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About this podcast

This episode, Chief Economist Eric Lascelles breaks down the latest Canadian and U.S. jobs market numbers and what they indicate for the broader economy. Eric also discusses the impact of falling inflation on wage pressures, and whether the era of interest rate increases is finally ending. [30 minutes, 1 second] (Recorded: August 4, 2023)


Hello, and welcome to the Download. I'm your host, Dave Richardson, and it's jobs reports Friday in Canada and the US, so let's check in with the hardest working economist in Canada, Eric Lascelles. Although I think we should actually reframe that: the fastest running economist in Canada. Tell the story. I think this is fantastic. You led off your Macro Memo with the story about your track and field exploits. You still got it.

You're outing me here, Dave. So I was a runner once upon a time. That was my sport back in high school and university. And so, several decades later, let the record show, I thought it might be neat to see I've still got anything left in the tank. And people may know there are masters’ competitions for older runners. I have hit not a fully round number, but half a round number, if you can figure out what that means. But anyhow, I hit a new age category and so I thought, okay, if I'm ever going to do this, this is the year. And so I tried to train the last couple of months. It was complete failure of training. I was injured every moment of the whole experience in about literally six to seven different ways. But I did make half an effort and I ran a little track meter, too, and I showed up at the Ontario Masters Championships. And I guess it goes to show that they run the races for a reason, because in theory, I was ranked fairly far down, and I got to win the 400 meters. And so let the record show, I am both the fastest 400 meters runner for my age and also the fifth slowest in the province, if you believe the number of people who bother to show up for these sorts of things. So don't get too excited about that. But yes, that was fun. And then I did the 200 the next day and did much worse and I'm still sore to this day.

That is absolutely awesome. I loved reading about that. I thought the listeners would enjoy hearing that story. It's great when you can go back and relive that past glory in a different age category. And it's great that, like I say, you still got it in some ways, right?

I remember why I stopped and many other things too. In any event, it was fun. It was a good time, and you had to join a club to get into the meet and so I joined a club. I met them all day of the meet, but they were lovely people. I had a great time. We all ate jerk chicken together. It was a JamCan, the Jamaican Canadian International Track Club. Lots of older sprinters do that, so that's why I aligned with them. And it was fun. We even ran some relays. It was great.

Gee, if you can get me some good jerk, I might start running again, but that would be completely disastrous. Okay, well, let's get to the job numbers because you're a good runner, but you're a great economist. Let's see, what did you think about the US and Canadian job numbers this morning?

Well, they were certainly a bit softer than expected. I guess that's the unifying theme across the two of them. The US print was 187,000. The expectation had been something a little over 200,000. So not a big miss, but certainly a miss. And I'm sure we'll get to Canada in more detail later. But Canada actually shed jobs in the month of July and so 6000 jobs were lost and that's the second decline in three months. Now, the month in the middle was so great that you really can't say too many negative things, even on a trend basis, but still you're starting to string together a few negatives, it seems like, in Canada, but on the US side. So it was a further deceleration. Or more precisely, Dave, it was not a further deceleration because the thing that always confuses us is that they revised the prior month's data. Was this announcement weaker than last month's announcement? It sure was. But in the meantime, they announced today they revised last month’s, and they brought that down in a way that actually rendered them about the same. So it was 187,000 jobs created this month; it was 185,000 last month. We thought it was 209,000, but anyways it was 185,000 and so a little bit softer. I mean, it's not a horrible number, it's still more than enough to keep an economy chugging along. But by the same token, payrolls averaged 400,000 a month in 2022 and had been running a whole lot of 300s in much of 2023. And so here we are now, not just into the low 200s, but into the high 100s. And again, there's nothing horrible about the level, but the trend is somewhat weaker, and the revision trend is also weaker. So as per the comment about last month, the prior month to that also saw a downward revision. So we lost 49,000 jobs just in the reestimation over those two prior months. This doesn't get as much play as it should, but to me maybe the most important thing is that you can actually tally up the number of workers, of course, but also the number of hours that each worker worked. And so you can make a statement about the total number of hours being worked in the economy. That was actually down 0.2% in the month of July. So actually, there was just less labor output, you could say. It's actually probably not quite true since in theory productivity could have risen or fallen or something. But anyways, fewer hours were worked across all the workers in the US economy in the month of July. If you're saying, it's the month of July and people take holidays, these are seasonally adjusted, so that's not part of the story here. And so there was some real weakness. The IT sector lost 12,000 jobs. Manufacturing lost a little bit of jobs as well, which was interesting. Temporary help continues to lose jobs. That's been a constant theme. By the way, that’s one of our leading indicators for a recession. When temporary employment turns negative, that almost always leads permanent employment. And the logic being of course, if you're suddenly revisiting your labor needs as a CEO perhaps, it's easiest to get rid of the temporary. We don't even need to do anything; you just don't need to ask them back for the next week and later on. Perhaps you make more aggressive changes. And so, in general it was a bit softer. I will say, just to confuse us all, the unemployment rate fell despite the weaker hiring from 3.6 to 3.5%. But I think the real story here is, it's been 3.4, 3.5, 3.6, 3.7%, just jittering around in that territory at this point in time. You might recall that unemployment number actually comes from a different survey altogether which was a little bit better this time. It's a bit less trustworthy but you can't figure out how many people aren't working by asking corporate HR departments. They have no idea about the people who aren't on their payroll. So you have to do it a bit of a different way. By no means is there a collapse here because we saw the ADP print just a few days ago and it was fine. Jobless claims are trending higher depending on what kind of smoothing function you want to use. You could say they're trending lower the last couple of weeks if you really wanted to, but I would say trending higher on a multi month basis and so a little bit weaker. But I guess the market interpretation is interesting because it's not quite what you would expect. We've got a stock market rallying a bit less than it was a moment ago but nevertheless, as I look at it, it's up, on the news. And so I guess the twist here is really strong employment would be viewed negatively by the market because it means that central banks have to raise rates and inflation is a problem. Really weak employment would be viewed negatively as well because it would be the recession call. Softish employment is perhaps being viewed constructively just because it might speak to a soft-landing scenario in which you slow down but you don't quite get a recession and inflation gets better and you just work your way through without too many adventures on the high end or the low end. I personally think that we're decelerating in a way that keeps decelerating and it eventually leads to something like a recession. But I can't say this one month is definitive of that at this point.

I guess one of the problematic numbers in it— although the market interpretation seems to suggest we're not too concerned about that— is that wages or average hourly earnings were up a little bit more than expected. And you would think that that's what the Fed would be looking at. Because the numbers, like you say, are decelerating. And in particular, this is several months in a row where we've had adjustments down for previous months, which you highlighted. But earnings are what drives the sustainability of inflation in the economy. And for those of us who are watching these monthly reports come out— and obviously we get you on to talk about them—, but you just see announcements coming out, different strikes and settlements. And these settlements seem to be coming in at fairly high levels in terms of increases over two-, three-, four-year periods. And one of the things I remember you highlighting at the front end of this inflation jump or spike, was one of the differences between today and the 1970s, where most people were in unions in the early and mid 1970s. So they basically renegotiated all these contracts, long term, collective bargaining agreements, and they were all at excessively high wage increases. Not as many people in unions now. But you look across the economy and it seems like you've got a labor market that may be decelerating in terms of employment gains, but it still seems like labor has the upper hand over the employer in terms of the negotiations.

I think that's right. I'm not sure if I'd take one month of wages popping up to necessarily speak to some profound pivot in that. But in general, you're quite right, workers are still in a pretty good position. And so wage growth, whether it was the 4.2% last time— or pardon me, it's 4.4%; it was supposed to fall to 4.2, and it didn't. That's the annual wage growth, pardon me. And so that's fast enough. It's not the nearly 6% peak that we had seen, but it's fast enough. We actually did some work, by the way— and this isn't a great measure because it doesn't control for the quality of worker and the type of job and things like that—, and so, we look at an Atlanta Fed median wage measure, which is certainly decelerating, but actually more like a 6% right now. So further to your point, which is that actually, if you maybe control for the right things, wage growth is still pretty fast. And so, the way we're thinking about this is just that indeed, wages usually do play some catch up later in the cycle, and they play some catch up after the inflation spike because the wages aren't as flexible. They don't adjust in real time to changing purchasing power and costs and things like that. So we're seeing that. I think there's a limit to how far that will go just because we are also seeing that maybe labor clout is softening a bit just as hiring slows and as corporate mentalities are shifting. You're quite right on the unionization side and so it's particularly extreme in the UK where strikes galore and we have some charts that actually track the number of labor actions and it's mind boggling how extreme that particular situation has been. We're seeing more than normal elsewhere and certainly fairly generous wage settlements, as you've mentioned. Not as extreme I think, as maybe we think. And of course, the headlines are focusing on those that are pretty notable. Of course, wage growth is only inflationary to the extent that it outplaces productivity growth. And actually, the US got quite a handsome looking productivity number recently. I should say the prior quarter was awful. So again, you could almost craft whatever narrative you care to, but that's helping a little bit again as well. But yeah, bottom line is, we think inflation can fall further from here, but wages and the labor market are one of the things that's going to make it a slower process. So I guess that's reflected here.

That's what I was trying to pull out of you there, the idea that a lot of these wage gains come at the tail end of the cycle. You see that and you mentioned temporary workers and that, so all of a sudden, oh, the temporary workers aren't coming in, and wait a minute now maybe we don't need you anymore with your big raise. Which is ultimately where you get to when you go into an economic slowdown, which I'd have to think is still your base case scenario; that this ultimately ends in a recession?

That is our base case scenario. Just to set the stage for that, I will say that stock market's been awfully happy lately. The economy notwithstanding, a bit of weakness here, deceleration; it's been hanging on and so a lot of people are giving up on that call. And we track Bloomberg which has a recession probability measure and it's just a survey of economists and so it’s still saying recession is pretty likely, but people are thinking it's less likely than it was in some cases, notably less likely for some countries. I can say that the increase in bond yields maybe reflects a little bit of that thinking as well. And so all of that suggests that fewer people are predicting a recession. We're not totally immune to that. We recognize that the economy isn't in recession right now and so some forecast tweaking is necessary and as inflation comes down, the odds that we need a real deep one to fix things has diminished. The way I would put it is, psychologically, it hurts to hang on to a recession call, whether you've been predicting it for a while. Where is it? It's not here. In fact, we just did our internal quarterly investment summit, and my presentation was titled «where's the recession?», with a big question mark at the end. We were working through leads and lags. Is it still plausible that the window is open? Is the window closing? Is it just opening, for that matter? And looking at historical rate shocks, the conclusion was, no, it's still wide open. And if anything, it's getting a little wider as opposed to narrower over the next several quarters. And so whether one happens or not, you would say at least it's plausible that we could get one. Fundamentally, the reason we're still calling for it is we're trying to steer clear of the emotional desire to align with the consensus and to feel better about things. And we're just saying, well, we still have big fancy economic models that say you should get a recession when rates go up this much. We have a big suite of simpler heuristics and rules of thumb that most of which say you should be getting a recession when the yield curve is inverted. Other things like that have happened, and then we just actually updated our business cycle work, and the business cycle work actually advanced. It had been saying «end of cycle». It's actually now saying «recession» more than not. Again, we're not in one. How do you interpret this? It's all a little bit blurry and it always is, but I guess the point being, it's not backing away from the notion that we're very late in a cycle, if not venturing forward. So we think it still makes sense to predict that. I will make three confessions, though. One confession is just from a probabilistic standpoint; at our peak, we had been saying 80% chance of a recession. We have pulled that down a little bit. It's now sitting at about a 65% chance over the next year. So that is a bit of a retreat, I will admit. In terms of the timing, we had been saying at one point, second half of this year. It's not there right now. And so we did bump that back. We're saying the fourth quarter of this year and the first quarter of next year. And then lastly, in terms of the depth, we'd never called for a deep recession, but we had been saying mild to middling was the phraseology we had used. Anyways, now we're just saying mild. And in numbers, we had predicted, as an example for the US, a peak to trough GDP decline of 1.4%. Now we're saying 1.1%. So it is a bit milder. It is a little bit less certain. It is a little bit later, so there's been a bit of a retreat for sure, but ultimately the models are pretty clear that you would expect a recession. If we don't get one, it will be quite an unusual event and a whole lot of models are going to have to be tossed into the trash bin. For the moment, it does make more sense and logic would suggest, if you ask the question, have we already felt the full effect of the rate increases? Obviously not, because we can see so many borrowers are fixed in, and these things have not yet rolled in. Maybe the trickier debate is, is the maximum pain two or three years from now? In a Canadian context— and not everyone's a Canadian listener—, in theory, 2025 and 2026 is the maximum pain from a rolling fixed-mortgage perspective, though it does depend on where mortgage rates are then. I'm not convinced they're going to have to be this high in 2025 and 2026, but certainly we haven't felt all the pain. So the debate is, are we going to feel enough over the next six months to a year to get there or not? Theory suggests we should, and I guess time will tell us whether we do or don't.

As you probably know, I am an obsessive follower of all of your content. And when you look at those key metrics that historically have always pointed to a recession, they are all flashing that something's coming. What's odd about this cycle would be how low rates got, and then the ability in a modern economy and with modern financial tools on the credit side, for people to lock in those lower rates and an awareness to lock in those lower rates. And so it's not surprising that it's taking longer for the effects of these higher rates to kick in in any way at all. But looking at some of the work that you produce on lending standards and what's happening there, and you just line up previous recessions, up against that spike in the tightening of lending standards, and if you think of the economy as a big engine, you need oil in the engine, and the engine will run for a little bit without enough oil in it. But if you take the oil, which is credit out of the marketplace, that engine is going to stop running at some point, or at least stop running at the rate that it is running before.

Yeah, I think that's a great analogy.

Oh, there we go. Well, wait a minute. I'm almost speechless. I think that's the first time you've liked one of my analogies in all the time we've been together. So then what do you do? Head of the bank of Canada, Eric Lascelles, or chairman of the Federal Reserve, Eric Lascelles, what are you doing with this one?

My mother was American. Does that mean I can do both at the same time?

I think you can. You know I'm rooting for you.

Well, thank you for that. Beyond the citizenship issue may be some other measures of qualification, but on those fronts, well, I mean, the bank of Canada seems to think maybe it's done. The Fed is waffling a little bit, but both are explicitly in data dependent mode. We learned that from what are effectively the minutes that came from the bank of Canada; I think it was just earlier this week, if I'm not mistaken, last week maybe. And similarly, from the Fed, it's clear they're in a data dependent mode. So there is no certainty here. It does depend on how the economy evolves and how inflation evolves. I would say our thinking is that the Fed, all else equal, is perhaps inclined towards another rate hike. So we'd be inclined to think that could come around in September. The default assumption for Canada is maybe that that is it. So a little bit of a different story there, but in both cases, just probing and feeling and seeing just what's necessary to achieve their objectives. And as I've said before, inflation looks quite good on the surface, and it's 3% or below. In fact, both countries ever so slightly below 3%. But core inflation is not there yet. Service inflation isn't there yet. Inflation x-gas isn't there yet. We do know, for instance, it's going to be a little tougher sledding in the next few months on the inflation front. By the way, I filled up two different cars gas tanks in the last few days, and my jaw is dropping again. We knew oil was up, it was $70 a barrel. Now it's 80 plus. That is most certainly mapping through into gas prices. So we're going to get a little bit of gas inflation in the short run, and so that's a challenge. The real time inflation metrics we look at were coming down beautifully. They're kind of going sideways a little bit going forward. We know the base effects aren't quite as easy in the future. I mean, you were knocking out big monthly gains from a year before that were falling out of the equation. You think back to July 2022, that was the first month things started to soften up a bit. So we're not going to get to remove big ugly numbers to help us in our quest towards lower inflation. So it's going to be a little harder. And so that might keep central banks going a little bit longer. I do think we're near the end, but maybe not quite there, particularly for the US and the bank of England, just to add another central here.

I'm going to give you another one. Let's see what you think of this one. So, between March and June, I travelled a lot, so I'm out on the road. And when you travel, you eat poorly, and you might have the odd drink with dinner. I'm not saying I do, but you might. So I gained fifteen pounds between March and June. So now into July, I go on a diet, and I take the first ten pounds off like nothing. Boom. I just adjust the behaviors and I'm down ten. But those last five pounds, man. I am struggling in the last three weeks to even get a little bit of that last five off. And that's really the challenge. Inflation is the same way. So I inflated; I deflated from my peak very quickly. But to get back down to where I was, that last little bit is the really tough part when it comes to inflation. So what am I doing? Well, I'm continuing my diet into August. The central banks are continuing their tightening a little bit longer and maybe make those last little 25 basis point here, a little 50 basis point overall here, just to make absolutely sure their clothes are going to fit when they go on vacation in a couple of weeks.

Dave, maybe you should head down to your local track and run a 400 meters. Worked wonders for me over the last couple of weeks.

I don't run, I walk quickly.

There was a race-walking event, by the way. But to your point, you're absolutely right. And just keep in mind, from a risk-reward perspective, they do not want a 1970s experience where our job is done and then it wasn't done. You don't want to make these mistakes of stopping prematurely. So you err on the side of going a bit too far. The question is, have they already gone too far? It's such a dismal science that you really can't say precisely, but it does incline them to go a little bit further until they really have a high level of confidence. The other thing, and I don't know why I'm working myself into a lather about central banks being hawkish, since that wasn't the point here— maybe they're not quite done, is the point—, but I keep thinking, and maybe we even said this last month, but if the most interest rate sensitive sector of the economy is rising, then are interest rates actually high enough? I'm referring to housing here, and so the housing market has been bouncing. If housing is bouncing, maybe this isn't all that restrictive a monetary policy. Not that that's the goal by any means. Even though there's an inflation component to that, it's so lagged that it's all a bit blurry as to how much they should actually care about that. But it's interesting that housing is bouncing at a 5% type policy rate. And so that would be the other argument that maybe we do need to go a little bit further.

Okay. And then let's get to one last thing, which is a question that at different points in time has been front and center. I know when I'm out talking to investors, there's always someone in the audience who comes up and says, well, we've got trillions of dollars of debt in the US. And hundreds of billions of dollars in Canada. How can this persist? It can't go on. Debt is going to be a problem. And sure enough, we see one of the debt rating agencies in the US downgrades the US from AAA to AA plus. And it's happened before, and the timing of it was really weird, but it did put the idea of debt front and center. And with all of the spending that you've seen, particularly in the US, you've now got issuance of debt, which has to be absorbed in the marketplace, and the Fed's not buying anymore. So the whole supply, demand on debt and volumes, all of this comes back front and center. What are your thoughts on that? Because we've certainly seen a little bit of a pop in some of the longer-term yields over the last couple of weeks.

We have. The US 10-year is 4.1% as I'm looking at it right now, which is quite a leap and not a low number and higher than it was just a few days ago. So the debt downgrade, I think was ultimately appropriate. The US has a big debt. It's running a big deficit. A weirdly big deficit. That's a weirdly small teacup, by the way, Dave. Anyways, we need to get this on video next time. That looked like it came from a little Lidl set or something.

It's an espresso cup.

Mr. fancy espresso.

It's very healthy on a diet. I take a straight espresso instead of something with milk or sugar in it. Very healthy for the dieting guy. What you have to do to get those last five pounds off.

Right, okay, noted. Thank you. So the downgrade was appropriate. It was a big debt, big deficit, political turmoil, the debt ceiling near disaster just a couple of months ago. Maybe the timing is a little funny. The reality is these are quasi bureaucratic organizations, and it takes them a while to say, okay, now is the time to pull the trigger. Nobody's looking to them for the real time assessment. So I don't disagree with the downgrade. And of course, S&P downgraded them in 2011, if memory serves. So the relevant thing here is you've got two out of the three major debt rating agencies that have downgraded them. Two out of three is basically what your rating is. And so S&P could do it, and it didn't really change who was allowed to buy what, because there were still two AAA ratings. Now there's only one AAA rating, there's two AA plus ratings. Once upon a time there would have been concern that certain investors wouldn't be allowed to hold the treasuries because their mandates were AAA only or something like this. I'm sure there's still a little bit of that, but having done our due diligence, it doesn't seem like there's much of that. Certainly, it doesn't constrict us, if that's of any interest, but I don't think there are too many parties who will be constricted from that. You could debate whether yields should rise or fall when the US is downgraded. In any other country you'd say, well of course yields will rise because you need to insert a risk premium and the risk of default is incrementally higher, albeit low. But in the US case, of course, as a safe haven currency, you could get a safe haven bid if people are nervous about this new development. That's actually what really did happen in a significant way at prior junctures. Interestingly though, we've seen yields up, not down. I think more of it was the economy hanging on and that sort of thing. But a little bit of it I suppose was also the downgrade inserting a little bit of a risk premium. This is not a unique US issue, by the way; a lot of countries are running big deficits right now. Bond market is waking up as quantitative easing turns into quantitative tightening, and you need private sector players to absorb all of this debt. And it's a strange state of affairs given that unemployment is low when economies are strong or at least there's no slack in the economy. And so it's not a normal place to have these big deficits. And we know governments are under a lot of pressure to spend more; they spend on the military, on aging populations and on climate change and on industrial policy these days. The cost of servicing the debt is big. So really there's a real push and pull here and they're not all in alignment with one another. And so I don't think the US is going to run into too much trouble here. But we do think that countries are going to need bigger risk premiums, the ones that are not as well behaved. And I won't go quite so far as to say defaults because I don't have a good sense for that. But I will say that it's a tricky situation on the fiscal front, and in theory, countries are going to need to do some fiscal austerity over the next several years. And certainly, the timing may not be ideal if we were to get a recession. And maybe they can just defer it for a little bit if that happens. But nevertheless, I think there's going to have to be a fair bit less fiscal support going forward because this fiscal picture isn't perfect whatsoever. And we saw this small example in the US.

Well, let's get your dual citizenship hat on here because this makes you perfectly qualified to answer this question along with your economics background and everything. Some of my American friends go, how can we be AA plus and Canada still holds AAA rating. How is that even possible? We're the United States of America. And you're just little Canada. How can that even be possible?

Well, I mean, you can argue any country that has its own currency could in theory just print money to a point that the risk of default is nil. And so I guess everybody deserves AAA in that little world. I mean, I'm sympathetic to that argument just in the sense the US is so big and so deep and such a trusted market globally. It would be better positioned to print money and do all the crazy things that might have to be done if somehow push came to shove. But just looking at things objectively, debt level is lower in Canada. The deficit is a lot smaller in Canada. The political discord is hardly perfect, but it's a lot less. Just by objective measures, you could say one country seems fairly stable and more under control than the other and I think that's where they're going and what they're looking at essentially. And you know what? I don't know if it'll be much of a wakeup call, but I think it may be a useful wakeup call perhaps and might encourage even politicians to mention the word deficit when campaigning and things like that in the US. And perhaps I still think back to the 2000 election, they were running a surplus briefly and there was a lockbox and all sorts of things. What are we going to do with all this money? And fiscal matters did get attention even when it was not a problem. It was like a good thing, and it's just completely fallen off the radar screen since. So maybe this puts it back on a little bit.

Yeah, that is one of the really amazing things, how much focus there used to be on the deficit when the deficit was lower, or when we were running a surplus, and now we've got these ridiculous levels of debt and it's just non-issues. Everything will be fine, don't worry about it. Just kick her down the road. But as you say, maybe this has created a little bit more profile for something that ultimately does need to be addressed and that can only be a good thing. Eric, thank you as always. Great update. We still have to get you in between these job reports to talk about some of the special work you've been doing. So we'll try and get a little bit more disciplined on that as we get out of the summer holiday season and into the fall. So, Eric, thanks again, and we'll try to catch you down the road. It'll be hard because you're fast.

Thanks, Dave. It was fun.


Recorded: Aug 4, 2023

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