Holiday pot pourri

Just a few thoughts as we wind down toward the new year...

* The US economy seems to be ending the year on a strong note, per this article from CNN.  The 2.1 percent annualized GDP growth rate originally reported for Q3 has been revised up to 2.3 percent, and modeling from the Atlanta Fed suggests a sharp acceleration to north of 7 percent for the final quarter.

Perhaps the most surprising stat in the CNN article is the news that US consumer confidence actually rose in December.  Evidently a lot of Americans are managing to avoid all of the hand-wringing over the omicron variant, with CNN very much in the forefront. It's very doubtful that confidence can remain high if hospitalizations and deaths start to mirror the rise in infections that omicron is driving. Q1 of 2022 looks likely to be a tough one for the economy, with the severity and duration of the slowdown almost entirely dependent on how omicron behaves. 

* The Canadian economy began the final quarter of the year on a strong note, according to one key indicator released by Statistics Canada today. Retail sales rose 1.5 percent in current dollar terms, or 0.9 percent in real terms, in the month of October.  Seven of the eleven sub-sectors posted gains, led by auto sales. StatsCan estimates that retail sale rose as further 1.2 percent in November. 

Just as in the US, the outlook for the Canadian economy is omicron dependent. Restrictions have been tightened across the country, most notably in Quebec, so it is very likely that the all-important retail sector will slow significantly in December and for at least the early part of 2022. (UPDATE, December 22: StatsCan reported today that real GDP rose 0.8 percent in October, and an estimated further 0.3 percent in November, which would bring GDP back within 0.1 percent of its pre-pandemic level. A strong GDP result for Q4 as a whole is just about locked in, but this tells us very little about how Q1/2022 will unfold).

* the lazy dog -- and on an entirely different note, the new Jane Campion movie, The Power of the Dog, appears to be the front-runner for the Best Picture Oscar. I watched this last weekend, and can only say, seriously?  The scenery is lovely and the acting is fine, but the pace is glacial. And the plot? Quite honestly, there's not nearly enough of that to fill a movie that runs more than two hours.

An interesting discussion of the movie by two critics can be found here on Slate. Warning: multiple spoilers! One of them liked it, while the other reacted to it much the same as I did. It's interesting that they agree that you really need to see it twice to figure out what happens. That set me thinking: do directors now feel free to make movies baffling because they assume just about everyone will watch via streaming rather than in a theatre, and can therefore watch as many times as needed to understand what they're watching? If so, that doesn't seem to me to be a good thing.

* Happy holidays! And finally, best wishes to all visitors to this blog for a safe and healthy holiday season. Hope to see you all again in 2022. 

Who's next?

The Bank of England, which wrong-footed markets by forgoing a rate rise in November,  today became the first major central bank to launch a tightening cycle, raising its target rate to 0.25 percent from the previous 0.1 percent. The move comes a day after the Federal Reserve gave clear indications that it expected to start raising rates soon, given the continuing recovery in the US economy. 

The Bank of England's move comes amid record daily COVID cases counts in the UK and extreme uncertainty over the possible impact of the omicron variant. Economic growth has recently slowed to a crawl in the UK, with GDP still about 0.5 percent below its pre-pandemic peak.  However, the Bank's focus is firmly on the buildup of inflationary pressures. CPI is already rising at a 5.1 percent rate, and the Bank expects it to reach 6 percent in the next few months. 

It is far from clear that the Bank's action will have any direct impact on inflation in the near term. Much of the current price pressure in the UK, as elsewhere, is related to supply chain issues. These may have been exacerbated by Brexit, but they are not something that can be addressed by raising rates. It seems likely that the Bank is looking to head off higher inflation expectations before they can take firm hold; memories of the double digit inflation rates of the 1970s may still lurk not far beneath the surface of public consciousness. 

No central bank starts a rate hike cycle thinking that one move will be all that is needed. However, the uncertainty over omicron means that today's move may indeed be "one and done", at least for the next several months.  This analysis from an article in The Guardian sounds right:

Hannah Audino, an economist at the accountancy firm PwC, said speculation the Bank would embark on further rate hikes in the spring could be wide of the mark.

“With [Covid-19] cases at record levels and expected to continue rising, the risk of further social distancing measures, and signs that business confidence is already weakening, it is likely this modest rate rise could be the first and only one for some time.”

Moving on to the US, we find that the Federal Reserve is continuing to clear the decks for a rate hike by accelerating the taper of its quantitative easing bond purchases. It is reducing its purchases by an aggregate of $30 billion per month ($20 billion for Treasuries and $10 billion for MBS), starting in January, with indications of similar-sized reductions after that. If this actually happens, new QE purchases would fall to zero before the end of Q1/2022. 

The Fed continues to stress that "it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment."   However, the detailed economic and financial projections that accompany the FOMC statement reveal that its base case expectation is that it will raise rates by 75 basis points in 2022 and by a further 75 basis points in 2023. 

Some of the same caveats as in the UK apply equally in the US. It is not clear that the current inflationary pressures that have carried US headline CPI above 6 percent can be addressed by raising interest rates. That said, however, the growth outlook for the US, even in the face of omicron, looks considerably more robust than that for the UK. So expect the Fed to be the next to jump, probably by April, and for there to be more than one move in fairly short order. 

Deficits and inflation

On Tuesday, Canada's Finance Minister Chrystia Freeland tabled the Government's Fall Economic and Fiscal Update. Briefly summarized, the update shows that the fiscal situation is somewhat more favourable than was projected in the 2021 budget back in the Spring -- and that fact, together with the recent worsening in the COVID outlook, is giving the Government cover for further spending increases.

Final figures for the 2020-21 fiscal year (which ended this past April) show a deficit of C$ 327 billion, materially lower than the C$ 354 billion estimated on budget day.  The improvement is roughly equally attributable to higher-than-expected income tax revenues and lower program spending.  For the current fiscal year, the projected deficit is C$ 144 billion, down from C$ 155 billion projected on budget day. It's worth noting, however, that without the package of new spending items announced in the update (under the clumsy umbrella of "Protecting our recovery by finishing the fight against COVID-19"), the deficit projection would have been closer to C$ 130 billion. 

The deficit is projected to continue falling in medium term, hitting C$ 58 billion in 2022-23 and reaching C$ 13.1 billion by 2026-27. It need hardly be stated that the data for the "out years" of the forecast are little more than aspirational -- if even that. Still, one positive the Government can point to is that the debt/GDP ratio may fall rather faster than earlier expected. It is now projected to peak at 48.0 percent in the current fiscal year, down from 51.2 percent projected back on budget day, and should slip to about 45 percent by mid-decade.

Despite cries of anguish from opposition politicians (of which, more later), it is hard to be surprised by the tack the Government is taking here. For now it can project a falling deficit while still spending more money for the fight against COVID, including a C$ 4.6 billion contingency to deal with the omicron variant.  The political calculus is that there is little appetite among voters for an early bout of austerity. Keep in mind that this is a minority Government, and recall that when Justin Trudeau was asked before the October election if he would commit to not calling an early election if he wound up with another minority, he simply said "Politics doesn't work like that". Until further notice, every decision and statement must be seen in a pre-election context. 

Even though this is a mid-year fiscal update and not a budget, the opposition Conservatives are taking the opportunity to try to focus on their overriding theme du jour: inflation is Canada's biggest problem, and it's all Justin Trudeau's fault. The Tories' belligerent finance critic, Pierre Poilievre, was on his feet soon after Freeland completed her speech, reciting a formulation I have not heard in many years: Canada's current inflation spike is caused by "too much money chasing too few goods", and the reason there is too much money is, of course, Trudeau and Freeland's addiction to deficit spending.

So it's timely that this morning saw the release of the latest consumer price inflation data*, for the month of November. The numbers are not good, but they remain a whole lot better than what's happening south of the border. CPI rose 4.7 percent year-on-year, the same rate as was seen in October. All eight major sub-components of the index rose in the month, led by a 10 percent rise in transportation costs, mainly resulting from a 43 percent jump in gasoline prices. Excluding gasoline, CPI rose 3.6 percent in the year to November, matching the rise posted in October.

The month-on-month increase in CPI slipped to 0.2 percent, down from 0.7 percent in October. However, there was no evidence of any decline in the Bank of Canada's three preferred core inflation measures, so we will be waiting a while longer for any real evidence that the inflation spike is "transitory".

StatsCan has, shall we say, a rather more nuanced view of the causes of inflation than Pierre Poilievre does. As regards gasoline prices, it notes that "Oil production continues to remain below pre-pandemic levels, though global demand has increased".  For grocery prices, which rose at the fastest pace in six years, it draws attention to "higher shipping costs and supply chain disruptions" as well as "poor crop yields resulting from unfavourable weather conditions". Not much that Trudeau and Freeland, not to mention the Bank of Canada, can do about any of that, but it would be unwise to hold your breath waiting for Poilievre to change his tune. 

* Link to the website is not available at the time of writing because of cybersecurity concerns at StatsCan. 

Mandate update

The Bank of Canada has based its policy decisions on an inflation target since 1991. It looks to keep inflation within a 1-3 percent control range, with a target at the 2 percent midpoint, over time.  Every five years, the Bank and the Government meet to discuss and update this mandate. Today a revised version  was announced, replacing the existing framework which is set to expire at the end of this month. The new mandate will run until the end of 2026.

The most important past of the announcement is that the existing target range will remain the Bank's primary policy goal, with the Government's full approval:   "The Government of Canada and the Bank of Canada believe that the best contribution of monetary policy to the well-being of Canadians is to continue to focus on price stability."    That said, however, it is clear that maintaining employment is now an important and explicit secondary goal for the Bank: "The Government and the Bank also agree that monetary policy should continue to support maximum sustainable employment, recognizing that maximum sustainable employment is not directly measurable and is determined largely by non-monetary factors that can change through time."

The increased emphasis on employment has in effect been telegraphed by the Bank in its recent policy decisions, which have seemed to put greater weight on the uncertain growth outlook than the persistence of above-target inflation. In that sense, it is not obvious that the new mandate will drive any immediate change in the Bank's policy stance. It is interesting to note, however, that what we might call the small print of the new mandate makes several references to the "flexibility" provided by the 1-3 percent range and states that  "The Bank will explain when it is using the flexibility in the framework."  

One wonders if at some time in the next five years, a Finance Minister might be tempted to ask the Bank why it is not using that flexibility. Still, this is a less radical overhaul of the mandate than some analysts might have feared, and the repeated references to the primacy of the inflation target should be reassuring to markets.

Today's announcement marks the start of a busy week for Finance Minister Chrystia Freeland. On Tuesday she switches her focus from monetary policy to fiscal policy, delivering the Government's Fall economic and fiscal update. Stay tuned.  

Whistling past the graveyard*

Fed Chair Jerome Powell may have sworn off describing the current level of inflation as "transitory", but his boss President Biden is still singing from the old hymnbook. Biden's response to the US CPI data for November that were released this morning shows that he realizes that the soaring cost of living is very much top of mind for American voters, seemingly overriding the feelgood effects of strong GDP growth and rising employment.

The raw numbers released by the BLS are startling, even if they are broadly in line with market expectations. Headline inflation rose 6.8 percent year-on-year, the highest print since June 1982,  when Paul Volcker was Fed Chair.  A 58 percent leap in gasoline prices was the most conspicuous contributor to the headline number. However, even stripping out volatile food and energy prices, year-on-year core CPI stood at 4.9 percent, its highest level since 1991 and obviously way above the Fed's comfort level.

President Biden's reaction smacks ever so slightly of desperation, not least in the fact that he tried to get his retaliation in early by speaking out before the data were officially released:  "Tomorrow, we will get a report on consumer prices that experts expect to be elevated again, driven in part by energy prices and used car prices. Fortunately, in the weeks since the data for tomorrow's inflation report was collected, energy prices have dropped. The price of gas at the pump has already begun to fall nationally, and real pump prices in 20 states are now lower than the 20-year average."

Well, maybe, but basing one's forecast on literally three weeks of anecdotal data seems very unwise. If you just want to look at recent data, here's another take. The monthly rise in headline CPI was 0.8 percent in November, versus 0.9 percent in October. So for those two months what we might call the running rate of inflation was edging into double digit territory. For core CPI the numbers are a little less extreme, but still annualize to something like 6 percent, suggesting that this more reliable measure still has further to rise, whether President Biden likes it or not. 

The FOMC's final meeting of the year is set for Tuesday and Wednesday next week (December 14-15). It should be a lively session. There is every reason for the Fed to accelerate its QE taper strategy and strike a clearly hawkish tone on the likely timing of rate hikes. Failure to get ahead of inflation risks a return to the Volcker era, which is surely something nobody wants.

* Yes, I know I have used this title before, more than a decade ago and in a very different context. My blog, my rules. 

It's coming (and so is Christmas)

Ahead of today's Bank of Canada Governing Council meeting, markets had begun to contemplate the possibility that the Bank's first rate hike might come as early as the first quarter of 2022.  The Bank has firmly put paid to any such expectations, with today's press release striking a surprisingly dovish tone and reaffirming the Bank's expectation that the tightening cycle will not begin until "the middle quarters" of next year.  

Market expectations for an earlier rate hike seemed well-founded, based on the latest economic data. The economy grew at a 5.5 percent annualized rate in Q2; employment grew by a remarkable 154,000 jobs in November, regaining all the losses caused by the pandemic; and inflation has been steadily rising throughout the year, reaching a multi-decade high of 4.7 percent in October. 

Despite these developments, the Bank believes that the economy "continues to require considerable monetary policy support". While admitting that the economy showed considerable momentum at the start of Q4, it argues that the omicron COVID variant and the devastating floods in British Columbia could weigh on growth, mainly by exacerbating supply chain disruptions. Concerns about omicron seem to wax and wane almost on a daily basis, while the impact of the BC floods is ambiguous at best. Arguably, the massive reconstruction efforts already under way could actually boost GDP growth in Q1 and beyond. 

As for inflation, the Bank remains convinced that the recent spike will prove transitory. It notes that gasoline prices, a major driver of recent increases in CPI, have recently eased, partly in response to the emergence of the omicron variant. It says core measures of inflation "are little changed since September", which seems a very small sample size to be relying on. It expects CPI to remain elevated through the first half of 2022 and to "ease back towards" 2 percent in the second half of the year. That form of words seems carefully chosen to cover the possibility that even if it begins to ease, CPI may remain above target all  through next year. This is surely not what the Bank had in mind when it first used the term "transitory". 

The Bank is taking a risk here. Taken at face value, the recent data on both growth and inflation seem to cry out for an early policy response.  The 2 percent inflation target has been the pillar of the Bank's policy approach for nigh on three decades. It is tempting to speculate that the approach it is now taking points to a broadening of its policy mandate, which is is set to be renewed almost any day now. 

UPDATE, December 9: This new report predicts that Canadians' food bills will rise 5-7 percent in 2022. Meanwhile it looks as if gasoline prices are on the rise again, after a brief fall triggered by the arrival of the omicron variant. Given the importance of these two items in most households' budgets, these trends will make it very difficult for the Bank of Canada to keep inflation expectations in check.

Wow!

The headline numbers for Canada's employment report for November, released today by Statistics Canada, are simply extraordinary.  The economy added 154,000 jobs in the month, against a market expectation of about 35,000. This means that employment is now 185,000 higher than its pre-COVID peak. The unemployment rate plunged 0.7 percentage points to 6.0 percent, with the continuing growth in the labour force keeping it just above its pre-pandemic level of 5.7 percent. 

Details of the report are generally positive. Full-time work accounted for just over half of the gains, or 80,000 jobs; this helped to increase total hours worked by 0.7 percent in the month, bringing this measure back to its pre-pandemic level. The bulk of the gains in employment came in the private sector, which added 107,000 new positions in the month.  The services sector accounted for 127,000 jobs, while the goods-producing sector, which has been losing jobs in recent months, added 26,000 positions. Lastly, the gains were well distributed across the country, with six of the ten Provinces reporting higher employment. 

StatsCan's commentary on its labour market data has become increasingly lengthy in recent times, and  this month's report provides some important insights into the changing nature of the employment market. Once again the agency points out that while the number of jobs requiring post-secondary education has risen by 490,000 (or 12 percent) over the past two years, jobs requiring a high school diploma or less have fallen by 150,000. A high reported level of job vacancies and a falling unemployment rate among the latter group suggests that employers are finding it difficult to find workers to fill such positions, an impression that certainly matches anecdotal evidence in most parts of the country. 

StatsCan's characterization of the overall state of the labour market is worth quoting at length:

....labour markets increasingly resemble those observed since the summer of 2019, when Canada's unemployment rate fell to a record low, average wages increased after a prolonged period of little growth, and job vacancies ticked upwards. These conditions are likely to contribute to new or worsening imbalances in provincial, regional and local labour markets, including shortages of specific skills, or geographic mismatches between vacant positions and available workers with the skills to fill them.

This all sounds very positive, but there is now a potentially very dark cloud on the horizon, in the shape of the new omicron COVID variant.  The November survey data, on which today's report is based, were collected before omicron began to dominate the news feeds. It is still too soon to draw any conclusions about the severity of the new variant or its likely impact, although that doesn't seem to be inhibiting the media from attempting to stir up panic. With or without omicron, however, the perennial volatility of Canada's employment data makes it a safe bet that the numbers for the next month or two will fall well short of the remarkable numbers released today. 

But can it last?

After contracting marginally in the second quarter of the year, Canada's real GDP rebounded strongly in the third quarter. Data released today by Statistics Canada show that real GDP rose 1.3 percent in the quarter, or about 5.4 percent at an annualized rate, well ahead of market expectations. Early indications are that the strong pace continued into the current quarter, but obviously the new COVID variant will have something to say about whether that can last. 

With COVID restrictions easing, it is no surprise to find that household spending was responsible for much of the growth in Q3. Spending on both semi-durables and services rose sharply: by 14 percent and 6.3 percent respectively. This was partly offset by a 1.4 percent fall in spending on durables. StatsCan attributes this to ongoing supply chain issues, which "constrained demand and spending". Some analysis from business economists suggests it may have been an outright lack of product to buy -- notably  automobiles -- that held durables spending down, rather than simply price considerations. 

The other main source of growth in Q3 was the trade sector. Real imports fell -- those supply chain issues again -- but exports were 1.9 percent higher in volume terms. The increase in exports was largely driven by shipments of crude oil to the United States, as the Alberta oil patch enjoys one of its periodic booms. 

StatsCan also provided monthly GDP data for September and an early estimate for October.  Growth was a scant 0.1 percent in September, with notable weakness in goods-producing sectors. However, it appears to have bounced back sharply to an estimated 0.8 percent in October, as manufacturing recovered strongly. 

It seems likely that growth remained robust in November, which all but ensures a strong result for Q4 as a whole. However, the emergence of the new omicron COVID variant at the very end of the month may weigh on the outlook for December and the early part of 2022. That said, the Canadian economy has shown improved resilience as each stage of the pandemic has unfolded, so it is not yet clear that this latest setback will have a severe economic impact. 

In the meantime, the next big event on the data docket comes this Friday, with the release of November employment data. The consensus (never reliable for this very volatile series) looks for the addition of another 30,000 or more jobs, pushing the unemployment rate closer to pre-pandemic levels. Long may the good news continue -- we need a break!

Oil spill

According to the American Automobile Association (AAA), some 48 million American drivers will hit the highway over the next few days for Thanksgiving weekend. They'll be filling up the tank at the highest prices in seven years, averaging close to $3.50/gallon nationwide but considerably higher than that in some states, such as California. The real economy is doing just fine -- check out the remarkable jobless claims data released today -- but the rising cost of gasoline (and just about everything else) is top of mind for voters, and largely accounts for President Biden's plummeting approval ratings. 

So it's no surprise that the President wants to provide some relief at the pumps. There have been rumours going around for a while about a possible release of supplies from the Strategic Petroleum Reserve, and this has now come to pass. Over the next while, the US will release 50 million barrels of crude from the reserve, and has secured agreement from other countries, including China, the UK, Japan, and South Korea, to do the same thing, albeit on a much smaller scale.

To which one can only say: seriously, folks? Global oil production is somewhere in the area of 90-100 million barrels per day. (It peaked at 95 million in 2019, fell sharply in 2020 but is now presumably rising again as the global economy bounces back}.  It seems pretty far-fetched to imagine that releasing the equivalent of less than one day's production will stem the upward pressure on prices, let alone reverse it. 

Indeed, as numerous commentators have already pointed out, it could even have a perverse effect. OPEC (and OPEC+, which includes Russia) is understandably ecstatic at the way prices have moved this year. There is every possibility that these countries will react to Biden's move by limiting their own production, in order to keep prices where the are, or even boost them further. 

It's no real surprise that Biden feels the need to "do something" when this issue is so important to voters, and the mid-term election campaigns are about to ramp up. But empty gestures can be dangerous, and this gesture is about as empty as it gets. 

"Transitory but not short-lived"

 Last week, Bank of Canada Governor Tiff Macklem told a reporter that the Bank sees the current uptick in inflation as "transitory, but not short-lived". He added that "I think transitory to economists means, sort of not permanent".  I can't say I remember spending much time in economics classes debating the meaning of that word, but I am reasonably sure that Macklem's current definition is not what he had in mind when he first used the term. I'm even more certain that it's not the message most Canadians thought they were hearing either. 

Today's report from Statistics Canada on consumer prices for October underscores why Macklem (like Fed Chair Powell) is hastily revising the lexicon. Headline CPI rose 4.7 percent in the year to October, up from the 4.4 percent rise recorded in September. The increase was in line with expectations, but serves to bring CPI to its highest annual increase since 2003. On a seasonally adjusted basis, CPI rose 0.5 percent month-over-month, which means that what we might call the running rate of inflation is not slowing. 

The transportation component of the index remains the largest contributor to the overall increase, rising 10.1 percent year-on-year, propelled by a 25 percent rise in energy prices. However, inflation is broad-based, with all eight major sub-components of the index higher than last year. Excluding energy, the increase in CPI was 3.3 percent, the same pace as in September; excluding both food and energy (the normal definition of core CPI), the annual increase was 3.2 percent.

If there is any small consolation for the Bank of Canada in this report, it lies in the three "special aggregates" the Bank uses to monitor underlying inflation trends. These indices have been grinding slowly higher all year, but in October all three recorded exactly the same year-on-year rise as in September. Even so, the mean rise in these measures, at 2.7 percent, is well above the Bank's 2 percent target.

Looking ahead, there is anecdotal evidence that the rise in gasoline prices at the pumps has stalled. However, supply chain pressures persist, and may be dramatically worsened by the impact of the disastrous flooding in British Columbia this week. Governor Macklem has hinted that the Bank is edging closer to raising rates.  The first move is likely to come around the end of the first quarter of 2022. 

What to do?

Even with everyone and their dog braced for higher inflation, today's US CPI print for October was a shocker.  Headline CPI rose 6.2 per cent from a year ago, the biggest year-on-year gain since 1990.  Although the focus has mainly been on energy and food costs, the report makes it clear that inflation pressures are much more widespread than that. Core CPI, which excludes both of those categories, rose 4.6 percent. Nor is there any consolation in the month-to-month figures: headline CPI rose 0.9 percent in October alone, with core up 0.6 percent. Both of these numbers were higher than in September, and both annualize to much higher rates than the yearly numbers reported today. 

It's easy to revive the old monetarist shibboleths here: "inflation is always and everywhere a monetary phenomenon", and "too much money chasing too few goods".  Needless to say, those points are already being trotted out, but the situation is a lot more complicated than that. It's well and good to point to the massive stimulus package launched last year in response to the pandemic during the Trump administration, but it is hard to argue that providing much less stimulus would have led to a better outcome. Most likely the US would now be facing a severely depressed economy, with few tools at its disposal to get things moving again.

That said, the data do cast some doubt on the wisdom of the Biden administration in pushing for yet more stimulus, in the shape of the infrastructure bill and the still-pending Build Back Better package. There is no doubt that part of the current inflationary surge stems from the demand side of the economy, as reopening of the economy induces Americans to spend the cash they accumulated earlier in the pandemic.

In Canada, Finance Minister Chrystia Freeland  described unspent COVID benefits as "pre-loaded stimulus".  Although US support programs were smaller than Canada's, the same logic applies there, and would seem to suggest that the economy is rapidly getting back on track without the need for further government stimulus. 

It is, of course, the supply side that has been receiving most of the attention for media and economists alike as the primary driver of inflation. The examples are legion, ranging from a semiconductor shortage that is cutting auto production, to wide-ranging problems in the supply chain itself (shortages of shipping containers and truckers), to inadequate production of oil and gas as economies recover from the COVID-induced collapse in demand.

In the light of history, it's not surprisingly that President Biden seems likely to focus on this last item. Fresh from lecturing the world at COP26 just over a week ago, he is demanding that OPEC ramp up its oil output in order to save Americans from pain at the pumps, an appeal that has so far fallen on deaf ears.  He also seems to be mulling the possibility of releasing oil from the Strategic Petroleum Reserve in Louisiana, though that's hardly the purpose for which the Reserve was established. 

If the White House can't do much to help (and may even be adding to the problem with its stimulus plans), it falls to the Federal Reserve to try to get inflation back under control.  Governor Jerome Powell's pledge to allow inflation to remain above the 2 percent target in order to foster economic recovery always seemed a little foolhardy, but we can hardly expect him to morph into Paul Volcker and start pushing rates through the roof.

Nor is it clear that he should. Raising rates might put something of a crimp into the demand side of the inflation problem, but that may soon calm down anyway as the savings built up earlier in the pandemic get spent. And there's no reason to think that higher rates would do anything to help ease supply chain pressures, many of which originate outside the United States.

This is not to say that the Fed can just sit on its hands. Powell's description of inflation pressures as "transitory" is looking more ill-advised by the day, but the forces behind those pressures are not easily addressed by monetary policy. The risk for the Fed is that inflation expectations start to move way above its 2 percent target. Movements in fixed income markets suggest that is starting to happen, and that is something the Fed can address. The lethargic pace of tapering QE may well have to be stepped up in short order, and Chairman Powell's rhetoric is going to have to become a whole lot more hard-edged. 

The situation is nowhere near as dire as in the 1980s, but both Governor Powell and I lived through that era, and I think he would agree that we don't want to go back there. Over to you, Jay!

Good but not great

In September Canadian employment finally returned to its pre-pandemic level. Data released today by Statistics Canada show that employment rose further in October, albeit at a slower pace. The economy added 31,000 jobs in the month, pushing the unemployment rate down by 0.2 percentage points to 6.7 percent. This is the lowest jobless rate since the pandemic began, but is still a full percentage point above the pre-pandemic rate.

The employment gains were entirely accounted for by private sector jobs, which rose by 70,000 in the month. This was offset by a fall of 38,000 in the number of self-employed individuals; this is always a volatile series, but it is striking to learn that self-employment is almost 10 percent below its pre-pandemic level and stands at its lowest point since 2007. Full-time work accounted for most of the month's gains; full-time employment for both males and females is now back to pre-COVID levels.  

In terms of sectors, the strongest gains were seen in retailing (up 72,000), offset by a slightly puzzling decline of 27,000 in accommodation and food services. Employment in the goods producing sector remains largely stagnant and is more than 130,000 lower than its pre-pandemic level.  The regional breakdown shows strong job gains in Ontario but Alberta and Saskatchewan, which have coped less well with the latest surge of COVID, both shed jobs in the month.

As always there are some interesting nuggets buried in the report that shed further light on the underlying health of the jobs market: 

• Total hours worked rose 1 percent in the month, but are still 0.6 percent below their February 2020 level. 
• The number of persons working less than half their usual hours fell by 100,000 (or 9.7 percent)  in the month but is still 14.5 percent above its pre-COVID level. 
• Almost 24 percent of employed Canadians continue to work from home. 
• Almost 28 percent of those unemployed are considered to be long-term jobless, a figure that shows little sign of improving. 
• The labour force underutilization rate fell by 0.7 percentage points to 13.1 percent in the month. 

One significant surprise: it appears that the Great Resignation supposedly underway in the United States is not being replicated in Canada.  Canada's participation rate is only 0.3 percentage points lower than in February 2020, while the comparable rate in the US is 1.7 percentage points lower. The clumsily-named job-changing rate was 0.7 percent in October, right in line with its 2016-2019 average. 

All in all the report seems to show there is still considerable slack in Canada's job market. Wages growth is also reasonably tame: StatsCan estimates that in the two years from September 2019 to September 2021, hourly wages rose 5.1 percent, barely outpacing the 4.9 percent rise in CPI over the same span. (It would be hard to find more than one Canadian in a hundred who would believe this)! These numbers will provide some short-term comfort for the Bank of Canada, but the near-ubiquitous anecdotal (as opposed to statistical) evidence of labour shortages seems certain to put upward pressure on wages in the months ahead.

Ontario's pre-election budget update

 Ontario's Finance Minister, my former colleague Peter Bethlenfalvy, tabled the Province's customary Fall economic statement and budget update today. With a Provincial election coming in June 2022, there were widespread expectations that the update would include tax cuts for individuals and corporations, one promise from the last election that the Ford government has not yet delivered. As it turned out, the budget update was largely a rehash of the last full budget, which was tabled in March. Perhaps Ford and Bethlenfalvy are holding back the tax cuts for a real pre-election giveaway in the Spring.

The statement repeats promises to build a couple of new highways on the outskirts of Toronto, a vote-rich area that the Tories need to rely on to deliver them an electoral majority. There is some additional funding for the health care sector, including long-term care.  The Province is also preparing to scale back its COVID-specific funding, which will fall from more than C$ 10 billion this fiscal year to $3.4 billion in 2022-23 and zero the year after that. 

The one intriguing statistic in the report, and the one that may offer the Tories two distinct choices as they seek to win next year's vote, is the deficit projection. The shortfall for the current fiscal year (to March 2022) is now set at $21.5 billion, down from the $33 billion projected in the March budget. This is attributed in large measure to a rebound in tax revenues as the Provincial economy has recovered from the pandemic.

Come election time, the Tories can spin this as evidence that they are good economic managers and offer the voters more of the same if they are re-elected: this would certainly be the old-school Tory approach. Or they can say that their success in getting the deficit under control gives them room to introduce targeted tax cuts, bribing the electorate with its own money in the time-honoured way. The fact is, it's not a bad choice to have, if you're Doug Ford. He may not have been a great Premier for the Province, but come June the opposition parties might find it very hard to dislodge him. 

Here comes the taper

It has to be said that the language of FOMC policy decisions is becoming ever more convoluted. In keeping its funds target range unchanged at 0-0.25 percent today, it expressed its stance this way:

"The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time".

It is, of course, always the case that policy decisions reflect the judgment of FOMC members; there is no mechanistic formula. Still, wording such as "levels consistent with the Committee's assessments of maximum employment" and the double use of the phrase "for some time" do not exactly provide much guidance for financial markets. Elsewhere in the statement, the Fed says that "Inflation is elevated, largely reflecting factors that are expected to be transitory."  The clear impression is that the FOMC is still feeling its way along here, which is perhaps inevitable in present circumstances. 

There is one important change, however: the taper is on. The Fed is now setting out a clear path for the winding-down of its asset purchase programs. Purchases of Treasuries will be cut by $10 billion per month and mortgage-backed securities by $5 billion per month, starting almost immediately, and a further reduction of the same size will take place in December.  The FOMC expects to continue reducing purchases by similar monthly amounts after December, if conditions allow. 

Since an end to net asset purchases seems like a precondition for rate hikes, this suggests that a tightening cycle cannot begin until mid-2022. Whether the "transitory" inflation pressures will still be around by then is something we shall just have to wait and see. 

Slow but steady

Why don't the media employ people who know how to interpret economic data any more?  A local news station in Toronto just introduced its report on Canada's August GDP data by describing the economy as "slowing".  Neither the headline number nor the details of the report support that conclusion in any way. 

According to Statistics Canada, real GDP grew 0.4 percent in August, compared to a decline of 0.1 percent in July.  It's true that this was slightly below StatsCan's preliminary estimate, but real GDP has grown 4.1 percent in the past twelve months. Fifteen of the 20 industrial sectors tracked by StatsCan posted higher output in the month, led by what the agency terms "client-facing services" such as accommodation and food services, as pandemic restrictions continued to ease.  The 7.0 percent month-to-month rise in accommodation and food services was the major driver behind the 0.6 percent gain posted by the entire services sector in the month.  

At first glance, the 0.1 percent fall in goods output in August looks worrisome. However, it turns out this was fully accounted for by a second consecutive sharp decline (5.7 percent) in agricultural output, which is almost entirely the result of drought conditions in the western Provinces. Manufacturing, which has been bedeviled by supply chain issues for several months, recorded a 0.5 percent gain in the month. 

StatsCan's preliminary estimate for GDP in September suggests almost no change from August, which leads it to project that real growth for Q3 as a whole was likely 0.5 percent.  (Actual data will be released on November 30). That annualizes to a 2 percent rate, identical to the  figure already reported for Q3 growth in the United States. With further removal of pandemic restrictions in Ontario and elsewhere, growth has very likely picked up again in October. Certainly the Bank of Canada sounded upbeat about the outlook earlier this week -- it's just a pity that nobody told CTV Toronto. 

"The upside risks are of greater concern"

The Bank of Canada kept its rate target unchanged at 0.25 percent today, as expected. However, the tone and wording of the rate announcement itself and of the accompanying Monetary Policy Report (MPR) were somewhat more hawkish than markets had anticipated. A series of rate hikes, likely starting before mid-2022, is now the probable outcome. 

Although the Bank's outlook for domestic growth is slightly lower than before, it is confident that the brief slowdown seen in the early summer is behind us. It describes the current growth picture as "robust", with strong employment gains and patchy labour shortages. It forecasts real GDP growth of 5 percent this year, slowing to around 4 percent in both 2022 and 2023. Growth will be broad based, supported by gains in consumption and investment at home and continuing growth in exports to the US. Based on persistent supply chain challenges, if warns the output gap is likely narrower than it had forecast as recently as July. 

The Bank claims that it had anticipated the recent rise in headline CPI, but admits that "the main forces pushing up prices – higher energy prices and pandemic-related supply bottlenecks – now appear to be stronger and more persistent than expected." It does not now expect inflation to return to the 2 percent target until late 2022, and notes that it will be "closely watching inflation expectations and labour costs to ensure that the temporary forces pushing up prices do not become embedded in ongoing inflation."

If we consider these growth and inflation projections together, it becomes clear that the Bank -- like other central banks around the world -- is operating in uncharted territory here. In more normal times, the rapid GDP growth and shrinking output gap the Bank is expecting would not be compatible with expectations of a decline in inflation. The hope of policymakers is that the unwinding of supply chain problems will both support strong growth and alleviate cost and price pressures, before expectations of persistently higher inflation become entrenched. 

This is by no means a sure thing, and the Bank acknowledges as much in the "Key messages" section of the MPR. While stating that it sees the risks to its base inflation forecast are "roughly balanced", it warns that "with inflation above the top of the Bank’s inflation-control range and expected to stay there for some time, the upside risks are of greater concern."

To clear the decks for the rate hikes that now look inevitable, the Bank has suspended its quantitative easing (QE)  programme and will keep its holdings of Canada bonds roughly constant. It still intends to provide "considerable monetary policy support" to the economy until current slack is absorbed, which  it now expects to happen "sometime in the middle quarters of 2022".  This supports the markets' growing conviction that rate hikes will start as soon as April, with the target rate conceivably reaching the dizzy heights of 1 percent by the end of 2022. 

Well this is kind of awkward

“When I use a word,” Humpty Dumpty said in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.” (Lewis Carroll, Through the Looking-glass)

Transitory (n): of brief duration; temporary. (Merriam-Webster)

Another month, another jump in that "transitory" inflation we keep hearing about. Statistics Canada reported this morning that Canada's consumer price index (CPI) rose 4.4 percent in the year to September. That's up from the 4.1 percent rise reported for August, and represents the fastest pace of consumer inflation since February 2003.

Gasoline prices continue to be a major driver of the headline figure, rising more than 30 percent from a year ago. If gasoline were excluded from the index, the annual rise in CPI would have been 3.5 percent. It's not just about gas prices, however. Every major component of the index rose in September, with significant gains reported for shelter costs (up 4.8 percent) and food, up 3.9 percent, led by a 9 percent rise in the price of meat. 

Two of the Bank of Canada's three preferred measures of core inflation ticked higher once again in September. The average increase of the three has now reached 2.7 percent, well below the headline number but moving steadily further away from the 2 percent target. The Bank's next Governing Council meeting and rate announcement are set for October 27; Governor Tiff Macklem has already admitted that the "transitory" rise in inflation has been sharper and more persistent than the Bank anticipated, and it will be interesting to see how the rhetoric changes next week.

Ever since the pandemic threw a wrench into monetary policy, the Bank of Canada has stressed its willingness to allow a period of above target inflation in order to sustain recovery in output. However, it has also stressed that it wishes to keep inflation expectations anchored at the 2 percent level, in order to maintain the long-term credibility of its policy approach. That credibility is coming under stress as inflation remains stubbornly high.

Financial markets are starting to bring forward the expected date for the start of a rate tightening cycle. My own former shop at TD Bank is fairly typical: it now sees a rate hike in July 2022, versus an earlier expectation of October, and it now sees a total of 75 basis points of tightening by the end of next year, bringing the Bank's target rate to 1.0 percent. It is evident that similar concerns are being felt outside the financial sector, The Bank of Canada's quarterly Business Outlook Survey, published at the start of this week, reported as follows:

Almost half of businesses now expect inflation to be above 3 percent over the next two years, with most anticipating it will be between 3 and 4 percent. Firms with inflation expectations above 3 percent frequently cited the following factors as supporting their expectations:

• supply chain disruptions
• fiscal and monetary policy stimulus
• recent increases in food and energy prices

In response to a special topic question, most firms anticipating inflation above 2 percent and about half of those with expectations above 3 percent said that the drivers of higher inflation are temporary.

The Bank may take some consolation from that final sentence, but it cannot ignore the messages it is receiving from financial and non-financial businesses alike. Next week's Governing Council meeting is likely to agree to reduce the scale of quantitative easing, and may offer a signal that once QE is wound up, actual rate hikes will not be long in coming. The credibility that the Bank has built up over the past two decades and more is at stake. 

With friends like these...

In 1969, Canadian Prime Minister Pierre Trudeau told the Washington Press Club that "Living next to you is in some ways like sleeping with an elephant. No matter how friendly and even-tempered is the beast, if I can call it that, one is affected by every twitch and grunt." Five decades on, those words still ring very true.

Joe Biden's very first act on assuming the presidency back in January was to cancel the Keystone pipeline project, which would have boosted exports of Canadian crude oil from Alberta to Gulf coast refineries.  Money that had been spent on construction of the pipeline went up in smoke, along with thousands of jobs. Nine months later, this egregious act of virtue signalling contrasts sharply with Biden's pleas for OPEC to boost oil production, as global crude prices head for $100/bbl. Canada is by far the largest supplier of US oil imports, but the lack of pipeline capacity makes it hard to boost those shipments when they're most needed. 

The centrepiece of Biden's domestic agenda is his so-called infrastructure spending plan -- "so-called" because the definition of infrastructure seems infinitely elastic. The size of the package is still in dispute -- $1.5 billion? $ 3.5 billion? Who knows?  But what is clear is a strong "buy American" theme running through the entire deal.  No surprise there -- protectionism runs deep in the US, particularly in the Democratic Party. This poses a particular threat to Canada, most notably the auto sector, as this article explains. It seems likely that many of these provisions will turn out to be in breach of the revised North American trade deal, but there's plenty of scope for damage to be done before that gets proved in court.

Then there's the border. The US and Canada closed "the longest undefended frontier in the world" to all but essential traffic back in March 2020, and that closure has been extended on a month-by-month basis ever since. (Travel by air has never been closed off). Canada reopened its border to fully vaccinated US travellers this summer, but the US kept Canadians (and Mexicans) out, even though Canada has done a much better job than the US in controlling the COVID pandemic. The land border will finally reopen for Canadian travellers on November 8, but the extended closure on the US side looks like a gratuitous slap in the face.

We started with virtue signalling and pipelines, so let's end there. The Line 5 pipeline carries Canadian oil and gas across Wisconsin and Michigan to supply Ontario and Quebec, as well as parts of Michigan, Pennsylvania and Ohio. It has been in operation since 1953 and has a good safety record. The pipeline crosses beneath the Mackinac Straits in northern Michigan. That state's Democratic governor, Gretchen Whitmer, has declared that portion of the pipeline is "a ticking timebomb" and wants it closed. 

This would cause serious harm not only to the two Canadian provinces, but also three US states, including Whitmer's own. The pipeline operator, Enbridge,  is resisting Whitmer's demand, backed by the Government of Canada and, it should be noted, by business interests and unions in the three affected states. The Biden administration has not responded to Canada's pleas for Federal intervention in the matter. It all seems set to wind up in court. In the meantime Enbridge's plan to build a tunnel to carry the pipeline safely under the lakebed is being reviewed, bizarrely as it seems, by the US Army Corps of Engineers. 

It's hard not to notice that Governor Whitmer's supposed concern for the purity of the waters of the Straits of Mackinac stands in sharp contrast with her state's failure to ensure safe drinking water for its citizens: just ask the people of Flint.  Really, with friends like these, Canada surely has no need of enemies. 

The Canadian Card

Canadian media are all a'flutter at the news that a Canadian economist is one of the winners of this year's Nobel Prize in economics.  In truth, it's not a "real" Nobel Prize, but then again the laureate in question hardly qualifies as a Canadian economist any more. David Card was born in Guelph, Ontario, and did his undergraduate work at Party Central (aka Queen's University, Kingston), but since graduating has plied his trade at a formidable list of US schools, including Princeton, Columbia, Chicago and Berkeley. He has US citizenship alongside the Canadian one he acquired at birth. Still, we mustn't be churlish, so sincere congratulations to Professor Card.

The research for which he has been honoured goes back in some cases to the 1990s, and falls into the category of applied econometrics known as "natural experiments".  Much econometrics involves the painstaking selection of randomized data in order to test hypotheses and if possible establish some sort of causal links between variables. Card's approach involves looking at situations in which the real world has in effect established quasi-random conditions, and then trying to tease out conclusions from that.

The work for which he is best known, carried out with a colleague who has since passed away,  involved an increase in the minimum wage in the state of New Jersey in the early 1990s. Conventional economic wisdom at the time suggested that such a move would result in reduced employment. However, by studying employment in the fast food sector in the western part of the state and comparing it to adjacent parts of Pennsylvania, where minimum wage was unchanged, Card was able to show that job losses did not in fact occur. Another similar study by Card showed that a sudden influx of Cuban refugees into south Florida in the Castro era dis not result in lower wages in that region. 

This is altogether very different from the economics that your humble blogger studied half a century ago. The curriculum was heavy on theory, with a substantial larding of mathematics, with linear algebra and difference equations part of the daily diet. Things are changing rapidly as the real world invades the halls of academe, and today's award is a recognition that researchers like Card and his fellow honorees are changing the way economists look at the world. 

Natural experiments are not perfect -- the results are perhaps best described as suggestive rather than definitive. What was true on the NJ/PA border in the 1990s is not necessarily true in other places at other times. Still, it's always helpful to be reminded that the handed-down wisdom of generations of economists, even about something as basic as the supply and demand for labour, should never be blindly accepted. 

Canada job market stays strong

Statistics Canada reported this morning that the economy added 157,000 jobs in September. This was the fourth successive monthly gain, and far exceeded the analysts' consensus expectation of a rise of 60,000. Today's data mean that employment has now returned to its pre-pandemic level, although as we shall see, there are some significant differences in the nature of that employment. The unemployment rate fell 0.2 percentage points to 6.9 percent, leaving it still well above the pre-pandemic level of 5.6 percent.

Almost 100,000 of the new jobs created in September were in the private sector. The service sector accounted for 142,000 new jobs, though there was a slightly surprising loss of jobs in the accommodation and food services category after several strong months. This likely reflects the winding-down of the peak tourist season. Both manufacturing and natural resources posted small employment gains.

There are a couple of surprising statistics that underline how the pandemic has changed the nature of employment in Canada.  Both public-sector and private sectors employment are at or above pre-pandmic levels, but self employment is fully 240,000 (or 8.4 percent) lower. One might have expected that the loss of conventional paid employment would drive more Canadians to try self-employment, but this is evidently not the case. One caveat here, however: as noted in this blog many times before, the self-employment data are notoriously volatile from month to month.

Here's another surprising nugget. StatsCan reports that the number of people employed in jobs not requiring post-secondary education was 287,000 lower than in September 2019. The agency's reason for choosing that month, rather than the last pre-pandemic month, is not clear. It has been evident all along that the pandemic was having a much more severe impact on lower-paid employees than those in higher wage and salary brackets, and this data allows us to quantify that. 

Where does this leave the Bank of Canada? The return of employment to its pre-pandemic level is an important milestone, though the fact that the unemployment rate remains elevated allows the Bank to argue that there is still slack in the labour market. Then again, Governor Tiff Macklem was forced to admit under questioning on Thursday that Canadian inflation was running hotter and might last longer than the Bank had expected (or hoped).  Markets are quite reasonably starting to think that rate hikes may be coming rather earlier in 2022 than previously seemed likely. 

The dumb ceiling

It is, I suppose, good news that a deal has been reached in Washington to extend the US "debt ceiling" and so eliminate, for now, the risk of a US debt default. It's only a temporary reprieve, however -- the ceiling is now set to expire in December, meaning that all this nonsense will start all over again in just a few weeks.

The debt ceiling has been in place since 1917, and only one country other than the US has such a thing: Denmark, of all places. The whole concept makes no sense, and in a way means that the US budget system is mathematically over-determined.

Think it through.  Congress gets to vote on the US budget each year -- spending and revenues. If spending exceeds revenue -- that is, there is a deficit -- the Treasury borrows to fund the gap. (Note to any MMT-loving readers: I know this isn't actually necessary, but it's how things work right now)!  The debt is simply the accumulated budget deficits resulting from those yearly spending and taxation decisions of the Congress. 

Setting a separate "ceiling" for that debt is unnecessary and illogical, and only serves to create the kind of shenanigans we have witnessed over the past few weeks. The Republicans are much more ruthless than the Democrats about using the ceiling for short-term political advantage, so you'd think the Dems might have used their wafer-thin majority in both Houses to abolish the stupid thing altogether, but here we are. One unfortunate aspect of today's deal: we've been robbed of the chance to hear the howls of anguish that would have come from the GOP if the much-mooted trillion-dollar platinum coin had made an appearance! 

A small setback

The headline number for Canada's GDP in July, released this morning by Statistics Canada, was surprising. Real GDP fell 0.1 percent in the month, leaving the economy about 2 percent smaller than it was when the pandemic began. StatsCan had already reported strong employment growth for the month, and July saw COVID restrictions eased in most Provinces, so it was reasonable to expect a more positive outcome. However, a look behind the headline is reassuring: it is highly unlikely that the decline in GDP recorded in the second quarter will be repeated in Q3. 

Of  twenty industrial sub-sectors covered by StatsCan's data, thirteen posted higher output in July. It is no surprise that the strongest gains were seen in sectors that had been hardest-hit by pandemic lockdowns earlier in the year. Accommodation and food services posted a second consecutive double-digit gain in the month, and the arts, recreation and entertainment sector was not far behind. These gains were offset by weakness in agriculture, largely the result of drought conditions in the Prairie provinces, as well as declines in utilities and manufactures. The fall in manufacturing output was concentrated in durable goods, suggesting that the global semi-conductor shortage again played a role. Retail trade was also slightly weaker in the month.

StatsCan has provided a preliminary estimate for real growth in August, indicating a 0.7 percent gain for the month. Further strength in accommodation and food and a rebound in manufacturing and retail trade are seen as the main contributors to growth partly offset by continuing drought-related weakness in agricultural output. Although some Provinces, notably Alberta and Saskatchewan, saw a worrying rise in COVID cases in September, there has been no reimposition of significant restrictions anywhere in the country, suggesting that the growth seen in August likely continued through the end of the third quarter. 

COVID modelling update

Time to revisit our old friends at the Ontario Science Table, who have just published the results of their latest attempt at modelling the course of the pandemic. Throughout this ordeal, Ontario Premier Doug Ford has insisted that he is "following the science", but the Science Table has not always made that easy. Regardless of how much work has gone into the models behind the scenes, politicians and the media have tended to jump on the worst case scenarios, which are generally just extrapolations. When those scenarios don't materialize -- which is, of course, the probable outcome -- public faith in both politicians and scientists gets eroded just a bit further. 

With that in mind, let's look at the slide deck the Science Table published on Tuesday. Clearly,  things are going much better than the scientists expected earlier in the fourth wave of COVID.  After Ontario relaxed many of its restrictions in mid-July, there were fears that the case count would soar, with the return to in-class schooling in September set to add to the toll. The worst case scenario was that cases, which had fallen to around 200 per day before the reopening, would soar to as many as 4000 per day by October.

There was certainly an uptick through August, with the daily case count seemingly heading north of 1000 at one point, but then the numbers stabilized and started to decline. For the past two days the number has been below 500. The Science Table acknowledges this, but in the most unenthusiastic way imaginable. Its first "key finding' begins thus: "New cases, hospitalizations and ICU admissions are not increasing".  You would think that was good news, but the scientists seem to want to play it down, calling the situation "fragile".  They attribute the fall in cases to rising vaccination rates and Ontario's decision to keep some of its public health measures in place.  Given that both of these factors were evident a couple of months ago, this rather begs the question of why the earlier projections were so much gloomier. 

In any case, the "fragility" of the situation leads the scientists to warn that the range of possible outcomes as the colder weather arrives is very wide, albeit starting from a much lower base than seemed likely earlier in the fourth wave. It's interesting to look at the graphics for cases and ICU admissions. Some smart person has chosen to print the worst case lines much thinner than those for the base case and more optimistic scenarios. Given the tendency of the media and politicians to glom onto the worst case at every opportunity, it seems unlikely that this is accidental.

These projections emerge as something interesting seems to be happening with the pandemic across the globe.  The WHO just reported that cases fell by 10 percent over the past week. Even jurisdictions that have handled this whole nightmare badly -- Boris Johnson's UK, Ron DeathSentence's Florida -- are seeing lower case counts than the gloomsters had predicted.  Some scientists in the UK are suggesting that the virus is set to run out of ways to spin off ever more dangerous mutations, and will soon be no more lethal than the common cold. That may be a premature call and it won't make forecasting any easier, but it might mean (please!) that the rest of us don't have to pay quite so much attention. 

Any day now...

As expected, the Federal Reserve kept both its interest rate settings and its quantitative easing program unchanged this week. In the customary press release and in his subsequent remarks, Fed Chair Jerome Powell stressed that progress continued to be made towards the Fed's two main policy goals -- inflation moderately above the 3 percent target and "maximum employment".  He hinted that gradual reduction of QE, the so-called "taper", could begin soon, which markets seem to be interpreting as November, but rate hikes are unlikely to come until well into 2022.

That press release is an odd piece of work. Check out the very long fourth paragraph, which reads as if it was created by merging drafts written by two or three junior staffers, with no attempt at eliminating duplication, let alone actual editing. It's more useful to consider Powell's remarks, which clearly convey his belief that the Fed's aim of achieving inflation above target has now been achieved (overachieved, one  might say) and its maximum employment goal is within reach, despite continuing COVID-related risks. 

The changes in the Fed's economic projections are quite drastic and cast serious doubt on its ability to fine-tune the economy.  As recently as June, it was forecasting GDP growth of 7 percent for this year, but the spread of the Delta COVID variant has led it to scale this back to 5.9 percent. This naturally means that the unemployment rate at year-end will be a little higher than previously expected, at 4.8 percent.  

In a similar way, inflation is also diverging from earlier expectations. Although year-on-year CPI edged down to 5.3 percent in August, it shows few signs of returning closer to the 2 percent target any time soon.  The core personal consumption expenditure deflator, a measure favoured by the Fed, is now expected to average 4.2 percent for the year, up from an earlier projection of 3.4 percent. It seems unlikely that Powell had numbers like these in mind when he first suggested that the rise in inflation was the result of "transitory" factors.

Just to make things tougher for Powell and his team, the US is once again facing a deadline to increase the insane "debt ceiling". Failure to do so by the end of this month could lead to a government shutdown, and possibly see the US default on its debt obligations for the first time since the Civil War.  Powell warned that it would be unwise to assume that the Fed could protect the US economy from damage if this were to happen. You don't say, Jay.  A US default would render any consideration of tapering moot for some time to come.

Sound and fury, signifying nothing

Those words from Macbeth seem like the perfect way to sum up Canada's Federal election, which took place on Monday. After a clamorous 35-day campaign, the outcome is a House of Commons eerily similar in composition to the one it replaces. The Liberals were about a dozen seats short of a majority before the vote; subject to any last minute corrections, they will be about a dozen seats short of a majority in the new Parliament. The Conservatives, despite again winning more votes than the Liberals, will again be about forty seats behind them. The NDP and Bloc Quebecois, both with around thirty seats previously, will again each have about thirty seats.

Evidently $ 600 million, which is what this election is estimated to have cost, doesn't get you what it used to.  It's hard to pick out any winners here, unless you count the manufacturer of the millions of stubby pencils handed out to voters at polling stations as a COVID precaution. Plenty of losers, though. Let's look down the list, starting with....

Erin O'Toole, the Conservative leader, had little public profile ahead of the election campaign. He seems likeable enough, unlike some of his caucus, but he failed to capitalize on a variety of issues that could have been used to bring down the Liberals -- the sheer pointlessness of the election, Justin Trudeau's perceived lack of gravitas, the mounting cost of COVID benefit schemes that may no longer be needed. Unlike his feckless predecessor, Andrew Scheer, he is unlikely to be ditched as a punishment for failure, but his party will not be merciful in a year or two if he is unable to make an impact in  Parliament.  

Jagmeet Singh, leader of the ever-so-slightly leftist NDP, is widely admired for his intelligence, even by  those who would never vote for him. The NDP is often described as "Liberals in a hurry"; in the last Parliament they regularly propped up Trudeau's government in the House of Commons, getting precious little in return and, as the vote count suggests, doing nothing to build on their support base. Singh's smart nice guy act may start to pall if the party continues to keep Trudeau afloat in the new Parliament.

Canada -- yes, the whole country -- is a clear loser here, and not just because of that wasted 600 mil'.  There's some small consolation to be had in the fact that the perfectly odious People's Party of Canada (populist, nativist) failed to elect anyone to Parliament. But this election served yet again to underline the deep divisions within the country.  The Liberals were elected by the country's poorest region (the Atlantic Provinces) and its three most cosmopolitan cities, Montreal, Toronto and Vancouver. The prairie provinces and most of Ontario were solidly Tory, while the Bloc Quebecois continues its hold on most of Quebec.  In their six years in office, the Trudeau Liberals have done nothing to bring the country together.

And lastly, we come to Justin Trudeau himself, probably the biggest loser of all. The election was his gamble and it failed to net him a majority government. His flimsy rationale for having an election at all centered on the fact that the House of Commons was hard to manage -- evidently he has not spent much time studying how things go in the US Congress or the UK House of Commons, let alone the Israeli Knesset.  Ottawa is a bastion of politeness and tranquility by comparison. He is unlikely to find things any easier now.

Many years ago Trudeau's father, Pierre, famously took a walk in an Ottawa snowstorm and decided to resign the Prime Ministership. Justin may soon start hearing subtle hints that it's time for him to strap on his snowshoes and take a walk of his own. His Deputy (and Finance Minister) Chrystia Freeland has been doing most of the top job for the past couple of years anyway, and is almost embarrassingly keen to take over. If that happens, it won't be long before she sees the need to obtain a personal mandate from the people, in the form of yet another election. Better put another $ 600 million aside -- we may be needing it soon.  

You sure about that, Tiff?

 A week ago I noted that the newly-released Canadian employment data for August looked reassuring from the Bank of Canada's viewpoint. A second strong month of employment growth seemed like evidence that the fall in GDP around mid-year was, as the Bank maintained, a temporary setback. Inflation, though? That may be a different matter.

This past Wednesday, Statistics Canada reported that headline CPI rose 4.1 percent in the year to August, up from  3.7 percent rise in July. That was well above consensus expectations and represented the fastest gain since 2003. As CPI has moved steadily higher during this year, StatsCan's commentary has generally focused on "base effects" -- a lot of prices, with gasoline at the forefront,  plummetted in the first wave of COVID, and year-on-year numbers were inflated as more "normal" prices were re-established.  Now the wording is different. The second sentence of StatsCan's press release says the August bounce "mainly stems from an accumulation of recent price pressures and from lower price levels in 2020".

The Bank of Canada has regularly expressed confidence that the rise in inflation is the result of transitory factors. That argument holds as long as base effects bear the brunt of the blame, but that "accumulation of recent price pressures" is another matter.  Gasoline prices are still a major wild-card, rising 32 percent from a year ago, but there is now much more to the story.  In August, seven of the eight sub-categories in the index moved higher.  On a seasonally adjusted basis, headline CPI rose 0.4 percent from July to August which, if it persisted, would annualize to an even faster rate than we have seen so far this year.

The Bank of Canada, as we know, likes to look through short-term trends and movements in volatile components such as gasoline. For that purpose it uses three "preferred measures" of inflation, which StatsCan faithfully computes and publishes each month. Those measures are no longer providing much comfort. All three ticked higher in August, and their mean value is now above 2.5 percent.

The 2 percent inflation target has been the Bank of Canada's lodestone for decades now. Every governor has reiterated that keeping inflation expectations anchored at that level is a key policy goal. It is completely understandable that the Bank wants to reassure itself that the deflationary effects of the COVID pandemic have passed before it contemplates any significant removal of monetary stimulus. However, each month of rising inflation, and the apparent broadening of price pressures, erodes the hard-won credibility of the inflation target just a little further. Governor Tiff Macklem and his colleagues need some good news on the inflation front, sooner rather than later. 

Canada jobs data: hold the doom and gloom

 A week ago, in the wake of the report of falling Canadian GDP in Q2 and July and the disappointing US jobs report for August, I posted about the sudden outbreak of doom and gloom among economists: It's legitimate to wonder if the dreaded Delta variant may have a negative effect on the economy, but the speed with which economists have swivelled to adopt that as their base case scenario is surprising.    Then the Bank of Canada came out with a rather more balanced take on the growth outlook,  noting that the only real source of weakness in the economy was the export sector, and that Consumption, business investment and government spending all contributed positively to growth, with domestic demand growing at more than 3 percent.

So today we saw Canada's employment data for August, and at this point, it looks as though the Bank of Canada's view is more valid than the suddenly-changed consensus among analysts. The economy added 90,000 jobs in the month, well above market expectations. This was the third straight monthly gain and brought the national unemployment rate down to by 0.4 percentage points to 7.1 percent, its lowest level since the onset of the pandemic.   Full-time employment accounted for 69,000 of the new jobs, with service industries leading the way as pandemic restrictions were generally eased across the country.

Some economists are trying to pooh-pooh the data -- check out the bank economist quoted here who claims to be able to spot some "flies in the ointment" -- but the numbers seem to suggest that the Canadian economy's recovery is continuing,  as the Bank of Canada said.  This is not to suggest that everything is back to its pre-COVID normal: total employment is still 0.8 percent below its pre-pandemic level, and of course the labour force has grown in the interim, which is why the unemployment rate is still so high.  Data for overall labour market underutilization and the percentage of persons working from home also indicate that the recovery still has some way to go. But the fears that were being expressed a week ago seem to have been seriously overstated.

Canada's Federal election campaign has ten days to run. Opposition parties have seized on the weak GDP data and recent high inflation numbers to argue that the Liberals are mismanaging the economy. It will be interesting to see if Trudeau and his team will try to capitalize on these strong employment numbers in the dying days of this entirely unnecessary campaign.   

 

Bank of Canada sits tight

With election day less than two weeks away, there was little likelihood that the Bank of Canada would make any policy changes at today's Governing Council meeting. And so it proved: the Bank kept its target rate unchanged at 0.25 percent and committed to maintain its quantitative easing program at the current pace of C$ 2 billion per week. 

Most of the Bank's press release was devoted to explaining why both growth and inflation have deviated from earlier expectations, and why those deviations do not signal any need for policy adjustments.

As regards growth, the Bank blames the unexpected fall in Canada's GDP in the second quarter (and in July) on global supply chain issues. The GDP decline was concentrated in the export sector,  with autos particularly hard-hit.  Aside from that weakness and some pullback in housing, the Bank paints a relatively rosy picture of current and future growth:

Consumption, business investment and government spending all contributed positively to growth, with domestic demand growing at more than 3 percent. Employment rebounded through June and July, with hard-to-distance sectors hiring as public health restrictions eased. This is reducing unevenness in the labour market, although considerable slack remains and some groups – particularly low-wage workers – are still disproportionately affected. The Bank continues to expect the economy to strengthen in the second half of 2021, although the fourth wave of COVID-19 infections and ongoing supply bottlenecks could weigh on the recovery.

In terms of inflation, the Bank's stance is almost identical to the Fed's: yes, inflation is well above target now, but only for transitory reasons:

CPI inflation remains above 3 percent as expected, boosted by base-year effects, gasoline prices, and pandemic-related supply bottlenecks. These factors pushing up inflation are expected to be transitory, but their persistence and magnitude are uncertain and will be monitored closely. Wage increases have been moderate to date, and medium-term inflation expectations remain well-anchored. Core measures of inflation have risen, but by less than the CPI.

As regards that final sentence, it should be noted that while core measures of inflation are indeed below headline CPI, they have moved steadily above the 2 percent target in recent months, something the Bank cannot simply ignore. 

Given the Bank's views on growth and inflation, its decision to stand pat is no surprise. It will continue its QE program and still does not expect to raise rates until late next year:

Governing Council judges that the Canadian economy still has considerable excess capacity, and that the recovery continues to require extraordinary monetary policy support. We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the Bank’s July projection, this happens in the second half of 2022.... We will continue to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective.

There is a small risk that the ongoing pandemic will require even more support, but the economy's resilience has increased greatly as each wave of COVID has unfolded. The bigger risk, for the Bank no less than the Fed, is that inflation proves stickier than expected, which could force the Bank's hand if it wishes to maintain the credibility of its inflation target.  

A pizza the action

The August non-farm payrolls report for the US, released this morning, has set off some alarm bells. The economy added "only" 235,000 jobs in the month, well below expectations. It's hard not to conclude that those expectations may have been unduly influenced by the very strong results seen in the previous couple of months.  The July job gain was revised upwards to more than one million, a pace that was clearly not likely to be sustained for very long. In more normal times (remember those?) a rise of 235,000 would be considered respectable, especially as it served to bring the unemployment rate down by two ticks, to 5.2 percent. It's legitimate to wonder if the dreaded Delta variant may have a negative effect on the economy, but the speed with which economists have swivelled to adopt that as their base case scenario is surprising.  

This is yet another of those months in which Canada's jobs report comes out a week after the US. Canada's July jobs data were strong, but StatsCan reported just a couple of days ago (see previous post) that the economy actually shrank in that month. Since employment normally tracks behind changes in overall activity, does this mean we can expect a weak August jobs report next Friday? 

Maybe, maybe not. Economists are not supposed to rely on anecdotal evidence,  though it has been suggested that the plural of anecdote is data. But anyway, here goes. Last night we headed out to the  excellent pizza patio at one of our local wineries.  As I was parking the car I could see that there were lots of empty tables, and yet when we made it to the front of the short line at the door, we were told there would be a wait of at least half an hour before we could be served. As more patrons arrived, that wait moved up to 45 minutes, then a full hour. Many people simply gave up and left. 

We sat on a couple of stools at the bar and quickly saw that only about a third of the tables were in use, and there were only a couple of servers on duty. A chat with the manager confirmed that they were unable to find enough staff to open the place up completely. A survey of our local newspapers or social media groups would indicate that any number of restaurants in the region are facing the same issue, which must be disheartening for them as the busy tourist season starts to wind down. 

What does this imply for next week's official data? The puzzling combination of high unemployment and widespread labour shortages has been around for some months now, and may well show up again in the August numbers. There's not much solid evidence that continuing COVID-related income support plans are disincentivizing people from taking jobs, but depending on how the numbers come out, that could well become an important debating point in the final week of the election campaign. 

Canada GDP data: all over the place

Growth data released this morning by Statistics Canada are, well, confusing. Monthly data show that GDP rose a solid 0.7 percent in June after declining in April and May. The improvement reflected the easing of COVID restrictions across the country and was very broad-based. Of the twenty sub-sectors tracked by StatsCan, fifteen posted higher output in the month, with both goods and services showing gains. Even with the June rebound, however, real GDP remains about 1.5 percent below its pre-pandemic peak. 

But then there are the quarterly GDP numbers, which showed that real GDP fell almost 0.3 percent from Q1, its first decline since the corresponding quarter of 2020.  Just one month ago, when StatsCan released its May GDP data, it expressed confidence that the final data for Q2 as a whole would show a 0.6 percent gain, so this outcome is a nasty surprise. Key factors driving the weakness include housing retail activities, as that market comes off the boil, and exports, where the main contributing factor appears to be the ongoing semi-conductor shortage. 

Other elements of GDP, including residential and non-residential investment, business inventories and government spending, all posted gains in the quarter. Moreover, real gross national income and final domestic demand were both higher in the quarter, so the overall picture is not as bleak as the headline numbers suggest. However, that hasn't stopped some business economists from switching abruptly to a much gloomier tone -- check out one or two cliche-heavy examples of that in the final paragraphs of this CBC article. 

But then again -- I warned you the data were confusing -- StatsCan's preliminary estimate for GDP in July shows signs of further weakness. The agency expects a 0.4 percent fall in GDP for the month, with weakness in manufacturing, construction and retail trade. Given that July was the first full month in some time with only limited COVID restrictions in place in most Provinces, this outcome is surprising, to say the least. It also looks to be inconsistent with the job gains already reported for the month. Final GDP data for July will not be available until October 1.

If there is a fresh bout of economic weakness on the way, that's bad news for all Canadians, of course, but perhaps especially for Prime Minister Trudeau. His campaign for the September 20 election is off to a very bad start, amid moderately higher COVID case counts, the shambolic withdrawal from Afghanistan and a general sense among voters that he had no good reason to call an election at this time.  Bad economic data are the last thing Trudeau needs.  Opinion pollsters are starting to suggest that the Tories are looking like the likeliest winners of the election, albeit without an overall majority. That's something almost nobody expected when the election was called.