In fact, you can even read the full transcripts in a lag of five or six years, which is fascinating, by the way, if you ever feel like doing that, but it's always quite dated. The dot plots, as you say. The list goes on. There really have been many incremental changes. In general, I think it is welcome. However, you can make a criticism as well, and some people do. They say that essentially, it's made the market think a lot less for itself. It used to be you had people say, I think they're going to hike next year. Somebody else says, I think they're going to cut next year. They couldn't both be right. But nevertheless, you have been resiliency in the market in terms of people thinking about different scenarios. Now everybody just kind of bets on what the Fed says it’s going to do. When there is truly a surprise, something happened they didn't expect, nobody was ready for it. There are some costs associated with a lot of transparency. Also, central banks can lose credibility if they predict things that they don't actually eligibly get to do. So lots of little nitty gritty thoughts as to why it's not necessarily perfect. But I think in general it's been for the best. As it stands right now, they're essentially transitioning and saying, well, we're into a world that's a bit harder to predict. They are more data dependent. That means we need to think for ourselves a bit more in terms of when those moves are going to happen.

Yes. I think if we even go back twelve or eighteen months, there were people who were quite worried about when this announcement would take place— that tapering that was going to start—, and the market just brushed it off and went to a new high, yesterday and Wednesday.

Yes. That's right. It’s not over yet. They haven't actually raised rates yet, but in general, we said we don't think there has to be a big taper tantrum. We learned lessons from a decade ago, or from 2014, I guess, and the tantrums that did occur then were unwound quite quickly. Anybody who bet on the tantrum lost money shortly thereafter, so I think people are remembering that lesson, and central banks are also trying to guide the markets in a clear and logical way. In the end, I'm not surprised that the markets are taking it a bit better. I think there is an interesting debate as to bond yields have moved an awful lot in recent weeks and months, and yet the stock market and currencies seem largely unperturbed, and that has caught our attention. I'm not sure it's inappropriate, but nevertheless, it may be unusual for several markets to sell so smoothly while others are encountering choppiness. I would say there are some questions around that, but nevertheless, we sort of have a veteran status markets here and it takes a lot for them to get panicked, after all the adventures in the last twelve or thirteen years.

Yes, well, one of the reasons we do this podcast is to make investors smarter and help them evolve as markets evolve, and central banks evolve in the way that they do things. That's why we bring you on, because you always make us smarter, particularly because you're probably the only one between me and everyone listening who's going to go back and read those minutes from five years ago. Because you are the hardest working economist in economics. Eric Lascelles, thanks for joining us again.

My pleasure. Thanks. Bye, everybody.


Recorded: November 5, 2021

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