Hello and welcome to The Download. I'm your host, Dave Richardson, and it is a big jobs Friday. In this case, Thursday, because of the July 4th holiday in the US falling on a Saturday. So they take July 3rd off, which would have been the Friday when the report came out. But we've got the report out early. And that means we've got Canada's hardest working economist, Eric Lascelles, Chief Economist at RBC Global Asset Management here to help us interpret what continues to be a very unusual pattern of numbers. But I guess we are in an odd spot in terms of politics and policy and AI and everything that's going on. So, I guess we have to expect that there's going to be some things that we have to dig in and think about. And that's what you do so well. It's harder, but you never mind that. So, anything you're seeing? Why don't we get to the US number? Of course, Canada's, will be next week and we'll catch up on that the next time you're on. But the US number is the one that most people are watching around the world. Markets watch it very closely. And so, what was the number and what do you think of it?

That's right. The headline conclusion would be it just came in short of expectations. 57,000 jobs created, that was really in the realm of about half what the market expected, 113,000. There is a disappointment there. There's going to be a caveat for me later, if you haven't guessed, but disappointment there. There were notable downward revisions to the prior 2 months, so that also weakened the interpretation. In fact, 74,000 fewer jobs created the prior 2 months than we had thought. But some context is useful here, I think. One would be the prior several months had been weirdly strong, stronger than anyone had expected. They'd all been upside surprises. What we've done is we've given back some of that. Maybe we were right all along is one of the takeaways. It was a labor market moving along at a normal pace, not an overheated pace. That's not an unwelcome conclusion. We economists, or at least we forecasters, were a little bit tricked though, because the prior several months had been so weirdly strong, we'd all been ratcheting up our forecasts, and so I'm not sure anyone would have said yes, the consensus was 113,000 jobs for June, and that's of course not what happened. I think we were only convinced we should predict 113,000 because the prior several months kept coming in at 6-figure levels, even though logically you would have said it should be somewhat less. I mean, the very low rate of immigration and thus population growth in the US would support maybe 25,000 to 50,000 jobs a month just as a normal trend. And so here we are sitting on 57,000. There's nothing wrong with that. It's a totally ordinary number. It's just not quite the rarefied air we thought we'd been living in before. And certainly, I guess, speaking to the idea that there's no horrible news here, the unemployment rate actually fell. So it fell from 4.3% to 4.2%. it's a small decline. I should admit, part of the decline wasn't just jobs gained. It was actually the labor force participation rate actually fell. And so I don't know that I can look into the minds of 200 million Americans or 300 and some, working and not working and reach a conclusion as to why a few of them decided they didn't want to even look for jobs this go-round. But that did help a little bit. And the takeaway, 4.2% is a perfectly fine unemployment rate. We've been assuming that 4 to 4.5%— and this is right in the middle— is in the realm of full employment. Yes, there was a moment a few years ago when it was in the 3%, and so you might say, how can you be on full employment? And certainly you can do that, just you can't hang on to it for very long, and you often tend to get inflation problems and so on. This is, you could say, the sweet spot and not an unwelcome conclusion. If you'd asked me 3 or 4 months ago, the concern was maybe the US and indeed the global economy weakens. There was an energy shock happening and so on. Generally, we were celebrating as those job numbers came in looking fairly strong. The thinking has evolved over really just the last month or two, into a-oh, is this too strong kind of question? The too strong meaning, might it require the Fed to raise rates? Inflation heats up and you kill the golden goose. And the stock market hasn't actually been celebrating some of the stronger numbers recently. And so just to turn that on its head, as we got a number that at least according to the headline miss was a little weaker than expected, though you can certainly quibble given the unemployment rate did just fine, but at the headline level was a bit weaker. The stock market is actually celebrating a little bit. This is a «bad is good» interpretation. We don't want things to be too good or else it creates problems down the line. Ultimately, markets feel fairly contented with this, and at the margin, the amount of rate hikes the market prices for the Fed over the next year, a little sliver of that was taken out in response to this as well.

I guess what I'm looking at in terms of inconsistencies, which for me is difficult to really rationalize— and for a lot of investors, difficult to understand, because this number is so important. It's such a focus. We do a podcast every month around the release of this number, and markets react to it. We'll talk about in a little bit more detail in terms of how the markets react. But I look again at a number that comes in a little bit soft, and then we take jobs away, but the unemployment rate goes down. We've got the World Cup going on. That's why I've got my Portugal jersey on, heading to the game tonight— very exciting— against Croatia. The end of an international career for one of the two great legends of football. I don't know if you're much of a football fan or soccer fan, whatever you prefer.

Every 4 years I can be, yeah.

There you go. And of course, Canada is still around. This is Ronaldo and Modrić from Croatia.

Oh, okay. So that's the second one.

Yeah, he's very underrated. In fact, I'd say you're the Modrić of economics. An underrated star.

And you're Ronaldo. But not retiring soon, I hope?

Yeah, I'm Ronaldo. I'm overrated and over the hill and can't quite get to the ball as I'm not quite getting to the point here, Eric. So, I'll try to get to the point. And so, World Cup's on. You'd expect hospitality and you'd expect some bump. One of the big US banks is out with a report yesterday in front of this report saying 40,000 jobs potentially on top of whatever they had in leisure and hospitality and all the things that work around the World Cup. I book a lot of hotels and flights with what I do for a living in real life beyond the podcast here, what I do day to day, and the prices are insane. Everything is booked up, every flight is booked, and then you add the World Cup on, you would have expected that that would drive some employment. It hasn't. You've got hundreds of billions of dollars that are being dumped into the AI buildout. All the plumbing, everything, and this is concrete, this is steel, this is energy, this is everything that has to be built. And you got a positive number of jobs created in construction, but nothing like there's some massive boom going on. Then you've got just AI in general, and tech firms are laying off people, or they were, or they kind of are. You might expect even more. We've got AI coming up. What does that even do? So you got all these things rolling around and the numbers just don't seem to make a lot of sense, at least report to report.

Yeah, it's a fair critique and I can promise you, as frustrating as it is to you and to the viewers and listeners, it is doubly frustrating to the person tasked with trying to interpret them— and in some cases failing. The leisure and hospitality, that was not an unreasonable prediction to think that the month of June would bring significant boost to leisure and hospitality employment in the US. They are hosting the largest number of World Cup games. It is a big deal. It does appear there has been a real surge in tourism and associated activities. I see countries taking over US cities, as they call it, and going to other sporting matches and these sorts of things. It's hard to fathom. Get this, it's not just that we didn't see that expected increase in hospitality and leisure payrolls, it was actually the biggest drop since 2020, which makes no sense now. Could it be that companies did the hiring last month in May? I don't think so, honestly, nor do the numbers really support that. And so this is one of the frustrations of job numbers. And so just to put into perspective and to defend the statisticians who I'm sure are trying their hardest, and I don't believe there's any sort of politicization. I know there's some concern about that in the US. I don't think so, nor can I think of the political advantage of downplaying hospitality spending during a global sporting event. But this is tricky business because here we are saying, well, it was only 50-some thousand jobs created, and people thought it'd be 100,000. That is a miss on an order of 2 times. And so you could say that's bad, but equally this is a labor market that employs a couple hundred million people, and so a 1% miss is 2 million jobs. A 0.1% miss is 100,000 jobs. We're complaining that they miss at the aggregate level, by 0.05%. And so they're not sampling every business here and they're missing things and so on. And so I don't think it's outrageous that if you were to frame this in percentage points, you say, gee, we all thought it was going to be +0.12 and it actually was +0.07. It's not that wild of a miss, truthfully, when you're talking about numbers. Nobody gets angry when retail sales is 4 and it was really 3.84 or something. That's the same size miss, you could argue. That's just the nature of the beast. It's hard to get this exactly right in an era where surveys are responded to less and less. That's a complication as well. We still look at the sector numbers. In general, it makes more sense to look at all of this on a trend basis and look across 3 months and 6 months and so on. The conclusion would be things look okay, if not, pretty good. We spend a moment on the sector data, but you have to view it with even more skepticism. It's just even less precise. It's even choppier. Yet, very weird that leisure and hospitality was down. I'm going to guess that it's going to be up a ton the next month, and we'll realize none of this actually happened or something like that. That's my guess. Some things do make sense though. There has been a very clear trend in recent years. A large fraction of the hiring is healthcare and social assistance. Not to say it's not a good form of hiring. Those can be wonderful jobs. It's not really a reflection of a booming economy so much as an aging population and the need for more healthcare and more social assistance support. That has been a reliable source of strength. There's a clear logical narrative, I would say, behind that. We did see construction employment rise, maybe not as much as you would think in a data center world. It's going up, and so that's consistent with this data center and this AI spend boom. Conversely, and with the view that IT companies and tech companies are probably the best position to deploy AI initially, and perhaps even to shed some fraction of their workforce, we have seen that information sector experience a 17th monthly decline in employment out of the last 18 months. And so there is a very real trend afoot there. It is a hard time to be a computer programmer, it would be fair to say. Of course, we're all a bit anxious about whether this spills over into other sectors and creates structural job losses. We've talked before about that, and it's not really a fully answered question. It's less clear or less automatic than you would imagine, but it's a risk. That's something that we're watching. For the moment, the most useful thing you can do is say, listen, US unemployment rate is 4.2%. It is still creating some jobs. Job creation seems to be at least in line with population growth. This looks fine. It's not a source of concern. You combine that with some ISM manufacturing numbers that came out on July 1st, and those were good but a tiny bit cooler. This is an economy that's clearly still moving forward and not overly concerning. Maybe the need for rate hikes is a little bit less than was thought a couple of days ago, and that actually could be a welcome conclusion.

Yeah, and I think that's why it's so important and why we do this podcast every month, because the numbers come out in the news. That's fine. Everyone can see the numbers there. It's generally front-page headlines or it's going to be reported somewhere, whatever your primary source of getting the news is now because economic news has become front-page news because of people's participation in the market and people concerned about what's going on in the economy. It's a tough economy for a lot of people. But what you're able to do is to put in perspective where that number sits within the trend line, within some of the changes that are happening in the economy. The economy is always evolving and changing, and different industries are coming to the fore. And that's why it's so valuable from an investment perspective to have your perspective in terms of how it all fits together. Because we've seen dramatic changes in immigration policy. From a lot to almost zero. We've got a maybe lifetime-defining technology change that we're just in the early stages of, which is artificial intelligence. And these are things that from an investment perspective, we need to be aware of. We need to see what's shifting around within the economy to help make decisions. And then, certainly, your primary job is not just to get on a podcast and interpret numbers once a month, but to share with investment managers your perspective on the economic factors that are driving the success— or lack of success— of different businesses, different sectors, which help inform investment decisions. And that's why these interactions are so important. Not necessarily the number specifically, but we need to put that number into the context to understand how everything fits together.

Yeah, that's exactly right. This is all a very holistic exercise, and we are trying to get a general sense of where the economy stands. I should mention, and I don't love to admit this, but one of the conversations we often have with the investment teams is the economy is not the market either. It informs the market, and some sectors are more closely tied to it than others, and others are off on their own little adventures right now. And so it's an important input. I think there are other important inputs top-down, would-be valuation considerations and earnings trends and technical analysis. And of course, probably our strongest asset as a firm would be even the bottom-up analysis and the corporate-level analysis and making very good decisions there, hopefully. And this is just all party to making good decisions here, if that makes sense. And I think the layperson imagines it's all about the economy and, oh, the economy is stronger, therefore X, Y, and Z. And there is some truth to that. And here we are acknowledging the stock market today seemingly celebrating a slightly cooler job number, which prevents overheating. So it all does fit together to some extent. But there are a lot of moving parts and a lot of inputs. And we're an active manager, and so we're doing our best to beat the market in all these regards, very much including in the economic forecasting, but it’s not an each-and-every data point outcome. When you look across many metrics and considerations, you can build up small incremental advantages. Not to downplay the economy, but equally not to overstate its importance in doing some of this investing.

Sure. Well, when it relates to your forecasting though, Eric, you had been a little bit less inclined to believe that the Federal Reserve in particular, was going to start to raise rates potentially even in July. The numbers today, as you say, moved the broader market. Technology's still under a little bit of pressure. That's a different discussion, and we'll certainly tackle that with some of the equity managers in that space in the coming days and coming episodes of the podcast. By the way, please subscribe to us here on YouTube and also follow us and give reviews wherever you get your podcast. So you can hear those episodes. But one of the things that's definitely come out of this is we did see some movement in the bond market and some interesting movement because, as you say, we can look at the odds of those Fed rate increases and you had about a 50/50 shot in July and a more than 50/50 shot in September. But now, you're below 50/50 for both of those meetings. And your 2-year Treasury yield dropped down. It popped back up above 4.20 the other day, earlier this week and now is back down to, I think, about 4.12% when we started recording this. And at the 10-year level, you'd pop back up towards 4.5% but pulled back away from that. Not as much. So we've steepened the yield curve a little bit. But it seems like, again, this report and the revisions have cooled down expectations for higher interest rates. And then as you mentioned, we roll in a $67 a barrel oil price, which is down from $120 where it peaked through this conflict in Iran and is right back to where it was when the conflict began with, it seems like, out of everything that's happened over the last several months, more supply coming to market so that the longer-term view is that oil stays in this level, maybe even gets a little bit cheaper. So that's got to help inflation. So you've got to be feeling pretty good about your forecast, but does this even make you think that maybe the Fed even pushes off even further than you thought before?

Yeah, that's right. So we have thought that maybe there won't be quite as much rate hiking as the market imagined. Yeah, recent events have very tentatively— and far from conclusively— supported that thesis. And so again here we are with numbers that are perfectly fine but not surging forward. And so not making an overwhelming claim that the economy itself needs lots of rate hiking. And then, as you say, on the inflation side, here we are with an energy shock that is, at least for the moment, been resolved just in the sense that the oil prices are $70 a barrel or below, which is getting pretty close to where they were before this war began. There's a big asterisk there. Will it hold? How will the Strait of Hormuz proceed going forward? There are question marks, and there's a 60-day negotiating period, but it does look as though that strait probably does remain largely open. And so from that perspective, yeah, we've taken away this inflation pressure, and our tracking of some of the real-time inflation metrics out there do suggest that we should be talking about a 0% month over month US inflation print for the next month. I would like to think there could be even some slight negatives in the months ahead that undo at least some of the damage that's been inflicted from March through May data. And so, yeah, it doesn't seem like there's an urgent need to raise rates right now. I know we have this new Fed chair, Warsh, who actually did come out swinging and trying to burnish his inflation credentials. He mentioned inflation a lot and didn't mention labor market all that much, in terms of the dual mandate. So he got the market thinking even more about rate hikes. But it seems to me the environment doesn't scream out for lots of rate hiking. And so I think the best guess is some unchanged rates over the next several decisions. And if there were to be a move, it still makes more sense to raise than cut, but I don't think there's urgency, and I wouldn't think it has to happen over the next several months. We'll see whether they actually need to get there at all when the dust is settled, because we're going to learn a lot over the next few months as lower energy prices now trickle their way through to other groups.

Even though the Canadian numbers are next week, we don't know those numbers. They come out a little bit slower each month than those in the US. The Bank of Canada is largely pinned right now. They're not going to be able to move the Bank of Canada rate a whole lot up or down unless the US moves one way or another.

Yeah, I think that's right. And I would even frame it less as «because the US isn't moving» and more just because, yeah, there's not really a strong call in Canada. Though I shouldn't understate your comment, which is fair as well. Here you have a currency to think about and a few other variables as well, and not frankly total control over your long end. So the US matters a great deal as well. But in the Canadian context, inflation happily has not increased as much as it has in the US in response to this energy shock. It's actually been considerably tame. The core metrics are actually still not far from 2%, and so that doesn't scream for rate hikes. The economy, well, it's almost hard to say something intelligent about it. I mean, the debate was a recession as recently as a couple of weeks ago because there were 2 consecutive quarters of declining GDP. We would say not. It was a very mild decline, and actually, there are 2 or 3 ways to measure GDP, and 2 of the 3 were actually up and 1 of the 3 was down. So certainly a subdued period for the Canadian economy, but certainly not disastrous. Confusingly, you may recall the last job numbers for Canada were really strong. And so getting some conflicting information here. We're going to learn more in the next week or so, actually on two fronts. And we've mentioned the job numbers. And so we'll see. I can't imagine they keep pace with last month's crazy number. In fact, I would maybe brace myself even for the possibility it's distinctly underwhelming just because that last month was so incredibly strong. But we'll learn something from that. We're also going to get the Bank of Canada's Business Outlook Survey, which is really important and includes CapEx plans and some other things that actually have been turning a little higher in Canada in recent quarters. We'll see if that holds. Again, here we are with July 1st that came and went and there was no trade deal, which certainly was the universal expectation, but nevertheless, that was a symbolic deadline. I'll just say this. The Canadian economy, certainly underwhelming in the first half of the year, which I think makes sense and it's partially population issues just shrinking, partially some trade uncertainty and some other things that are being sorted through. We do think there's room for faster growth ahead. We did actually get— and it's sort of laughably stale in a sense— but we did just get Canadian April GDP, which was a big positive and conclusively said, well, yes, the economy may have been weak there around the turn of 2025 to 2026, but it's growing. And we got a little flash number for May that was also growing. And of course we got a big May job number, and we'll see what June brings. But I would say I think the Canadian economy is growing again. We think between some deregulation and some tax cuts and some still fairly supportive monetary policy— and maybe there was even a tailwind for Canada from the high energy prices— but the bottom line is we think there's probably room for some better growth over the second half of this year.

Yeah, we've talked a lot about that as we celebrated Canada Day yesterday. There's reasons to celebrate, I think, what's going on in in Canada. And we always celebrate your appearances, Eric. So thank you again for joining us and putting what I've just got to say are odd numbers month to month. But we look at the trend, they pull together, make sense, and it's been a great little period for investors and likely continues to be. So Eric, thanks for your time again today, and we'll talk to you soon.

Thanks, everybody. Happy summer.