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In this episode, Chief Economist Eric Lascelles looks at the recent job numbers of the U.S., as well as other long-term, post-pandemic employment trends. He also discusses the different ways to think about the moves in the yield curve, and what these say about the likelihood of a recession. [14 minutes, 01 seconds] (Recorded April 1, 2022)


Hello and welcome to The Download. I'm your host, Dave Richardson. And it is a jobs-report Friday, the U.S. jobs report out for April. Canada is a little bit delayed. We take our time, when the first of the month falls on the Friday. The U.S. is right out there. That means we are joined by the hardest working economist in Canada, Eric Lascelles. Eric, how are you doing?

Doing great. Thanks for having me.

We were just talking about how you've written some fantastic stuff this week that I know listeners can get access through Twitter and LinkedIn, and all the other places where they can find you on the RBC Global Asset Management website, as chief economist at RBC Global Asset Management. A little longer this week, right? Apparently, you get paid by the word. You work hard for the money.

I'm training to type as quickly as I can just to maximize that salary. Exactly. There's a lot going on, more seriously. So, it's drifting. I know I lose a lot of you when it goes too long, but nevertheless, there's a lot to share. But we'll try and keep this as tight as we can, Dave, on the oral side.

I believe, as your host, I've already failed in that regard. We will tighten up from here and get to the serious stuff, which is why people are listening. Like you said, there's a lot going on. Let's start with the jobs report in the U.S. this morning and, for once, on the ground where we would have expected, right?

That's right. Maybe I should start by saying, expectations were pretty optimistic. We continue to be in this world in which job gains well exceed anything resembling normal or pre-pandemic norms or anything like that. We got 431,000 new jobs in the U.S. in the month of March. The expectation had been a little more— 490,000—, but still 431,000 is quite strong. It's literally four times what you need just to keep face with population growth. It's double what you might describe as a good number. They did have some positive revisions. The job creation ultimately was consistent maybe with aspirations, if spread, over the last few months. We saw hourly earnings go up somewhat, which has its own discussion, of course, in terms of potentially perpetuating inflation; in terms of being, of course, good for workers, being less good for profit margin and businesses, a mixed billing on that. But nevertheless, as you'd expect, with a tightening labour market and with high inflation, we are seeing wage growth pick up to some extent. Unemployment, to no one's surprise, given this rate of hiring, kept falling. We are now down from 3.8% to 3.6%, so a .2 percentage point drop. That's low. The pre-pandemic low was 3.5%. And we hadn't touched 3.5% in many decades before that. We're not just talking about back to normal, we're talking about into an extremely tight labour market by just about any standard. I will say that if you wanted to quibble, it wouldn't be a complaint about this month in particular, but you can still say that surprisingly U.S. employment is still 1.6 million jobs below where it was before the pandemic. If you're trying to reconcile how was the unemployment rate normal, but a level of employment that isn't, people have dropped out of the labour force. People take early retirement. Some people have decided that maybe they want to be a one-income household after all, or just logistically, it makes more sense to take care of kids oneself instead of via some third party. There's been a drop there. At the risk of going off script here, I would say certainly that's a small constraint on the economy in the short run, if we've lost a certain pool of eligible workers, but I will say our main takeaway from the pandemic and its implications over the long run is that we think it's actually more likely we'll see more people than otherwise eventually in the labour market as a result of the pandemic, as opposed to fewer. Some people have been scared off. That's the situation right now. However, on the long term, working from home is now much more viable. People can't handle a long commute or maybe the labour market is just bad where they live, whereas it's not bad somewhere else. Or maybe they're in a position to work a few days a week or to work half a day each day. It doesn't make sense if you're doing an hour commute each way. But without the commute, that can make sense. The bottom line is, if virtual working sticks around, we could see a higher level of employment over the long run than we're seeing. So I think this is a temporary distortion as opposed to a new permanent level of lower employment.

I heard some numbers this morning that the labour participation rate in the U.S. is still about 1% below where it was pre-pandemic. But there are some signs that we're starting to see some people coming back. That's what's giving you that optimism, right?

Exactly. There was a nice little jump in the labour force participation rate, and it's always so confusing. How was there a jump if we're seeing simultaneously the unemployment rate come down? But confusingly, there's a separate employment estimate that comes from a different survey, and that's where the unemployment comes from. Maybe the takeaway from all of that is that 431,000 was the official job gain in the U.S., however, there's another survey that says it was 736,000 in the latest month. Just to confuse everybody, I'll mention that as well. It's not quite fair since we don't talk about that some months. But again, the main point here would be, let's not be glum about a slight miss in the raw job creation numbers. There was much to like beneath the surface. And of course, this then is the bedrock from which consumer spending can emerge and things like that.

Just more evidence why it's hard to be an economist. Lots of data being thrown your way. One of the things I think we should come back to at some point, maybe in a longer-form podcast, is talking about this complete change in the labour market and maybe the implications for that. I know you're always thinking about stuff, not to put more work on your table, but let's go to one of the other big news items from this week around the economy, and that's with respect to the yield curve. Of course, the yield curve measures the yield of various lengths of bonds to maturity, from one month to 30 years. And at different points along that bond curve, we've seen some inversion. For example, as we speak right now on Friday, April 1st, in the afternoon, the two-year bond in the U.S., the yield of that is higher than the ten-year bond in the U.S. That for a lot of people, is that signal that maybe down the road the economy is not going to be doing as well as it is right now. What are your thoughts on the yield curve and where we're sitting right now?

There's certainly been a lot of flattening of the yield curve and as you say, even some inversion in terms of longer-dated bond yields being lower than shorter-dated bond yields. Historically, people will say that when that two-ten inverts, that the risk of recession suddenly can be quite high. I would say that the risk of recession is certainly increased from where it was six months ago, and it is, I think, higher than it normally is, but I'm not convinced it's 50% or above. We've been saying we think the risk of recession in the U.S. and Canada is maybe in the 25 to 35% range for the year ahead, and for Europe, maybe it's 40 or 45%. Significant. But still, there's nothing suggesting we have a guarantee of a recession for the next year. In terms of why we're a bit more optimistic— or maybe less pessimistic is the right way to put it—, keep in mind, there are other ways of teasing out the risk of recession from a yield curve, and actually some of those other ways tend to be historically a bit more successful. They've had a better predictive power, particularly in recent cycles. For instance, instead of the two-year-ten-year spread, the three-month-ten-year spread is thought to be actually more accurate over the last several decades. And that one is holding steady. It's still a positive slope. It hasn't actually declined all that much lately. And so that one is suggesting that we have a model that uses that spread and says the risk of recession is less than 10% for the next year. Maybe we want to split the difference here. In fact, there's a third one that the U.S. Federal Reserve thinks is even better, and that one has been actively steepening. It's suggesting that the risk is shrinking and quite low. I wouldn't say the risk is quite low at a time that central banks are raising rates and inflation is high and war is happening and so on. Clearly there are some pretty big headwinds out there. But I would just emphasize to not obsess over just one measure of the yield curve. There are others that are a bit more mixed. You can even argue, for instance, you can say, let's take out all these crazy inflation distortions. What is the real yield curve telling us? We did that recently. The real two-ten yield curve is actually happily fairly positive and pretty steady. Basically, people are adjusting their inflation expectations and they're assuming inflation is going to come down in the next few years. That pulls down the longer-dated yields. That maybe is a good thing. In fact, if you really want it to be a little bit coy, you could say that, gee, shouldn't we be concerned if the yield curve was steepening? A steepening yield curve would suggest people are pricing in high inflation for the long run. That's what would make me concerned. People pricing in structurally higher interest rates over the long run would be a bad thing as it stands right now. I guess just to emphasize that we are in a different situation than usual and some of those yield curve signals, therefore, are becoming a bit more nuanced.

As we've talked before with you, it has everything to do with what you were expecting, a shorter business cycle this time out. Again, you're not sounding an alarm that a recession is around the corner, certainly, and those numbers remain very low in percentage terms, but we are moving through this business cycle faster than we did the previous cycle, without a doubt.

Yes, that's right, for sure. We've been saying mid-cycle for a while. We'll see what the next revision says in a month or so when we do it, but I think it'll probably still say mid-cycle. But equally, I suspect it will also continue to tell us that the early-cycle claims keep weakening and the late-cycle claims keep strengthening, and so on. It made it all else equal. We've been guessing for more than a year now that maybe it will be a five-year cycle, not a ten-year cycle, in which case 2024 gets a little interesting. But in theory you could expect 2022 at least to continue delivering growth, though, again, that's just one way of assessing the economic outlook. I will say we're actively expecting a deceleration in growth over this year. We think it's likely to still be a recovery, but a decelerating recovery, and we did actually get a little bit of evidence of that as well today in the data. The ISSA manufacturing print for the month of March also came out, and I've been clicking on my computer so much I think I've lost all my numbers here, which is a foolish move by me. But nevertheless, I can say modestly lower. Indeed, the production sub component did fall. So consistent with growth. The new order sub component failed fairly substantially, though still consistent with growth. What was good about it, though, was that we saw slightly fewer complaints about supply chains. That was a welcome thing. But equally, one of the reasons the measure didn't fall further, and this is a weird one, is that inflation expectations or the assessment of inflation was higher. Higher inflation means a higher index. It's a bit of a funny thing. You might think it should have the opposite effect, but in any event, we are seeing signs of economic deceleration here. Let's be candid about that. There is a slowdown. Recession risk is higher than usual, but it's still more likely we get a recovery. I'm sure you've been giving all sorts of very helpful messages to everyone out there, but in general, it's a time when one shouldn't be taking extraordinary investment risk, I don't think. But equally, normally, mid-cycle is a time when you can still more often than not expect risk assets to rise. It's worth heeding that as well.

That's always the point as you're watching the economy move through that economic cycle. If you check in with us at least once a month, when Eric's on, we typically check in on his view of the economic cycle and where we're sitting. That is when you want to sit down with your advisor as we move through and just make sure that your portfolio is positioned at the level of risk that it should be for you. Of course, everyone listening has their own standard for that. That's why this is an important discussion for you and an advisor to make the right call for yourself. I should mention, I was in Long Beach last week, Long Beach, California. I actually drove by the port and you can see the ships out sitting, waiting to come in. It was pretty interesting, if you think about that, as maybe the picture of the supply chain backup. As a quasi-economist, I get interested in those things. I made a special trip up to Long Beach just to look out in the ocean to see what was sitting there.

I used to get somebody who would email me occasionally who would, as many people do, drive down the Queen Elizabeth outside Toronto and would tell me whether there was a lot of cars parked in the assembly plant or not at the local car manufacturing facility and he thought that was a key input. I'm sure it probably is as well, though most of the time car production isn't a particularly volatile indicator, but yeah, that's great insight. We're now in a world in which we get all sorts of fascinating real-time measures. We just need you to go back again. Do you feel like going back again next month? We need a point of comparison.

I left 25 degrees and came back to minus 12 so yes, I'm ready to go back. The weather is only going to get better from here in Canada and hopefully we continue to see good job numbers for Canada, similar to the U.S. next week. And of course, it's never better than when we're hanging out with our favorite economist, Eric Lascelles. Eric, thanks again.

Thank you.


Recorded: April 1, 2022

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