Transcript
Hello and welcome to The Download. I'm your host, Dave Richardson. It is time to spend a jobs report Friday with Canada's hardest working economist, Eric Lascelles. Eric, I'm in Kamloops. You've been to Kamloops, right?
I have been to Kamloops, yes. I think I've done one work presentation there over the years and I was there once for pleasure as well.
Well, you've got a lot of fans here in Kamloops, and we are in our plaid lumberjack shirts. Urban lumberjacks is more our thing. Maybe I'll go down outside and chop some wood because this is a working man's report. More people going to work just like us. Most people work as hard as you, but you always have that little bit of an edge as the hardest working economist.
I just keep that small edge.
Yeah, that small, small edge, maybe not as a lumberjack, but as an economist. That's what we're talking about. But bottom line is more jobs. We wanted more jobs; we got more jobs.
Canada and the US, both more jobs, which is the default assumption. Economies are usually growing, and populations are usually rising and so on. So no shocks there. But actually, some above-consensus job creation is maybe the main takeaway. On the US side of things, 227,000 new jobs. That was a little bit above consensus. Not a total shocker, but above consensus. The main thing to know is that this is the reversal of the presumably pandemic distortion. I mean hurricane distorted. I've got my wrong distortion, Dave. The hurricane distortion data from October. Basically, the numbers were really weak on October. There had been 12,000 jobs created. Nothing like the normal trend. That's, by the way, been revised up to 36,000, but still weak. But of course, we knew that was people just unable to get to the office and so on. We figured November would be strong, November is strong, up to 127,000. Dave, do note, we were flagging the upside risk for this, so we got that right. It doesn't always work that way, so I'll brag when I can. But yes, it was some catch-up hiring plus some underlying fundamental hiring assumed. I wouldn't say I'm blown away by the number. I mean, yes, I guess at the end of the day, it's above consensus. I feel like they could have managed more. I just keep thinking that for an economy that's chugging along and by all accounts, growing at about 3% annualized, as it has now for two quarters in a row and seemingly tracking something similar for the fourth quarter, I would have thought you could generate 150,000 jobs a month. To the extent you didn't really get any in October, it wouldn't have blown my mind if it had been 300,000. So I wouldn't say it was a crazy number, but nevertheless, it did prove that the prior month was an anomaly. It does show that there’s still hiring happening. Aggregate hours work was up 0.4%, so again, not a shock that it's rising, but still that's a pretty good rate. If you wanted to poke a hole in it, one would just be, hey, this was catch-up hiring, and so it wasn't all totally legitimate. That's fair. The other hole would be the unemployment rate did go a little higher. So it went from 4.1 to 4.2%. That's where we've been for a while now. It's been a 4 to 4.5% labor market. I would still say this smacks of a soft landing in the sense that we are seeing unemployment rates that go up a 10th, then go down a 10th. The hiring numbers are loosely in line with what you'd expect or need to keep pace with the population. To me, this is about where you want to be. I think to the extent that we're a little nervous about the next six months, a little nervous about, I hesitate to say too much hiring—because, of course, hiring is good and workers are good and nobody wants to be unemployed—but with the stimulus coming and the animal spirit revving up in the US with a Trump win, all of which would seem to point to more economic growth. One concern is just, could it be a bit too much? And might there be some overheating? We didn't get that this time. This seems to be the classic soft landing, but we'll be watching closely. And so, nervous about weak numbers, but also a little bit nervous about strong numbers, hoping for those numbers in the middle. A hundred and some thousand jobs a month is a good number.
But this is an important period because once you get to the point where the Fed starts cutting rates, they're usually cutting because they're worried about the potential for some softness in the economy. I know this has been an unusual cycle when you do go back to COVID and many things that have happened, the government spending and the inflation, everything. But once the Fed starts cutting, the expectation is you start to see a little bit more hiring going on. You want to see that employment market strengthen. Not too hot, not too cold. You always like that little Goldilocks right in the middle. This almost seems like it fell in that area, right?
I think so. I would say this is very much in that range right now. I guess I just said this, but I'll say it again, I do wonder whether the trend rate could even be a little bit higher in the coming months. I mentioned that, at 227,000, higher than half of that you attribute to the prior month if things have been normal. This is maybe consistent with a low 100,000 for an individual month. I wonder if it could be a little bit higher just because, do keep in mind this is November. November was the election month. Really what you're capturing is mid-October to mid-November in terms of the reference months and when they're actually surveying people and picking up information. It wouldn't have been a complete shocker if some businesses did sit in their hands a little bit and said, let’s just wait and see what the tax profile and what everything else is going to look and tariffs and everything else is going to look like over the next four years. I wouldn't be surprised if the number looked even a little better in the coming months. That's one thought. On the rate cutting, it goes many ways. Obviously, bottom line is that rate cuts help the economy, and so you would expect, all equal, more growth, not less. I would say, first of all, often the context in rate cuts, though, is something bad is happening and we're cutting rates. It's not unusual to have rate cuts paired with bad data. I would say this one is a bit different than that. To me, the rate cuts are this attempt—and seemingly tentatively a successful attempt—to manage this soft landing where you're taking rates down at the same moment that the economy might have otherwise lost some steam. If you pull this off and get the balance just right, you end up with an economy that keeps moving at a similar rate. I guess I've just argued that rate cuts can equal fast growth, slow growth, or the same growth. Just keep in mind, the whole point here is that the monetary policy is meant to be this ballast that is providing an offset to whatever other forces are in the economy. On that basis, it looks like the rate cuts are coming off in a way that's keeping the economy alive. We'll see whether there ends up being a bit of a deceleration or a bit of an acceleration. But for now, as you say, it's actually in the middle, and that's the porridge we're hoping to be eating, to use the Three Bears’ reference.
Oh, yes, very much so. I have to watch for bears where I am right now. You probably don't in downtown Toronto, but I do when I walk out of my room and head out to the airport here later today. In reading some of your latest material, it is starting to feel like maybe the somewhat maligned Fed in different quarters may have actually nailed this. They may be engineering this soft landing that we all would love to see. Markets have been signaling that over the last several months anyways. You're feeling your odds of a soft landing are nudging up at this point?
Yeah, they've been rising really across 2024, incrementally. I think the last official number we put on was a 75% chance of a soft landing, which is pretty good, I should say. In my head, it's probably rising a little more. The no-landing scenario, I'll admit, is maybe also growing a little bit, which is the economy is a little too hot. Let's be careful what we wish for. But yeah, I think a soft landing is still most likely. Again, someone asked me once, when will you say with certainty that we've achieved the soft landing? It's a bit tricky in the sense that, of course, the risk of recession over the 12 months ahead is never zero. You're left with this rolling. There's always something new. I didn't have a great answer for that question. I just celebrate that things are fine for now and they look pretty good, but no guarantees forever more into the future. But I will say, historically, it's really hard to pull off a soft landing given the environment that we've been in. Every other time in modern history, dating right through the '60s and '70s, that there was an inflation spike of five percentage points or more, there was a recession every other time, and seemingly that's been avoided. We're now far enough removed from the inflation shock that the risk of that is shrinking. You know as well as I do, historically, when a central bank, when the Fed specifically is engaging in a tightening cycle, you do end up in a recession 70 or 80% of the time. You might debate the definitions, but most of the time, those things end badly. But this one, we’re now out of the window of the risk of recession from an earlier tightening cycle, but we're moving beyond, as we said now for several quarters, certainly beyond the period of maximum risk. Economy seems to be just fine. I would say that it does really look like a soft landing is likely. Again, if that sounds just like an ordinary run-of-the-mill comment, just keep in mind actually how unusual that is to pull off given the circumstances over the last several years. I guess they do deserve some tentative credit, and we should probably talk about it in the context of this job number.
Eric, as usual, you're anticipating all of my questions. Sometimes you just flow into answering my next one. It's this telepathic thing we've created over the years doing these podcasts together. But the Fed is up in a week and a half or so. Does this change the decision? I think markets are expecting a quarter of a percentage cut, but does this make it maybe they even pause? Or it looks like they're on the right track. You stay with the program, you do your 25-basis point cut, and then let's see what happens next.
Setting aside the economic data, the lesson is usually that if the market's got a 60 or 70 or higher percentage chance of something, you go with it. Not just because probabilistically that's the outcome, but because actually it's been vanishingly rare for the Fed not to go with the strong expectation and desire not to surprise markets. Probably the more credible answer is because they've guided the markets to where they'd like the markets to be, and you'd get a couple more speeches if they were planning on pausing and the market expected a cut. It looks like a cut is fairly likely. This is probably not that helpful, but I will say that I do think the odds of a cut are a little bit lower than the market is pricing. It is still probably the best guess. That's probably the only useful takeaway I can give here. But the job numbers look pretty solid, and the inflation numbers have been a little warmer than people would think. I'm just reading a Fed shared Powell quote here: the US economy is in very good shape and there's no reason for that not to continue. The downside risks appear to be less than the labor market. He did say that before today's numbers, but I think it still holds up. Growth is definitely stronger than we thought. Inflation is coming a little higher. The good news is we can afford to be a little more cautious as we try to find neutral. When I read that, I think they could pause. That definitely is not inconsistent with a pause. Again, cut most likely, pause not impossible. Maybe even a bit more likely than the market's pricing. I do think, though, maybe the more important point is the urgency of cutting is down, which is precisely what Powell has just said. We're probably shifting to a not-every-meeting phase of this cutting cycle. If they go in December, maybe they don't go in January. If they don't go in December, they probably go in January. That wasn't the last rate cut in our view. It is shifting to that mode. Again, the Fed has proven quite profoundly in recent months that it's not holding back in the context of political uncertainty or holding back out of deference to political events. It's just doing what it thinks is necessary, and that's probably going to continue. In the back of my mind, I did think for a moment, I wonder if it makes sense to pause here and cut on January—the 29th, late January—when Trump gets to claim victory, and suddenly the pressure on the Fed is a little less. I'm not sure if there's a little tactical consideration there or not. Almost certainly not is the right answer. But let's assume December, but they're still cutting. They're cutting fairly gradually. We do have a little bit more cutting, actually, than the market has priced in over the next year. It's actually not our growth forecast. Our growth forecast, if anything, is a little above consensus. It's not the inflation forecast. We did add a little bit to that in the context of prospective tariffs and faster growth under what we presume to be some of the Trump policies. It's more a statement we would have said that a neutral US Fed funds rate going into the pandemic in the late 2010s was 2% or 2.25%. That was the best guess. And I struggle a little bit with the idea that the new neutral five years later is twice as high. That's a real big change in what you think a normal rate is. You can certainly stack in scarring from the pandemic, and you can stack in that maybe rates were too low in the 2010s in retrospect, and some de-globalization and some tariffs and a whole bunch of things. I would still struggle to say that normal used to be 2% and now it's 4%. I still think a normal neutral rate is low or mid 3% or something, and so they may not get there immediately. Again, circumstances may not allow a neutral rate to be achieved in 2025. But I do think that that's not an unreasonable target to think about over the next 18 months, maybe.
Again, we're going to see how this new presidency plays out and what the whole set of policies is going to be. There are some that people would clearly view as inflationary, but there are others that, if you look back to his previous term, we're not. Actually, they were anti-inflationary. So there's still a lot of uncertainty on the table. And that's why you, by the way, need to subscribe to this podcast. Here you go. The marketing is going to love this one. That was a very smooth lead in, Eric. You need to subscribe to the podcast. You can do that anywhere you get your podcast. Give us a five-star review. My mom is getting tired of giving five-star reviews, so she needs some support. She's on there every day, Eric. Another huge Eric Lascelles fan. How can he work so hard? I'm worried about him. That was her message to you.
Identical twins. That's the answer.
Oh, really? That is pretty amazing. The market reaction today is a little bit neutral. We'll look out on the Fed for our Canadian listeners here. A little more interesting is we got a surprising little pop here in Canada.
Yes, we did. This caveat applies to the US as well, which is the numbers tend to be choppy and there are some pretty big standard errors around them, but it is particularly true, famously in Canada. So you have 50,000 jobs. That's double the expectation. As I look at it here, it’s almost quadruple the prior month. Those are exciting sounding numbers, though very much the margin for errors we've seen historically. But still, it was a good-looking number from a hiring perspective. It was all full-time hiring, for what it's worth. I guess you could describe those as quality jobs. I will say, though, that there were some holes in this one. It was a weird report, to be honest, and that's not unusual for the Canadian numbers. You probably shouldn't interpret too much unless you're looking at 6-month or 12-month moving averages. I think the general story is one, in fact, on that basis in which hiring has slowed to some extent. But nevertheless, that's the choppiness in this particular month. Total hours worked were down a little bit. You had more workers, somehow more full-time workers, and yet fewer hours worked. I mean, go figure. It's always a bit of a frustrating exercise trying to construct one coherent narrative for these things. The unemployment rate did go up. Canada has been buffeted by some really big immigration numbers and population growth. We know you need a lot of hiring just to keep pace. It's getting a little confusing again because we think that the rate of population growth is slowing and a lot of the immigration programs have slowed and universities—I should say, probably more community colleges—are complaining that their applicant pool has fallen, in some cases, by half. It would seem to me that we should be seeing some slowdown in the population numbers. But despite 50,000 new jobs, there was a larger increase in people looking for jobs. And so the unemployment rate did actually rise from 6.5 to 6.8%. You might recall that way back in late 2022, the Canadian unemployment rate had been as low as 4.8%. So this is a two percentage point cumulative increase now. It's the highest number we've seen, I guess, seven years or so, or since January 2017. So not perfect on that basis. It was a weird report. Beneath the surface, you had some sectors with giant gains and others with giant losses. I don't really know that it's worth even digging too deeply into it because I'm a little bit skeptical. But wholesale retail was up 39,000. Construction was up 18,000, which sounds promising if it's real. Professional, scientific, and technical was 17,000. Education, 15,000. Accommodation, food services, 15,000. Those are big numbers. If you added that up, Dave—and I'm sure as a human calculator, you were—what was the total? I'm just joking. It was a big number. But there were big negatives, too. Manufacturing lost 29,000, and transportation and warehousing lost 19,000. So a weird report, to be honest. Almost all the hiring was Alberta and Quebec. Kind of random, too. Not Ontario and BC. So I don't know. I guess the headline looked pretty good. Beneath the surface, not quite as good. I guess it's okay, maybe, or even a little bit less than okay.
I did do the calculation. It came out to 50,000 net gain.
That is incorrect, but in any case.
No, it's not. We gave the number. But anyways, so Canada, as you mentioned, shifting policies on immigration. Clearly, the economy is not as strong as in the US. So we've got the Bank of Canada up next week, and we've got on the table as much as a 50 basis point cut. We’re starting to hear people leaning towards a 25. Where do you think this sets the Bank of Canada up? The other dynamic here, one of the things since the Trump election, is we've seen a firming up in the US dollar. The US dollar index is up about 5%. So that's all the basket of all the different currencies. But the Canadian dollar is down maybe a couple of percentage since election day. So a weaker Canadian dollar. A lot of people talking about the Canadian dollar continuing to weaken. Where does this leave the Bank of Canada next week, in your opinion?
It is a tricky spot. I tend to think that the currency side—it's certainly relevant, and of course, a weaker currency has all sorts of implications, if you're an investor and not currency hedged, it's a very real thing, of course, or a vacationer or any number of other economic actors—but I will say a couple of percentage point decline doesn't radically change the inflation or growth outlook in a way that makes the Bank of Canada have to shelf rate cuts or suddenly double down. I would say I don't feel like the move is enough to force a big move, but at the margin, it does argue you do a bit less rate cutting because you've had a bit of equivalent help from the currency. So your competitiveness is a little bit higher and you're in a position to import a little bit more inflation and so on. Obviously, twisted against that is the idea that tariffs have been threatened and bigger tariffs than anybody had talked about on the campaign trail, even, which has perplexed everyone a bit, but nevertheless represent something of a threat. We think it'll be negotiated away in border controls and so on. But nevertheless, that risk isn't zero. In fact, Canada is really in a very convoluted position right now. In the economy, GDP was weak in the third quarter, 1% annualized growth, not great. US moving at 3%, that's a big miss. Conversely, we've seen some, I would say, forward-looking business surveys getting a little better, like the Canadian Federation of Independent Businesses—like the NFIB in the US, the Small Business Barometer—their expectation just rose to its highest level since mid-2022. The business outlook survey in Canada has been getting incrementally less pessimistic in recent quarters. You're in a weak economy, people feeling a little better about it, which maybe makes sense given rate cuts. But then with these tariff threats and immigration potentially falls out of bed unless it doesn't, depending on undocumented residents in the US and what they do. And productivity, we're counting on reviving to hold everything together. I think it's realistic to expect it to revive, but it is a bit of a wishful thinking. There's no guarantee that it does. There are a lot of moving parts in Canada. There's a huge amount of uncertainty in terms of the economy in the near term. The market has priced in one or two cuts for December 11th. That's the debate. US is no cut or one cut, and Canada is one or two. Market is leaning toward two. Again, the rule of thumb is unless you really want to be a hero, you probably shouldn't fight the market that's priced in a 77% chance of a 50-basis point cut—and I shouldn't say two cuts—is what is the most likely. But I will say, as with the US, I have a little bit of sympathy towards a slightly smaller cut in the sense that if you got Canada chugging along at 50 basis point cuts, what happens if, six or seven days later, the US doesn't cut and suddenly that's a big gap. If it was me running the Central Bank, maybe I'd do a 25. We're still cutting, we're still moving, we've come a long way. We're now down to the mid 3%, which is a pretty big distance. We can always do more later. And so that would be what I would think might be a bit more logical. But again, I loathe to be the hero and fight too hard against a market that's priced in quite a lot of cutting. And these job numbers are open to interpretation. If you care more about the hiring or the unemployment rate and so on, I wouldn't say they are the final answer as to what the right decision is.
You bring up that interesting dynamic that the Bank of Canada is a week ahead of the Fed and just the flow of data out of the US, and we're all data dependent. I live my life based on data. I know you do, too. The data out of the US opens the door, as we've been talking about on this podcast, to maybe not having to lower rates if you're the Fed's reserve. I can see, and even in your comment, the Bank of Canada has got to be sitting there going, are they or aren't they? Can we go 50? Because that's the expectation market, but maybe it's more sensible to go 25 and hedge against it, but maybe change the language in our release. But it's a really interesting one because of the timing of the two and the relative data flows within the two countries.
And market liquidity gets a little lighter. There are all sorts of other small asides. It's funny, as you talk, I feel more and more sympathetic toward a 25, in the sense that you reclaim a little currency weakness and a few other things, too. So we'll see what they bring. This is really an exercise. We said this before, no model says that a 3.5% policy rate versus 3.75%—or 3.25% versus 3.5%—is idiocy. When you're getting right down to individual decisions, it's reading the tea leaves. Trying to get a sense of what will the Bank of Canada actually do, neither one is a great or horrible move, they're pretty similar in the grand scheme. So it is hard to say on that basis, I feel like maybe the 25 makes a bit more sense, but that's not where the market is.
I know you went to Minneapolis yesterday. Did you notice a difference at the border?
Gee, that's a good question. I will say, yes, there was a feeling of optimism I detected. Now, I was in a room full of businesspeople and finance types who are focusing on economic growth and all these sorts of things. I'm sure I was missing a few perspectives in that. But yes, I would say there was a feeling of optimism that you see reflected in the stock market and elsewhere as well. Dave, this is getting a little bit real, but I did take an Uber ride, and somehow it came to light, and this just revealed this to me that I was riding with an undocumented resident, and I was asking him, what's the plan here? He was saying, well, I'm going to stay if I can stay, and if I can't, I guess I'm headed back home. Certainly, there are other concerns and perspectives depending on the group that you talk with, of course. But overall, some optimism. I was in Minneapolis. I did get to tour the Minnesota Vikings Museum. There was an event after the conference that was there, and that was pretty neat. They've got a good team this year, I'm told.
They very much do. I'm hoping for a big week from their quarterback in my fantasy football league. But that's an aside. Did you get a McRib, though, Eric?
I did not. Were they available? I did not realize.
McRib is out. This is the big thing. Right after I get off this call, I'm heading to a flight, Kelowna-Vancouver, Vancouver-Chicago, Chicago-Indianapolis. Lots of McRib this weekend for me. I'm very excited about that and football. But I'm pretty excited. Where I was actually going with that question—so you actually gave a much more interesting answer than I was looking for—but I was just wondering, based on the discussions around border security, did you notice anything at the border or were they just, oh, that's Eric Lascelles, we just let him through?
Right. No, it certainly wasn't bad. I do have a Nexus, though, for the Canadians who know what that is, which meant that it's a pretty smooth crossing. So nothing notable to report from the border on that front. I did not see drones flying overhead, nor are they usually flying within an airport. In any event, we should expect to see sterner border security and certainly all sorts of fascinating things, if you read the news, or more the Canadian news. There's been a lot of fascinating reports coming up recently trying to quantify some of the undocumented flows across the border. There are loopholes in Canada. The rule says that you can't claim refugee status if you've already been in the US. They closed that big loophole in 2023. But there's this other one. If you sneak across and are not found for two weeks, you still can, which seems like a pretty big one that seemingly is being used. I was even seeing estimates in the paper today about the cost of the operations that are helping people move across the border illegally. The cost was between $6,000 and $40,000. Anyways, all sorts of information are coming to light. We're going to learn a lot more about that, I think. I guess the border is going to become a lot stiffer, though it is such a long border that one wonders the ability to actually pull that off.
Well, this entire discussion just leads up to: 2025 is going to be a really interesting year. We're going to be watching closely with Eric Lascelles, Canada's hardest working economist. Eric, have a nice hard-working weekend, and we'll catch up with you in the next couple of weeks.
Thanks, Dave. Bye, everybody.