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About this podcast

While there is still work to do, Chief Economist Eric Lascelles suggests that we can start to feel better about the inflation story overall. Eric discusses how much further inflation will fall from here, why housing and labour costs could take longer to come down, and other economic stories including November’s U.S. job numbers, and recent volatility in bond yields. [27 minutes, 9 seconds](Recorded: December 8, 2023)



Hello and welcome to the Download. I'm your host Dave Richardson, and it is time to catch up with Canada's hardest working economist, Eric Lascelles, because, Eric, the economy never stops working, so you don't either. And boy, have we got a bunch of data to catch up on since the last time you were here.

Yeah, it's been busy and with some conflicting news and bond market markets skittering around and so on. Yeah, that's quite right. I guess the big latest one, Dave, that's just come out literally moments before we're recording is US payrolls. And of course, that is a particularly closely watched indicator. It's always important. It's one of the first reads we get on the month of November. And in this particular case, it actually held up okay. Now I don't want to say it was super strong because it wasn't. 199,000 jobs was 14,000 more than the consensus. That's kind of a rounding error sort of thing. Do note that there was some artificial help beneath the surface in the sense that the auto workers went back to work and so that added 30,000. And so, you subtract that off and it's starting to look a little more similar to the month before, which to be clear, we had been just moving along at 200,000 and 300,000, even beyond not too long ago. So this is still somewhat diminished, but it's a solid number, not suggesting any great concern. Again, you can chip away at it and say there were negative revisions of 35,000 jobs and so on, but of course, anyone who wants to feel good about this one, the main rebuttal would just be that the unemployment rate just fell. It fell from 3.9% to 3.7%. That's a pretty big reversal— you might recall last month—, and certainly in general. I've been talking about, we're getting close to that Sahm's rule, the idea that when the moving average of the unemployment rate goes up by half a percentage point, there's never not been a recession. And we got right around there, and here we are walking that back. If you're wondering how the unemployment rate fell so much when the job number was just decent, the answer is, keep in mind that unemployment rate is calculated using a different survey. It's calculated using the labor force survey, which contacts individuals at home essentially directly instead of asking businesses what was happening. And it claims there were 747,000 new jobs, which is a huge number. Now that, I should say, is known to be the more choppy of the two. You should note that the prior month, they had announced the loss of 348,000 jobs. And so this thing really has been swinging around. And the broader trend actually is plus 200,000 for the last two months, which again looks maybe similar to where we are right now. But that lower unemployment rate was because of this other funny number on the side. I wouldn't criticize the underpinnings of the payroll increase too much in the sense that 150,000 out of the 199,000 were private sector. That's a decent chunk. That was a little bit less than the consensus, just as an aside, further to the idea that not everything here was crushing market expectations. It seems to me— and of course it gets a bit blurry when you're talking education and healthcare, because some of that is public sector, some of that is private sector, it's just a blurry mix of the two—, but a fair chunk of the hiring was not what I would describe as being economically motivated or economically driven, in the sense that you had fully half of the job creation came out of education and health care. Good jobs, of course, and so good for spending, but not necessarily a signal that businesses are saying giddy up and here we are, off to the races. Government more generally was a chunk. 50,000. And then leisure and hospitality was up, which was interesting. And I guess that's a more genuine source of strength. I'm giving all sorts of irrelevant details here. I think the takeaway was it was a solid report. It wasn't as amazingly good as the falling unemployment rate looked, but there was nothing too wrong in it.

So, Eric, As we were talking very briefly before we started recording, I think both of us were expecting to wake up this morning, see that US job number, have it be fairly tepid. Now, as you're suggesting, it's not that spectacular and it is kind of following the trend that we've seen the last few months, which again, we've gone from 300,000 to 200,000 and now we're in the high one hundreds. And the unemployment rate actually did come down. But we've been seeing a lot of and fairly consistently negative numbers or negative surprises around economic data out of the US and Canada. So this somewhat falls out of line. I mean, I thought we were going to get on this morning, and we were going to be talking about, wow, here's another nail in the coffin on the soft landing story. I was doing an interview with another investment professional yesterday, and we were just looking at a slew of charts that just had inflation very much under control coming down. Everything's in good shape there. Oh, we're slowing down at a nice pace, so still a chance for a soft landing, but very much looking like a recession. And then this number just seems out of line. And then you were saying there's even a couple of other things that have popped out over the last couple of days that also put a little chink in the story of how much we're slowing down.

Well, first things first. When I woke up this morning, I wasn't thinking of job numbers at all. I was thinking, did Shohei Ohtani sign with a baseball team? And at least at this juncture, he is not. So my attention was misdirected. But you're right.

Wake up thinking about how you can be cruel to an Angels fan like me. Because for an Angels fan, this is a nightmare. Losing Shohei Ohtani would be a disaster, and we are going to lose him.

Dave has the most eclectic sporting interest. Here's a man who lives in Toronto. Remind us of your sporting fandom again? You got the Oregon Ducks.

And a devastating weekend for the Oregon Ducks, too.

Yes, you've got the Angels. I forget, was there anything else in the football realm?

St. Louis Blues. Denver Nuggets. Got a Denver Nuggets title last year. There's some happiness on the sporting front of my miserable teams that I love.

No Toronto teams? Okay, good to know. Hopefully we got a lot of non-Toronto listeners. But you're quite right on all fronts. I will say these job numbers don't fit with the narrative of a weakening economy. Do note, though, that when we look at other labor market signals, broadly speaking— this is me possibly cherry picking, but I don't think too much— the ADP number came out on Wednesday. It was 103,000 jobs created. That was notably underwhelming. That technically is actually a bigger survey size than the one we're just talking about today, but I wouldn't want to suggest they necessarily have the same statistical chops to get right down to the truth. But anyways, in theory, an even bigger sample. Unemployment is still several tenths higher than its low, and so we have seen some trend upwards despite the fact that this particular month went down. We've been talking for a long time about temporary employment falling. Temporary employment did keep falling in this month. That's a precursor to bad news elsewhere usually, though it's taking its sweet time coming. That might just be the theme song for the year 2023, «taking a sweet time coming», from an economic standpoint. Youth unemployment has been trending notably higher. Often you see a bit of pudginess there before you see trouble elsewhere. Job openings just fell quite a bit, but it was a downward trend. We had a big drop in the latest month. Continuing jobless claims have been rising, not this week, but have been rising on a trend basis. I still think we're seeing some tentative softness. Nothing saying recession is here in the labor market, but some tentative softness even in the labor context. You mentioned we're seeing maybe some other general forces that are pushing towards a weaker economic narrative. I think that's right. We look quite closely at economic surprise indices. I think it's well appreciated. The US has had these big positive surprises at a time when other countries really have struggled more, as you mentioned. And so that's been the case. The US Economic Surprise Index, though, is now in very significant retreat. It's gone from huge positive surprises over the summer to moderate positive surprises over the fall. And now we're working our way back to a more neutral position and just trending downward. So there has been a change there. Economic data change indices which try really just to smoosh every possible nugget of information together, had been rising almost without stop with regard to the US, since I believe February 2022. And just in the last month, we've seen that go sideways and start to go lower a little bit. And so I would say the general trend of data has been weaker despite what we got today. We're seeing global trade and decline and other things that are traditionally a precursor towards weakness. One thing that doesn't get its just desserts, I think, is the beige book. Again, US focus. This is the qualitative assessment of what's going on. I always find it very instructive. I recall, the prior beige book was pretty weak too. This one was even weaker. It just came out in the last week or so. They look across the twelve districts of the Federal Reserve and they try to assess where things are. And their summary was as followed. First of all, economic activity slowed since the prior report. So they do see some deceleration. They had four of the twelve districts reporting modest growth. They had two of them saying «flat to slightly down». They had six saying «slight decline». So that's six out of twelve saying «down», eight out of a twelve saying «flat to down». We'll see if that means anything. You can't put all your weight in one particular indicator, but this is a large fraction of the US saying we're not really growing all that reliably. And that is a worse cumulative reading than before. And slight signs of housing weakening were some of the anecdotal reports that came out. Another one was the economic outlook over the next six to twelve months diminished over the reporting period. Demand for labor continued to ease. Again, if you're going to be an economist, you have to learn to deal with contradictions. You’ll never get everything lining up precisely or logically, if I'm being honest. Price increases largely moderated across the districts. I should say, the last one would be sales of discretionary items and durable goods like furniture and appliances declined. So again, maybe I'm cherry picking a bit too much, but that tends to be quite useful. It is taken into account by certainly the Fed, and I think it's telling us that we are, despite this number, seeing some deceleration in activities. Not a recession right now, let's be completely clear, but we are seeing a bit of a tilt lower for the most part.

Wow, you really are a member of the dismal science, as they call it in economics. The dismal member of the dismal science. But I was looking at a bunch of charts yesterday, digging through a lot of your stuff and other things that you can consume voraciously, if you choose to, around economics and markets and such. It seems like we've been talking about a recession for a long time— because rates have been rising, and we'll get into yields in a second—, the central banks, bank of Canada, Federal Reserve raising rates, and it usually takes about 22 or 24 months. And that's where we're starting to get into that territory from the first Fed rate increase. So even though we've been talking about it for a long time, and we're almost tired of waiting for that final result to come, be it a recession or a fairly significant slowdown that sort of resets and normalizes the economy coming out of COVID and that pop that we had when we released all that money and stuff out into the economy in 2021 and 2022, but it generally takes a little bit longer than you expect to see that slowdown. And markets are starting to tell you as well. They're seeing what you've been seeing for a long time.

You're certainly right, it takes a long time. It's very tempting to give up on these things somewhere along the way. In fact, often you do see forecasters give up on it, and that tends to be the moment of maximum danger and when maybe it starts to happen, ironically. But that's right. The normal schedule— and there's no really normal schedule— but historically, the average experience, it takes about two years before rate hikes map into recession. So we're still ahead of schedule from that perspective. That would be the first half of next year. Now, you'll let the record show, the historical experience has shown a range of time anywhere from one year to four years. And so let's not set our watch to this exactly, but I think the one intelligent thing you can say is that the window hasn't closed for trouble from higher rates. And indeed, we're still seeing mounting pain in terms of delinquency rates and certainly in terms of the cost of servicing debt and that kind of thing.

Kind of the experience of you and the listeners, as I was trying to get that last thought out. You could all see where I was going, but it just seemed to take me forever to actually articulate that thought and a question for you. So I apologize to everyone. Maybe not as sharp as I normally am this morning, but I'm used to Eric carrying things for me here.

They’ll listen at 1.5 times and it’ll be fine. You’ll sound good. I’ll sound like a chipmunk. It's okay.

Excellent. Why don't we get to those yields? The one dramatic change from your last appearance is that. I tracked the 10-year US Treasury, I think that's probably the most important number on the long end. And we got up. The last time we spoke, we were up just a touch above 5% on that. And a couple of days ago, I think it kissed 4.09%. So down a full 0.9%. It's kicked up a little bit this morning with the jobs numbers, which, again, are a little somewhat positive, as we've been talking about. And now we're at 4.20%. But it's pretty remarkable. And it's not just the 10-year, it's across the whole curve that you've seen those rates come down. What do you make of that? Is that just that we'd overshot? We saw about 150 basis points to the upside in about three months, and then we do 90 basis points to the downside in three weeks. How on earth do we put this together? This volatility in yields is just not normal.

No, I think that's right. It is pretty wild. And as much as we can point to some things that did support yields rising and now support yields falling, I don't know that you could honestly say that's 150 basis points worth of motivation in one direction and 80 or 90 in the other direction. So I guess there's a few ways you can interpret this. I'll say that when the US 10-year yield touched 5%, we thought, this is too high, this is not a likely sustainable position. And so I'm feeling happy that we've seen yields fall in the sense that it's consistent with our forecast and it's probably closer to a sustainable number. Equally, though, just as a little aside, I'll confess, when our forecasts come true, I always feel some anxiety because then you need a new forecast. It's nice when it's happening, but then you think, what's the view now? My level of conviction in the short run on yields is much smaller than it was a month ago, when it seemed pretty obvious that yields were too high. So that's just my own inner turmoil in my mind, I suppose. From an economic standpoint, keep in mind higher yields equals bad. Lower yields equals good. And so I was banging the drum when yields were approaching 5%, saying, gosh, this is certainly an extra reason why there might well need to be a recession here, and it's going to be a more painful experience. To be fair and to be symmetrical here, we have to say yields have come down partially, and so some of that potential pain has gone away. So that's quite nice, actually. I would still emphasize yields are a lot higher than they were a year ago. I think they're even a little bit higher than they were even a quarter ago, just to be clear. We've had such a swing and so there's still a very material economic drag coming from rates. But I guess it's not quite as incredible as it was, or it looked like it might be there for a month. We still think it's enough, though, to trigger a recession and so on. I will say, in terms of why yields are going up and down again, it probably is just a good old-fashioned overshoot, at least to the upside initially. But the rally recently has been significantly motivated by the fact that we are getting inflation under control. The inflation numbers have really cooperated, and that's something that makes sense to us. We've been slightly optimistic on the inflation story for a while. I think that's actually played out quite nicely this year. We think there's room for a bit of more improvement next year. And then the market's been pricing in rate cuts. It’s moving a little today, as you say, as these numbers have come up pretty strong, and there was also some consumer confidence data today that looked pretty strong, too. So a few things are arguing, oh, well, I guess the recession wasn't in November anyways. But the market has priced in 50% of a rate cut in March at this point in time. And so for a long time I've been saying, listen, I think the rate cuts could come sooner than the market thinks, and it could be more cumulative cutting over the span of 2024. I felt pretty good about that call. The market has now embraced it and then pushed even further. And now I'm not quite sure what to say. I don't know that I am convinced that March is when it could happen. If you get a recession that starts really soon from now, you could start to talk about March, I think, but it might well be a little ahead of itself. So the market's priced in a lot more rate cutting and maybe a little too much from a timing perspective. I'm not sure it's too much from an amount of cutting perspective, to be honest, because when central banks do start cutting rates, they generally take that elevator down.

So with all of that, Eric, is the inflation fight over? Can we declare victory at this point?

Probably. I mean, we can feel better about it. I think that's the honest answer. It's probably a little early to declare victory. It depends on your definition of victory. If victory means we're not stuck in a 10% world, then, yes, let's declare victory. If victory is, we are clearly back to a 2% world. It's probably a little bit early still. I do think ultimately, we get pretty close to that. I still see the big original drivers of inflation. They've all turned. They're not doing anything new or worrying. They're still supportive for inflation coming down. It certainly depends on the country. Canada's got a bit of a tricky situation with shelter costs; the home price side is falling, but the rent side isn't. And then the interest cost part is, of course, soaring. And it's adding up to a bit of a murkier picture that maybe doesn't let the last big driver of inflation settle quite as quickly. So there are certainly complicating points. But wage growth, by the way, looked a little better in this report. You're now down to wage growth in the US, 4% year over year. In fact, 3.96% or something like that. And so I think that's the first time we've seen a three handle in a while. So that's nice. But wage growth maybe isn't quite fully settled in a way that you can speak with complete confidence. And you see some of the recent union settlements— and of course it's wonderful for the workers—, but to the extent you got a settlement that's locked in for the next four years or so, that might prevent wages from coming down in a way that's consistent with perfectly normal inflation. But I'm giving you too much detail here. I do feel pretty good about the inflation story. I am betting on it continuing to fall in the coming months.

And I just want to come back to that because I don't think we covered this enough back at the front end of all this, when we were making the comparison between this inflation spike versus what we experienced in the 1970s. And one of the key points you made was around the level of unionization. So the idea that these huge contracts that cover thousands, millions of people, embed higher wages out into over three, four years, again, for a big chunk of the population. But the level of unionization today is much smaller than it was in the 70s. So you just don't have the breadth of the impact. So again, it's good for those people, they get a nice wage increase, but it doesn't embed inflation in the economy the same way it would have done 50 years ago.

That's right. There are a number of differences with the 70s, fortunately, because we don't want to go to the inflation side at least of that experience. So one is reduced unionization, which prevents wages from getting stuck at that high level, beyond the point when inflation is high. Of course, workers should be getting compensated for inflation increases, and over time, generally that does happen. But we saw in the 70s some big locked-in double-digit wage increases over four or five years, and it was really hard to pull inflation back down when the wage side was still moving so quickly beforehand. Certainly, let the record show that part of the story is also that corporate profit margins have gone up this time. And so, in fact, I would say the bulk of the inflation that we've seen runs in a number of directions towards commodity costs and so on, but a chunk of it has gone towards corporate profit margins too. So I wouldn't want to put it all whatsoever on the worker. But that's one difference from the 70s. Another big one is just the demographic side. The young, fast growing population back then, which a funny theory would say you wouldn't expect lower inflation, but the practice is whenever that happens around the world you get more inflation. And here we are with an older world. And central banks have learned some lessons and depoliticized a little bit and so on, and you look back at even the late sixties and there was a multiyear period when inflation was just inching its way higher and higher and clearly it was no longer a 2% type number and it kind of kept going and nobody sounded the alarm. And so they just let it run for so long that it became embedded into expectations and it took longer to fix. This time mistakes were made. Transitory proved to be less transitory than hoped but they did get on it within six months and they've been pretty aggressive about it.

Yeah I was actually reading a report this morning out of the UK, a big policy report that suggested that it was corporate profits and corporate pricing power in the face of the type of economy we had coming out of COVID that was the primary cause of inflation. So we'll share that to balance things out. We're agnostic here. We love everyone to be paid fairly and we like companies to make a fair amount of money. We're not cheering for anyone's side. I just want to make sure; we're just reporting the news and doing the analysis in terms of how it impacts markets to help you make better decisions around your investment portfolio. That's kind of where we sit. Right Eric?

Ditto. Sounds like a safe thing to say. No, that's quite right, yeah exactly. I should say even, it's easy to vilify corporations. Of course, if you're a resource producer and suddenly Russian oil isn't available, well the price of oil is legitimately higher because demand exceeds supply and so it didn't cost you any more to pull out of the ground, the profit's gone up, it's no dirty dealing by the company, that's just the way it works. And so you just have a lot of different forces, and supply and demand for certain products, and the cost of labor and the cost of capital. All these things sort of fit together and it sort of falls out and no one wears a white hat or a black hat particularly. It's just everyone is profit maximizing. I'm trying to get the highest wage I can get. The business is trying to get the highest profit. And things fall out of that equation.

As I like to say to people, because I have an economics degree as well— and this is an oversimplification—, but you're given a set of resources and skills and then you try to maximize your happiness through life. That's economic. So we're all economic actors in our own way, trying to make the best of it in the world. That's a lot of people coming together, making millions of decisions, billions, trillions of decisions every day that we're balancing out. So it is a complex world that we live in from an economic perspective. So we're always looking at lots and lots of data points to try and figure out the path forward. And you do it better than anybody, Eric. You've been sharp.

Gee, thanks, Dave. I heard Chat GPT is going to figure it all out by tomorrow, so maybe we'll all be out of a job and our wage negotiation powers might be a little reduced to that.

I have booked Chat GPT for the next jobs report. Our producer just pinged me that we're running a little bit long, so maybe Chat GPT will be a little more concise. Although they probably won't talk as fast as you, so I don't know whether we'll get more information or less into a shorter podcast. By the way, I do cheer for one Toronto team. I cheer for my University of Toronto Varsity Blues. I’m a UT alumnus. You want to talk about dismal? That football team is dismal. Okay, so there you go. Being the Harvard of the North has its advantages academically, but then you also track with the athletic department. Lovely people. I actually lived with a bunch of the football players when I was there.

I roomed with the captain of the Princeton football team and never went to the games. I was such a bad friend; I don't know what I was thinking. Anyway, he's now a very successful hedge fund manager. He doesn't hold it against me.

Okay, well, and probably a relatively unsuccessful football team? But you should have gone.

In the grand scheme we did have one guy, Dennis Norman, who actually was on the track team with me and on the football team, and I think he played for the Seattle Seahawks or something. Anyway, so like, there were a couple freak athletes, but yes, it was a step down in the football department. That's fair.

I don't know if you remember this— some of the older listeners will remember—, Fred Flintstone actually went to Prinstone University.

Is that right or are you making this up?

No. Fred Flintstone went back to school. He went to Prinstone University. And he was a dominant player there. He was a lot bigger than some of the other kids. So there is a legacy back in the Stone Ages of Princeton being a good football school.

Well, I'm certainly glad we went long on the podcast to figure that out.

All right, Eric, thanks a lot. I know you got to get back to work. You're frustrated because we're having silly conversations instead of you being able to put pen to paper. So we'll check in with you next month. And thanks as always.

Thank you. Bye, everybody.


Recorded: Dec 8, 2023

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