Hello and welcome to The Download. I'm your host, Dave Richardson, and we are joined a little bit late for our monthly jobs report update by Canada's laziest economist, Eric Lascelles. Eric, I normally introduce you as Canada's hardest working economist, but there are no economic reports coming out of the US because of the shutdown. So you actually have nothing to do?

That's more or less it.

Or you're focusing on Bolivia a little bit more now than you were before?

I'm the one Canadian who has also been furloughed, effectively. That's right. No, there's lots to be done. I mean, there's alternative data to try to sort through to figure out what the real data might have said. And of course, the shutdown itself brings its own set of cascading implications. And what do you know, even before all that started just a few days ago, the economy was fairly interesting in and of itself. So we're still pretty busy, but we are missing the payroll number that was normally the punctuation mark that pulled us together for the purpose of this podcast. So we do not have one, though we can say that the ADP survey, the private sector, approximate equivalent, was fairly soft. It was down about 30,000 jobs. And so it doesn't precisely match with payroll. Though I should say they redid the methodology some time ago in a way that made it less of an effort to match the payroll’s report and more of an effort just to be a good employment survey. And so, tongues have wagged for a long time that it might actually be the better of the two to begin with. Not to say we don't miss the payroll number, which we certainly do, but I would say that data point would suggest a continuation of that fairly soft trend that we've been seeing for a number of months. And I would say similar evidence when we dug our way into a few of the others, the ISM employment component and services employment component, those sorts of things would all say, yeah, this is a labor market that is still cooling.

And I know your family and your boss listen to this. So you are still Canada's hardest working economist. There's no doubt about that. I'm seeing all the reports you're coming out with because like you say, just because the official government stats aren't coming out, there's still lots of stats coming out. It makes it even harder because as you say, you got to piece it together to figure out what's going on. I think the first thing I wanted to cover—and we probably should have gotten on a week ago to do this—but for Canadian investors, government shutdowns, how should they think about this? It seems like, as an observer of politics in the US, and obviously following economics and investing, it seems like these shutdowns come up all the time. Should Canadians really ever concern themselves about these?

The last part is a good question. Maybe the answer is no, to the extent that they're generally short-lived and there's a bounce back and so on. So maybe that is the simple answer. I guess you could step back and suggest maybe it's a proxy for government dysfunction or polarization, and perhaps there are some threads that come out of that that might be relevant to long-term investors. But no, it's a temporary thing. You're right. We hear government shutdowns threatened all the time. They happen less frequently than that. The last one was 2018, 2019. I wouldn't want to say you get one every five years or so, but let's call it that. And I think in recent years, it's been maybe at that approximate frequency. And so not unprecedented. Certainly, a headache for economists, as we've already covered. So you don't get the numbers. That is, of course, just an incidental part of this. I mean, the big story is one in which every year the US government has to agree to a budget. As it happens, their fiscal year starts October 1st. So that's why October 1st was when this shutdown happened, because they did not agree to a budget. The whole government is not shut down. It is just non-essential workers who are shut down, which, as it happens, is almost a million workers. It's three quarters of a million. I'm sure they're entirely useful over a longer trajectory, but you can get by without them over a shorter period of time. The longest shutdown in history was actually the last one under President Trump in his first term. That was 35 days. We've never seen one go much beyond a month. We do generally see some economic short-term damage. And so you can often see in that quarter, the economy is 0.2, 0.3% smaller than it would have been on average. The unemployment rate goes up a couple of 10ths of a percentage point on average. This one could be a bit more intense. So there's two elements here. How long could it last and how deep could it be, you might say. And you might think that «how deep could it be» is pretty constant because they shut down last time, they shut down this time. There actually are different gradations of shutdown. For instance, in 2018-19, it was a long one. However, there are 12 different budget components that they have to agree to have the full budget funded. And they had already agreed to seven of them last time. So the last shutdown was only five out of twelve. Not that each one is the same size and all that. But nevertheless, this is the full twelve out of twelve they haven't agreed. So you would assume that the depth of the short term impact would be greater this time. So maybe it's a half percentage point off Q4 GDP. That's non-annualized, by the way. It would be more intense if you want to annualize that. Maybe it's a bit more on the unemployment rate as well. Maybe it's three or four tenths as opposed to two tenths. Of course, we don't get the number till it's done. So that's maybe beside the point. But nevertheless, there is some damage. This one is more intense potentially, but as I've mentioned, you do then get a full bounce back. I mean, as soon as the shutdown is over, you get all the regular output returning. Often, you even get a bit of catch up in terms of someone is scrambling to clear the paperwork off their desk. So there isn't a lot of long-term damage. The furloughed workers do get their back pay. That was actually legislated. It always happened, but it was legislated actually last time. There are contract workers who do not. So I don't want to suggest there's no suffering. There are a significant number who will not get their back pay. Further, it is non-trivial suddenly not to have a paycheck coming in from making a mortgage payment perspective and these sorts of things. And so you can imagine the stress associated with that as well. So that's a consideration. And then the thing we really don't know this time is how long the shutdown lasts. I can say as of last week, the thinking was not too long. And if when you look at Polymarket, the betting markets, they were assigning a greater than 50% chance this thing will be done by October 15th. That's an important date, by the way. It's when the military gets paid. Actually, a very large fraction of these non-essential workers are military, and they're spread across the country in a way that maybe encourages politicians to get moving on this. You might imagine perhaps a bit more hand to mouth than some in terms of savings when they're younger and this thing. That could still be a very important date in terms of putting pressure on politicians. But all that said, as I'm tracking some of these betting markets, we've seen a distinctly rising probability extends beyond October 15. In fact, right now, the market says a 70% chance it is not resolved by then. The issue here is you've got two fairly stubborn parties. The Republicans want a smaller government, and so maybe they don't mind that this shutdown lasts. And they're saying they might even fire some people permanently just as part of that process. There's no connection, I should emphasize. You could put it on the day before the shutdown or the day after with the same rules in place. The Democrats are very keen on restoring some of the health spending cuts that occurred in the summer and that are set to expire at the end of this year. And so there is a scenario where this just dribbles along and does get more painful. And no one would deny that the level of polarization is incredibly high in the US right now. And so if you're ever going to have one that does take some time to resolve, this could be it. So we're left really not that clear on the timing side. In the meantime, it is a short-term hit. We're left a little bit in the dark on the data front, but we're doing our best with alternative indicators.

Yeah, it's like this time of year, every Sunday, I'm lying on the couch watching football because I love to watch football, and my wife comes down and she wants me to go and do something. Every time I stay a little bit longer on the couch to battle, but ultimately, I get off the couch and do what I'm supposed to do. And the government will as well. I think the important thing, and we've talked about this on previous podcast—by the way, you can subscribe to the podcast, wherever you download podcasts, subscribe to us, watch us on YouTube, review, let us know what you think of the podcast. Everyone loves Eric, so you don't even have to do that. But some of the other podcasts we do. What we've talked about on previous episode is the idea that there's economic events like this, and the comparison would be to a natural disaster or hurricane in a small area, it does a lot of damage, so you get a hit in the early days to the economy there. But then you do have to rebuild everything if everyone's going to come back and live in the same area again. That's when you get this pickup on the other side. A government shutdown is a lot like that in that it is temporary, it seems big, and when you start to talk about numbers, it's billions of dollars, but it tends to get resolved, and then everyone is made full, chilled by it, and just getting over the hum of the possibility of the government shutdown even gives you maybe a little bit of a jump on the other side of it.

Yeah, that's right. Markets usually do not respond in a major way, as per all the reasons you just articulated. We were looking at the last eight or nine episodes. I guess you could say as soon as it happens, the stock market can be down a little bit. By the way, that would have been in the rear-view mirror, if it was going to have happened. You would think on average, the 10-year yields, a hair lower, but really, you have to squint your eyes to see it. Again, it should already be absorbed. US dollar, in principle a bit softer, not stronger. That's, of course, a structural theme we have in our investing thesis as well. Really not big market implications is the takeaway.

Yeah, I do like your point in terms of linking it for a longer-term investor—and I think Canadians feel this way a little bit right now. We see the discourse and the divide across the border in US politics. Ultimately, that discord it does create problems and friction. It stops them from resolving issues they need to resolve. It stops them from investing in areas where they probably should because they can't agree on where they're going to invest. And all these things ultimately roll into the economy underperforming what it could do over time.

So there's been some scarring from the prior inflation bout. Inflation wasn't all the way back to 2% even before the tariff story got going again. I would just emphasize that as much as we are, therefore, looking for a bit of additional inflation over the next six months or so, and it could make its way up even to a 3.5% reading. Do keep in mind a few things. One is that's not the 9% that was hit during the real inflation shock a few years ago. It's a different order of magnitude of issue, which is important to keep in mind. Keep in mind too, we happen to be getting helping hands from lower oil prices, from lower shelter inflation. Those are quite helpful as well. The tariff side is coming through less profoundly than had been feared. We're seeing some additional part of the tariff shock absorbed by foreign manufacturers, by domestic American companies more than you might have even thought. And so that's reducing the hit to the consumer. It's coming in a bit lighter than we thought. And it is inherently temporary. It's a price level shock, meaning that you should expect the purchasing power of the average American to fall by a percentage point or a bit more, but it's not the inflation rate remaining higher forever. And so it's not a perfect situation. It is one, though, that I would still say the Fed, of course, cut rates in September. The Fed's in an okay position to do a bit of additional easing. Inflation is not quite where they'd like it to be, but they know there's some artificial effects there. They do see the labor market in particular cooling in a way that I think motivates them to cut because they've been starting from a fairly high starting point. It was almost a 4.5% rate until they cut recently. I think they can deliver several more of those and work their way maybe over the next year into the low 3s without overheating the economy or creating too much extra inflation.

Great. Well, Eric, we'll stop there. We'll get you on in a couple of weeks to get the stuff, talk about interest rates and where they're headed. Once again proving my initial comments foolish. You are in demand. You're headed to another meeting immediately, so we've got a hard stop on this. So thanks for squeezing this in and updating Canadians on the government shutdown and just as I think they're seeing, but it's good to confirm that this is not something from an investment perspective you need to worry about in the short term. And so carry on. Have a great rest of the day and we'll talk to you in a couple of weeks, Eric.

Thanks. Bye, everybody.