Hello, and welcome to the Download. I'm your host, Dave Richardson, and it is US labor report day. So that means Canada's hardest working economist has probably been up since three in the morning preparing. And then, how many TV interviews have you already done today?

None, Dave. I actually don't do that anymore. In any event. I'm working hard, though. This is not my first speaking engagement of the day, let's just say.

There we go. That's what I thought. Because this is still very early in the morning, and he looks tired, friends. I'm glad, sometimes, when we do an audio podcast instead of video. But you look like you're succumbing, like everyone around the world, to Denver Nuggets fever. My beloved Denver Nuggets, up one game to nothing already in the NBA finals, probably headed for a sweep in the championship. I'm super excited.

I must say you have the most eclectic sporting interests of anyone I know, for a man who, in theory, lives in Toronto. There's Oregon this. There's Denver that. I'm losing track. It was Boston.

St. Louis Blues. It's been quite a run for the miserable franchises that I cheer for. The once in 50-year championship is only good if you live to 50, and fortunately I've done that. So away you go.

Fantastic. All right, well, I can cheer for Denver alongside you. That sounds just fine.

Well, I'd appreciate that. And get the family on board, too. But the other thing that continues to be hot is that US labor market. What do you make of another fantastic number this morning?

Well, I'd appreciate that. And get the family on board, too. But the other thing that continues to be hot is that US labor market. What do you make of another fantastic number this morning?

14 or 17, officially.

Thank you. Maybe I should be interviewing you on this. I think you've done more prep than me.

It may seem like I arrive unprepared, but I actually do read quite a bit, and I have to keep up with you.

Sure. Okay, well, call me out at all my other mistakes too, please. So in any event, strong hiring. It was broad hiring as well. If you wanted to poke holes— and I'm loath to poke too many holes just because the number is the number, and that's the most important thing; companies were adding workers, and that says something— but if you want to poke holes, there's the standard holes that are in other surveys: job openings are falling; in other surveys, the quits rate is down; in other surveys, the mass layoff numbers are inching higher and in other surveys, jobless claims are tending higher as opposed to lower. So we still think that there's room for labor market weakness out there somewhere, but it sure wasn't in the headline numbers. If you wanted to quibble with this report, you could say, well, the unemployment rate did go up, so it went up from 3.4%— which is really low and you can correct me on this in a second, Dave, but I think that's the lowest we've seen in many decades— to 3.7%. So 0.3 percentage point increase is interesting. Now, let the record show that the unemployment rate number does not come from the payroll report where I was just quoting big job creation. There's a separate report. I guess the problem is, if you ask businesses how many unemployed people are they? They don't know. They only know how many people they've hired. And so, you have to turn to a labor force survey which canvases individuals in their homes, essentially. And that one gets a lot of attention in many countries, including Canada, incidentally, but it's a secondary one in the US. And that secondary survey, the household survey, actually says there were 310,000 jobs that got destroyed in the month of May. So we either added 339,000 or shed 310,000. One or the other. So it was great or it was horrible. The household survey does tend to be bumpier. So, probably you want to put a little more weight on the good number, I guess. We had a conversation to this effect four or five months ago maybe, but it is fair to say the household survey hasn't quite been keeping up. And again, not to say it's the better one, but there's a little bit of informational value in there. So I'm at least a little bit intrigued by that softness that's there. And one thing we pay really close attention to is the unemployment rate, because when it starts to rise, usually it's hard to stop. Now, I think one month isn't a trend and 0.3 isn't the threshold you need to trigger guaranteed recessions and things like that. You'd need to see a few more months of something like this. So let's wait on that. But nevertheless, the unemployment rate does matter, even though it's coming from this jumpier survey. The other thing that was good and bad depending on what you're looking for here, like wage growth slowed a little bit and so of course, not great for workers, maybe good for inflation, maybe good for the sustainability of the recovery. So the bottom line is wage growth did decelerate a bit. It was still up. It was up 0.3 but had been trending 0.4 plus before that. And so year over year, wage growth in the US is down to 4.3%, which is, I wouldn't say, a tame number, but that's a number that you might occasionally have seen pre-pandemic. So overall though, it was a strong report, but with a couple little wobbles hiding beneath the surface.

So just again, to set the record straight, the unemployment got back down to where it was just before the pandemic during the Trump administration, but then you got to go back to 1969 to see unemployment that low. But you got me because I missed that unemployment number this morning. And that's really important from a Fed perspective. I've read a lot of things about the Fed and they almost need to see that unemployment number tick up. You alluded to that in your comments. They need to see it tick up a little bit more to really be assured that what they've done is enough and that's where they can stop. Is there any validity to that view?

Yeah, it's a big one for sure. Keep in mind, particularly in the US, for the Fed, their mandate is explicitly two things. It's inflation and it involves the labor market. And so, this is not just that the labor market is a convenient proxy for economic slack. A lot of central banks might say: this is our job also. And so let the record show, they look at a broad number of labor market metrics, it's not just the unemployment rate. A bunch of them still look fine, but this is absolutely one that they do look at as well. It is trending in the other direction. I hope we get into this in a moment, but when I think about central banks right now, it is pretty wild. Let's not lose sight of this as we debate what the next move might be, but the big story is they went from a lot of stimulus to a lot of restraint and the heavy lifting is probably done or mostly done. And so I think that's the big story. But the littler story is what do they do next? And really, I don't think it's completely absurd to suggest that there could be more tightening. That's a possible scenario given inflation that didn't totally cooperate in the latest reading in April and given some GDP prints that have been okay and so on. And so it's possible there could be a little bit more tightening. It's certainly possible there could be a long stretch of steady policy, so unchanged rates. In fact, that's considered the more likely action or inaction at the next decision, that is to keep the rate unchanged. It could be there for a good while. Or we might not be that far from rate cuts if we actually get a recession, and it starts to show up in a couple of months and inflation is cooperating again and we think maybe it will help a bit before too long. You could basically predict all directions and you're not a fool to say any of those things. So maybe the big conclusion then is there's a lot of uncertainty over the exact direction in the near term in terms of what markets are pricing. And I've got Canada in front of me now, but I had the US a moment ago. And so the market really is debating between will there be a hike at that next decision in the US or will it be a pause? The cut is more of a speculation about later in the year perhaps, or at a minimum 2024. And so right now we're thinking a pause is a little bit more likely. And it's just been the signaling we've gotten a bit more from Fed speakers. And let the record know whether you're at 5.5% or 5.25% or 5% for that matter, these things don't have a radically different effect on the economy. It's not an exact science. It is more about reading the tea leaves of what policymakers are saying. When you get down to the short strokes— to mix my metaphors—, that's the more important thing. And they're not being at all definitive on their needing to be more tightening. I wouldn't want to take one inflation print month and run away with that because we get months that are good, we get months that are bad. It's been bopping back and forth for quite a while and so it might be a mistake to make too rash a decision on that basis. And so we're thinking pauses are a little more likely. I could probably believe a hike a bit more credibly in the US than Canada for the next decision, personally. But anyway, I'm talking too long here. The bottom line is the job numbers were pretty decent at the headline level.

We have this conversation every month. But again, I think you have a month more of data now and this report today. And where is this most anticipated recession in the history of the world? It's been sitting there. I know as we've been out talking to advisors and clients, we would have thought that maybe we'd be in the midst of it now or then maybe the fall. Is there something in the numbers that is saying that it's here or is it still out away and we got to wait some more?

Well, Dave, you didn't hold me to a particular country and so I can say it's finally here in Germany. So Germany did just record two quarters of decline. I mean, that is interesting though. These are global forces at work and so the fact that one country did just tumble into at least a narrow, simple definition of recession is notable. When we look at the broader picture, the story all along has been one in which rates went up by a lot. And so there's a real headwind that emerges from that. And I think that argument, if anything, strengthened over the last few months at least as we began to encounter banking stress in the US. And so I think that is certainly the most compelling argument for a recession, maybe even within several months. We've seen lending standards tighten a lot in a way that is historically always consistent with recession. In the US specifically, the level of bank loans outstanding is now shrinking, which is not a totally normal state of affairs. And so that does suggest it's not all talk, it is translating into action to some extent. The second quarter— for those who don't follow along, that's April, May, June; that's where we are, at least as we're recording this, Dave, albeit towards the latter end—, there's a lot of uncertainty over exactly what the US economy has been doing in the second quarter. We were reviewing some of the smarter now casting models and forecasts that are out there. The Atlanta Fed, the last I looked just a couple of days ago, was tracking almost 2% annualized growth for Q2. That would be a pretty pedestrian ordinary quarter. So that would argue definitely no recession there. However, the blue-chip consensus forecast— a bunch of economists like me who get polled— and they're forecasting just 0.4% annualized growth, which is growth but meager. And then, I'm forgetting now, I think it's the Cleveland Fed, anyhow another one of the District Feds, has their own GDP now cast that they've been trotting out and it's predicting a 0.3 percentage point decline, which would be in theory, maybe the start of a recession. So there's a real wide range of estimates because there's a real wide range of economic outcomes right now. And so at the optimistic end, you see hiring that's still great, though as we've discussed before, hiring is not a leading indicator, it tends to be a lagging indicator. We do see global trade that is in decline now, which doesn't usually happen without a recession. We do see business confidence and business expectations that are quite weak. In fact, I was looking that small business expectations in the US are now weaker than they were at the worst of the Pandemic in the spring of 2020, which is hard to fathom. But at any event, they're not expecting too much. And we just got the ISM manufacturing printout which remains firmly in sub-50 territory. But to me the big takeaway there was that the new orders component really fell sharply further and it's now approaching recession. The manufacturing sector itself is already contracting but normally you need a deeper contraction of manufacturing to pull the whole shebang of the economy in. And so it's getting a little closer to that. We still think it's coming. I will admit it's taking its sweet time, Dave. It's been a frustrating experience for someone like me, forecasting it. It's been lovely, of course, in any sort of realistic way, because nobody actually wants a recession. But we do still think it's more likely than not. And I'll be honest, if we don't get one, I don't know if we can control service sector inflation. And if we don't control service sector inflation, I don't think we get to sub 3% inflation. And I think there's your scenario where the Central Bank suddenly needs to do another percentage point of tightening. And so I don't think it's quite that by definition there has to be a recession because they'll just induce one later. Maybe it's probably not quite that cute, but nevertheless, if we don't get one, it's going to be a trickier journey to get service inflation in particular under control. And that's an important objective for central banks.

And the listeners who listen to podcasts on a regular basis are familiar with the analogy that I've been using throughout COVID: if you're standing in a swimming pool, you've got a ball with some air in it, and you take the ball and you push the ball down underwater and you hold it down. That's what we did during COVID, we locked down the global economy. Then, of course, governments spend trillions of dollars. We lower interest rates to zero, people stay at home, but we get a vaccine. And then, of course, we learn to deal with it. So we release the ball and what happens when you do that in a swimming pool? Well, it overshoots the surface of the water, so that's our inflation supply chain, all those things. So now we need the ball to get back down to the surface of the water. That normalization. And to do that, to take that extra energy out of the global economy, you've got to have a little bit of an economic slowdown. As you say, we're certainly not looking forward to a recession, but you do need, as you suggest, some kind of a normalization in activity to get the economy back on a stronger footing. The one number that I did see yesterday or over the last week that is indicative of perhaps where you could start to see some of that ball of energy come out of the service sector, is credit card debt is peeking out again in the US and Canada, for that matter. So maybe, just maybe, the consumer is starting to run out of that excess cash and capacity from a credit perspective that they had coming out of COVID. And then, of course, credit card rates are at record highs as well with the increase in interest rates. So that takes a little bit of money out of people's pockets to spend on those things. Although I've been traveling much of the last three or four weeks, and I know you're on planes, too, they're all full and the fares are not cheap, so it's hard to see that. But Eric, just one last thing around the reports. The Canadian housing market has continued to be incredibly resilient. Does that give the bank of Canada a little bit more space to maybe tick it up one more time? Or does it really even matter? Because we're so dependent on what's happening in the US, would the bank of Canada just be very happy if they don't have to do anything? And the housing market is nowhere near where it was a year and a half ago, but fairly stable and calm.

Well, I think the bank of Canada's preference certainly is to keep the policy rate unchanged. They've been signaling as much. And of course, the more hiking you do, the more damage you do later. So the preference isn't to do too much. It is fair to say there's a chance they do have to do more to the extent that Canada has also had a somewhat resilient economy and Q1 GDP came out and looked pretty good, and Canadian hirings held together mostly, though, we're still waiting on the May number till next Friday for Canada. I guess the way I would think of it for the bank of Canada is that they would need more data. Even though inflation was a little higher than they hoped in April, even though GDP was a little faster than they hoped in the first quarter, we'll see what the job numbers bring. Housing, as you say, may be surprising them a little bit. So they probably need several months to process that, to ensure these are real trends. And so our thinking is, if there's more tightening in Canada, it'd be more likely a fall affair. That's our thinking. Unless it really becomes truly quite urgent. We're still waiting on the full effects of the tightening. So there's a whole bunch of forces pushing in different directions right now. On housing, though, you're certainly right, it has rebounded. By the way, not totally uniquely a Canadian phenomenon. The US housing has rebounded somewhat. I was just looking. And UK isn't. Germany is. There are some other places outside of North America. Australia, New Zealand, I believe, are seeing a bit of a pop as well recently, and they often look a lot like Canada. But on the Canadian side, home prices are rising again, resales are going up again. The debate becomes, where do we go from here? Is this for real? Is this a new leg of the housing market? Optimists would point to the recent rebound, first and foremost, but they'd also point to the incredible immigration numbers in Canada and just a shortage of housing relative to demand and prospective demand in the future. And so I think that's your bull case. To me, the bear case— and I have a little more sympathy this way, though I don't have precision on this one at all— the bear case is more just that affordability is so atrocious that there's very little precedent for a housing boom beginning from a place of awful affordability. And so it's still way offside. It may be a seasonal story. If you're ever going to get a seasonal pop in housing, the spring is when you get it. So some of that may be the case. There is an artificial shortage of homes for sale, so homes for sale are really low. A lot of people still sitting on that, remembering how high prices were a few years ago and preferring not to move. And eventually they will need to move. And so we will be starting to see perhaps that supply come onto the market and so that could change the short-term supply demand equation in a way that doesn't quite support housing as much. But then we also did work just in the last few weeks, and we said, okay, what a historical developed world housing busts look like? How long do they last? And the median housing bust in the developed world is 6.6 years. And so it's been one year so far. We did find one example where it was 1.3 years. So it's not completely impossible that was that. But it would be pretty unusual if that was that. And maybe the way I tend to think of it is actually the Canadian experience from the early 90s, which you had a pretty sharp home price decline for one to two years, and then you had four or five years after that of what I would describe as a malaise. It was a weak market. Home prices went up a little, they went down a little. They certainly underpaced inflation, they underpaced personal incomes. There was a net loss to homeowners, and it took a long time before the market really got cooking. And so I don't know if six years is the right number, but I would say I'm dubious that there's a real boom about to happen. Mortgage rates are still so high, affordability is still so poor. But I do think perhaps we're through the worst of the decline. We're going to see a little bit of an increase in the spring, and I'm assuming we then revert to a flatter profile later. This, by the way, matters a lot, Dave, because if I'm wrong and housing is off to the races and prices are up 15% a year from now, first of all, you don't get too many recessions during a housing boom. There's a debate of causality here because you could say equally if there's a recession, then the housing boom ends and goes both ways in a very confusing way. But equally, if home prices are rising, that's an inflation problem. And so, as a selfish economist who cares about his forecast, that throws all the forecasts off, first of all, both from an economic and an inflation perspective, and I guess he could say from a central bank perspective, which is again, that's a scenario where you say, oh, this housing rebound persisted through the summer. The bank of Canada is thinking this in September. Then I guess we need to go to 5,5% instead of 4.5%. And so they would need to do some more work. And again, I'm inclined to think that would then cool the housing market down and cool the economy down. But there are a lot of moving balls right now. You can tell from my voice, but maybe the most important takeaway from this chat we've had is just it's a period of high uncertainty. It's high uncertainty in the short run on the basis of, do we get a recession? Does inflation keep cooperating? What is that next Central Bank action? Does housing bounce from here further? But it's also uncertain over the long run to the extent, what is the normal interest rate coming out of all of this? I have my guesses, but it's a guess. What is the normal inflation rate coming out of all this? Is it 2%? Is it 3%? Is it something else altogether? To what extent are exciting new technologies going to change the normal productivity growth rate? That's a topic for another day, I think, but high uncertainty is absolutely part of the story and it's part of the reason why, as investors, at least, we're behaving a bit more cautiously. Happy to clip some coupons in the bond market and in cash. And it's not really a time to pretend that you've got it all figured out.

It's interesting, you mentioned the difference between the UK housing market and then Canada and US. And you think of the impact of interest rate increases. They're almost immediate because of the structure of mortgage programs in the UK. In Canada, where we've got a lot of people who are locked in at 1.5% and 2% from 2019, 2020 and 2021. So you're going to see those long term mortgages roll off and then feel the effect of higher interest rates. In the US, you can renegotiate your mortgage, lock it back down, so when you actually see that in the housing market, it takes a little bit longer. But it is interesting that this resilience in the Canadian housing market is just one of the most confounding things I've seen in my life.

Well, I mean, the X factor in housing is always sentiment. And Canadians have lived through an almost 20-year period in which home prices only did one thing and any decline was viewed as a buying opportunity, and it wasn't really about the fundamentals, and it just kept going and going. So the question we always had over the last year or so as a housing bust finally ensued was just how materially would that change the underlying psychology? And it seems, tentatively, not that much, as maybe the conclusion right now. There are still hard and fast limits on what someone can afford to pay versus their income and things like that. You make a great point, which is that in Canada— which is less extreme than the 30-year lock in in the US—, but even in Canada, it takes a number of years for that effect to be fully felt. Don't pretend that the rate increases that have happened already are already fully felt. The classic stories is that it takes 18 months, but of course it takes longer than 18 months, because you got the other three and a half years’ worth of mortgage holders in a Canadian context. And so it takes quite a while for that pain to be fully felt. And you think a couple of years out and then this is I don't quite have a crystal-clear view on what 2025 will look like. That's a little outside of my time range, to be precise, at least. But you can start to imagine some pretty huge changes in the mortgage rate for people relative to the incredible rates they would have locked in 2020 and 2021 in particular.

Absolutely. Because the purpose of this podcast is education, we want people to understand markets, understand economics better, and that's why, again, you do such a great job— and Stu and the other guests we have— in terms of breaking down really complex ideas into simple, everyday language that people can take away and actually use in their decision making. But out of this whole conversation around housing, if there's one thing I would like people to learn is as housing prices did drop over the last year, nobody was rushing out to sell their house when it might have been down 10 or 15% on paper. But people sell stocks and bonds when that happens, and I wish they would have the same behaviors with their stock portfolio as they have with their real estate portfolio, that when things are down, it's a buying opportunity. But I digress. That's been the focus of my whole career, and I guess that will continue for a little while longer. But I like to buy when things are down. Eric, always a great conversation and I really enjoy these US labor market report days because we get a chance to chat and you always have incredibly interesting stuff to say. Thanks, Eric.

Oh, you're so kind. Thanks so much. Bye, everybody.