Hello and welcome to The Download. I'm your host, Dave Richardson. And we have Canada's hardest working economists with us because the economy is on people's minds right now. And this is, I guess, a repent for me as I just took two weeks of vacation. I always feel guilty when I take a vacation. Of course, you never do because you work 24 or 25 hours a day, I think we've established. Eight days a week, as the old Beatles song used to say.

Thirteen months a year, Dave.

I didn't realize that. That's new information. I hope all the listeners appreciate that, throwing in that extra month. But I've done nothing for two weeks, although I have paid attention to what's going on. Eric, is it ever going to slow down? I don't recall many periods like this, but maybe I'm old and forgetful that it's always like this. Does it feel like an unusual period to you?

Oh, it sure does. I mean, don't get me wrong, we've had other inflection points and other momentous times before. You think of the pandemic and the global financial crisis and other events. And in some ways this one is actually less momentous with the emphasis on the «so far» part of that comment, because, of course, we haven't actually seen the economy fall out of bed and we haven't seen markets have any great sustained trouble. And we may not. We'll talk about that in a moment. But in terms of just the number of things being thrown at the economy and what policymakers are up to with a particular emphasis on the US, of course, it is pretty remarkable. So I would say it's as busy as we've been, even if the economy so far is only showing little hints and bits of distress so far.

Let me tell you how crazy it got. I miscalculated my daughter's allowance while we were on vacation, and she fired me. She disowned me. It's gotten that bad. That takes us into a good conversation about jobs. And we had the US jobs report out, and then a lot of news around jobs. But I think at the core of that report and the adjustments on the previous two months is that the economy is slowing. And I think as we go through all of the different numbers, we're going to see some softness along with a little bit of heat in the area that we don't want. Why don't we start with the jobs report? You got that. What were your thoughts when you saw that number? Certainly, the markets didn't like it, but then it shrugged it off and just went higher in the last couple of days. But when you first saw that report, what were your thoughts, Eric?

It was certainly weak. Often we can say, but this part was good. And there's always a couple of little exceptions, but this was pretty thoroughly weak. And so the headline wasn't really where the action was, as I'm sure you know, Dave. And so the headline was itself a bit soft. So there were 73,000 new jobs created in the month of July. The consensus had been for 105,000. And so it was a moderate miss. But the narrative going into this had been, hey, the labor market is proving surprisingly resilient, and the original estimate of the June numbers, the prior month had been really strong, actually. And we saw just about the biggest revisions we've seen. I should have looked and figured out when the revisions were last this big. But in any event, certainly one of the big ones. Maybe you know, Dave.

1968. You were not even alive. I was. And I remember it clearly as a two-year-old. It was devastating to see that week of jobs report. My prospects for employment at two years old were devastated by the weak economy then.

Okay, since 1968. «In a while» still holds. Maybe that was an understatement. And so we had a big down revision is the short of it. And so the prior three months, which they revise every month on a rolling basis, 258,000 fewer jobs had been created over that three-month span than had been estimated just a month before. Sorry, the prior two months, I should say. And so if you do the average of now the most recent three months of fresh data that exists, it's only been 35,000 jobs created per month on average over that three-month period. Suddenly that paints things quite differently. We've been sitting in this very comfortable triple digit land where job creation appeared to be, I would say, easily keeping up with population growth and this sort of things. In fact, if anything, it was maybe running a little bit ahead just because there's actually very little population growth in the US right now, now that the immigration spigot has been turned off. And suddenly it's only 35,000, and that's quite weak. That is very, very weak. I think it is still relevant to make the observation, there is very little immigration right now in a way that I would say the run rate, the number of jobs you need per month to, in theory, keep a steady unemployment rate isn't that high. It's probably only 50 to 100,000. So it's not that this has been a radical miss on that. But it is below. It's a lot weaker than we thought it was or a lot weaker than we're used to. The unemployment rate did go up, as you would imagine. It's now up to 4.2%. Less of an increase than you might have thought. There was actually a drop in labor force participation, people looking for jobs, essentially. And so it was actually a fairly tame increase, but it was an increase nevertheless, still in a familiar range. In fact, you go back over the last year, and I think I can say this, the unemployment rate has varied between 4.0 and 4.2%, essentially. It's been bouncing back and forth. This is the upper end of that incredibly tiny range, but it's still in the range for the moment. But seemingly the unemployment rate is trending higher. Very clearly, the rate of job creation is slowing. I don't want to overstate the doom and gloom in the sense that we do also look at the ADP employment survey, which has been weaker, but still says there is some job creation. Weekly jobless claims, which has actually been really good recently. So it doesn't seem like a ton of people are being laid off. It seems more like it's hard to get a job if you're not presently in the labor force, might be the way to think about it, which is still concerning, but maybe one notch lower on the concerning scale. And so not a labor market that's collapsing, but certainly one, as you said, that is consistent with just some economic deceleration, less healthy conditions. And you might even say you throw in those twin ISM numbers that have also come out in the last few days that are also a bit soft. The ISM manufacturing is down to 48. That's consistent with contraction. The services equivalent is down to 50.1, which is 0.2 above contraction. And so I'm not seeing a lot of strength there. We have economic data change indices. City Bank runs one that shows the data changes have been more negative than positive; completely consistent with what I've just said. So there is something of an economic deceleration here, still fairly slight. We're looking at high frequency Dallas Fed weekly economic conditions. No great deviation, but we are definitely decelerating, not accelerating. And of course, the elephant in the room would be, presumably, tariffs are a driver, at least in part, of this. And even though tariffs are meant to perhaps protect and even embolden US manufacturing, actually, manufacturing sector lost 11,000 jobs as well in July.

Yeah. And as you say, because you saw the unemployment rate tick up so little, and you've had such a massive shift in immigration in the US, if we're talking about the US, and the Canadian numbers still aren't out. They're not working 13 months a year on generating those numbers, but they'll be out this Friday. So we'll see what's going on in Canada because we have, not to the extreme, but a similar dynamic happening here. So you don't need to add as many jobs to keep unemployment level. So we're going to have to get used to that adjustment. But anyway, you look at it, you look at your manufacturing, you look at these jobs numbers, you even look at the GDP report, which also came out last week. The second quarter number was good, but the first quarter number was bad. And as we explained on a podcast earlier this year around the bad first quarter number, well, some of that was math, and the good number this quarter was math as well. If we go back, we won't go into too much of the details of all the different figures, for those of you who took high school economics or university economics and you remember «this plus this plus this» and the brackets, «this minus this» and how that math works out. But you look at the first six months of the year, anyways, with the good and the bad math working for us and against us, the growth is not spectacular in the US. And then you look at the hot number, which is also bad news. And that's inflation. What did you see there, Eric, in those numbers?

Yeah, that's right. So this is US data still and the US inflation number was hotter. This is for the month of June. We've been waiting for some heat from tariffs, and it's taken its sweet time. And in fact, if anything, the spring was defined by surprisingly tame inflation, to be perfectly frank. So we were sitting on fairly soft numbers earlier in the year. But that June data did, I think, start to pretty clearly show some extra inflation. It's not just that the monthly print was a bit higher. It is that when you dig into it, it was core goods, which is, of course, the tradable thing, at least the thing being hit by tariffs that is tradable. And we did see pretty clearly some appliance inflation picking up and toy inflation and recreational goods and a lot of these things that come from China where the official tariff rate is 30% and the effective rate is closer to 40%. And so it does seem as though we are getting at least a hint of extra inflation. And that's consistent with what you're hearing, what American companies say very often, which is they were saying, listen, the pressures are getting to us. Of course, they're under pressure not to raise prices as per White House edict. And so I think this all showing up a bit later than maybe conventional theory would have suggested. And companies, to their credit and helping to explain some of those GDP distortions you cryptically referenced earlier, we did have inventory builds earlier in the year. And the inventory is now being deployed in a way that they're able to hold those lower prices for longer than you might have initially thought, but running through that now in a way that the companies are suggesting—I shouldn't suggest all companies but a number are—that July, August, September could be prominent months where you do start to see those prices go up more. And we also look, as you may know, at some real-time inflation metrics that are daily internet trawling bots, pulling data off of websites, and it certainly shows for the US some acceleration recently. So that's the high-level thought. And then specifically, it does show some in those tradable goods departments that you would expect to see a particular effect. So we are budgeting for more inflation. I would emphasize, for all of us traumatized by the inflation of a few years ago, it isn't on that order. We're talking about—and this is very theoretical and there could be misses either way here—but we think there's an extra percentage point, maybe a bit more, but something like a percentage point of higher prices than otherwise because of these tariffs. Instead of a 2.5% inflation rate, maybe it's a 3.5% at its peak, and then it does settle back down, not giving the price increase back, but the rate of increase doesn't have to stay higher forever. This is not ideal. It does complicate the life of the Fed, it does make everybody 1% poorer unless your wages have managed to make a special effort to keep up with that. But it isn't the 8, 9, 10% that the supply chain and pandemic shock and all the stimulus brought. It's not on that order of magnitude, nevertheless undesirable, nevertheless complicating the life of central banks who are going to deal with some economic weakness and some extra inflation, and you get pulled in both directions. And the level of uncertainty is still high enough. We're starting to see bits and pieces of it, but it's still high enough that you've had a Fed particular that's been on the sidelines saying we need greater clarity on the policy because, of course, tariffs have been moving rather substantially even in the last week, and it's hard to have much visibility as to where these things will land six months or two years from now, which is the time frame they're meant to be operating on because monetary policy operates with a lag. And then also just some uncertainty over what the exact damage will be. And so you've got a Fed that probably could be cutting if they had perfect clarity, but doesn't quite feel comfortable. Though anyway, that's its own discussion. And it wouldn't surprise me if we did get that cut before too long.

Yeah. But this is where, as a child of the '70s, I have a hard time throwing this word out. We never like to exaggerate when we're going to throw this term out, but if I've got inflation rising, I've got growth slowing and weak employment, that starts to sound like stagflation, which was the big fear that you had coming out of what tariffs could do to the US economy. So we get all this data the last couple of weeks, and everyone consumes it. We culminate on Friday with the jobs report and the revisions, which really start to shake people to say, wow, maybe we are slowing down here. And the market comes and sells off a few hundred points, but everyone takes the weekend and comes back on Monday and the market just picks right back up where it was and just shrugs it off and says, hey, now this means there's more space for the Federal Reserve to lower interest rates. Off the jobs report on Friday, we saw bond yields come down right across the curve. Then on Monday, when the stock market went back up, the bond market held on to those gains or lower yields. I mean, as an investor or an economist, where do we go from here? What the market seems to be saying every time we go through a little bit of uncertainty, if I look out a year from now, that's generally what markets do. And again, this is why we do this podcast. We hope you subscribe to it. If you're on YouTube and you're watching us on video, love you to subscribe and follow us there and give us reviews and let us know what you want us to talk about more or less as we go through this. But this is what's so important and one of the lessons—whether we're talking to you about economics, because we need to have at the core, we need to understand what's going on in the economy because an economy that's growing with lower interest rates, low inflation, well, that's when asset values can increase and that's what we mean, companies functioning in growing economies generate more profit, so stocks go up in theory. So the economy, and we're talking about some lagging indicators like employment, current indicators like retail sales, indicators for what's happening in the future, which is what yields in the stock market does. The stock market, to me anyways, seems to be sitting here and has for a while as it shrugs off these numbers, and is looking out 12 months and saying, you know what? Twelve months from now, we think the economy is going to be growing more than it's growing right now, and we think interest rates are going to be lower. And is that not how it's shaping up? Because that one big thing sitting, I think, in the background is the tariffs and inflation. So with all that, what say you to everything I've just talked about there?

Oh, I was meant to be listening. No, I'm just joking. Excellent comments. There is so much to say. In recognizing I am the economist and not the controller of all of the elements of what goes into making market decisions, from an economic standpoint, it does seem as though markets are perhaps being a bit glib and perhaps not paying quite enough attention to some of the damage that may be on its way. I don't want to totally discount the optimistic attitude just because, do keep in mind, we had some tax cuts that came through and that's relevant. And the CapEx inducement of accelerated depreciation is significant, and there are other things that are in the mix here. And it's fair to say, even though maybe the tariffs have come in a little bit hotter than expected—worse, that is to say—so far, the damage hasn't been quite as bad as the theory would say, though, stay tuned. We're going to see whether it gets worse or reaches that point later. But I can half understand some of the attitude. When we do our forecasting, we're still expecting quite meager growth over the second half of this year and still somewhat diminished early next year. So not a recession, though, of course, this is a probabilistic world, and the chance of a recession is, of course, higher than it would normally be. But we're still pretty comfortable saying we think that the US economy can grow, just not grow all that well over the next several quarters. We do have, though, over the latter three quarters of 2026, most of 2026, a US economy that can probably pick up somewhat. And we think that the tariff shock will be substantially absorbed. And we have tax cuts that click in and start of 2026 and could get the economy moving a little bit more quickly. And so it really comes down to our markets willing to hold their nose for a year and say, we don't care about that because we know that there is some room for growth later. And so I have some sympathy for that, but equally, it does seem as though there are some challenges in the immediate future that probably do need to be discounted a little bit by markets.

Yeah. And then if you look forward. You're sitting in the Fed reserve chair, and or you're on that committee and you're looking at rates, I think you already alluded to it, but is that now we're starting to see the need to lower rates in the US?

There's all sorts happening here and there's a politicization, and I'll try to remember to get to that at the end of my comment here, but you could even say, just in the context of the last few weeks where there was a Fed decision to keep the policy rate unchanged, and then the job numbers came out shortly thereafter and radically revised what we thought we knew about the economy. You could have said if the numbers had come in true to form initially and had revealed that indeed, hiring had been quite meager over the prior several months, you maybe could have argued that the Fed would have cut or at least would have seriously considered cutting at its latest decision. So it just didn't have that data at the time. It had looked like hiring was going quite well. So markets are of the view that there is now a pretty clear probability of a rate cut at the next decision in September. I'm sympathetic to that. I think that would probably be a reasonable choice. It's not a guaranteed outcome because they are still juggling that higher inflation versus less growth and we'll see which one dominates going forward. But at this juncture, I would say you probably could get away with a bit of cutting. And keep in mind, it's a pretty lofty policy rate in the US, right? It's 4.25, 4.5%, pretty out of line with other countries. In fairness, their inflation is higher, and there are a few other motivators for that, but there's room to cut without suddenly being outright stimulative, maybe would be the angle. So I think there is going to be some room to cut. And then, of course, there's this extra pressure, this political pressure to cut. Of course, the White House is very keen for a lot of cutting. They've talked about 300 basis points of rate cuts, and I'm not budgeting for that, per se. It would take a lot for the White House to gain complete control over the Fed, I think.

Before we get into the politics of it, because we don't like to get political on this podcast, but I think we're going to have to here because of what's happened. But I'm going to start coming at it from a different angle. And don't worry, listeners, we will get there. And don't misinterpret the question I'm asking, please. But when we look at those jobs numbers and we've talked about this several times, the discrepancy between the two different jobs reports that we get within the same month. When we look at consistently over the time that I've been tracking this—and I've tracked this for three decades now; you've tracked it for three decades as well—the idea that the largest economy in the world. We do a monthly podcast in line with this jobs report because this number is so important in terms of determining interest rate policy, what's happening in the bond market, what's happening in the stock market, companies making decisions every day around employment and what they're going to pay. These are very important numbers to have them that far off all the time. How is that possible, Eric? Or a quick answer. This is why you work 13 months a year because they need more economists to actually be looking at this. But it just seems unbelievable that the numbers could be that far off. And this is not just a one-time thing. Month after month, year after year, you see these numbers all over the place.

There's so many different angles to it. The bottom line is this was a doosy of a revision. And it was notable—and you brought this to the fore—that we haven't seen one that big since 1968. So it's not like it's happening all the time, and it's not as though it only happens now and never used to happen. I guess it happened in 1968 as well. But it does certainly feel as though there are very consequential revisions that have been taking place. It really changes the interpretation. The BLS, I gather their funding is down 22% or something, I saw recently. I think there are some challenges. Some challenges are just that survey response rates are down. The less popular of the two employment surveys is one where they're literally calling households. I don't answer too many of those unknown numbers myself. So that has got to limit things.

Or sending it out in the mail.

That's right. And the corporations, I'm sure, are a little bit better with the payroll survey in terms of responding. But similarly, they not all look favorably upon the government intruding on their business, and they're just very busy, I think, and so on. And so the quality is not great. And then just similarly—and this is maybe more in defense of the fundamental difficulty of getting this right—we're just talking about the change in the level of employment in a single month and keep in mind, there's several hundred million workers in the US, and we're getting mad when they missed it by 100,000 in a month. You do the math on that. Is it 0.1% or 0.05%? It's actually pretty remarkably small. And it's amazing that they can come even close to getting a sense for what happened. So it's all sorts of different angles there. But yeah, we do really rely on this thing. And then it's a little bit crazy that it gets revised so much. I do think it's probably the ideal way to look at it is to give a heavy weight to the payroll number, but to give a little weight to the household survey, which is even choppier, but it has its own information amid the noise and to give a pretty good weight to jobless claims, which actually aren't that choppy and really do tell you something. And they're, by the way, looking okay. And to give a little weight to the ADP survey, which in theory is better. I can't quite say that it has a bigger sample size. This private sector payroll company actually surveys several times more people than the BLS does. Now, it may not be perfectly distributed across the country. It's a function of their own business interests. And so it's not necessarily better, but it is a really meaty source of data. And so you're probably wise to smoosh all those four things together, do a bit of a moving average three-month thing. And that's what we try to do. And the takeaway is that labor market is softening. Hard to say. I don't think it's collapsing at this juncture. And so it's a tough situation. And of course, the head of the BLS lost her job recently. And it's hard to say whether that's going to help or not. You'd think that there's certainly light of fire under some people, but equally not clear there was any misdeed done there.

Yeah. And again, this is where the politics come in, and we do want to get to that. But again, it just seems, for someone to lose that job, maybe this has been something that's been going on in the background, and they've been asking for this to be revised. But again, this has been going on not for months, but decades in some ways, or certainly the last two decades, where we've got very good technology where we can very quickly get responses or do checks in. That's certainly the last three or four years anyways. You should have improved it. But it doesn't seem like the way to inspire confidence in the process—and this is where I'll come specifically to you and the other economists that you talk to—is to let that person go with the public statement, which is, I just don't like the number, bye. How are economists reacting to this? And then you mentioned some of the additional pressure. I'm not going to say that Trump is the only president that's ever jawbone the Federal Reserve and suggested that rates should be lower or higher. But this is certainly being done at a different level. Are you feeling still a sense of confidence, and your peers and colleagues, are they feeling a sense of confidence that the numbers we're getting, the reports we’re getting are clean and things that you can actually take and interpret on the surface and make decisions and make forecast off of?

Yeah. I would say our assumption has been that the data is at least unbiased. It's not politicized, if that makes sense. I think maybe there's some concern as to where this might go as we see these unconventional actions taken. I would say unbiased, but noisy. And so as much as we do tend to revolve this podcast around the payrolls report, you'll hear me introduce caveats, and we cast a wide net, and we try to get a very holistic, broad sense of what's going on, because I don't have a perfect confidence in any one indicator. They're all funny in their own ways, and the GDP numbers, we talked about those, and the CPI numbers get their distortions, and the payrolls get revised substantially and repeatedly, not just next month, but of course, you get the semi-annual revision and you get the five-year revision, and they're cross-checking against state-level data and things. I think it's all legitimate, But nevertheless, you wouldn't want to invest or make decisions on the basis of one of these things. You want a broader sense. So we like to look at data change indices that are looking at a lot of things or surprise indices that look at a lot of things as well. We like to look at sources that aren't just—and this isn't a statement about the government—but not just from the government. We like to see that's why the ISM numbers are nice and some of the purchasing manager indices is just a different way of doing things, if that makes sense. And one of the beautiful things that's come up in the last five years or so is that our ability to tap non-conventional data is really gone through the roof. The pandemic spurred that forward as we were all trying to figure out what was happening in March of 2020 in real-time. But you want to see restaurant reservations? They're here from OpenTable. You want to see flight bookings and flights, that's over here. You can see all sorts of things. So we look at all of that. Our judgment would be slight deceleration in the economy so far, probably a more notable one in the months ahead, probably not all the way to recession. But to be honest, at that point, you're getting into forecasting, which is then not certainly different from data, but it's its own separate exercise.

Yeah. And as we always say, it's only half joking about how hard you work because you are wrapping your arms around a lot of data. And it is important for listeners to understand that when someone like you is on talking about this, or we have Stu Kedwell on, who's going to be a little bit more stock-market focused when we have him on in the next episode of the podcast, as you say, you're casting a wide net. As you say, what's really important is, A, not only do you have data sources because of the advent of technology and new sources becoming available to get access to more data to crunch, and to understand big picture, what's happening. You now also have the advent of artificial intelligence, you're going to be able to cast an even broader net and have that help you do those analytics and to start to see a clearer picture of what's been happening, what's happening now, and where you think things are going to happen. So again, a lot of noise, and there is that politicization of some of the data, as some will argue. But ultimately, when you take a step back and you think about the world we're living in, there's more information from more sources that you can get your hands on. The important thing is that you're taking advantage of as much of that information as you can. And the technology that's going to come is going to make it even easier for you to do that. It doesn't dismiss how important these reports are, but you as an economist and as an asset manager, a professional investment manager, has more tools and more resources than they've ever had in more consumable forms than they've ever had to help make forecasts and calls and make better investment decisions.

Yep, absolutely. You should see the AI push in particular that is happening internally. It is a sight to behold. I was having a conversation just this morning about that with one of our key stakeholders there, and we're pushing as hard as we can down that path. It just makes our life easier. Some of it is really just time saving. Some of it is doing more sophisticated things and natural language models and things we just couldn't do. Some of it is even just letting us be better at generating econometric models. It's amazing. We've had a few tariff-specific type models that have just added to our suite of capabilities that have been created by some of the big AI models out there, and they're just giving us ideas, and we implement in our own software language on the side afterwards. But nevertheless, it is quite something. So as much as this moment has more uncertainty than usual because there happen to be some consequential and unconventional policy decisions—so there is a higher than normal degree of uncertainty that just inevitably emerges from that—in a more standard way, I would say, okay, maybe the quality of the data is going down, but I think the quality of the analysis is going up. And so we're hanging on and still able, hopefully, to say useful things and able to predict the future to some extent.

Yeah. I've been a gluttonous consumer of everything that you produce for many, many years now. And I only see the thing that you and your team are putting together for listeners of this podcast, for just consumers in general who come to the website or follow you on Twitter, where you're constantly putting out new materials. I don't think your material has never been better. This is no insult to anything you were producing 10 years ago, but I think what you're producing now is significantly improved over what that was. And a lot of it just has to do with the sources of information and how you can focus more of your energy on that interpretation and having the right stuff put in front of you to make those right calls, to make those interpretations, and even the way that you present it to the consumer of that information.

Well, thanks for that, Dave. And I should say as well, it's not all about computers and AI. We have been so lucky as part of being just a successful firm, and we've, of course, grown our assets under management and so we've reinvested in that, and some of that has gone towards technology. As you may know, we've also added an important new staff member, Josh Nye, a new senior economist. And so we're able really to do a whole lot more now that we've grown in that way as well. And he's been a wonderful addition to an already strong team. And so that's been great, too, and it has really helped us stay on top. I mean, these tariffs have been swirling, as you well know, or just sorting through that and figuring out effective tariff rates and just projecting into the future. It's been so much easier with that extra manpower as well.

Yeah. We're going to get Josh Nye, the economics guy, on pretty soon. But as always, Eric, great to catch up with you. A lot to cover. And I hope we've been able to, along with putting in perspective where we are from an economic perspective, also cover off some of these concerns around the data and the ability for forecasters and investment managers to see through and make good decisions regardless of the noise and the politics that are happening. We wish that wasn't happening, but nevertheless, we can still get at what we need to do our jobs well.

I think that's right. Thanks very much, Dave.

Thanks, Eric, and we'll see you in a couple of weeks.