Hello and welcome to The Download. I'm your host, Dave Richardson. And it is a big Jobs Friday edition of The Download with Canada's hardest working economist, Eric Lascelles, who will dutifully tell us that it is not Friday. It is actually the Wednesday after Labor Day. And so, we're a little bit late with this update. But then, lots of stuff has happened which we can give you a better update on now, so all the better. And hey, you were away anyways on Friday. Because we're going to keep everyone updated on this ongoing exciting story of the hardest working Canadian in baseball. And that would be Elliott Lascelles. And you were down watching him. You got the chance to see him play.

Yeah, we got to see one game. It was meant to be 2. They rained out in a desert for the first time in 5 years or something on the other game. But yes, on play, we did just fine. All is well. They're into the playoffs now, and so that's exciting as well. So lots happening, and we got to go to Petco Park in San Diego for a little ceremony they had for some of the top draft picks, and that was pretty fun too. Got to sit in a suite, meet the owners, all that fun business.

Wow. I hope everyone is enjoying this as much. I know we got a lot of people listening actually, Eric. We just found that out with the ratings. We've got more people listening than we thought. It's actually like a lot of people are listening. And so, I hope everyone's enjoying the story. We're going to keep up to date on that. Actually, the job numbers that we're talking about, technically your son would he come into the jobs report in the last month? He would register, right?

Given survey periods, maybe you're right. He technically started working in July but probably got picked up in the August numbers.

In the August numbers. He's one of those people.

So, 162,000 more jobs minus one, my relative. And so, a big number, that's the first takeaway. It substantially exceeded expectations. It has been something of a punchline that there will always be negative revisions associated with every release such that it's not quite as good as you think. That wasn't the case this time for once. And so actually, 55,000 more jobs created over the prior 2 months than had been thought. So certainly a strong report. Incidentally, when you tack those extra 55,000 on, the negative number from July isn't negative anymore. And so it's now up plus 21,000; it had been minus 23,000. Obviously, the main point through all of this is just that with currently slow population growth, limited immigration, you don't need a lot. And so small positives are probably the steady-state number, and that is arguably where you are when you're talking on a smooth basis. And so you look over 6 months, and you see a big gain this month, and you see some smaller gains that were earlier. It's still running about where you need it to run, maybe slightly ahead, but about where you need it to run. The strength at a sector level that we saw this month of August was really significantly unwinding the weakness from the prior month. I know I just said the weakness wasn't as bad as it looked, but still, that point stands, I think. And so you had some strength in leisure and hospitality. It had been weak. Some strength in local government. It had been mysteriously weak, I must say, the month before. And so some of that got resolved. When I step back, I would still say the US job market is doing fin— maybe a little bit better than fine— but I wouldn't go beyond that. So the unemployment rate is sitting steady at 4.1%, which is a good level, but nothing wild in either direction. You look at some of the alternative indicators, you can see jobless claims still very good, but stable. We'll take that. Some of the JOLTS survey stuff came out not long ago, and the layoff rate fell a little bit. The job openings rate rose a little bit. Broadly, it's a healthy labor market right now, and we're not concerned in a weak sense. Neither all that concerned in an overheating sense. This is still moving along, I think, just fine.

Eric, one article that I read is that these jobs are more in the private sector than public sector, or is it fairly balanced? And does that make a difference where the jobs are being created?

Yeah, well, that's a great question. So certainly historically over the last couple of years, it has been skewed more towards either the public sector or you would say maybe sectors that are not that economically sensitive. And so there's been a lot of healthcare and that sort of thing. And so that's still broadly the trend. That is fair. And if you wanted to critique the broader trend, you would say this is not the world's hottest companies doing lots of hiring. This is coming from elsewhere. It's still legitimate demand. It is often good-paying jobs. Maybe it is a case in which the monthly job report isn't telling us quite as much as we think it is about whether the economy is getting better or worse. And it's an open question why, by the way, because the cyclical companies are broadly doing well. It's not that they're struggling or anything, or it's just the government that's growing as a share of the economy. It may be a bit of AI in terms of finding efficiencies there. It may just be efficiencies in other forms as well that have always been sought and occasionally found. But it's fair to critique that way.

Okay. Well, we'll look back and start to think about this from the perspective of inflation and rates and all the other things we talk about. as the knock-on effects. But let's go to Canada. How did Canada look this month?

Well, it was the opposite. And so that's not unusual to get one one way and one the other. Not that there's any reason for that, but it often is the case, it feels. And that was, in fact, the case last month. So remember last month, we were saying, oh my goodness, the US lost jobs. Now, those losses are gone, of course. And Canada added 75,000 jobs last month, which is a stunning number for 41 million people. And so Canada lost 42,000 jobs this time. And so the usual refrain applies, which is these are choppy numbers, and probably you're best served to look at them in a smooth sense. And so the 3-month average is 17,000 jobs gained a month. The 6-month average is a little more than that, 22,000. I would describe those as pretty good and probably, if anything, more than pretty good just because Canada's population is shrinking right now. It's that temporary recoil and the temporary workers partially going away. We see population growth, by the way, turning back positive in 2027. It'll be running modestly positive in 2027, 2028. It'll return to what we think is a steady state. Call it 0.8% population growth a year situation. But any job growth, therefore, is pretty good. And so I would say, despite this weakness, overall, Canada's labor market's holding together as well. The unemployment rate managed to hang on to that 6.4% level, but improvement to that level that was achieved in recent months. And so I think looking okay. Again, the details of this month weren't great. The numbers were down. There was a loss of full-time employment, there was a loss of private sector employment. It wasn't great by itself, but I just don't want to read too much into that. The one thing I would say is maybe a bit more interesting because it encompasses a full year's worth of data is that Canadian annual wage growth did really decelerate pretty notably. We had been seeing quite strong wage growth until recently. We've now had 2 months of deceleration. It's down to 2% year over year. That's not a lot because of course, here we are with inflation that's running a little more than that. And so that would suggest that real wages are down a little bit. And so good from an inflation standpoint, which is a concern, but less good from a worker standpoint or a purchasing power standpoint. Just to throw one more twist into things, because there's never really a final analysis here, it seems. If you look at hours worked in Canada, they went up a lot this month. They went up a lot the month before. I guess that one made sense. And so you have fewer Canadians doing more work, if that makes any sense. And so one thing is these are noisy numbers that may be meaningless, it may go away, but you'd be tempted to say it's not that the economy didn't need more work. The economy needed more work and got more work; it just didn't happen to get more workers. It was everybody who's got a job was working a little bit harder, say. And so therefore the total amount of wage money sloshing around is more than you would think because actually there were more hours put in.

Are there previous instances of that that you can recall that were a signal in terms of what's happening in the economy? Or is it just, again, something in the numbers that you won't really be sure of until a couple of months from now when you can look back and you've got a trend?

Probably more of the latter. I wouldn't say, to my eye, it's reliably a leading indicator or anything like that. I would just say you do want to consider that in the broader context and say, okay, the jobs are down, but it's not a signal that demand is collapsing. It's not a signal that consumer spending should slow. There was still money being fed to workers and so on. So to me, it's just a tempering factor that means the job numbers weren't quite as weak as they looked.

I'm going to do some work with some real estate professionals over the next couple of months. And I was looking at the charts on population in Canada. And they're really quite stunning, how the population growth just drops off a cliff as you tap the brakes or maybe even you slam the brakes on immigration. Those numbers just dropped precipitously. That has to be an incredible supply shock and demand shock. Beyond the labor numbers and employment numbers, is there anywhere else you're seeing the impact of almost going from 100 to 0 in 4.2 seconds?

No, it certainly is astonishing, and there is really no analog or precedent in a Canadian context, maybe outside of World War-type population flows, which would predate us a little bit and predate the modern data as well, so we can't opine precisely on that. But it is amazing. You had as much as 3.5% population growth per year. That was, in fairness, the tippity-top and didn't last for long, but it was quite strong for a number of years, and here we are with an outright negative. Just as an aside, by the way, it’s not that Canada has blocked all immigration or anything like that. It's actually the permanent immigration flow has remained fairly steady through all of this. It's just the temporary workers and students were allowed in, and now they're allowing fewer and still allowing some in as well. The twist is, of course, to the extent the prior cohorts were temporary, many are then returning home, and so that is outweighing the more moderate numbers coming in. So nothing has been turned off. It was just something was really turned on for a moment and isn't really turned on anymore, and that's the dynamic. Here we are. We saw a few Canadian GDP prints towards the end of last year and into early this year that were flat to even a bit down. The Q1 one, by the way, the slight decline got revised away not long ago. So we're back to dealing with one quarter of decline, not the two that had tongues wagging about recessions and things. But nevertheless, it's absolutely the case that just top-line economic growth has been slower as a result of this. And it makes sense. And it's not that there's been a productivity collapse. Thankfully, that happened before. It's that there's been a population growth collapse. Just the run rate on the economy, 1% growth a year in this temporary environment would be very good. That would signal significant productivity growth of the sort that we haven't achieved all that regularly. Actually, I would say the economy is doing a little better than you would think it is. Of course, it affects different sectors of the economy differently. You've got some that are just very geared to top-line growth or even just the number of humans. You think of the telecom sector and how many cell phone subscriptions and probably to a lesser extent, the banking sector and some others that are really reliant on population growth. And so, of course, they felt it a little bit right now, but it should start to settle in 2027 and be a very normal-looking type of trend in 2028. But yeah, it's been a couple of funny years and the population-sensitive sectors are going slower.

Okay, let's just layer on then— and this affects both Canada and the US— is the latest tariffs, which have really shot again to the front pages and are creating a lot of concerns in a lot of different areas. It's certainly got social media going crazy. And it's not something you can avoid whether you're on the US or Canadian side of the border. What do we make of this latest wave of tariffs? And can you see in any way the direction it's going? And are you concerned?

That's the last part. The real question is also the tough one to say anything intelligent about. So, of course, US tariffs had been falling, at least on a global level, from let's say, the start of this year through to the middle of this year, and some court rulings overrode some things, really primarily. The trend has been reversed somewhat recently, and that's been true to a certain extent at the global level, but of course, most acutely, you might say, versus Canada. We had those big new tariffs come on in mid-August against Canada, and it was a 50% tariff against about 5% of what Canada sells to the US, so a significant hit. Canada has retaliated roughly tit for tat, so that came on as we're recording this, I guess yesterday, right? And so I guess we should define yesterday. September 8th, I believe it is. And so roughly equivalent. The US has now done a little bit more. And so blocking altogether 3 products: motorcycles— of which I don't know a lot about what Canada exports, but it must be relevant— and similarly, dairy and alcoholic beverages. And of course, Canada already had some restrictions on US dairy and significant on alcoholic beverages in particular. Some threats leveled against Bombardier. We'll see whether something comes to that or not, but it's certainly in play. Canada, to my knowledge, has not done a further retaliation, so holding steady for the moment. And so I guess there's a couple of things we can do with that. One is just to assess the implications of all that's already happened, and then the other is try and speculate about where it might go. And so in terms of what's happened, our modeling would say, certainly any country involved in tariffs, you expect less economic growth and higher inflation. So those are just directionally what you anticipate. One of the lessons, both from the last year and a half and from the 2017 to 2020 period, is that tariffs do probably a little bit less damage than you might imagine. You're often talking in tenths of a percentage point as opposed to whopping whole percentage points. That seems to be, at least we think that's going to be the case again. Our modeling would say that as much as this does materially increase the tariff rate on Canadian exports, it might chop in the realm of 0.2% off Canadian GDP growth. Now, that's with a bit of a helping hand from the government, so it'd be a little more than that without that, but that's already been announced. Adds 0.1% or 0.2% to Canadian inflation. That's, by the way, the Canadian retaliatory tariffs, right? That's what increases the price side of things. For the US, directionally, it's the same. It's a weaker economy, it's more inflation. It might be a similar dollar value hit, but because the US economy is so much bigger, the numbers are considerably smaller, and so we haven't actively subtracted from US growth or added to US inflation, but it's directionally of that nature. And so not ideal. You could say manageable blow, or at least not a recessionary blow, might be the way to think about it. More painful for Canada. That doesn't mean Canada stops necessarily. There are other motivations at work here and the thinking that they can't roll over on this, lest other less desirable developments occur. And so I think that it will likely remain in place as long as necessary. There have been some tweaks on both sides of the border just to reduce the pain a little bit. So that's been visible, a sector or two that really was getting hammered and you adjust where it gets hit. And so some changes are happening, but there is going to be some real pain, I think, in Canada in particular from this. And in terms of where it goes, unfortunately, like the risks extend in both directions. And so, of course, there's a risk it gets worse. We've just seen a little bit of that in the last day or two. The US does have a January 1st proposal for some more tariffs on mostly the auto sector for Canada. Conversely, of course, there are plenty of episodes over the last 18 months where the initial tariff rate got lightened significantly within a few weeks. And so really, it could extend either way. We're assuming it sticks around this level. I would note, I don't think Canada wants to escalate needlessly. I would say the US may be a little shy about doing that as the midterm elections approach— though maybe it won't be, but that's not an unreasonable thought in our mind right now. We're assuming these higher tariff rates last for a while, but not forever. So we just penciled in somewhat arbitrarily 6 months as our assumption, and then it gets a little lighter next spring. It might not, but that's our assumption right now. That's where we are. Not great, particularly for Canada, but it's the reality of the situation right now. Of course, the government is stepping in with some specific supports targeted at sectors that have been hit particularly hard to help them hold over and get through this and probably minimize the job loss that you might otherwise expect. Stepping back a moment, you can say there admittedly have been a number of adverse macroeconomic developments in recent weeks, or over the last 6 weeks or so. And so one would be, as mentioned, these tariffs have gone higher. Another would be that, of course, bond yields are a little higher again. The third one would be oil prices. Brent, at least, is in the realm of $100 a barrel. None are complete killer blows, but these are things that run a little bit adverse to the outlook. And so we're generally happy to be above consensus. And we still think that's probably about the right place to be. But you start to shade your outlook a little bit, if that makes sense.

And this latest escalation is really around the big deal that they're ultimately trying to put together to replace or renegotiate the USMCA. And so it almost looks like it's just part of a negotiation. The Americans always seem to target specific industries. And they take it out more on, as you say, particular sectors than others. That always seems to be where they come back to. Is there any significance to that?

Yeah, I think so. I think there are different considerations at work, and there's a risk we're all overthinking this and ascribing intent where maybe it doesn't exist. But I would start by saying it's clear the US wants the auto assembly business to be an American proposition in a North American context. So I think that it's not a coincidence that sector has been targeted. Steel and aluminum, I suppose, in a security context, there is a desire to onshore that, too. I'm not sure how fully practical it is, probably not at all practical from an aluminum perspective in particular. But nevertheless, I think there's some logic there, just strategic logic, if that makes sense. In terms of the latest moves, I think they are targeted certainly in a way— for example the bulk of the item— the Canadian exports targeted by the US are products for which the US primarily relies on other countries, not Canada. And so the trick there is, of course you can lose 4% of your import source, and you can redistribute that among your many other import locations without getting hurt too badly. So you can say they've done a good job of targeting areas that are going to hurt the Canadian sector and maybe hurt the American consumer a little bit less than otherwise, all else equal. Canada's done the same, by the way, in response. It's hard to do it to the same extent because the trade connection is so deep for Canada, but I think I've seen a number. The products that have been tariffed, 40% of those come from the US. So that means there's a lot of other options. And so those other options will presumably be pursued. So I think that's an angle. And then the last one is speculative, but it has been observed that the tariff products do disproportionately hit Ontario and Quebec and don't hit, let's say, Alberta and Saskatchewan and some other provinces that have maybe had a lighter touch in terms of relations with the US. And so perhaps there's an element to that as well. I think it's easier simply to say they're trying to reclaim manufacturing jobs is probably the more honest appraisal.

Yeah. I would hope that this follows a path of previous outbursts where we see things ratcheted back very quickly at some point and get back to the table and get a proper deal in place, because that's ultimately the interest of all these economies.

I think so. We've seen, the US is very keen on a number of occasions in striking a steel and aluminum deal and effectively lowering some rates there. It's hard to predict these things. And when political decisions are being made, it's hard to make intelligent comments, obviously. But I I think the bottom line is both parties would like a deal at some point. They both need to walk themselves back a little bit at this point and let time pass. And again, we're hoping next spring is perhaps a time when you can get serious about a deal again and find something that works.

Yeah. And so you've got this flare-up, you've got the war in Iran, which continues to carry on. And that is not one where you're expecting any quick resolution. It at least doesn't look like it at this point. So as you mentioned, oil prices are higher, and we've got an inflation report coming in the US on Friday. If we look at where we were in terms of gasoline prices and just some other things, back when the last report came out, you'd expect to see a little bit hotter number here. Is that the expectation that's set out in the market? Any thoughts on where we might end up here?

Yeah, that's right. That's exactly the expectation. The consensus is a 0.4% increase in the monthly price level. You'd expect a 0.2% maybe normally. And so that is reflecting gas prices higher. Now, the core expectation is 0.2%. So very much the market has its eye on energy costs essentially. And so that's where the strength is. So that is priced in. So it wouldn't be a huge surprise. Really, I feel like the consensus is about right here. That's reasonably what you would expect. I might take the smallest swing and say maybe it'll be a little bit below consensus. But really, the consensus is about right, I think. And of course, that leads you very quickly then to the Fed. And the Fed decision comes rapidly on the heels of this Friday inflation report. It comes next week. And so fascinatingly, the market has priced in— and I looked at this maybe an hour ago, so it might be stale already— but about a 62% chance of a rate hike next week. And that's a significant number, because there have been very few occasions where the market is priced in 60% plus that did not get delivered. The Fed rarely surprises. Now, it's a bit of a different regime right now. And we're getting less communication. So the scope for error in terms of the market's expectation is greater. And perhaps the flip side is maybe the current Fed doesn't care quite as much about what the market thinks. And so I shouldn't guarantee anything, but I would say between inflation that's already too high, between inflation that probably comes in a little toasty, even if it's just on consensus, between a labor market that's holding together and an economy that's holding together, it wouldn't surprise me if we did get a rate hike next week. And it's tricky or not to ascribe too much significance to political events, but the midterms then start to approach pretty fast. And it's been observed that you don't usually get rate hiking cycles starting literally a couple of days, I think, before a political event like an election. And so if they want to do any hiking, September would be a pretty good time to do it. I don't think there's a ton of urgency, but you deliver that 25 basis point rate hike and then you can sit and survey the situation and then revisit again later in the year.

Yeah. You're not going to feel it a lot to begin with. 25 basis points, you're not going to feel it until several months down the road in practice. But it does send a signal with what you've been seeing with longer-term yields. And again, this war in Iran— and by the way, the war in Ukraine also carries on— which has an impact on energy markets and with no end in sight on that, it's maybe not a bad idea to take a shot across the bow and make the move now.

And build some credibility for a new Fed chair and that sort of thing. Yeah, so that's our thinking. So unless big new— I guess inflation could yet surprise to the downside and change this equation. But I would say a rate hike is probably a good assumption right now.

Now, the expectations, if the Fed is viewed as building that credibility and gets more serious around that fight on inflation and concerned about some of the things that are happening out in the economy, does that maybe take some of the pressure off those longer-term yields?

I'd like to think it would. A fraction of the reason long-term yields are higher are inflation expectations and term premium type concerns. And it's not all about the credibility of the Fed or the conduct of monetary policy. But the inflation side is significant. And so that should help. It's one of these tricky bits of calculus where you would say, well the underlying short-term rate should go higher. After all, the Fed potentially is about to raise rates, but it should help to incrementally tame inflation. So that little bit of a bond yield comes down, adds some credibility to the Fed, that little bit of a bond yield comes down. And so I'm left a little unclear whether you should say a long-term yield falls or whether it just doesn't have to go up or quite how to interpret that. But I would say it would be welcomed, I think, by the bond market. Probably a little bit less so by the stock market, but even there, it's tricky business because the stock market does not want this to overheat. To some extent, they're all on the same team here. Certainly, companies care about the discount rate and their borrowing costs, and I wouldn't want to downplay that. And of course, low-rate environments are a happy time for the stock market, but the least happy time is overheating and having problems. And so I would say that stock market may tolerate this better than people think as well.

Okay. And the Bank of Canada held.

They did. Now, it was a hawkish hold, though. They were signaling a tightening bias as well. And so the market's priced in pretty much a rate hike by the end of this year. And so that could yet be in Canada's future. Not to push too hard against that. The market's got a 90% pricing. I'm not going to be the hero who says guaranteed doesn't happen, but I think it's a little less certain than the market thinks right now. In the Canadian setup, the inflation isn't as high. Not to overplay a weak job number, the economy is doing fine, but it's not red hot. The tariff story, the debate is always the tariff adds to the inflation, hurts the growth. How do you possibly deal with both as a central bank? The theory is you deal with the growth side and less so the inflation. So I may be less sold on a hike than the market, but I don't deny the direction is up, if anything.

But our rates are already lower. So in theory, how much could the Fed raise before the Bank of Canada is compelled to raise? Any history on that?

It's a good question. Usually, they rhyme with each other. You do have a history of spreads not unusually going as much as 200 basis points between the 2 policy rates. And so I guess that maybe partially answers the question. If you price in 2 hikes for the Fed or even a little more, that would be starting to push the limits of what you historically see with a 2.25% rate in Canada. Yeah, I don't think we're going to see a huge deviation, but it feels a little bit less urgent, I suppose, for Canada right now. Not that a perfectly stable currency is the objective or anything like that, but the Canadian dollar has added a couple of cents recently, having, in fairness, lost those not long before that. I guess you could say, yeah, you could have a little hiking out of the Fed and you'd lose presumably a little bit out of the currency without— I'm not sure what the danger zone is, but eyes open when it's a 60-something type number— before, you'd have to think about that.

Excellent. Well, Eric, that's a great summary of a lot of stuff going on. And as always, we'll get you back shortly for any other breaking news that we get, including breaking news in the big playoff series between Lake Elsinore and the Ontario Tower Buzzards. We got to watch for that. So we'll be checking that out. But again, thanks for your time and we'll talk to you soon.

My pleasure. Bye, everybody.