Hello and welcome to The Download. I'm your host, Dave Richardson. And it is Jobs Friday with Canada's hardest working economist, Eric Lascelles, who is even extra tired this morning because we've got the jobs report out early — which is always a hard day for Eric — but a lot of work with the trick or treaters in the neighborhood last night.

Yeah, who's kidding who?

How was Halloween at the Lascelles house?

It was fun. My youngest child is still hanging on to the trick or treating experience. That might have been it for him. He insisted on doing it solo, so we were just the candy givers at the door. But nevertheless, it was fun. If I'm feeling particularly tired, though, it's more the World Series games that ended a little late over the prior several days, so still a bit of a hangover from that.

Even though it was only five games, there were some really great games in that relatively short series.

Yeah, it was super exciting. And the whole play-offs were pretty exciting as well. So, yeah, we enjoyed it. I’ll defer final judgment. I guess maybe I'm slightly pleased the Dodgers won. It's two giant empires battling each other. Neither was really the underdog there nor a Toronto team, which would have been ideal. But anyways, it's all settled.

As an Angels fan, of course, I detest the Dodgers. Just on principle, I detest the Yankees. It made it very difficult to cheer for anything except for good baseball. As we would say to the listeners, I know there's been a lot of words tossed around depicting large groups of people this past week down in the US, which we'll get to in a moment.

We will?

But if you don't appreciate baseball and economics — people think it's slow and boring stuff — but as we know, Eric, it's the tip of the spear in terms of excitement.

And by spear, you mean slide rule, I presume?

Oh, well, slide rule, yes. Well, it’s too bad the angle you've got on your camera, for those of us watching on YouTube who cannot see his pocket protection. And then when he takes his headset off, he's got his propeller head cap on. So it's all good. And me too. So Eric, jobs report. I think you probably had more trick or treaters last night at your house than jobs were created in the US this past month.

Yeah, I guess that's technically true. Well no, but yes, you're close to the truth in the sense that it was very much an anemic month for job creation. Just 12,000 jobs created. That is literally an order of magnitude or two times one order of magnitude, just to confuse everyone. Let's get that slide rule out and figure out what I was trying to say here. So 12,000 jobs was not a lot. The consensus had been 100,000, but the prior month had been in the 200,000. So this was a weak month. You can pass through it any which way, but I guess the main punchline here was that there were some special factors at work. And so the main one was, I guess, two hurricanes, you could say. One was technically in September. But keep in mind, these numbers are really comparing the reference week in one month to the reference week in another month. And the reference week gap did encompass both those big US hurricanes in the Southeast. So hurricane distortions, a little bit of strike distortions as well. And that seems to, to my eye, at least, largely explain the weakness. It's a bit frustrating. You might say, well, let's just go look at the Florida and the North Carolina job numbers, but we actually can't do that. Those numbers don't come out till next month. So on December 1st or thereabouts, we'll be in a position to speak more definitively. But we can say that there is a metric that just says the number of workers who were unable to work due to weather, and that number was 512,000 workers. Now, you can't just immediately say, well, 512 plus 12 equals a nice big juicy number because there are always some people who can't work and there are seasonal factors and things. By the way, the Bureau of Labor Services does not like it when people just add this on. They say it's not quite clear math. I won't suggest that the real number was a quarter of a million jobs created, but they would say that normally you had a quarter of a million people unable to work due to weather and therefore, there's about a quarter of a million more people unable to work due to weather than usual. Again, you can't quite add that to the 12,000. But I think the point is it was probably a pretty normal-looking month if it wasn't for that. There were also some more strikes. Boeing strikes, if memory serves. That did have a notable effect on manufacturing jobs and might have explained another 45,000 or so. I think without that, it might have looked semi-normal. It is notable that the unemployment rate just kept jugging along and remained at 4.1%. So that held together okay. When I look a bit more broadly and beyond this particular survey, it seems to me the labor market's okay. So the jobless claims numbers are weekly, and so they're fresher. And we did see in late September and early October, the jobless claims numbers materially jump as people were not able to work. And we've seen in the last two weeks, first the number came back to where it was before the hurricanes. And actually the number we got out yesterday is now actually a bit below, if memory serves. I would say we're not seeing evidence of some sudden turn lower in other metrics of the job market. And so overall, we're feeling okay. We think we can look through this. I think that's more or less what the market is doing. I saw the bond yields initially really fall on this, and the bond yields have since reversed, and stocks are actually up, not down.

You've kind of answered the question I was going to ask, but maybe guide the listeners through how do you, as an economist, take a look at a report. We were actually talking about this, I think, when we taped a podcast last week. By the way, you should go back and listen to it. Please subscribe, click «like» on whatever platform you're either listening to or watching. Give us a five-star review. Eric is used to getting five-star reviews on all of his work back to when he was in elementary school, so don't hurt his feelings. But we were talking about the idea that we knew these hurricanes had happened, and whenever you get these big natural disasters — typically around this time of year — that just makes a mess of the numbers. So how do you and the listeners take a report like this — which again is so critical because we're right in front of the election, and we'll get to that in a minute — and after the Fed first rate cut, one of the big things we're looking at is employment. So we're looking to see in the months just after that first Fed rate cut, because the first Fed rate cut is saying there's some weakness in the economy. We're worried about employment. So we want to start to see employment pick back up. But then boom, the second report we get after the first Fed rate cut is just one that really doesn't give us the headline number that helps us understand what's really going on. You've already said you just dig deeper into the numbers, and you talked about some of the numbers you dig into. But is it always a case that you're looking out over longer term periods? Because markets move to this, but you as an economist you’re looking at it a little bit differently, right?

Yeah, I guess so. I suppose you zoom in and you zoom out at the same time. So the zooming in is to say, well, let's see what we can observe on the sector mix or let's see what we can observe in the regional mix, which we won't get till next month. Let's focus on those things, indeed, including metrics like «unable to work due to storms» and the number of workers on strike for the month and so on. And so we're limited in our ability to do some of those things. But based on what we can see here, it seems reasonably plausible that the weakness on evidence is specific to the hurricanes and strikes and not to the economy suddenly keeling over. So that's the zooming in. The zooming out is to say, well, we can look at other economic indicators. And yeah, the activity ones are all going to be a little bit messed up for October, honestly. But we have other metrics that are maybe more forward-looking. We can look at ISM metrics and we can look at other surveys of expectations and consumer confidence and things like that. And for the most part, those are holding up fine, if not getting a little bit stronger. The ISM manufacturing came out 19 minutes ago, as we're recording this, Dave. That'll give people a bit of a timestamp, I guess. It was a hair weaker on the headline level. But you know what? The new order side moved up and the employment component, while not great, moved up. I don't see any sudden collapse. I just am profoundly skeptical that anything too new is happening in the labor market here. And then in terms of relevance, it's a tricky thing in the sense that the US economy is now, we think, in the approximate realm of operating at its potential. You don't want weakness, obviously. You wouldn't want an half a million person job creation in a month either. That would be threatening to overheat. And so there is a sweet spot somewhere in the middle. I think the sweet spot has grown a little bit over the last several months. I think that, as the economy settled down over the summer, there's a bit more leeway, and 200,000 jobs would have been good, too, not just 100,000. And so that's adding to the mix, too. But at the end of the day, I think that if we X this out, we're probably to see something that looks pretty normal. And of course, the November numbers, Dave, will then be distorted, presumably in the opposite direction as people come flooding back to work. And so that needs to be heated. But at least now we have an approximate sense. So we can say — I shouldn't be overly precise — but it might have come in 140,000 jobs below normal. And so let's go see if next month is going to be maybe closer to 300,000. And that would then confirm the thesis that the economy is generating about 150,000 jobs a month. So that'll be important to see as well. And I guess the other thought is — you mentioned that on the top of your rather multifaceted question — we can look at historical data, too. So for instance, historically, the average hurricane would have subtracted about 50,000 from payrolls. Now, this was more than that, we think. But these were two big hurricanes. When I saw the Bloomberg consensus come in for about 100,000, 110,000 jobs — 150 might have normal guess — so the market was pricing in a fairly normal amount. I thought immediately, and I wrote this in our Macro Memo last Monday, I'll take the under, which is to say that it seemed to me more likely that we were going to undershoot that. And so we did. It's nice psychologically that we didn't get a negative. I mean, I don't think it would have been relevant in the sense that we get it back next month, but that could have induced a little bit of just psychological concern, and we didn't quite hit that, which is good.

We've been talking about, over the last couple of months, good news in the economy — better growth numbers, better employment numbers. And that we'd shifted from where we were before, where markets almost interpreted bad news as good news. In other words, that softness was going to help get inflation under control and ultimately lead to lower interest rates. And so you needed the bad news to create the good news down the road. Then we seem to shift to where good news was good news. So now we start lowering rates. We've got inflation. It looks like bottled up a little bit. And we can talk about that. Good news is good news. We'll talk about some of the news we got on inflation and other things yesterday, but now the good news yesterday was interpreted as bad news. Market had a bad day. Today, seemingly bad news is good news. So what's happened to just change that market psychology? Or is this, again, just what makes a market? There's buyers and sellers, and they've got to come to an agreement. And who knows exactly where sentiment is going to be any given day, which is what makes it fun and why we're not all billionaires.

Right. Yeah. I do think there's some just general jitteriness here. We have an election coming up in just a few days in the US, and so I suspect some is that. I suspect some of today's, at least as this reading, stock market enthusiasm is some pretty good corporate earnings reports, too. So there's all sorts of things that are swirling. But to the extent some of that is related to the economic data, I think that's probably right. So not to rehash the entire sequence here, but indeed, the market wasn't sure. Are we going to get Fed rate cuts? Are we not? Are we going to get anything of significance? At some point there was a desire for weaker data just so we could get those and take away the pain high rates. And so that was maybe the dominant thinking over a fair swath of the summer. I would say then, going into the very late summer, but really September in particular, suddenly then we were back to the Fed cut 50 basis points. Everybody felt pretty amazing about that. There were lots and lots of rate cutting priced in. We didn't need to get any more rate cutting priced in. And so the market was just celebrating when the data was good. And of course, since then, we've seen the market price out a couple of rate cuts by the middle of next year and no longer quite so convinced in some of those fronts. And so I think it's back to «we don't want the data to be too good or else the rate cuts are gone». And it's tricky operating in a high-rate environment. So there's a degree of fickleness here. Again, I would say, moderately good data is good. That's the consistent feature here. Bad data is bad. That's consistent. Really, the only point of debate is when it's really strong. Is that good or bad? I guess it depends on the context to some extent. We're no longer in quite as simple an era as we were a month ago as when even really good data was viewed in a straightforward way.

This is why you're not allowed to take a day off because things are moving around so much. Yesterday, PCE. So a quick refresh on PCE and then what came out. With everything we've talked about, how does that affect where you think the Fed is going to move in the short term? Then you already talked about the longer term into next year.

Yeah. Well, so the PCE is — I guess — personal consumption expenditure. I should know the acronym better. In any event, it's a combination of monthly income, monthly spending, monthly inflation metrics that comes out of the US. In theory, although I think the CPI does matter a lot, the PCE deflator, which is a price index, is the Fed's favorite inflation metric. So we should pay some attention. Do note that just based on how it's constructed, it does tend to run a little bit cooler on average than CPI. So the fact that it's a bit cooler is not necessarily an amazing news signal. It's just how it goes. And so on the activity side, it was pretty strong. So we had income up 0.3% as expected, but more than the prior month. On the spending side, we saw a good increase. It was a 0.5% increase. This is for one month. So I mean, not to say that you sustained that twelve times in a row, but that's 6%-plus annualized growth rate. So that looked pretty good as well. And there were some upward revisions along the way. And so the activity side looks strong. And again, you were saying maybe that's why the market didn't feel so good because it's too strong. And perhaps at the margin, you wouldn't sustain that. And then on the price side, so the PC deflator was mostly as expected, but I guess you could say it was a little bit harder than we would like it to be. So the net result of all the metrics was, okay, there's a little bit of heat here and it does further complicate the Fed outlook and that sort of thing. In terms of the Fed outlook, it's immediately in front of us. It's next Thursday, I do believe. And so I think the Fed can still cut. It seems to me a 25-basis point is probably the right size. At one point, there were debates about 50. I think those debates are mostly gone. I guess there's a little bit of a debate as to «could they pause?». And of course, it's so intriguing the timing right around an election and all that thing. But my suspicion is that they will be able to deliver a 25-basis point rate cut. And the value of a measure of consistency and predictability is considerable. And even if you had a moment's thought as a central banker that like, well, it’s not totally clear, I'd say you need more evidence to stop an easing cycle after one rate cut. I think they can probably pull that 25-basis point cut off. But it does look as though it might be a slightly slower journey just as the economy shows, we think, some strength, notwithstanding hurricane distortions.

Eric, just in front of next week's election, we should probably just get some thoughts — and we'll keep them general; we'll get back likely next week. We'll get together again and then do a recap because we may have a winner at that point, or at least a fairly good indication of who the winner will be and how Congress will be set up, the Senate and House of Representatives. We'll have an idea of whether we have one party in full control or split government. And then we have an idea of the policy direction of each administration, so we can start to make some observations about how things may play out given the current backdrop. But as we head into the election — I know you were doing some writing and thinking yesterday — what's on your mind as Americans go to the polls next Tuesday?

Right. I was just fervently clicking the probability, to make sure I gave you a good fresh number here. So I mean, certainly the theme of the last month has been that you've gone from a very, very close race to one that seems to modestly favor Trump as the more likely winner. So this one very much could end either way. And let's appreciate that polls have not no meaning, but they have less meaning they used to. Response rates are so low and there are biases and all sorts of things in there that render the outcome rather uncertain. And so it's a close race, and you won't find too many things arguing that anybody's got more than a 60 or 63% type chance of winning. So Trump does seem to be a little bit ahead. I was just noticing in the last two days that it’s tightening up a little bit again. Now, of course, a lot of people have already voted early, and it gets very messy. But I would still say, just reading the numbers, it does appear as though Trump is a slight favorite. Harris, though, still has a very real chance, and it should not be a surprise at all if either one wins. Sorry not to have a great slam dunk guaranteed answer for you, but that's where it stands right now. We likely won't know with precision on Tuesday or Wednesday. It may take a little bit longer to find out. I'm hoping that we will have a sense — though it's also not quite certain — for the contours of Congress, because one thing we said is that certainly the presidential winner matters on any number of fronts, but it is arguably economically as important whether there is a congressional sweep and you get one party aligned with the President, and that would be just a scenario in which you'd expect more legislation to happen and more money to be spent or tax cuts to be delivered or something like that. So Congressional alignment would be a scenario that would be more supportive of the economy in the short run. Divided Congress would be less supportive in the short run. And then in general, the very loose math we've done is that we think in the very short term, neither president would be enormously supportive to growth. We don't have either one just boosting the economy massively. Each has elements of their campaign that would hurt growth, potentially. The Trump tariffs and immigration plans would slow growth. The tax cuts, the deregulation would pick it up. We have a roughly neutral takeaway when we add all that up. There's a lot of conjecture and guessing in there. On the Harris side, you have spending increases which support growth. But you have tax hikes, which hurt it. A number of other more subtle things. We have her as having a slightly negative impact on short term growth, but the difference is pretty small, and within the margin of error. I wouldn't expect one to be the economic savior and the other to do the opposite. I think it's small effects there. It is clear from a market perspective that the stock market likes Trump. They like the Republican platform. They just like tax cuts and deregulation. That's where the priority lies. We could debate whether or not that's the right interpretation, but that is the interpretation. I don't think the market's interpretation is going to change in the next week. And so if there were to be a Trump win, I would think the stock market could go up a little more. And if there were to be a Harris win, maybe not. I would emphasize a fair chunk of that is already priced in. I would emphasize that it's actually pretty rare for the market to make big, big moves right after an election result. And it's pretty rare that the presidential outcome is the dominant market theme for that matter. So I wouldn't suggest that that's the only thing by any means we need to think about. But those would be some very, very broad strokes as to how the market could interpret things. Trump would be higher yields, maybe. Harris could be lower yields. Trump could be a stronger dollar. Harris, a slightly weaker dollar. But these are at the margin type thoughts. And again, maybe not the central thesis for our own investment decisions for the next year, in large part because it's so hard to predict in advance. Even if you could nail all this down, the betting markets aren't sure. And I don't think we have a particular inside track to the outcome that's superior than the betting markets. I'm not sure really anybody does at this point in time. We've parsed through all the models you can look at. I was just looking at what it's called now, some 13 question list. People have all sorts of very interesting models, but they're not perfect, and they disagree with each other in significant part. I think we're left, like everybody else, waiting for the outcome, and we're hoping it's a time where there'll be a bit more clarity, and then we can get on with our lives and get back to normal economic activity and market activity.

Yeah. With the structure of the US election, with the way you've really got individual state elections, and it's «winner take all» in that particular state. And you're running within the margin of error in seven different states. And as you reference polling, if we look at the last several elections — not just presidential, but the elections in between in '18 and '22 — the polling has just really missed the mark relative to where they had gotten to earlier in the millennium. Anyone who thinks they've got a real handle on this, either they tapped into some information that we don't know or they're just placing a bet. What I talk about when I'm doing different presentations this time of year in an election year, is that generally investment markets like divided government over one party having complete control. And that's the theme that you see overall in all of your work, right?

Yeah, that's right. It just limits the excesses that any one party might pursue and allows for, I guess, a sober second thought before things to get done. And corporations, they do like tax cuts and things like that. So let's not totally dodge that part. But they do like some measure of predictability as well. And a regulatory environment that's consistent and fair and that doesn't change all that much from one year to the next. And so you're quite right. Divided congresses can be perfectly fine from that perspective. It's such a tricky thing. Even when we talk about candidate X might send the economy a little bit faster in the short run, you keep in mind, what we're talking about is essentially the government borrowing more money under that candidate and then spending it. It's a higher debt, and you got to service that later, and maybe the bond market doesn't like it so much. So it's profoundly nuanced all the way through. So not to say we throw up our hands completely and say none of it matters, but I would say that it's not quite as black and white from an economic and market perspective as you might imagine. I see people coming at it and thinking they've got an edge. And Trump was underestimated the last two elections, and so therefore he's more likely. Maybe, but equally, that wasn't the way it played in the midterm election last time. And in fact, the Republicans were overestimated. And of course, the pollsters are not blind to this. They are actively adjusting their forecast based on their prior misses. And so not to say that anyone is perfect in this, but I think you just have to accept that it's a highly uncertain outcome. And I would pay deference to the betting markets and say, well, Trump probably has a slight advantage here. But if you don't think a 40 or 43% chance can happen, those things happen 43% of the time, I do believe. And so we really can have either outcome here.

That's right. If you understand baseball, this is what baseball can teach you, right? Because the best baseball teams win at a slightly into a 60 to 65% clip. And that, by its very definition, means they lose 35 to 40% of the time. So quite regularly during the regular season of baseball, which is 162 games, the very best team loses to the very worst team on any given night. And so it's not like it's 100 to zero, where you know that, which is more of a soccer or football situation. You get the odd upsets here and there, but generally, the much better team beats the much worse team more often. So baseball is life, Eric.

Okay. I thought you were going to say something along the lines of a 300 hitter is an all-star. If one candidate gets 30% of the vote, they should feel really good about themselves. I'm not sure if that's the right interpretation.

Yeah. So maybe baseball doesn't teach us that much. That's where it teaches us about failure. You can fail a lot and still be great in baseball.

That's what my teachers told me, Dave.

Oh, very good. I think one of the things that people need, as I listened to what you were saying earlier about looking at the policies that have been put out by both candidate and what you would expect both parties to do, given divided government or government aligned one way or the other, it's interesting that the election is so divisive and the portrayal is that these parties are so far apart. There are differences in the way that they want to get at economic growth and economic stability and managing inflation and all these things. But as you do your analysis in terms of what both parties are going to do, it ends up pretty much in the same spot.

Yeah, from an economic standpoint.

From an investment perspective, I think that's what you want to take away from this. That there's lots of noise around what's going on down there, lots of vitriol around, «I'm going to do this, I'm going to do that». That's a terrible policy. My policy is all of this stuff. But when you shake it all out. And there's going to be some short-term noise, let's not understate it, around what could happen. One party wins, the other party wins. There's a lot of emotions around more recent US elections. But when we look at it from an investment perspective, the world goes on. The companies that you're investing in, if you're buying stocks, are looking at both policies. They're going to adapt to those policies. Smart people are running those companies, so they're going to continue to make money. Some will get a little bit of favor, others won't, but that's at the margins. And then in terms of what happens in the bond market, that is a big, huge, beautiful world of trillions of dollars of bonds all over the place in different types of credit, from government to high-grade corporate to high-yield, everything. And it's a deep, deep market. Again, you may see a little bit of a shock short term, but overall, if the policies end up in the same spot, where the bond market was going to go is where the bond market was going to go. It's certainly something. I don't want to downplay the emotion. I know a lot of Canadians are anxious about what's happening south of the border. Certainly, always has an impact with what's happening here. But at the same time, if we're thinking about it from an investment perspective — and that's what we want to talk about on this podcast — generally, elections are overrated in terms of the impact it has on a diversified portfolio.

Yep, exactly. Markets have historically gone up remarkably similarly under Democrat and Republican regimes over time. The one thing I always remind myself is this is for the next four years, and then it changes again. If anybody made some bad policies, those policies have every opportunity to be changed. We iterate from there. In the end, you can look through an awful lot so long as the business fundamentals are good.

Well, Eric, we covered a lot of ground. I continue to add layers and different offshoots on all the questions I asked you. After being up all night, handing out candy, you still managed it with your normal dexterity and plump and all the things we would say about Canada's hardest working economist, Eric. Thanks for joining us. And we'll see what happens next week, and we'll get you on if there's anything important for the listeners to hear.

That sounds great. Thanks, Dave. Bye, everybody.