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This episode, Chief Economist Eric Lascelles, discusses the strong job numbers out of Canada and the U.S., noting significant growth in sectors where pent-up demand has heated up. Eric also provides some early predictions on where we are in the business cycle. [7 minutes, 54 seconds] (Recorded August 6, 2021)


Hello and welcome to the Download. I'm your host, Dave Richardson, and we are joined by the hardest working economist in Canada, Eric Lascelles, chief economist at RBC Global Asset Management. Eric, welcome.

Thank you very much. Good to be here again.

And it is Jobs Friday. I'm going to warn you, though, Eric, we're right in the middle of the Canadian women trying to win gold at the Olympics. They're in a penalty shootout with Sweden right now. Sweden missed the first kick. I might jump in with a cheer here and there. I know you're not watching because you're working really hard like you always are.

Dave, I was going to say, I probably don't know quite as much about the job numbers as I should, having watched Canada's 4x100 team pick up that bronze a few minutes ago. I used to be a runner in the five thousand. Not many people like to watch twelve laps go around, but that was to my liking.

Fantastic. So, great day for Canada. But was the jobs number great? Because it fell a little bit short of expectations, but still a pretty big number in historical terms.

Yes, I think that's right. It did not hit the truly epic forecast or expectation of one hundred and fifty thousand; it was ninety-four thousand new jobs. That is a big number. For the record, a normal pre-pandemic normal month might have been twenty thousand. So, this is absolutely absorbing, not just the growing population, not just graduates and so on, but also very much eating through the labor market slack that existed. The details were pretty good. Full-time was most of it. And so they were high-quality jobs for the most part. We couldn't quite say after the June job increase that we had fully unwound the losses from April and May. We can now say that. This now puts us ahead; I guess the best place we've been since the pandemic has struck, though still 1.3% lower unemployment than before the pandemic. So, the work isn't done yet, but being done, unemployment rate fell from 7.8 to 7.5%. It would be nice to get that down to a 6 or down to a high 5% number by the time we're done. But progress is being made and that was broadly expected. This is July data. We knew June and July were going to be pretty spectacular months economically, just because they were the big reopening months for many Canadian provinces and the sectors or the parts of the employment space that did well were very much the logical ones: service sector focused, hospitality and travel focused, the things people couldn't do. The things they are now starting to get to do. And so, we're seeing, for instance, very much pent-up demand for those kinds of activities that previously weren't possible. And if anything, employers are having trouble getting enough people employed into those sectors to meet the sudden turn-on of demand that's occurred.

And in the US, we saw arguably a super strong number and some revisions for previous months as well?

Yes, that's right. I guess you should start by saying that expectations are everything, because the US created nine hundred and forty-three thousand jobs. Great by any measure. A little ahead of consensus. But if you actually stop and do the math and say nine hundred and forty-three in the US versus ninety-four in Canada, with ten times the population, that’s kind of the same thing. I guess the twist is that the US didn't lose jobs in April and May to the same extent. And so genuinely, you could say this is maybe a happier surprise, but not actually that different rate of job creation. You mentioned revisions and so, yes, a hundred and nineteen thousand jobs created or discovered after the fact, over the last couple of months, based on revisions. Their unemployment rate is now from 5.9 to 5.4%. Once upon a time, that would have been thought to be just about normal. Before the pandemic, we realize you get under 4 and still call it maybe normal. And so there's still work to be done there as well. But still pretty great progress. And very much like Canada, the leisure and hospitality sector is seeing the lion's share of the gains. And indeed, we've seen markets respond to some extent. Bond yields, a pretty good little leap higher there, logical to the extent that it argues this US economy is tightening and it starts to get tongues wagging at least about the need for monetary tightening down the road, and that sort of thing.

And for investors looking at this, we're seeing an interesting shift in the way these numbers are interpreted and how they play out in markets after they're announced.

Yes, I think that's right. Let me start by saying I'm the economist, not the portfolio manager. So, don't listen to me. But I will say that during the early phase and even the mid phase of this pandemic recovery, good data was good for the stock market. It also sent bond yields higher. Great data was great for the stock market and sent bond yields even higher. It seems to me that it's twisting a little bit and we noticed that the correlation between stocks and bond yields is weaker than it was. The way I view that, and you can see it in today's data as well, as bond yields jumped quite a bit again in response to a great US number. And so that makes sense. That reflects concerns about inflation, concerns about central banks tightening and that kind of thing. Stock market is up, at least as we record this, but not as wildly or enthusiastically, and so I think we're in a world now in which the best-case scenario for risk assets is good, but not great data. You essentially want to keep the economy moving well and of course, that feeds into earnings and all the things that we care about as investors. But you don't want to overheat the economy. We want this to be a multi-year expansion, not one that just boils over six months or a year from now. And so, the stock market said, oh, we'll take it. But I bet the stock market would have been as happy with a number that was a couple of hundred thousand jobs lower than that for the US.

And Eric, just one last quick question; I always like to check in on your thoughts about where we are in the economic cycle. Are we still in the early stages of this expansion or do you think we're starting to see that transition into more the mid-phase of it?

Somewhat tragically, I would have a better answer if I hadn't been watching the Olympics this morning. We're finishing our quarterly business cycle today. And so that's my next task. So, I can't give you a formal answer, though this will certainly trickle out in our Macro Memo we'll be sending out on Monday. But I can this, my strong suspicion is, we're going to see further progression. We were already a quarter ago in a position where it was early, but starting to hint at mid. I can't say with precision it's going to be mid this time. I'm not quite sure that it will, but I think it's going to be signaling more and more of that. And so, to your point, a cycle that's moving unusually quickly, which makes sense since it was artificially impeded to begin with. And so we're just snapping back perhaps to where we should have been. I don't think it means that we're going to be late-cycle next quarter and end-of-cycle the quarter after that. I think it's more likely there are several years of growth left in front of us. So I'm not panicking from that perspective. But it's undeniably a quickly moving cycle. And you can see that in the way that job creation is eating through economic slack. You can see it in the way that inflation isn't low. You can see it in the way the credit spreads are very narrow. All those sorts of things are consistent with a cycle that's looking increasingly mid as opposed to just early.

And from the old mantra, don't ever ask the question you don't know the answer to. I was just setting that up because people should be following you on Twitter and watching the RBC Global Asset Management website for all the great content that you produced, including your ultimate view, once we get past the Olympics, on where we are in the global economy. The Canadian team is in real trouble here. It's been an interesting penalty kick round. So we will leave that hanging with the podcast. Eric, thanks as always, for taking the time to visit with us. And we'll look forward to that view on the economic cycle, because that's a real important one for investors to watch.

Yes, you're not the only one asking. So, we've got to light a fire and get that done today. Nice talking to you, Dave. Thanks for having me.

All right. Thanks, Eric.


Recorded: August 6, 2021

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