Hello and welcome to The Download. I'm your host, Dave Richardson. And it is economics Friday. The first Friday of every month, in the US, the Bureau of Labor Statistics releases their jobs report. And we always enlist Canada's hardest working economist to break down the numbers because he's up waiting for those numbers anxiously. He stays up. As we say, it's almost like Christmas morning for Eric Lascelles once a month, the first Friday of every month. He's like a 10-year-old little boy waiting for a bicycle under the tree or whatever you wanted Santa Claus to bring you when you were a kid, Eric.

That's exactly what it is. Now, if my computer had booted in under an hour, I would have actually been able to see the numbers as they came out. That would have been extra great. Santa was a little delayed, but eventually arrived. So here I am able to interpret these numbers. Shall I just fire away, Dave?

That's how hard he's working because he's fixing the bicycle or fixing his computer to get onto the call this morning. If we're having some technical issues here, it's because I am in the middle of the Atlantic Ocean. I'm on the São Miguel Island in the Azores. It's part of Portugal. It's too bad you can't see my backdrop. Eric can. Eric, if you watch carefully, you may see some whales just floating along behind my house here. So don't let that interrupt you. But was it a whale of a number this morning out of the US?

I don't think it was a whale of a number, no. The first blush interpretation was 206,000 jobs. Consensus was 190. That's on the screws or a little stronger and a number that's consistent with the soft-landing stories. That was the first take. Then you looked at the next line of data and you said, oh, this is not quite super straightforward. There were a few things that I think downgraded, made it look weaker. I think one would be, despite that being quite a robust job number, unemployment did inch a little higher. It went from 4.0 to 4.1%. That's the highest we've seen in quite a while. You recall, I like to introduce that Sahm rule. When the unemployment rate goes up by half a percentage point, three-month moving average, crucially there's always been a recession. We still haven't quite hit that, believe it or not. It feels like we should have to the extent the unemployment rate was, if you remember, below 3.5%, but the three-month average hasn't quite done it. But it will. We're fully resigned to that. The debate is more, is this a reliable signal or not? I'm not convinced that it is, but still unemployment up. Maybe the big one was downward revisions; a minus 111,000 jobs just removed from the prior two months that we thought had been created and hadn't been created. Maybe the gawdy number is from April, which is now just at a plus 108,000. Keep in mind, we then got a May number that was north of 200. We now have a June number that's north of 200. That's not to say that suddenly the economy is generating just 100,000 jobs a month on a trend basis, but certainly some weakness there. So one thing people like to do is just subtract the revisions from the latest number to say, well, is the actual level of employment as good as we thought it would be or not? And so the answer would be, with that, it would have been a significant miss. And then hours worked as well was not very impressive. So you can also say, well, hold on, maybe we should care less about the number of workers, more about are people actually earning more hourly or fewer. That actually was down a bit, though it was after a big increase. I walk away and it's a bit weaker than it looked. I think it still lives within the approximate realm of a soft landing in the sense that the market has been very keen to celebrate weaker economic data, of the view that it accelerates rate cuts and isn't too concerning in a broader economic context. I think that's probably not a bad way to view this. Just for the people who listen regularly and recall that I like to harp on the household survey, which is the other survey that comes out. Last month, we were feeling pretty good about the number, but a little freaked out that the household survey was minus 456,000 jobs, which was certainly not desirable, though it's the choppier, less reliable one. We generally set it aside and say, okay, let's wait and see what happens next month. I think it was good we did set that aside because this month, guess what? Plus 322,000. So again, I don't think that's the real answer. I don't think the real number is necessarily stronger than the official payroll number, but we did actually get a little counterpoint there. But overall, it was weaker. I did take a look, Dave, at Fed pricing, and it looks pretty much unchanged. And so the market had been in the realm of about 80% of a rate cut for September. So this is the Fed still playing a bit of a waiting game. And it's still about 80% for September. I still think that is the most logical likely time.

There might be an orange fellow who might say those revisions are huge. But it is interesting, just doing the math in my head, as you're throwing the numbers out on the household survey versus the labor payroll report is that you start to line up the numbers. They are lining up over time. So you got the more volatility in your household survey, but it seems like they're coming in over three, four months scan about even. I was just on a call with some colleagues just talking about the report and my thoughts on it, which, of course, always align with you because you tell me what to think. But knowing what you would think, I was just saying it just seems like almost a perfect number. It's a little hotter than you expected, but then you had the revisions so that when you back everything out, you go, this is not really changing a whole lot of my way of thinking about things. And then, sure enough, your betting odds or your market for rate cuts and rate revisions. And then we look at what happened with longer term bond yields. It just seems like things are continuing to go in the direction we thought they were. They're at the pace that we thought. Not too cold, not too hot. And then the PCE number that came out earlier this week is the same, really. Right trend, not as fast as we'd love, but maybe about the right speed because we don't want a recession.

No, that's right. So the context here, the critical context is, under normal circumstances, you're cheering strong numbers and booing weak numbers, and that's where the narrative lies. This time, of course, in particular in the US, the economy is a little bit overheated. Of course, inflation is still a bit too high, even though, as you say, it is trending lower. Certainly, rates are higher than anybody would like them to be in practically every country in the world, except maybe in China. When you get weaker numbers, that's helpful on the inflation front, it's helpful on the interest rate front. We're crossing our fingers that it's sufficiently smooth and gradual that it is the soft landing, not the hard landing. You can't quite rule out the hard landing. I would say I still feel pretty good about the soft landing. Do note, we did get the twin ISM numbers that came out recently. They were weaker. There's certainly been some weakness in particular in the US economy. In my mind, when we pivoted toward a soft-landing call around the end of last year, start this year, I thought we'd be pulling that recession risk probability down every quarter, and it'll just smoothly fade away. It hasn't totally, just because we are still getting some numbers that make me think I can't quite rule out that there is something a little bit more sinister brewing. But for the most part, I would still say it's not inconsistent with a soft landing. I get a little nervous when the stock market says, hooray, a weak economic number, let's rally. It might be a little bit too much enthusiasm being expressed, particularly in the US market. Of course, that helps to inform our own tactical asset allocation, which still has a lot of bonds in there, too, recognizing there's a nice coupon and scope for a capital gain and maybe a bit of downside protection if the stock market is feeling a little too good for its own right about weakness. But ultimately, as you say, this still looks not inconsistent with a soft landing, and weaker economic data at a bare minimum will help detain inflation, which is the important thing.

I completely missed commenting on the stock market, which again has reacted fairly balanced around that. But the stock market has been predicting this outcome for a while. Because the stock market is surging towards new highs as it has been since last October. It's pretty clearly saying, we're going to slow down, but we're not going to slow down too bad. Profits will be better next year. Rates will be down. So, hey, that's a pretty good scenario for us. And there was nothing in today's report or the PCE report a couple of days ago that would push any bowls off the ledge that they've been standing on, which suggests that things are going to work out just right and everything's going to be fantastic. But because you look at everything, and we talk about the ISM numbers, am I wrong in suggesting that the ISM numbers, the US ones, have been a little bit volatile in that they've bounced around 50? Normally you get on a trend line where you trend down for a while and then you build back up. But it seems like we're even bouncing up and down almost month to month or every two, three months if we look at a scan, that they've been unusually up and down lately.

Yeah, I do agree with that. In fact, I would say when I think about the ISM Services Index, which in theory is the biggest chunk of the economy, though it's still not maybe quite as much of a bellwether for markets and for economic forecasts, but it's a big chunk of the economy. That one's been really choppy. I'm forgetting the exact sequence now. 55 is a pretty strong number. 50 is a somewhat weak number. This is a pretty fine-tuned figure. We've been bouncing multiple points per month, and it was down close to 50, and then it surged its way up into the mid-50s, and things looked great. It did just fall quite sharply. Now it just fell notably below 50 in the latest go-around. That does have me a little nervous, though, of course, cognizant that it's been choppy. The manufacturing one, it's flitted above and below as well. I would say it's been a little less choppy, but just maybe a little less reliable in the sense that, as you recall, we're now like a year and a half, almost two years in which this thing has been mostly sub-50, indicating contraction in the manufacturing sector. It just hasn't been a very useful guide for what the broader economy has been up to. The broader economy has been fine. Manufacturers have been grumbling. For a moment, they felt pretty good. They're grumbling again. I'm downplaying its importance for forecasting because it doesn't seem to be aligning with what I'm seeing elsewhere. The one that makes me a little nervous is that the services side did just drop. But again, it's been so choppy, it could just bounce next month. It's hard to say. If you're looking for reasons to be concerned, you would look at the NFIB, the small businesses. Small businesses are not happy. They've been screaming for a long time, though. This is the thing. A long time. Genuine in many cases, I think. These are more vulnerable businesses, maybe more exposed to higher rates without the cash hordes that provide an offset that maybe an S&P 500 company might have. They've been screaming for a long time, but it just isn't a useful signal for what the economy has been up to. We're watching and we see some things. Just unusual dispersion in the economic signals. You got some signals that look pretty strong, pretty weak, some in the middle. It's just quite a wide range. The answer seems to be that the middle route is what's playing out here. But you can certainly construct alternative narratives in either direction if you wanted to at a time like this.

Which, again, speaks to that balance. But let's just level set because we always have new people joining the podcast and we will reference the ISM numbers on a regular basis. When we're at 50, that's a neutral position. Above 50, we're growing. And below 50, we've got a contraction in activity. Correct?

That's exactly right. Now, it should be noted, the manufacturing one has the longer history. It's historically been viewed more closely. The manufacturing sector, not unusual for it to be contracting without the broader economy contracting. In fact, normally, the rule of thumb is when the ISM manufacturing index is all the way down to something like a 43 reading, that's usually when the broader economy gets engulfed as well. We're not there. If anything, there actually was an upward trend in the ISM manufacturing for much of the last 6 to 9 months, and it fizzled a bit in the last few months, but it's still sitting — I'm just scrolling around here — it’s sitting at 48.5. That's about where it's been. I'm looking at the last — I’m just clicking here — it was 48.7, then 49.250. It's weakened a little bit. There were some 47s and 49s and 46s. It's what we're used to seeing over the last year. The services one is the funny one right now, or maybe not funny in a good way, but the ISM Services index just fell from a 53.8, which I've described as pretty good, to a 48.8, which I describe as not so good. That was a big drop. Let's see if that sticks. It's just not clear to me. It is the weakest number that we've seen going back a number of years. That's something to watch quite closely. But I'm not getting the same signal. You look at the Beige book in the US and businesses are feeling okay. Economies are growing via that signal. We're looking at other metrics that seem to be holding. It's just the tracking of Q2 GDP, 3% annualized, which is a pretty good number. Again, lots of contradiction. Maybe in a balanced way, Dave, just to pick up on that theme.

Yeah, the classic Van Hagar album, 5150, draws from the dispute between Eddie Van Halen and David Lee Roth about whether the ISM manufacturing in the US was growing. David Lee Roth, 51, and Eddie Van Halen, 50, and that's that 5150. Always one more.

«54/40 or bust» was also a debate.

Oh, there you go. That's a Canadian ISM fight amongst musicians. There we go. So you always tilt Canada. I always look down south of the border for more signals. So speaking of that, how's the Canadian number? Because that's out today, too.

Yeah, it wasn't great. So I mean, famously choppy, right? We just talked about choppiness in the US, but Canada's job numbers are famously choppy, so I wouldn't want to hang my hat too much on it, but it was weak. Minus 1,400 jobs. Keep in mind Canada's population is one eighth the US, so you don't expect hundreds and 200 of thousands in a month, but still a negative is a negative. It's been choppy before. Do keep in mind there was a negative number back in March. There was a flat number in December or there was a negative last July. We are ticking along where you do get two or three negatives over the span of a year, even when job creation is okay. We're not going to want to leap to conclusions. In fact, prior few months had looked pretty good. But you know what? When Canada has population growth that's this fast, again, immigration-driven largely, the unemployment rate went up again. Canada's unemployment rate, you will recall, was briefly sub 5% at its low a while ago. It breached 6% a couple of months ago. It just rose from 6.2 to 6.4%. I would say my best guess is that Canada's neutral unemployment rate, consistent with an economy that's running in the realm of its potential, is probably 6 to 6.5%. So it's in there, but it is working its way from the optimistic end to the more pessimistic end, and seemingly not with an immediate halt in sight. This is a labor market that is cooling as it is in the US. In Canada, I think that's celebrated a little bit less just because the Canadian economy is already maybe no better than at its potential. Bank of Canada, I think, is actually a little below its potential, but it's not overheating, if that makes sense. And so, yeah, a little bit of weakness there. I just don't have a good reason for this, but very confusingly, wage growth, at least for permanent workers, which we tend to focus on, actually accelerated a little bit from 5.2 to 5.6% year over year. This already was strange before. Like, wait, growth is holding up faster than you would have guessed as the unemployment rate goes up, as the labor market is flooded with new job seekers, many of them coming from abroad. I don't know if I can quite fully explain why that's happening. In fact, I was just having an internal call with the Bank of Canada just in the last couple of days. I wouldn't want to put words in their mouth, but they were equally intrigued by this and trying to understand what was happening and of the view that it probably eases to some extent, but that would be maybe the one counterpoint there. I guess the other thought I can share here is just that for the Bank of Canada, the debate is actually a little bit more right in front of us because the Bank of Canada did cut in June. Bank of Canada has a decision to make for late July, and the market has been really torn on it. The market has been bouncing around between 40%, 50%, 60%, and then back down. It's a live decision, not yet fully resolved. You might recall that Canadian inflation came in a little bit hot in recent weeks, and so that pushed the probability down a little bit below 50%. Well, we just got a weak job number despite the wage growth, and so we got that up to 62% of a rate cut now for July. I suspect it's a bit of a fool's errand to pretend we can say anything intelligent about the July decision for Canada until we actually get the next inflation print, which comes out as well before the decision. Until that point, they don't have the information that they need. But I would say, yeah, this number does increase the chance that Bank of Canada cuts two decisions in a row, which maybe is something we didn't think would be all that likely a while back because the urgency, or at least wasn't there.

It's quite a conundrum they have, isn't it? That's what we're going to watch on. I want to try and get you back then middle of the month before the bank moves. The other thing I want to get to, and we don't have time today, we're on a little bit of a hard stop today, but I like to get into this whole idea. I think from an economist and market perspective, they would say the economy is good, right? And from a broader population perspective, they seem to feel like the economy is bad. I'd like to get your thoughts on that disparity. So I'm going to send you away with a couple of weeks to think about that. And I'm going to thank you for joining us as always for your monthly recap. These are such important numbers given where we are. Again, we're just like right at that 50 line. And then are we a little bit above, a little bit below? And then do we cut now? Do we cut later? The overall direction seems pretty clear, but just how we're going to get there and when we're going to get there is so much in dispute. And that's why it's so great to have you once a month on these fabulous celebration Fridays. I'm going to go and celebrate the jobs numbers at the Festa du Ribeira Quente, here on San Miguel, which is the Hot River Festival. You like that? That's a good one. That's the direct translation.

I'll just join you later.

We got an extra room here, Eric. Come and join us. All right. Check in with you later this month, Eric. Thanks again. Bye.