Hello and welcome to The Download. I'm your host, Dave Richardson. It is a Friday's job report, and we've got our fantastic guest, Canada's hardest working economist, Eric Lascelles, who is in Victoria, British Columbia. It's early morning there, but he's already been up for hours studying the jobs reports out of the US and Canada. He's already done a big presentation out there to a crowd of adoring fans. A lot of autographs in Victoria for you because I know in other parts of the country, you're signing a lot?

A lot, yes. Quite a few. Send new pens, Dave. The real reason I am in Victoria — this is going to be an inside joke for those who are listening from BC — it's funny, there's federal level political stuff happening in Canada. The NDP withdrew their support for the Liberals. One of the things I've been talking about is, I don't think we're going to get a snap election. I don't think it's in too many people's best interests. But nevertheless, even if there's just a regularly scheduled election, it's about a year away and it's time to start thinking about this, and it might be a new government. So that's been one line of attack. But the BC-specific one. Again, Victoria being the capital of BC, and I can almost see the legislature from my hotel room — I can actually see garbage dumpsters, too. I didn't get the premium room, Dave.

You should draw my name. I'm pretty popular there.

You may have heard in BC, the opposition party just ceased to exist. Did that catch your eye? There's an election happening in October, and you've got the NDP who are leading, and it's BC United Party that were the opposition, and they just literally dissolved themselves in the middle of the election, which is a bit of a baffling move. Sometimes you have an election, and you lose so many seats that you functionally cease to exist. But this was, to my knowledge, not the case. So I'm looking for answers.

I've been driving around Montreal, so that means I've got to focus on the road and avoid potholes. I don't know if you know about the roads in Montreal. With the lighter employment report in Canada, we could actually put some people on that.

We could get the military on it, Toronto style, too.

If you spend any time around Montreal, you know that they've been working on it for the 58 years that I've been alive. So growing up here, it's just part of the charm of the city to be just clunking through a pothole that hasn't been fixed in 40 years.

Well, Dave, my maternal grandfather was born and raised in the Bronx, New York, and he would come to visit us in Ottawa occasionally, driving up. And he had not so good things to say about Montreal. Less about the potholes, more about the state of the driving. I was three or four years old, but I'm told he was not a fan. When a New Yorker is not keen, you know it's a little bit tricky in Montreal.

But we had an unbelievable dinner last night. And all the other stuff that makes Montreal so special. So Eric, let's get to the jobs. Actually, why don't we start in Canada this time? Because the Canadian numbers, particularly the unemployment rate, you're starting to crunch the numbers around and it's not looking that good, right?

Yeah, that's right. And so, of course, the backdrop in the prior two months in Canada, the months of June and July, the economy officially lost a couple of thousand jobs each month. So that wasn't great. This one was a plus 22,000, which is not that far from consensus. And if a time traveler from a couple of years ago landed here, they would have said, that's a pretty normal-looking month of job creation. But it's actually not that normal in the present circumstances, just because, of course, the rate of population growth is just so extraordinarily high that you need — I'm losing track of the exact number — but 50 or 60,000 jobs a month to keep pace with the rate at which people are coming into the country and they want to work too. In many cases, not even eligible for some of the benefits if you can't find a job. So they're particularly motivated and not everybody's finding a job. So 22,000 is not enough to keep pace. And so, as you alluded to, that unemployment rate was a 6.4%, and now it's a 6.6% so it's moving higher at a couple of ticks a month, at this rate. I've been more charitable than most in my definition of what a neutral unemployment rate is for Canada. And I've been heard to suggest it could even be as high as 6 to 6.5%. But we are now well and truly through that range. And even the likes of me would admit that this is an unemployment rate that is higher than normal, higher than desirable, and I suppose an extra incentive for the Bank of Canada to continue cutting rates, which they did earlier this week. And maybe the other angle — and I was speaking about this in a recent presentation — is that youth unemployment in Canada is particularly high. I should emphasize, youth unemployment everywhere is always pretty high. They are people with less job experience and maybe fewer skills and less attachment to the labor force and less tenure and all of that. But nevertheless, maybe a normal youth unemployment rate in Canada is 9%. It's 14% now. It's gone up five percentage points. And so that's not great. And that is in part an acute function of low-skilled temporary foreign worker programs intentionally bringing in people who happen to compete with a lot of the jobs that the youth might otherwise get. So that helps to explain that. But point being, this is a Canadian economy that is notably underwhelming, and the rate of growth isn't great, and unemployment is rising, and some economic slack is opening up. And while we can celebrate that this means inflation keeps coming down, probably, because that fits into the equation somewhere, maybe for investors, an even bigger message would be Bank of Canada can keep on trucking here in terms of rate cuts because there is nothing in their way right now.

And just as an anecdote of one, if you were listening to this podcast a little over three years ago, my 17-year-old, who was still 14 at the time, was looking to get a summer job. And companies were so desperate to get workers, they snuck her in under the 15-year-old threshold that they had. So she walked out at the start of August, figuring maybe I'll make some money in the last month before school. I've had a nice enjoyable summer thus far. So she just walked into a store she wanted to work at and said, when do I start? And they went, well, we're not hiring. It's a little bit of a different job market, or that part of the job market, which, as you mentioned, is youth. But right across the board, a very different job market. You and I both manage teams in a large organization. I know that the job market for people on my team or people I'm trying to bring on to my team is very different than it was two years ago. You feel it and the employees feel it, and then that permeates the economy. The Bank of Canada, now we can look in hindsight and the fact that they moved well in front of the Fed and have now cut 0,75% before the Fed has done anything, although I think we know the Fed — we'll get to that in a second — is going to do something this month. But they were right to start cutting when they did.

That's right. Certainly, they are redeeming themselves after making the same mistakes so many other central banks made earlier, which is not treating that initial inflation burst with the respect that in retrospect, it deserves. So that's right. They are gaining some credibility again. So good on them. By the way, if anyone is looking for work, I will say my 12-year-old has a job. He's an umpire. He's making 50 bucks a game. You can go have parents yell at you. No, no one's yelled at him, but the risk is ever present.

I was a top umpire here in Montreal when I was a kid. That is a fun job. It's a character builder, too. You'd be surprised how many parents who have incredible jobs, like being the chief economist of a large asset manager, might take unusual interest in the strike-or-ball calls in the middle of an 11-year-old baseball game. That’s youth sport in a nutshell.

For the audience, Dave, explain to them what a balk is.

A balk is basically deceiving the runner. Using tactics on the mound to deceive the runner, which can come in many forms. I guess the balk from the labor department in the US was those 800,000 missing jobs all of a sudden. You might call that a deception as you're pitching towards the mound of the world looking for an accurate jobs report. We'll take this number with a grain of salt, given what's happened over the last year. But was that just an okay number?

Okay drifting into soft, but maybe not quite as bad as the market is viewing it. The official number was 142,000 more jobs created in the US in the month of August. 165,000 had been expected. That's a small miss. I think the reason the interpretation is somewhat more negative than that is that there were some downward revisions to the prior couple of months, which by the way has been a theme. Every time you get a number you pencil in, well, it's probably 50K lower by the time they get done with it a couple of months later. Keep that in mind. But there were some 86,000 fewer jobs created over the prior couple of months. It's funny, I've seen some people say, hey, this is an improvement because the last month was only 89,000. But it wasn't 89,000 when they first announced it. So this one could yet be weaker too. Bottom line is there has been some weakness here. Unemployment managed to improve just to confuse everybody. So it fell slightly from 4.3 to 4.2%. But keep in mind, it comes from a different survey. There was a hurricane in July that we think boosted the unemployment rate and we unboosted it a little bit. But nevertheless, a bit of softness here. I would push back slightly and say that I don't think it was too bad. In fact, my general way of thinking was that if this thing came in under 100K, people are going to get pretty concerned. If it came in 100 to 200K, which is what happened, the jury is still out. It's ambiguous quite where we are. More than 200K — which again, didn't happen — would have been a pretty good sign that the prior month was an outlier and we didn't need to worry. We are still in uncertainty mode. I will say aggregate hours worked was up. This is one of these things where you can say, well, it's nice, there's more workers, but sometimes they're working fewer hours, and you actually didn't end up with an economy needing any more people. That was up. We'll take that. Hourly earnings were up to a moderate extent. Again, it depends if you're paying that wage or you're earning it, but nevertheless, it doesn't sound like things are utterly crumbling here. I looked through it and yeah, there's still a bit of softness in the labor market. You recall two podcasts ago for us, but the last one that was employment-focused in early August, if memory serves, we were all pretty nervous because you'd seen the job miss and you'd seen an ISM manufacturing that came in quite weak, and it looked suddenly as though the economy just literally fell off a cliff two minutes ago, and we weren't sure. I can say since then it looks like it didn't fall off a cliff. We are still talking about a decelerating economy, so that's important and it still presents its own risks. But since then, we got another manufacturing PMI just earlier this week, and it wasn't great, but it was okay. It was up a hair from the prior month that had scared us so much. It doesn't sound too different, but the point was it wasn't collapsing further, which had been the concern that we could just be chomping our way down multiple points a month for a while, and it went up a little bit instead. And we got the US Services PMI, actually both for July and then August. In both cases, it reverted back to growth. Of course, now we have the payroll. I think the interpretation here is the US economy is still probably decelerating. It's decelerating at a moderate pace, not an aggressive pace. Some of that moderation is welcome. We have five different ways of trying to estimate whether the economy is overheating in the US or not. And four of the five would still say it is running a tiny bit hot as opposed to a tiny bit cool. Maybe the add-in of the unemployment rate is another one, and we generally thought 4 to 4.5% was the sweet spot. And we're sitting at a 4.2% right now. And so that's still in the sweet spot if we can stabilize it. The issue is just that labor markets can be a slippery beast, as you know, and when the unemployment rate starts rising as it has since last year, it can be hard to stop. And so this is just the eternal question, and I don't think we got a clear answer to it this particular time.

Yeah, it just continues this spot that we're in right now, which is where we expected it would be. It would be in the third and fourth quarter of this year when you would really start to feel that deceleration and then wondering just how quickly it's decelerating. And one of the things we talked about if you go back and you listen, I think over the last couple of years, when we've talked about the recession risk at different points in our conversations, we did talk about the idea that recessions just happen. You're coasting along and the data looks pretty good. And of course, unemployment is a rear-view mirror. You're looking at the past. It's not a current indicator. And then just all of a sudden it does almost feel like it drops off a cliff. Just boom, all of a sudden, you're in a much slower environment or a recession. And so it's not that surprising. But Eric, if we look at the Fed now and how it’s going to look at this, does this increase the chance that they maybe go 50 basis points on September 18th, or you think they still are most likely to do the quarter and just continue to watch because it is such a mixed picture?

The way the market is viewing it — and this is probably right, particularly given the revisions — there's a bit of softness here. It does increase at the margin the amount of cutting the Fed wants to do, and I suppose it increases the odds of a 50-basis point cut. I think the odds are still pretty low, though. I'd be, not utterly shocked, but I'd be surprised if they did opt to go by that much. I will say the market is really on a knife's edge right now. I'm just looking at this, and so the market has 49% chance of a 50-basis point cut, and I guess a 51% chance of a 25. So it's in play. We will get more data over the next couple of weeks that perhaps will help to inform this one way or the other. I still prefer 25. I guess the market does by a percentage point as well. I still prefer that just in the sense that if you start with a 50, it does sound like a little bit of panic, and there is a risk that people maybe interpret a bit too much into that. Other than the labor market that's cooling, things aren't that radically different than where we've been over the last few years. The ISM manufacturing Index, and the manufacturing sector has been complaining at a contraction mode for two straight years at this point in time. And so that's not particularly new. You still have a service sector that appears to be growing. You have small businesses that in the last month actually grumbled less, the least they've grumbled in the last two and a half years. And so not everything is pointing down whatsoever. I'll certainly concede the labor market is, and it's a pretty important one, but I would say right now, it's a little bit more likely they stick with the 25. But here's the thing, they can go, if they want to, at every meeting. You do a 25 on September 18th. Maybe you do another two days after the election on November 7th. You can get another one in December if you like. I think it's perfectly reasonable to think they can move like that. Not to say they will move at every option over the next year, but you get eight of these decisions a year. You can make a fair dent in this thing fairly quickly if you go at that rate. I think that's a bit more likely to me. I did see at least one Fed member say, I am now in support of rate cuts after the outcome. So yes, this does incrementally increase the odds of cutting and the amount they could conceivably cut.

From an investment standpoint, the way to think about it, as you're listening to this conversation, there's a degree of uncertainty around this outcome. Whenever you have uncertainty, markets don't like it. We were having this discussion at dinner last night, and I was saying, why is uncertainty such a problem for the market? Well just think of your own life. I'm thinking of myself. My wife and I, both our kids are gone off to school. We're empty nesters, and there's that anxious feeling. How are they going to do? How are things going to play out? You don't know. The first few weeks of school. And both of us are expressing that uncertainty through a behavior that is anxious. We're crying, we're hugging, we're laughing. When human beings are uncertain, they express emotion a certain way. When markets are uncertain, they express that emotion through volatility. And we've seen that volatility increase in markets, stock market in particular. But even the bond market. If I think of my long history of watching bond market moves almost second to second for 50 years, which is a bit of an exaggeration, but it seems like rates and long-term rates are bouncing around a little bit more than you'd seen historically.

Yeah, I think that's entirely right. Of course, inflation has been in play for a while and big questions as to what a normal interest rate is coming out of this, so that's part of the debate. We know that rates are restrictive now. I think 3% is about a normal policy rate, I should emphasize. And so that's a question mark. And then also there wasn't a term premium in the bond market for a long time. You wouldn't have known it if you were just walking around because there was often an upwardly slope yield curve, but that was more on the presumption that you'd eventually get some rate hikes at some point. I'm thinking back a number of years, and there wasn't really much of a term premium, and it seems like maybe that's working its way back in. Logic says there should be one, particularly given some of the fiscal excesses out there. Some of the big variables that influence bond yields are all in play right now and subject to interpretation. There's a fair chunk of uncertainty there, not to mention there's always some event risk, of course. Here we are, Dave, two months less a day away from that US election, at least as we're speaking. That's getting close. Okay, Harris has got a 52% chance of winning, says the betting market, but that's pretty much a coin flip at this point. There are two possible options with some pretty different policy priorities. I've been saying to people — not that who the President is is unimportant; obviously, it's quite important — but ultimately, maybe the most important thing in terms of whether they deliver an economic boost or not is going to come down to whether congress is a sweep and is aligned behind the President. That's also a knife's edge thing right now with some 50% chances going in different ways. There's another event risk that exists. But it's worth keeping in mind with all these things that over the long run, markets tend to go up and over the long run, economies tend to grow. Sometimes we obsess a little bit too much on that, but that's my job anyways.

That is an excellent point. That's right, that is your job and you do obsess. My uncertainty diatribe is that election sitting two months out is also a 50/50, and that creates, as you get closer, that uncertainty, this next couple of months, for investors. And as we said, volatility can be your friend, but there's likely going to be a little bit more volatility in markets than we've seen in the first part of the year. And then we'll get that resolution. We'll start to see what's happening with the Fed. We'll get some more reports on the economy, and hopefully, that removes that uncertainty. We look out a year from now, rates are lower, and we likely have better economic growth. And so markets are ultimately going to look at that, and that should be a positive.

I think that's right. Be a long-term optimist is a good rule of thumb in markets and in life, Dave.

Words of wisdom from Canada's hardest working economist, Eric Lascelles. We're working on his work-life balance. That's my wisdom for him: balance things out. You can't work 25 hours a day, but I know that's what you love, so that's okay. But thanks, as always, Eric, for joining us on the big Jobs Friday, and we'll check in with you next month.

Thanks so much. Bye, everybody.