Hello and welcome to The Download. I'm your host, Dave Richardson. It is time to check back in with Canada's hardest working economist, Eric Lascelles. Eric, you've been working so hard. We haven't been able to get you on the show for a while.

So hard? I was on holiday for two weeks. We'll have to reconcile that later. But in any event, yes, that's right. We haven't talked for a while. There are some things to catch up on, some recent data, but also some broader views, I think.

You're damaging the way I positioned you by saying you take a vacation. But I know you were working the whole vacation, and we're going to hear today, actually, some of the stuff you were working on.

That's right. I had a huge family holiday. We were in Tokyo, Japan for much of it. And so this has very little to do with me working, but I can say I was there when the Bank of Japan raised rates for the first time in, I think it was 17 years. So I was living history, if not actually actively contributing to it. So maybe I can expense that somehow. I suspect not.

Oh, no, no. You got to watch that or you'll be a part of the jobs numbers that we're going to talk about. And we'll start maybe quickly with Canada because it's probably not as important as the US number in the grand scheme of things. So the Canadian number was positive, but not overly positive.

Well, actually, it was slightly negative. The headline was minus two. So we were just joking: we were the two laid off, Dave and I. But no, it was minus 2000, actually. In fact, 2200. So that's not great. Obviously, we don't want to see declining employment, particularly at a time when the population is growing quickly because that does speak to a non-optimal allocation of labor. The unemployment rate — when you have big population growth and simultaneously, you're losing some jobs — it went up. So it went from actually 5.8% to 6.1%. So that's a fair-sized increase. So I don't think we could celebrate too much in this Canadian Employment Report. I will say, though, that the private sector added jobs. It added 15,000 jobs. Normally, when I say that, the reciprocal is, oh, well, then the public sector obviously lost some jobs. No, the public sector added 12,000 jobs. Then the question is, well, what lost jobs here exactly? The answer is it was self-employed. Self-employed was down 29,000. Certainly, there are some self-employed people who are making the next amazing company, and so I wouldn't want to underplay the importance of the self-employed, but I will say that a large fraction of the self-employed are working not full-time and are working in a low paying context. Maybe it's a personal consultancy that's just sitting on the side, that thing. Self-employed went down 29,000. That's usually the least damaging way to see some job losses. I take, I guess, some small consolation in that. I think maybe the broader context is useful, though, which is Canada's job numbers are famously choppy. It might have been minus 2, it might have been minus 40, it might have been plus 38; it could have been any of those things. It's hard to say with precision. Maybe more useful is the observation that it comes on the heels of two pretty big job creation months. There were 41,000 new jobs made in February. This is March data, by the way, we're talking about. There were 37,000 jobs created the month before that. I think we've had seven consecutive months of gains. You may recall that over the first half of 2023, it was a little dicey there, and we had some negatives interspersed. We ran seven in a row that were positive. I don't think we need to panic. When I look at some of the forward-looking indicators, the business outlook survey came out recently. Businesses said they planned to hire more or not less. And so we're not getting an ominous sign there. We were looking at some real-time economic activity, business activity metrics, in fact, in Canada that comes from Stats Canada. And that showed a pretty nice-looking jump in the latest week. And so I don't think that we're suddenly tilting into some awful labor market trajectory here. And wage growth is still rising at 5% a year. But we did see a softer number, and maybe I'm not focusing on the right thing here, which is minus two. Again, it could have been plus something, it could have been minus something. It's pretty choppy and noisy. But the unemployment rate is higher. Canada did have an unemployment rate that was 5% at one point, and now it has an unemployment rate that's 6.1%. I think that if you just look at that simplistically, you can say, well, 5% probably wasn't sustainable. That was a moment of madness and overheating economy that we probably couldn't hang on to. If we could settle at 6 or 6.25% or something like that, that's a pretty reasonable place The question is just, well, there's been a bit of an upward trajectory here, and can we stabilize here or do we keep slipping? I view it less as an indictment that there's a recession or something like that — and we should talk about that in a moment — but I view it more as Canada has let a lot of people in, and there is always indigestion when there is a huge jump in population. I think we are getting a little bit of an indigestion here, both in terms of hiring, keeping up with the population growth, and also in terms of the productivity that we're getting along the way. I don't think either are permanent conditions.

Yeah. And as you say, notoriously choppy month to month, but we take a longer-term view and keep watching it. Well, I know you'll always be watching it, even on vacation. But you can't just look at the one-month number. You got to step back, look at a longer-term trend, and the trend is okay. But we hate to see it go from 5 to 6 to 7%, and it doesn't look like it's heading in that direction. So then the US. The number is strong?

It was strong. That's right. We got 303,000 new jobs. And so, again, if you're trying to make a direct comparison to Canada, keep in mind you've got that nine times multiplier in terms of population. So it's just a different order of magnitude of what normal is. But 303,000 is a good number. The US has been churning them out at a pretty fast rate, generally north of 200,000, sometimes above 300,000, like in March. That's looking pretty strong. One of the criticisms of the US job numbers in recent months has been they announced this amazing figure, and then a month or two later, they say, oh, it was actually 100,000 less than we thought. And your amazing number becomes an okay number. And they keep repeating this trick where you're saying, hey, everything's great. And then it's slightly less great a month later. But that actually wasn't the case this time. There were some small net positive revisions to the prior couple of months. And you know what? I personally thought even the quibbling over is that a 200 or a 300 was overdone because those are both really good numbers. We're not that far removed from an era in which 100,000 was considered a steady state. That's what you need just to have a steadily growing economy without overheating. To be running even at 200,000 is a pretty strong figure. The unemployment rate has been bumping around a bit. It fell a little bit from 3.9 to 3.8%. If any Canadians are listening and wondering how it is the US is two percentage points below Canada, maybe part of the answer is the US economy is stronger, but a bigger part of the answer is there are some definitional differences. Fifteen-year-olds are included in Canada's unemployment rate. It's not until you're sixteen in the US. And guess what? The unemployment rate for 15-year-olds maybe isn't as good as the overall economy. Canada does have, in some cases, more generous unemployment programs that do influence the figures and it has more seasonal industries in which there are people who are just unemployed for a season every year because they're working the other seasons as that particular industry demands. I would say two percentage points is a reasonable comparison. Canada is a little weaker than the US, but ultimately both are looking pretty darn solid as far as I'm concerned in terms of the level of unemployment right now. One little sport we've done in recent months and years, Dave, is that we've said, well, the payroll survey was 303,000, but what about that household survey, the other estimate of job creation? That one actually had three negatives in a row leading up to this one. You could certainly paint a different picture if you wanted to of the US economy. But that household survey was actually really strong this month. It was up 498,000 jobs. It's a really choppy metric compared to the payroll. There's also been some interesting research recently saying, okay, this other survey has — not this month, but on average — just structurally underperformed the payroll number that we tend to focus on. And so, is it signaling secret doom or is it just missing the mark? And there's been some research suggesting actually maybe it's missing the mark. So the one that was negative for a bunch of months and now it's crazy positive, it's missing some things. And it sounds like there are some assumptions about population growth that go into how that particular one is constructed more so than the one that people look primarily, and the assumptions have probably materially undershot actual population growth. There's been a lot of illegal immigration on the southern border in the US. So actual population growth has probably been a fair bit higher. Anyways, that works into the numbers in a way that suggests that maybe that household survey and its weakness, notwithstanding this month, has overstated any weakness that actually exists. I'll mention one other thing, which is just hourly earnings running 4% year over year — 4.1%, in fact — in the US. You walk away and you say this is a pretty strong report, I think is the right conclusion. Maybe the debate is, is it too strong? We're into this interesting world again in which is good bad? Every once in a while, the market gets worried when the economy is too strong and worried that it's going to be harder for inflation to come down and harder for central banks to cut rates. I must say, I think there is a bit of truth to that. It makes sense to me. It's hard to pinpoint precisely what the exact optimal rate of job creation or economic growth is. But 300,000 plus probably isn't an indefinitely sustainable rate. I have to say I have some sympathy to the idea that central banks are probably going to have to move a little slower than we all thought they might on the way down compared to a quarter or two ago.

That's where we want to get off of this because it’s just another number, and you say there's some choppiness in the numbers and not complete consistency. But if you take a step back and you look at pretty much every number that's been released economically through the early part of this year, the numbers are showing the picture of a US economy in particular that's in pretty good shape. So then when you start to think about this recession that we've been waiting for, that hasn't come, and you still have to look in your role every day and say, hey, is it ever going to come or not? What are the odds tilted to? And again, this more recent data has you in a little bit of a different spot than you've been in for a while.

Yeah, that's right. Thanks for queuing me up on this. This is maybe the important message to share here. I feel badly we didn't get to do one of these last month, because we could have had this conversation a little while ago. But better late than never. And so let's get it. And I should say, hopefully some of your listeners are picking up some of the webcasts and some of the Macro Memos and other things that have been conveying this for a while. But if not, we've been talking for quite a while about recessions and high recession risks. And indeed, that was the base case forecast for a long time. And I'll say it was a reasonable forecast on the basis of historical precedent, given when rates go up that much, usually there is a recession, and we were getting all sorts of recession signals. What's interesting is that some of those recession signals, a notable number have been vanishing. Some of these signals that, by the way, were never wrong, at least never in the modern era. Every time it happened, you got a recession. They've been unwinding without getting the recession. At a bare minimum, you would say the risk of recession has fallen pretty materially over the span of the last three, four, five months, is probably the way to put it. We were seeing this happen, and we've been flagging really since the fall of the last year that the plausibility of a soft landing, of avoiding a recession, had been going up. Certainly, the risk of recession isn't zero, just to acknowledge that. We still have inverted yield curves, which historically have been a worrying signal. We still have temporary employment trending downward, which historically has been a signal of recession to come. That risk is still there. We think the risk has shrunk quite a bit, though. We're now in a position where we think the risk of a recession has actually fallen to about 35%. We think, therefore, the odds of the economy continuing to grow — this is US-focused, but it rhymes with other countries — has increased to about 65% over the next year. Still not normal. Normal recession risk is 10%. That's still an elevated recession risk, but it's greatly down from some of the risks we were talking about. I think that really existed as of a year ago. We do believe that the economy is more likely to continue growing. Some of that, as I said, is because some of the traditional recession signals have gone away. Just to flag an example or two, I can say that lending standards tightened enormously across 2022 and 2023. Every other time they tighten that much, you got a recession. They have now begun loosening, importantly, in a way that normally only happens as you're emerging from a recession. It's invalidating the recession signal, and we didn't get one this time. Maybe the way to view that is maybe we already had the weakness, if that makes sense, and the weakness wasn't quite of a recessionary depth. Another one would be, we look at profit margins The S&P 500 profit margins, every time they've fallen materially over the span of the last 40 or 50 years, you've had a recession. And they did fall materially. We just didn't get one. Now we seem to have S&P 500 profit margins that at a minimum have roughly stabilized. Maybe they're even bouncing a little bit, and that recession signal is gone. As I said, there are still some others that are in place. And yield curves are inverted, and every other time inflation went up by a percentage point, you did get a recession, and so we can't completely lose sight of that. But the reality is, particularly for the US economy, it just continues to exceed expectations. And every quarter, the number comes in, and it's faster than the conventional economic wisdom and the economic models say that it should be. And if that happens for a quarter or two, you say, well, I guess I'll stick to my model when these things happen. But when it happens four, five, six quarters in a row, I think you have to say there's something going on here that's not getting picked up in the models, and there's just this resiliency or this buoyancy to the economy that's not otherwise being captured, and we can't ignore that. We should recognize it and ultimately embrace it. That's essentially where we are right now. To be sure, we know the US economy is less rate sensitive. That's in the models. That's well appreciated. We know consumers were spending with some enthusiasm and so on. The fiscal side ended up being a little bit funny, particularly over the last year. But bottom line is the economy continued to grow, and as it stands right now, if anything, we are seeing a slight acceleration. You're always looking for a turning point as well, just in real-time. We're not seeing a turning point right now. It's not to say there couldn't be next month or the month after or something like that. But we've always thought that — I shouldn't say always, but for quite a while — we've thought that the first half of 2024 would be make-or-break for the recession call. You'd either start to see some weakness showing up here or plausibly, you are moving beyond the most dangerous period. Here we are, maybe with central banks getting to cut rates into the second half of the year and beginning to remove a bit of the stress that motivated the recession calls to begin with. That argues that soft-landing odds have improved. I know I'm going on much too long and much too quickly here, but I'll just mention, looking beyond the US, obviously, it wasn't all that fun in 2023 for a lot of countries. We saw economies — I'm being very silly here in not taking the win here and saying that Germany and the UK and Japan had recessions. They did have two quarters of declining output in a row. If I wanted to salvage this thing, I would say, hey, those are recessions. Mission accomplished. Onward. But you know what? Their labor markets held together pretty well. That doesn't normally happen in a recession. Can it be a recession if nobody lost their job? I would argue not. Bottom line is, we didn't get a recession last year, but we did see a lot of economies that were underperforming and did suffer to some extent, and there was a visible effect of higher interest rates. But even those countries are showing some signs of rebounding. We track a lot of economic surprise indexes, and we track some data change indices that nicely summarize the broader trajectory of the economy. We're seeing a nice bounce in Europe and in Canada, and maybe tentatively in the UK. Again, we're not really seeing evidence of trouble brewing there either. Bottom line is, it looks like we're on the soft-landing trajectory, which is awesome. That's great. Obviously, that's preferred. I like to get my calls right, but first and foremost, I like to minimize suffering in the world. I think this broadly does that. And so we should ultimately celebrate it. And gosh, the stock market has been thinking along similar lines, hasn't it? And so it's been celebrating very much so over the time frame where we've been shifting our thinking as well. I will say that, of course, there are some complications that come when you are suddenly on a soft-landing trajectory and unemployment is only sub 4%. That is to say, it is now a more difficult journey to get inflation down to 2%. It was never quite assured, and it was never set to be super easy. But there's nothing like a recession to reset wages and to reset corporate pricing power. If we don't get those helping hands, it's a tougher journey. Here we are in a 3% inflation world. I do think we can still see some improvement, but I think it's going to be a little slower and a little tougher. Maybe ultimately, from a bond market perspective, it's an environment in which, can central banks cut rates? They probably can, but probably not quite as soon, not quite as much, not with quite as much confidence as otherwise. You see bond markets now saying, well, June versus July was the debate, and the market was betting on June. We've been saying for a while, maybe you want to bet on July or a little bit later, and it looks like that is indeed where the thinking is shifting now. This is an open question, but we might only get two or three rate cuts in 2024 if the economy keeps growing. You get a recession, you can talk about a couple of hundred basis points of rate cuts, but if it's still moving and if inflation is sitting in the high 2%, it's not an environment in which you need to get back to neutral in a hurry.

I did a big speech in Edmonton yesterday and several sessions with financial planners, and we just talked about what you were talking about with the indicators. And that if you just look historically, there's just several indicators — and I track them, knowing from you, learning from you — that these are pretty much 100% right in terms of projecting a recession. And it just didn't work. And lo and behold, what's different this time? Well, hey, we just came out of a once-in-a-lifetime and hopefully once-in-the-history-of-the world pandemic where we shut down the world and you have all kinds of disruption still occurring in the world today. So it's not surprising that maybe some of those things didn't work out as well, just different circumstances in the background. But you've gone to the point where, okay, so we're leaning more towards a soft landing. And then a lot of the data, because of the strength in the data, suggests that, hey, maybe inflation, that 3% to 2%, which is that last leg down in inflation, maybe that takes longer, maybe even it doesn't happen at all. And then you look at interest rates and, hey, interest rates aren't going to come down as early as we thought. But what about we take it to now the worst-case scenario? Because let's roll over to the other side that, hey, things are too hot. What are the chances that we're in the process of seeing a little bit of a rebound and a fairly strong rebound in economies, which actually puts upward pressure on inflation? Is there any chance that we see this start to look a lot like the late 1970s, where, again, despite all the vigilance, despite all the work that's been done to manage inflation, somehow the toothpaste gets out of the tube again, and we get into some tougher times in terms of higher rates on that. Is that anything that's on the table or something that people should be thinking about, or is it just so remote that you just dismiss it?

Yeah, no, I wouldn't want to dismiss it. I mean, I would say the two central scenarios don't include that. It's recession versus soft landing, neither one involving inflation re-accelerating. But if you look beyond the main two scenarios and you add in four or five scenarios, that's one of them. One of them means that inflation at a minimum gets stuck in the 3% range, which no one wants, and maybe central banks even have to raise rates a little bit, or in worst case, as you've said, it accelerates further. I can say that I think there's a pretty low risk of the accelerates-materially-further story. You look at just so many metrics and inflation expectations. Inflation expectations, whether you're talking consumers or businesses or the market, they're skeptical about 2%. They think that inflation might get stuck at 2.5 to 3%. That's their bet right now. It would be quite a surprise to all parties if we ended up accelerating beyond 3% in a sustainable way. I should say expectations maybe aren't quite destiny, but they do influence the outcome. It's not just a guess, it's also the behavior of individuals that ultimately is what sets prices. Let's acknowledge that. I do think there are some important differences. I believe an older population is a very different inflationary setup than a young booming baby boomer population, at the time. I think that might be the biggest and underappreciated issue as well. You had a highly politicized central bank back then. I believe it's considerably less so right now. Unionization was higher then. It's lower now. Of course, all sorts of positives come from unions, but I can also say that it does tend to lock in the price increases for a while longer. You get that five-year contract and suddenly wages are moving fast for well beyond maybe the initial inflation impulse. The risk of inflation from that is maybe somewhat diminished as well. The list goes on. We've done a compare-and-contrast before, and it doesn't look to us like the '70s, but I do think that maybe the more reasonable third or fourth probability scenario is getting stuck at 3 or 3.5% and saying, okay, what do we do about it. At a minimum, it's one in which central banks don't get to cut, and maybe it's one in which they have to hike a little bit. I don't want to underestimate their willingness to pull inflation down to target. I'm not sure if they're willing to die in a ditch over 2.5 or 2%. I think that they could tolerate a little bit more, and that might be okay. But I don't think they're going to take 3% plus rolling over. Ultimately, there is a risk there. I do want to emphasize, though, I wouldn't say it's a super high risk, but just to be fair here, and not to argue in favor of perfect symmetry, but there is also the risk of a scenario in which inflation surprises us to the downside. Keep in mind that it's not quite clear that food prices at the retail level have to stay this high. It's not consistent with the experience in terms of the underlying wholesale and the underlying farm gate prices. I can say that there's still room for car prices to come down. There could be scenarios in which home prices come down. There's also a scenario in which inflation surprises us how low it is. We're surprised that suddenly central banks don't just find themselves in a position to cut rates to 2 to 3.5%, whatever neutral is these days. But maybe they're working below that. Again, not a high chance, but there is a risk that runs that way, too.

Well, there we go. So that's a great catch up, Eric. And you came back from a vacation with lots of energy. So maybe you actually did get some rest. That's a great synopsis. And again, taking us from where we were the last time we talked with lots of new data and taking us to where we think we are today. And of course, we look at markets. Yields are a little bit higher, so the bond market maybe hasn't been as good as we thought. But with that better economic play, the way the economy plays out, you end up with a stock market that looks a bit better. And the stock market, really all investment assets over the last year, have been quite fantastic. And ultimately, lots of people keeping jobs, economy growing, better stock market, good bond market. I think that's a win for everyone. So I will give you the win on that German recession. And then all the rest of us will take the big win on a better economic outcome than maybe we thought before. So Eric, thanks again for your time. It's always great to catch up, and we won't miss next month.

Okay, perfect. Thanks so much. Nice talking to you.