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This episode, Chief Economist Eric Lascelles takes a look at what’s on his economic radar this week. Eric starts with the latest jobs reports out of the U.S., and then discusses inflation is finally peaking, aggressive moves from the Fed and other central banks, and the impact of China’s zero-tolerance COVID-19 policy on the global economy. [22 minutes, 30 seconds] (Recorded September 6, 2022)


Hello, and welcome to the Download. I'm your host, Dave Richardson, and it's (S)Tuesdays - except wait a minute - that's not Stu that I'm looking at on my screen. That's Canada's hardest working economist. You’re even taking over for Stu now, Eric Lascelles?

I guess. I don't know. You tell me. I can talk about stocks and valuations if you like.

Well, maybe we'll stick with the economy. You don’t have time to worry about individual stocks and that. You've got too much economic stuff coming out. You think you'd think that the summer would kind of quiet down a little bit, but it never seems to. There's always something going on.

Yeah, boy, tell me about it. Yeah. This has been about the busiest year - I can't say on memory since 2020 was not exactly a sleepy year either. But there's a lot going on. You're absolutely right. So we'll get to some of those things.

Absolutely. And again, no one covers it better. So why don't we start with - we were hoping to connect on Friday, but we were unable to - the U.S. jobs report is out. Anything surprising or interesting there that you take away?

It seems to me that the big takeaway is just that the labour market is still, for the moment, mostly holding up. I do emphasize mostly in the sense that when we look at maybe the periphery of employment indicators, we can see jobless claims that aren't quite as low as they were and some slight evidence of more layoffs. And because anecdotes in the tech sector in particular of downsizing and that kind of thing. But when push comes to shove, and you get a big U.S. payroll number. It's 315,000 jobs created, which was in the realm of what was expected and pretty good in an absolute sense. You have to walk away and say there's no evidence of an economic collapse at this point in time. You can maybe split hairs and say there were 107,000 downward revisions to prior months. And so maybe that made the prior months not look quite as good. And yeah, the unemployment rate went up, which I guess maybe might have been a red flag for a lot of people. It went from 3.5 to 3.7%. But it was really only because more people decided they wanted to try and get a job, which is not necessarily a negative interpretation. So I walked away with the conclusion that the U.S. labour market is still mostly holding together. Really what's interesting right now is that when you start with confidence metrics, we've seen really a collapse over the last six months or so. So very low levels of consumer confidence, business confidence and so on. You then kind of step or take a half step forward to say, what about intentions? You see consumers saying that you don't really want to spend that much now. And businesses are suggesting their CapEx plans are getting scaled back, and maybe their hiring plans getting a little scaled back. So we're seeing a bit of caution in the intentions, not to the extent that the confidence numbers would suggest, but some caution. Then you get to the real economic data, the actual activity data, and again, a slight decline, but it's actually been pretty resilient so far. So I think at this point in time, the debate is it's just a timing issue where you're going to get the weakness in the real economy a bit later, or is there some secret pocket of resilience that no one quite fully understands that is coming to the fore? I think it's more likely a timing issue. But, you know, I will admit, for instance, Dave, over the last month or so, I think I was talking at 1.80% chance of recession risk over the next 18 months. I've been saying 70% chance now. So a few things have gone a little better than we'd expected. A different way of framing it, by the way - we have a lovely little chart that I guess no one gets to see here, but nevertheless a lovely chart that will make its way into a MacroMemo in the not too distant future. Just looking at soft economic data versus hard. Soft, meaning surveys and things. Hard, meaning the actual activity. Soft data has come down quite a bit. Hard data has softened, but not nearly as much. And so normally those two things look similar. So I think we could get some more hard data weakness, but not that evident in the U.S. numbers. And then by the way, we don't have at least as we record this, we don't have the Canadian job numbers for August yet. Those come out at the end of this week, and the expectation is a small gain. Canada actually lost jobs the prior two months. I think it's one of those things in which probably the Canadian labour market is moving a little less quickly, but not obviously to a point where it's losing jobs every single month.

Yeah. You raise a really good point. Well, a lot of good points on the economy. But a really good point about the people who really like to listen to Eric on this podcast. Eric has a lot of content that comes out in social media. So watch for him on Twitter, etc. because he's got lots of lots of stuff coming out on a regular basis, including that fantastic MacroMemo. One of the things you touched on was, was a number that I'd seen or basically overheard it as a as I was watching TV on Friday. This is about this labour participation. We actually did see some younger people, and some older people, kind of come back into the into the job market. What do you make of that? Because we've been hearing about all of this, great retirements and the impact that different government programs have had. And it's certainly kept the labour market very tight. Is that actually some good news maybe, or are those numbers so small that it doesn't even matter at this point?

I think in general, the default assumption is that when the labour force participation rates go up - so more people either looking for jobs or working - is generally thought to be a good thing. As I mentioned earlier, that seems to be why the unemployment rate went up. Just more people now looking. They don't get counted if they're not looking. And so it's at worst, kind of a benign interpretation, maybe an optimistic one. It's a bit tricky right now, though. I will say that I can think of kind of good and bad reasons why more people are maybe trying to get jobs. The good reasons would normally be that, hey, the economy is looking pretty good, companies are hiring and paying higher wages. Like, get me in there. I'm now no longer indifferent to working. I would like a job because the salary is attractive. So I'm sure that's part of it. I would equally say, though, that you also hear anecdotes and maybe now it's outright evidence of people, of course, combating high inflation and suddenly finding they don't have the retirement savings, for instance, that they thought they would have versus costs. And so they're being forced back in, out of necessity. They may be single-earner families now requiring two earners and these sorts of things. That's a less happy, I guess, motivation to the extent that companies have a lot of jobs outstanding. I guess it's still a good thing. It means that there are more prospective workers who might be able to fill those roles. But there might be a little whiff of desperation beneath the surface as well, in terms of people whose financial circumstances have changed as rates have gone up and oil, gas and food and all those things.

Yeah, it's interesting because one of the groups that's coming back to work are people aged 60 to 64, was what was in the data. One of the advantages I have - everyday people have to look on social media for your content or listen to the podcast. I get your MacroMemo right into my inbox and the headline on the MacroMemo is ‘Inflation has peaked.’ And so you've been kind of there as we've been talking the last couple of months. But are you feeling a lot more confident that we've seen the worst of inflation? We'll get into some of the issues around what's going to happen with energy through the winter. The job market continues to be tight, as we've just talked about. But you're feeling better about where we are with inflation.

Yeah, feeling better. I will confess I did debate that title. It is factually correct in the sense that July inflation in the U.S. was lower than June inflation. Therefore, June inflation was a peak. I guess you could maybe debate whether it is the peak and whether there's a happy get a monotonic decline from here. So maybe there's a bit of ambiguity still in that. But let's start with what we do know, which is that certainly in the month of July, inflation came in a lot cooler. And so after a year of monthly gigantic price increases, we didn't get any price increase at all in July. In fact, in the U.S. it was a very slight drop. August, a very similar narrative. In Canada, August looks like it's also a fairly soft inflation month. Now, I must confess much of that is being informed by the fact that gas prices were lower at the end of the month, than at the start of the month. There's no great deep insight into that. But it seems, visually, that we're getting a bit of a turn. As you know, we run the scorecard that includes - I'm forgetting exactly how many indicators - but, you know, 10 to 15 indicators, and a lot of those turning. So that is to say, it's not just consumer prices that turned. The producer price index turned and inflation surprises that are starting to turn and things like that. So we do think there's some backdrop or some basis for that claim. I guess the thing that makes me most optimistic that inflation has indeed truly peaked in the most aggressive interpretation of that claim, is just that we've always thought there were four big theoretical drivers of inflation over the last couple of years. And all four of them have turned in various ways. Monetary stimulus, fiscal stimulus, supply chain problems, and I suppose last but not least, a commodity shock. Monetary stimulus is absolutely turning. We've got a Bank of Canada decision tomorrow as we record this. I don't know what day that'll be when it comes out, but that looks like yet another big rate hike. That’s been part and parcel to that story. Many central banks are removing stimulus , and indeed are now reaching neutral levels. You can say not just stimulus is going away, but stimulus is gone and soon outright restraint will be there. The fiscal policy is a bit trickier. I know there have been interesting developments recently. Countries are spending some money and we are getting, say, in a European context, some relief bills being put into place to save people a bit of money on their exorbitant energy costs on that continent. But still, fiscal policy less generous than it was. It is a net fiscal drag. That's pretty clear. And then commodity shock, well, that's the one that you could speak maybe with least confidence that it will keep going in this direction. But certainly commodity prices are down from where they were. Natural gas, you have to set aside because there's, of course, a very real scenario in which it gets worse. Indeed, it seems that worst case scenarios just keep happening for natural gas in particular. And let's admit oil, just saw an OPEC cut. So again, no promise that we see happy declines persistently from there. But nevertheless, the oil prices are a lot lower than they were. That's helping quite a bit. I don't know that too many people are expecting oil prices to scoot back into the triple digits, let alone well into the triple digits. And then food prices, certainly the base material inputs, like corn and wheat and things have come down a lot. Base metals prices are collapsing at this point in time. It seems to me there has been a turn and a big part of it is that China is moving more slowly. A big part of it is just the global economy is expected to be weaker, which is bad for demand for things, including for commodities. And to me that feels like the right call. So I think it makes sense that commodity prices are down. Of course I'll parrot the old line that we don't need commodity prices to fall from here, we just need them to not go up and you get rid of the inflation. And so, you don't need to have a big, bold call that oil's going 50 or something to have less inflation over the next year. And then sorry, going to long Dave, but the fourth item, supply chains. We are seeing pretty impressive improvements on the supply chain front. You can say that in terms is classic metrics like how much does it cost to ship a container, or how long are ships waiting at port? Those are kind of the conventional measures. But we can also say the computer chips were a big pinch point. And you now see plenty of claims from plenty of both chip makers and chip buyers that they are now getting access to what they need or demand is softening. Maybe some of it is a crypto bust, and some of it is people finally got that laptop they needed for school, and some of it is just there was maybe a little too much investment in capacity going forward. But bottom line is that's one that feels quite credible to say it has improved and it probably should keep improving, particularly if the economy continues to soften. So I walk away saying theoretically, yes, inflation should have peaked and we should see less intense inflation going forward. You still have to grapple with the wage pressures, which also should start to ease. In fact, we see a bit of evidence they are. But nevertheless, that could be a second-round force. I make no promises that 2% is in the immediate future for inflation, but I do think that maybe we'll look back and say that that June month was ultimately peak inflation.

Since our last discussion, we had the Jackson Hole speech from Chair of the Fed, Jerome Powell, where he used the word ‘pain’ in describing what we were going to go through economically. Because they're going to raise rates until they don't have to anymore. And I believe the line you've used is, they may break something, which means the positive growth in the economy. Where do you think, given this, since again, you look at that the data and you just went through all those key drivers of inflation and how things have really changed over the last three months, and changed significantly. How much longer and how high are they going to need to go with rates in your view?

Right. Yeah, I know. I mean, it's a good question. You could say all else equal, they should have to do a little less than maybe they thought they had to do as of a few months ago, to the extent inflation has behaved a bit. But again, they're just going to err on the side of doing too much as opposed to too little. They can't get this wrong in terms of letting inflation persist. And so I think they're going to perhaps overdo it, I guess, in that sense, which is part of the recession story. Keep in mind, not to circle back to inflation with too much obsessiveness, but I guess it is an important topic. But keep in mind, we have such breadth to inflation right now. So many things are going up. And so it's nice that the cost of a computer chip is a little lower and the cost of gas is cheaper. That's certainly been a big one I've noticed in my own pocketbook. But so many other smaller items are still surging ahead. And so they're just they need to do enough, really to get everybody's attention, not just my attention. The professional economist who tracks inflation, not just our listeners’ attention, who are tracking all sorts of market things and think a little bit about inflation. We need to get, you know, your retired parents’ attention as well. And small businesses’ attention, and all of that does require a bit of a monetary shock. And so, unfortunately, there's some extra work to be done, I think. And based on what markets are pricing, I guess you could say after inflation seemingly started to ease markets, we're thinking, oh, maybe they only have to go to, you know, three and a quarter, three and a half, percent for a peak policy rate. And after the Jackson Hole speech and that kind of thing, you're now seeing markets are saying, okay, maybe they're going to go to 4% again, which had been the thinking maybe earlier in the summer. It’s gone back to where the thinking is now. So a high three number is, I think, what we're guessing right now. But the market is pricing in something like a 4% peak policy rate. Central banks often have to sugar-coat their message a little bit. If they're seen to be predicting a recession, then it could be a self-fulfilling prophecy. And really only the Bank of England has been bold enough to explicitly forecast such a thing, I think because it's such an inevitability for the UK. But you're seeing maybe the curtain pull aside a little bit here in the U.S. and they're recognizing, you don't raise rates by 400 basis points in the span of a year and not generate some pain. You can see the pain in housing. And chances are the pain goes a little bit broader. I'll be honest, Dave, as much as I think recession is the most likely scenario and certainly rate hiking like this is consistent with an outcome like that; the thing that makes me most nervous, would be if we didn't get a recession. That’s supposed to be a professional comment, which is predicting if we don't get it, I look like a fool. But nevertheless, I think the recession might just be necessary because we want to get that inflation tamed back down. And it's a worthwhile sacrifice if we can get that prosperity rising again over the long run. And recessions are so inherently temporary.

Yeah. We've talked about in previous episodes where you know things kind of - we suppress the global economy through COVID, then released it and it just kind of shot back, and overshot. And you need it to kind of settle down and normalize back to a nice base from which we can build. That's what I like about listening to you over the months. You've been pretty consistent in that view that we need to get that nice, stable base in place for that next period of economic expansion. And you know, a recession may be the thing that puts us in a position to have that nice base in front of us so we can grow. And that would ultimately be a positive thing. Because we got a little bit frothy, particularly in markets and over the latter stages of 2021.

That's right.

So let's just change gears just a bit. One of the things that caught my attention reading that reading the papers this weekend is China, and their COVID policy. Another 21 million people locked down because of the policy there, which is a zero-COVID policy. The potential implications for the global economy out of that. You've talked about, perhaps they're going to revisit that policy. I guess that's a crystal ball type of prediction. But if this continues, is it going to have a fairly significant effect on the global economy?

Yeah. I mean, it really is. You're certainly right. We seem to be back into another lockdown wave from China. And so on the one hand, you can say China is the most-affected country in the world by COVID. On the other hand, of course, it's the least affected - it has almost no cases, just a so-little tolerance for them that it becomes so consequential. So you have the city of Chengdu has shut down, which is southwest in China. As you say, 21 million people. It's a name probably a lot of people haven't heard before. Yet, it's a city bigger than New York City. It's always amazing the scale China operates on. And so China has long been very important to global growth. We were just looking at the numbers, and China generates a good one-third of global growth most of the time. In fact, it's been more than that over the last several years. And so it hurts everyone when the Chinese economy slows. The Chinese economy has slowed. We’ve been forecasting some 3% growth for 2022, which is pretty unprecedented stuff. They've been growing 6 to 8%. It wasn't that long ago they were a double-digit growth nation as well. And so this is this is a lot less, and a number of things going on. Some of them are structural, like demographics, and some of them relate to the world shifting back to services from goods, which isn't great for China. China, doesn’t like high commodity prices, and yet they're still pretty high even as commodity prices have come down. But China has also done the corporate crackdown, the tech sector. I think entrepreneurship is feeling a lot less entrepreneurial these days in China, and the housing market is still wobbly. So plenty of problems, and then you just throw on top of that the COVID lockdowns. This seems to be the latest wave. I think they might have learned a few lessons from Shanghai, maybe both in terms of doing it efficiently and also not totally crushing the economy. Maybe I would say a city like Chengdu probably doesn't have the same scale of consequence as a place like Shanghai. So I'm not looking for quite the same scale of implications. But still, it means the Chinese economy is going to be slowing over the next month and a half. And that means less Chinese demand, which is why commodity prices go down. And it means that it gets a little harder for the rest of us to get things as well. And so as we look at supply chain issues, more improving than getting worse. But every time Russia does something or China locks down, that does add a new complication, unfortunately. So that's where we are right now. Long term, China's going to continue to grow, continue to be a global economic superpower, which it has been now for a while. But it's not moving very quickly right now. And even with a bit of a rebound that we're assuming next year, it's still going to be running well short of that 6% norm. We actually have a giant econometric model here, and its forecast for the next decade is four-and-a-half percent growth per year, which is great for countries not named China, but a lot less than China is used to. And it's just getting richer and slower, and has a number of problems.

Where else in the world does that does the growth come from if China slows down? Now, I guess in four-and-a-half percent of a much larger pie is still a lot of growth that they're contributing to the global economy.

Yes, that's right. That was always the answer. As they slowed, they were still driving growth just as much just a bigger base and a smaller growth rate, which is still true. We'll have to see. But it does feel to me as though India has turned a very important corner, and they are picking up big time manufacturing, and they fixed a lot of their infrastructure and banking issues and so on. And so I'm hopeful that India can play that role. It has the population certainly to do it. It'll be the most populous country in the world, passing China in the next year or two. India has that scale. And I suppose you look across maybe a set of Southeast Asian nations, and you can maybe make an argument that when you lump them together, they start to approach a scale. They do have the dynamism necessary to look to fill that hole to some extent. But it's going to be hard and it's still, we still think a slow, long-term growth environment for the world. And China may be increasingly part of that story.

All right, Eric. Well, let's stop it there. We were going to talk a little bit about housing, but we're a little over 20 minutes. So we'll pass that again for the second time in a row over to the next one. But a lot of great stuff there on inflation, what's happening in the job market. And then, something I think we're going to have to keep an eye on. I know you keep an eye on this very closely, which is why I kind of blended into our discussions here and there. China - because of the importance of that economy to global growth. So Eric, thanks as always for stepping in on (S)tuesdays, and hopefully we'll be able to catch up soon.

My pleasure. Thanks so much by everybody.


Recorded: September 6, 2022

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