Hello and welcome to The Download. I'm your host, Dave Richardson, and it is Jobs Friday, or at least one Jobs Report Friday. Canada's hardest working economist, Eric Lascelles, joins us. We're actually taping late in the day today. Normally we tape this at about 10:00 in the morning. Jobs report is out at 8:30 Eastern Time in the morning, but we're in the afternoon because Eric is so busy, he hardly has time to even break in and chat with us. So welcome, Eric.

Thank you. I was actually interpreting the job numbers from the seat of an airplane. So that gives you a sense of why we're doing this.

That's what I mean. Some people just get on the airplane, sit back, relax, throw the headphones, or maybe watch some entertainment on board. And they might even be in business class because they're a big-time economist like you. But you're stuck in the back of the plane in economy. You've got your knees up in your face and you're still tapping away in your computer because you are Canada's hardest working economist.

Okay, if you say so, I will take it. The guy beside me was drinking an 08:00 AM beer, which was interesting. But in any case, to each their own, as we say.

Well, we all have to help the economy in our own way. So everyone's contributing. And the other thing, we were just chatting before, you've got some big news on your son.

Well, I mean, maybe not on yet, but I will just say he's had a great deal of baseball success. He's a baseball player. Both my kids are, actually. And so he was very lucky to be named to the National Junior Baseball team, which is pretty cool. So he's really excited about that. And it's been a busy late summer and early fall of looking at US colleges. And so we think we're narrowing things down, and it seems to be a high academic path, but I guess to be determined beyond that. But it's been pretty darn exciting for him, and he's been traveling all over the place.

We've got lots of people joining and subscribing all the time. We're growing still, Eric. You probably don't know. And by the way, if you haven't clicked «subscribe», please subscribe to the podcast on iTunes or Spotify or Apple podcast, wherever you get your podcast, I believe, is the expression people use. And now we're on YouTube here with this video. So please click «subscribe» and «like» and all the things that you have to do, five-star reviews. And now I've done all my promotional stuff, Eric. But for those people who are new and don't know, you went to Princeton on an athletic scholarship, right?

One of those two statements is correct. So I did go to Princeton. I did run. I will tell you that anyone who claims to have gone to an Ivy League school on an athletic scholarship, at least in the last 50 years, is either fibbing slightly or simplifying the truth a little bit, which is to say their needs base. If you come from a middle class family as I did, then you do get a lot of money. It's pretty great. But it wasn't because I was better than the runner beside me. We were all good enough to be there, and they made the funding work. But yeah, you're right. I did run there, and I did study there, and it was pretty great. I had a wonderful time. So I recommend it if anyone has that option.

Imagine your boys are great athletes and great students and hard working like you. And so that's great. Although, no money under the table at Princeton?

The opposite. I was working in the cafeteria and the library making the necessary amount of money to make that all fit together.

Okay. So in the process of building your credibility for the listeners, we've eroded mine. Let's get to the jobs report. Well, actually, we're keeping the suspense up because we're hiding the good news, right? Good news on the jobs report.

That's right. We've spent years at this point in time fretting over the risk of bad job reports. And then for a month or two recently, we have had some underwhelming job reports. Do keep that in mind. So here we are. You've hinted this, Dave, we got a good one. Let's appreciate that one good number does not fully negate a couple of iffy ones. And so we can't say suddenly that it's rocket ships ahead. But 254,000 new jobs created in the month of September is a pretty big number. That was a good 100,000 beyond the consensus and a good chunk beyond what we'd seen actually over the last few months. And in recent months, we'd had numbers, and then they'd been undermined by the fact that there were negative revisions for the prior two months. And that wasn't the story. For the first time in quite a while, I think actually we had positive revisions. An extra 72,000 jobs were discovered from the prior two months. Actually, that rendered those a little bit less weak as well. So it was strong. If you do a little bit of averaging, the three-month hiring rate now is 186,000, which is pretty solid. I mean, we were getting nervous that we would fall below 100,000, and that would start to bring some implications of weakness. But no, the last three months have actually, at this point, averaged a pretty good number. And you know what? That's actually in line with or just a hair below the average of the prior year. So we can't even really say it's decelerating now. So that was all very nice. As you might expect, given a decent job number, the unemployment rate fell, not rose. There had been a rising trend. It was interrupted actually last month because two months ago, there had been a hurricane, and then last month we were unwinding the damage. That's why unemployment went down the prior month. People didn't think it necessarily meant that anything good was happening. It was just a mathematical thing. But this time we actually saw a further decline in the unemployment rate. It's from 4.2 down to 4.1%. That looked pretty good, too. This is getting fully into the weeds now, but if you look at the breadth of hiring, meaning the extent to which it was spread across all of the sectors, that was a bit broader than we've seen. In fact, it was the broadest we've seen in eight months as well. So a good-looking report from top to bottom. It does need to be viewed in the context of the broader trend, but actually the broader trend has been refashioned a bit, too, and doesn't look too bad either. And just to give you the last little bit here, wage growth actually picked up a little bit from 3.8% year over year to 4.0% year over year. So that’s where we stand. And, gee, I mean, recession risks may be down, all sorts of implications from that that we should probably talk about.

Yeah, absolutely. We're going to have to go there. But let's go back before we go forward, because the Fed, just a couple of weeks ago, cuts rates. And that's okay. It’s one thing to cut rates, but they actually cut rates 50 basis points. Based on the jobs reports that we had up until that point, before these adjustments higher for previous numbers, it seems as just they were quite concerned about weakness building in the economy. Now this number comes out. Did they make the wrong bet or is it not really that significant? Or are they still looking farther out ahead and seeing weakness that just is not in a single month's number?

Yeah, those are good questions. I don't know that I have perfect answers to them. I mean, let me admit that we had thought a 25 cut was more likely than a 50. So this would say that that maybe is the more valid choice, hindsight being 2020, which it never is in real time. The way that the Fed characterized that rate cut. If they'd done a 50 — and they did — our fear before that that maybe it would smack a panic. The view would be, uh-oh, the Fed's nervous here, and they don't like the economic weakness, and they're going hard to try to stop that. They did communicate really very effectively. The way they described it as, first of all, we're off to a good start. And so the idea being like, not that it was preordained, that it's lots and lots of 50s to come, but it was a good brisk beginning. And furthermore, they described it more or less — this is my paraphrasing — but as celebrating the decline in inflation as opposed to fretting over the deceleration in growth. And so they certainly painted it in very positive light. The market just ate that up. And so the market celebrated for sure. And I should be clear here: you can debate 50 or 25 and it gets heated and so on. But the reality is, okay, the debate was, should the Fed funds rate be 5% or 5.25%? And the answer is that's not that different. No model will tell you one's a genius move and one's the worst decision in the history of the world. And so I would just say they chose to move fairly briskly at the beginning. They've been pretty clear that it's not at all certain that they keep going that fast. I think it's reasonable to assume that they will go maybe at 25 basis point increments from here. Actually, just to that effect, I was looking at what the market pricing was. And as of yesterday, the market priced in a two in three chance that there would be another 50 basis point cut somewhere out there this fall, either the October or the December, and the other one would be a 25. So one 25, one 50, that was the default thinking. The market has taken that out on the back of this number today. So it now looks like it's a pretty precise two 25 basis point rate cuts is what's predicted. That's what we were thinking all along. I guess the markets moved toward us, which is always nice in this context. I think they can still cut. And you and I were saying beforehand, and this is worth flagging as well, which is just that we've been in this funny world for a little while now where, of course, because of fears about inflation, we liked it when the economy wasn't bad because bad, of course, signaled recession risks and things we didn't really want to deal with. But we didn't really want the economic data to be too strong because it was not at all certain that inflation would settle. And so there was this happy medium that we were pursuing. And there's still some truth to that. Obviously, we don't want inflation to reignite and that sort of thing. But inflation has been so well-behaved recently and has come down. And all of the important subcomponents and drivers have come down such that I think the risk of being stuck at a high number is so greatly diminished, and we saw this in the market's interpretation today, it's not quite fully back to good is good and bad is bad, because, of course, you don't want overwhelmingly strong data that does overheat things. But this was one of these situations in which we got outright good piece of economic data, and the stock market rallied. So the stock market says this is good for the economy, which I think is fair. And the bond market, of course, sold off because it does suggest a little bit less rate cutting, perhaps. So I think it's more maybe taming some of the over enthusiasm that was previously priced in. But you're not seeing people suddenly fretting greatly about inflation. And so that's actually a pretty good place to be right now.

Yeah. The dismal science that we both studied in university that we've been talking about. It always feels better, even for those of us involved in the dismal science, when people are getting jobs and the stock market responds positively to that instead of having higher unemployment and the market responds positively. It's nice when things are aligned more on a values basis. We can cheer on the good economy, and everything works out well.

That's right, for sure. And we think a sustainable US unemployment rate is somewhere between 4 and 4.5%. We are right in that range. And so when we get a decent looking number like this, we can feel good about it and we don't need to be too concerned that we are in overheating mode already. You stitch together a whole whack of these and do it for a year, and we maybe need to be a bit nervous again about the economy being unsustainably strong, but that's just not where we are right now. I will say, just stepping back and thinking labor market, we did get that recession signal out of the labor market. The unemployment rate went up by enough that historically you tend to get recessions. We're feeling okay about the growth outlook at this point, but my rebuttal would be partially that we have a lot of other recession signals that aren't saying yes right now. It's not all about the labor market. And this is going to confuse people, unemployment went down today, but some of the prior increase in unemployment was due to more people looking for work as opposed to people losing their jobs. Not to say that it doesn't matter if someone's unemployed who's newly looking for work, but it's a bit more benign or a bit less malignant than when companies are actively laying off, and they're just not in a big way. We're watching the labor market closely and feeling pretty good about today. The broader story, though, is you've also got a household survey. It was actually quite strong, Dave. It's so choppy. You don't want to read too much into it, but it was up 430,000 jobs this time. There had been a couple of negatives, you might recall, a few months ago, so it does swing. The ADP survey, which is actually, I believe this was true a few years ago, at least, it's actually a bigger sample than the payroll number, but it's conducted by the private sector, and it may not be as perfectly stratified and sampled and so on, such that no one thinks it's more important. But the ADP held together. It was a solid number, I guess, is the way to view it. And jobless claims, which is the weekly metric that we get a really fresh read on, it was up ahead of this week, but the broad trend has been trending actually down, not up. And so this is a variable where down is good. So overall, we see a labor market that's holding together. It's certainly not as strong or as hot as it was, and you can see with lower job openings and lower quit rates and things. But overall, there's a fighting chance, or more than a fighting chance, this soft landing gets achieved. I say fighting chance because historically labor markets do get really slippery when they soften a little bit. And we are very tentatively seeing something that looks like maybe it is starting to stabilize in a 4%-something unemployment rate, which is exactly what we're hoping happens. Let me warn you, Dave — we are going to talk through these, I'm sure, no doubt, and maybe you'll have to remind me about all this in a month — but some people are saying, and I think rightly, this could be the last clean job number for a while because they've had this big devastating hurricane in the US Southeast. And that is likely to distort the numbers. Of course, you get a distortion downward initially, and then you get a distortion upward after that. And suddenly it's January 1st, and you're for the first time looking at a number that you can fully understand. And so there's going to be a lot of weight put in these numbers because we don't know as much about the next few rounds.

I do want to go to the hurricane and its impact, even beyond jobs numbers, but just from an economic standpoint, because it's important to go back and review that on an ongoing basis and be aware of how these events impact the economy short term, long term. But I did want to talk about on the unemployment front — we have touched on this a bit, maybe not gone into the depth we should have, so let's try it today — which is the elevated levels of immigration that you see in both Canada and the US, and the impact that that has on the number of jobs that the economy needs to produce. Because you've got more people of working age who are coming into the economy, need jobs, want jobs, are going to get jobs, and then how that impacts the movement of the unemployment rate. And then with that, as you're looking at it just as an economist, what is the most important number that you're looking at to see through the noise of just more-than-normal number of people coming into these economies?

Yeah. Great question. And indeed, to varying degrees, immigration has been higher, and it's been in some ways less well understood because it's been through unusual channels. In the US, it's just undocumented immigrants who aren't tracked all that well. The Canadian story, which we're not focused on here, but it's temporary workers and students working and things like this, which again, isn't the traditional immigration channel. But the point is just the numbers have been higher than normal, and it's particularly not well appreciated in the US, but it's been a few million more people a year are coming in than normal, and that does move the needle. I guess the way to think about it is, if there was no immigration, US economy would not need more than 100,000 jobs a month to keep base. In fact, it would even be a bit less than that, probably. Now, there's always been some immigration, and so that's not fair. The question is there's been a bump in recent years, and so maybe 100,000 or a little more would be your steady state under normal circumstances. But when you have a couple of million extra people coming in and you're averaging that over a 12-month period, you do need an extra, potentially 100 or 200,000 jobs to keep pace. And that's been the story here. Hiring really hasn't dipped in any material away below 100,000 a month. You'd think that at all points, unemployment would be low, and if anything, even declining, especially on the back of big numbers like this or what was achieved in recent years. But the strong immigration numbers have meant that you do need to generate more hiring to keep pace. So that's been the main story. Secondarily, though, it's pretty far from the heart of the pandemic at this point in time, but there was some gradual rebounding of the labor force participation rate, even among Americans who've lived here for a very long time. And so there's been a little bit of that as well in terms of people coming in. And so I guess the question is, how do we deal with this? And so, first of all, we think that the rate of immigration in both countries is going to slow. It's not a forever phenomenon. We're going to lose some of these unusual forces over time, and it's already very clearly slowing in the US, and both presidential candidates are talking about certain measures of control that would suggest some further deceleration. So it's not a forever thing. In the meantime, though, we're just putting a little more weight on the employment rate instead of the unemployment rate. I know that sounds like it should be a one minus the other thing. It's not quite, though. The employment rate is literally the fraction of the working age population who are working. The unemployment rate is not the fraction of the working age population that's not working. It's the fraction who wants to work, who aren't. It's a little bit different. But the basic idea is we're literally just looking what fraction of the population is working. And we've seen some small declines. So it is to say the labor market isn't quite what it was as of a year or two ago, but it's been much less significant. And indeed, we talk all the time about that Sahm rule and the extent to which it's triggered for recessions and so on. And it's a little bit dangerous to say the Sahm rule triggered. I don't like that. Now let me introduce my new Sahm rule. So let's be a little bit careful about that thinking. But I will say, if you do one that adjusts for the immigration and focuses on that employment rate, it hasn't yet triggered its recession signal. I shouldn't use the word yet. It hasn't.

It hasn't. And I was talking to a group of investors the other night, a big group of investors, and I was just talking about that. Because once the Fed starts to cut rates, it is a very clear signal that the economy is slowing. And we've known that for a while. And then what we're really looking is over the next few months, three or four months — and you can jump in with what number you would look at — but we want to see some solidifying of the employment market. Once you start to cut rates, the confirmation that you're not going to have a recession is that the employment starts to pick up. Maybe we've already got that after today's number. But because of the impact of high immigration, you might normally watch the unemployment number, as you just said, the employment number is really the more important number to watch because that's really telling you the actual underlying strength of job market. Because when you look at unemployment, because it's just the math and the way it's calculated, it's missing some things that you'd like to be able to see and use it as the key indicator.

Yeah, that's quite right. And of course, we look at any number of other non-labor market things, too. Those matter, too. Just to rhyme off one or two recently, the ISM services just came out. We've had this weird dichotomy that's persisted for a couple of years now in terms of ISM manufacturing has been pretty reliably soft. It still is. It really isn't suggesting any great renaissance. But the ISM services actually bounced very nicely indeed in the last couple of days. And that is, in theory, the bigger chunk of the economy. So that was looking pretty good. And when push comes to shove, probably the Atlanta Fed puts out the best GDP nowcasting metric. We made our own. It wasn't as good. The New York Fed made one. It wasn't as good. It just it seems like it's the one that works best. So we all just lazily click on their website. And they're tracking about 2.5% Q3 growth, which is pretty good. And the Q2 growth was revised up to 3%. And so it's amazing. You recall in early August, we had a couple of bad data prints and we were all panicking for a moment. I'd like to think I wasn't panicking. Everybody else was panicking. I was making them feel good, Dave. But there was some real risk, and it seemed like some real economic softness. That is part of the third quarter that seems to be on track for a 2.5% GDP gain. One interesting question that I've seen some posit that hiring could pick up further post-election, maybe companies are holding back waiting to see what happens. I don't totally know if that's the case. I wouldn't say there's an overwhelming historical pattern of that. It's possible. Probably more possible is just that we've seen central banks cut rates, including the Fed. We're seeing other rate cut expectations in place such that there's been a material easing of financial conditions. And so for the moment, I'm assuming that economic growth is okay, but nothing special through the middle of next year and then starts to pick up more palpably. But there is a scenario it gets going even sooner than that. That's possible.

Well, you teed up my next tease as the host of the podcast. Join us for Eric Lascelle's election preview and Jobs Report edition, November first, because there's another jobs report out before the election, which comes out on that date. So we'll be we'll be taping this episode just in front of the election. And at that point, well, actually, I shouldn't even say that because it's highly unlikely. This is a coin toss almost. It's highly unlikely that something's going to move the needle that much where we'll have any idea, even more so than today, where that's going to play out because it's seven states and 100,000 votes either way that’s to determine the president. And so it'll be hard to make a prediction, but we can maybe get into the impact that we expect because we'll be much clearer or a little bit clearer anyways on policy and the way markets might react to the election at that point.

Yeah. Dave, I have one political comment, and this is very apolitical for a political comment. We were visiting a US college that shall go unnamed, but you might be able to sort out based on where we were headed. We were crossing the Ambassador Bridge and into Detroit and eventually beyond. It was 10:00 PM on a Friday night. School had ended. We were making our way to this recruiting visit, and we were on one of the many Detroit highways, and suddenly there were two police cars that blocked in front of us, and we thought maybe something was up in a police context. We came to realize they were closing down the highway and all the on-ramps were closed. And so we waited for 10 minutes. And then on the highway, you saw these police motorcycles and police cars and some big SUVs and the reverse trailing. And we said, gee, that's probably a politician. That certainly looked like a political convoy. And we looked it up and we just watched Donald Trump drive by. And so I presume every person who visits the US within three minutes sees Donald Trump. But if not, that was certainly our experience. We were a little bit miffed that Kamala Harris did not make an appearance on the drive home. But other than that, I guess we're right into the political narrative at this point.

Well, just for the record, you are not a voter. So they're not that concerned about you and your support in the election. We are concerned about your analysis. But it's amazing when I'm out —and I'm out a lot this time of year — doing speeches and talking to investors. All over Canada, the nervous anticipation, anxiousness around this election. And I think what we'll get to, and we'll come back to this in more detail, we'll have more time on November first, but from an economic perspective and market perspective, there could be a little bit of noise in the short term, but ultimately things just carry on either way. You may agree or disagree with policy, just like you do here in Canada, one side or the other, but ultimately, things carry on. I should also say from a political standpoint — because we try to stay apolitical as much as possible and just look at the data and look at the numbers and see how it impacts markets — but the one thing I always want to say, when we start talking about immigration, is that on the whole, if immigration has been higher in recent years for a number of reasons on either side of the border, long term, it has been one of the secret sauces to building the wealth that we see in the US and the wealth and success we have in the Canadian economy. So immigration, ultimately, when it gets to a high level, it can create some adjustments and some shocks in the system, but it ultimately ends up being a fantastic thing for everyone.

Yeah, that's right. I mean, we've been clear that this is indigestion to the extent there are some distortions that have resulted. It's not a permanent condition, nor is immigration likely to remain this white hot indefinitely. It makes sense at a more moderate pace.

Yeah. So one last thing just to finish off here, we've had this horrible hurricane in the US and it impacts in unusual areas because of its nature. And it looks like this is maybe on par or in the vicinity of Hurricane Katrina, which is 20 years in the past, but I think most people would remember New Orleans and the impact it had in 2005, the economic impact. But what is the impact short term? You talked a little bit about that, but maybe extend the view of what happens short term when you have a natural disaster in this one particular area. And then typically what happens longer term from an economic perspective?

Yeah, completely fair. So first of all, as always, natural events, human tragedies, the economic side is very much a secondary consideration. But hurricanes do have temporary effects, at least on the economy. And so, of course, it's a negative effect. There's been a period of time where people have been unable to work. There's been damage to infrastructure and electrical grids and homes and buildings and so on. And so I'm seeing estimates in the approximate realm of $100 billions of damage along those lines, which isn't quite the same thing as saying, therefore, the GDP is $100 billion less, if that makes sense, because you've damaged things that you might rebuild over a lengthy period of time. But nevertheless, it's palpable. Certainly, Hurricane Katrina had a very real effect. You saw a quarterly GDP print that looked very different than the quarterly GDP prints before and afterward. Not to diminish the consequences of all that. And it's just hours worked go down, shopping goes down and construction comes to a halt temporarily and all that. And of course, some tragic loss of life, though that doesn't figure quite essentially into the economic math. But nevertheless, you do then bounce back. And so national disasters are inherently temporary. You see less activity for a bit. You then get back to your baseline level, more or less thereafter. In theory, there's even a little bit more to the extent you now need to rebuild some things that got destroyed. That's one of the perverse things about GDP. It almost goes up more when something bad happens that destroys physical capital. We're just measuring the activity, and so that's all it is. There's no real agenda behind it. But nevertheless, it wouldn't be a surprise if there was a moment during the fall, as I mentioned with the job numbers, where things suddenly look a little bit more sour, and we need to take into account that there was this hurricane, and then they go faster later, and it ceases to be a major driver by the turn of the year.

Excellent. Well, wow, we covered a lot today, Eric, including that good news is good news, and particularly good news when your son's playing for the national team. We have our little conversations off air about your son and his progress. And then, I just checked in, and that was just fantastic news that you shared with me, and now all the listeners. So congratulations to him. We're always cheering for Canada anyways, but we maybe get a little bit extra, now that we've got a good solid son of an economist on the team. And actually, probably good with the sabermetrics, which is a big thing that I've been doing for many years.

All the baseball stats, high level. Yeah, right. Me too.

You can sit and help the manager on the team, right? Help him make those good decisions. But that's great news. And again, good news is good news on the job front here. We'll wait for the Canadian number next week, so we'll see what comes there. But that US number, which is really important, even here in Canada, is good and the market reaction is good. So it's a happy Friday. Have a great weekend, Eric, and thanks for joining us.

Thanks so much. Bye, everybody.