A turning point?

First the good news: Canada's real GDP rose at a 3.3 percent annualized rate (0.8 percent quarter to quarter) in Q2, according to data from Statistics Canada this morning. This marks the fourth consecutive quarter of real growth and stands in marked contrast to the US, where real GDP declined in both Q1 and Q2. Much of the growth resulted from business inventory accumulation, which may prove a mixed blessing if we are in fact about to see a shift to slower growth or even recession. Both housing investment and durable goods spending fell in the quarter, which may well indicate that higher interest rates are already having an impact. 

Given mounting concerns over the possibility of a pause in growth,  monthly GDP data are arguably more informative at present than the quarterly figures.  Here, the data also published today by StatsCan provide a mixed picture. Real GDP rose 0.1 percent in June after rising only minimally in May.  (It is worth noting that the May data originally showed a 0.1 percent decline, which immediately led the media to start proclaiming a recession).  Growth in June was reasonably broad-based, with fourteen of the twenty industrial sub-sectors showing gains. The accommodation and food services sector was particularly strong as border restrictions continued to ease. 

Advance data for July seem to tell a different story. StatsCan estimates that GDP fell 0.1 percent in the month, with manufacturing, wholesale and retail trade and utilities all posting declines. If final data (due on September 29) confirm this, it will imply that GDP is essentially unchanged from April, which was the last month to post really solid gains. This does not meet any sensible definition of a recession, but it does suggest that the economy has moved from the post-COVID recovery phase to a much lower growth path. 

Such a slowdown is, of course, what the Bank of Canada is trying to achieve, given its clear concerns about overheating in the economy, particularly in the labour market. Today's data are among the last major indicators the Bank will see before its next rate decision, due on September 7: the all-important employment and CPI data for August will not be published until later in the month, though it is likely that the Bank will have advance knowledge of the jobs data when it meets to make its rate decision. After the outsized rate hikes at the last two meetings, expect the Governing Council to settle for a more modest 50 basis point hike this time. 

Canada's budget surplus (yes, really)

Not getting much attention in the media, but Canada's Federal budget has swung sharply into surplus so far in fiscal year 2022/23, which began in April. Data released by the Department of Finance this morning show a surplus for the three months April-June of C$ 10.2 billion, compared to a deficit of C$ 35.6 billion in the corresponding period last year.

Most people's first guess, including mine,  would be that the improvement is largely down to rising revenues, particularly in light of the surge in energy prices. It turns out this is not entirely the case. To be sure, revenues are up sharply -- more than 20 percent, in fact -- but the Fiscal Monitor describes the rise as "broad based". The biggest contributors are corporate and personal income tax revenues, consistent with the ongoing recovery in the economy. However, a bigger contribution to the turnaround can be found on the spending side: program outlays fell 25 percent, largely as a result of declining transfers to persons, through falling unemployment benefit payouts and the virtual elimination of COVID-related transfers. 

The data almost totally destroy the arguments about fiscal policy being put forward by the likely new Conservative Party leader, Pierre Poilievre. His view that what he calls "Justinflation" is entirely the result of out-of-control public spending financed by the Bank of Canada's printing presses was never remotely accurate and now looks totally asinine.  So far, no comment on the data from the Poilievre camp. Well, it is the last Friday in August, after all. 

Leaving aside the politics of all this, it's worth asking whether the swing into surplus is actually a good thing. After several years of dismal fiscal results, it is useful to have a reminder that strong economic growth is almost always the best way to solve a fiscal problem. Justin Trudeau's much ridiculed statement that with a growing economy, "the deficit will fix itself" is much more true than not. 

The flipside of this, however, is that fiscal policy is for the moment, rather unexpectedly, working alongside monetary policy to put the brakes on the economy. This may help get inflation back to target rather sooner, but obviously heightens the risk of tipping the economy into recession. If the good fiscal news continues, expect some sort of mini-budget in the Fall where the Government can spend some of this unexpected windfall. 

Gissa job

Outdated numbers, sure -- they're for June -- but still worth reporting as the media continue to stoke recession fears in Canada: Statistics Canada reports today that payroll employment rose by 114,000 in June, while the number of job vacancies rose by 32,000, resulting in a job vacancy rate of 5.9 percent, matching the record high for the series. 

The data come from the Survey of Employment Payrolls and Hours or SEPH. This is completely separate from the more familiar monthly labour force survey (LFS). That survey has shown some modest weakness in the last two reporting months (June and July),  while still suggesting that the Canadian jobs market is extremely tight by all historical standards. The SEPH results seem to confirm that.

Both sets of data are consistent with anecdotal evidence in my own home region and all across the country. Employers are finding it difficult to source enough employees to run their businesses the way they did before the COVID pandemic. Here in Niagara, for example, at the height of the all-important tourist season, restaurants are having to close for parts of each week because of lack of staff, while local stores are having to tempt retirees back into the labour force in order to keep their doors open. 

Can it continue this way? The anecdotal evidence suggests that the situation certainly hasn't changed in the two months since the SEPH data were collected. However, it is worth remembering that employment data tends to lag behind economic activity data, such as GDP, both on the upward and the downward side of the business cycle. Recall that Canada's GDP growth, in contrast to that of the US, appears to have remained positive through the first two quarters of the year. It may be that things have weakened in the current quarter, which would suggest that employment data might take a turn for the worse in the next few months. For now, though, there's no real evidence of that.  

Who cares who cares?

The summer months have seen Ontario media crammed with stories about the supposed collapse of the Province's healthcare system.  A vanishingly small number of short-term emergency room shutdowns has been offered as evidence that the entire system is "on the brink".  An unholy alliance has sprung up almost overnight. Commentators on the left, led of course by the Toronto Star,  argue that the fault lies with the Doug Ford government, while those on the right want to see further privatization in order to ease pressure on the system.

As it happens, yours truly has had lots of exposure to the health care system in the last two months, as my wife has received a hip replacement.  There have been countless visits to hospitals, diagnostic centres, physios and such. There have been no issues at any stage of the process, and no signs of the burnout, staff morale problems and all the rest of it that we read about every single day.  It's dangerous to generalize from a single example, but if our experience in our very unfashionable small city is anything to go by, the health system remains resilient.

It's worth pointing out that the Ontario health system is by no means exclusively a public sector operation. Hospitals are public, but there is no public dental care whatsoever, eye care is a mixture of public and private, there is no pharmacare except for seniors and most diagnostic centres (blood tests and such) are privately operated. Wall-to-wall TV ads offering insurance for "the things your public health plan doesn't cover" offer all the evidence you need that the system is already far from comprehensive.

Be that as it may, the Ford government is not about to let a good crisis go to waste, and today unveiled a multi-part plan to relieve the pressure on the system. One element of the plan calls for allowing private clinics to offer a wider range of procedures while making sure that costs are still covered by OHIP, the Province's health care plan.

It's not at all clear why this would be a better or lower-cost option than simply increasing funding for the public system. At the start of this century I spent more than a decade living in the UK, which has a mixed public and private health care system. I could write a whole post about this, but one observation that's relevant here is that the private sector goes after the low-hanging fruit. They'll schedule you for a hip replacement if it looks likely to be a simple procedure, but if there's any risk of complications they'll boot you back to the nearest public hospital before your ass hits the gurney.  

Supporters of greater private sector involvement in health care point to a variety of countries that have a blended system and deliver better outcomes than Canada at a lower cost; France and Spain are two regularly cited examples. Fair enough, but does anyone really believe that opening up the Ontario health system to private money would move us in that direction? Far more likely that an influx of money and methods from across the border to our south would push up costs and rapidly erode the equal access that we currently enjoy. I'll take a pass, thanks.

Behind the headline

Sure, the headline numbers from Canada's July consumer prices report look good. StatsCan reported this morning that the year-on-year rise in headline CPI slipped to 7.6 percent in the month from 8.1 percent in June, breaking a year-long streak of ever-higher inflation. The month-on-month increases -- 0.1 percent unadjusted, 0.3 percent seasonally adjusted -- were the smallest since December 2021. 

All well and good, but you only have to read as far as the second sentence of the press release to realize that there may be less to this improvement than meets the eye: "The deceleration was a result of slower year-over-year growth in gasoline prices". That bald statement of fact says it all: aside from the fall in the price of gasoline, it is difficult to spot much really encouraging news in this report. 

Gasoline prices fell 9.2 percent in July, dropping the year-on-year increase in this key component to 35 percent from the alarming 55 percent recorded in June. However, a quick glance at most of the other measures in StatsCan's summary table makes it clear that price pressures remain broad-based. In particular, food prices actually accelerated on a year-over-year basis in July, rising 9.9 percent after a 9.4 percent rise in June. Excluding both food and energy, prices rose 5.5 percent year-on-year in July, well above the Bank of Canada's 2 percent target.

The special aggregates developed by the Bank to monitor core inflation trends also offered little solace. Two of the three measures rose in July; all three are now at or above 5 percent, with the mean reading edging up to 5.3 percent. 

Even with all these caveats, it seems likely that the peak of the current inflation spike has passed, but the headline rate will decline only slowly from here. Gasoline prices may have slid in July, but they continue to fluctuate wildly on a daily basis, making it hard to get a handle on how the August index may be affected. Looking further ahead, natural gas prices may well supplant gasoline as the top-of-mind concern for Canadians as the colder weather approaches: the year-on-year increase for natural gas in July, at 42 percent, was actually higher than the increase for gasoline.  

It seems clear that the Bank of Canada will raise rates again at its next Governing Council meeting in September, but a 50 basis point move seems more likely than the much bigger increases seen in recent times.  There are still no signs of an emerging wage-price spiral, with the rise in wages, at 5.2 percent, lagging far behind CPI. Moreover, the Bank's tightening up to this point has put the housing market sharply into reverse, with both sales activity and prices falling sharply. By further undermining the housing market, aggressive rate hikes from here could seriously damage consumer confidence. That would make the soft landing for the economy that is the Bank's stated goal all but impossible to achieve. 

Weird economics

I wasn't able to blog yesterday about the US July CPI data, but it turns out that may be an advantage, because I now have the opportunity to focus on some of the downright weird ways that the numbers have been portrayed on social media.

First, though, a quick look at the numbers themselves. Headline CPI was unchanged month-on-month in July after rising 1.3 percent in June. This dropped the year-on-year rise to 8.5 percent from the 9.1 percent reported in June.  This result was slightly better than expected, and mainly reflected a sharp fall in energy prices.  Core CPI (ex food and energy) rose 0.3 percent month-on-month, the lowest increase for four months, resulting in a year-on-year increase of 5.9 percent, the same as in June.

Now, about the way some people have been interpreting those numbers. There seems to be an almost coordinated effort out there on social media to pour scorn on official data that don't correspond to the "we're doomed to stagflation and it's all Biden and Powell''s fault" narrative.  One genius on Twitter, whose mini-bio says he is an investment advisor, pontificated that "CPI isn't inflation", prompting one well-known economics blogger to respond "Jesus Christ! That's exactly what it is"! If your investment advisor thinks like this, it may be time to take your business elsewhere.

Then there's the crypto community, which seems to be ever more anxious to see societal collapse,  if it's a way of making money. One Bitcoin booster dismissed the July data with the argument that "inflation is cumulative".  This is of course true, but it might be pointed out that 0 percent per month cumulates in a rather different way from 1.3 percent per month. 

The same person also chose to comment that the 528,000 increase in non-farm payrolls reported last week was not a good number because more than 300,000 of the jobs reflected "seasonal adjustment", an opinion that suggests minimal or no understanding of how statistical measures are calculated. Misrepresenting both the inflation and the employment data in this way allowed them to declare that the US economy was indeed enduring "stagflation", an opinion that is frankly little short of gaslighting. 

Enough of the rant!  Does the July data indicate that the worst of the inflation spike has passed? One data point is never enough to draw a conclusion, but there are signs in energy markets, supply chains and shipping rates that allow at least cautious optimism.  One key example: the nationwide average cost of a gallon of gasoline, which topped $5 earlier in the summer, slipped back below $4 (well, to $3.99 to be exact) this week, which should help to keep the August headline CPI in check.

The bad news for Messrs Biden and Powell is that the decline in year-on-year CPI is likely to be painfully slow, thanks to the so-called base effect. Here's where the "cumulative" nature of inflation actually becomes important. The monthly numbers that will fall out of the index for the next few months (i.e. the numbers for August 2021, then September 2021 and so on) were relatively small; the big monthly increases really only came along after the turn of the year. This means that even if August and September see monthly CPI in line with July's -- and it's unlikely the actual numbers will be that good -- the year-on-year figure will very likely stay close to 8 percent.

That's not good news for the Biden administration as the mid-term elections loom. It also makes things tough for the Fed.  Even if low monthly prints for August and September indicate that what we might call the running rate of inflation, calculated by annualizing a few months of data, is falling back towards target, the year-on-year number that the media (and social media) tend to focus on will still be historically high. It's tough to figure out how to frame policy in those circumstances. 

Whose recession is it anyway?

With the media full of recession talk in both the United States and Canada, and US GDP marginally lower in each of the past two quarters, today's July employment reports in both countries took on added importance. So what we actually saw on both sides of the border came as a complete surprise, with significant implications for monetary policy in the months ahead. .

Start with the US, where the reported falls in GDP might have been expected to translate by now into a weaker jobs market, given that employment is generally a lagging indicator. So much for that. Employment rose by 528,000 in July, twice the market expectation, with the unemployment rate edging down to 3.5 percent. Data for both May and June -- a period, recall, when the economy was supposedly contracting -- were revised moderately higher. 

Both total employment and the unemployment rate are finally back to their pre-pandemic levels. However, some after-effects of the "great resignation" can still be detected in the data, with the participation rate still below its February 2020 level. Wages rose 5.2 percent year-on-year and continue to lag well behind the pace of consumer price inflation. The only real note of caution comes from the separate weekly jobless claims dats, which have been ticking higher for the past three months.

The data may well indicate that the technical factors cited to explain the weak GDP numbers, including quirks in trade and inventory data, are in fact the key to understanding those numbers, with the underlying economy still in good shape. Calls for the Fed to rein in its tightening plans, which have come from a variety of sources ranging from Larry Summers to Bitcoin maximalists, look to be badly misplaced. There may not be any more 75 basis point hikes, but there is more tightening to come. 

Canada has reported modest GDP growth so far in 2022, with the pace even accelerating marginally in Q2. On this basis, consensus expectations had been for a rise of 15,000 jobs in July. Instead, today's report from Statistics Canada showed the loss of 31,000 jobs in July, following on from the loss of 43,000 in the prior month. The unemployment rate held steady at an all-time low of 4.9 percent. 

The remarkable volatility of Canadian employment data has been a regular topic for this blog over many years, and there are features in today's numbers that warrant caution. The fall in overall employment was entirely explained by a 51,000 job loss in the public sector. Private sector employment rose marginally, while there was a 34,000 gain in the most volatile component of all, the number of persons reporting themselves as self-employed.  

If we count those self-employed positions as being effectively part of the private sector, it is fair to suggest that the underlying economy remains solid.  The loss of public sector positions may well turn out to be a one-off development, with the number bouncing back in August. Still, the decline in employment in two consecutive months is not something the Bank of Canada can reasonably ignore. It may be too soon to call for the Bank to decouple its policy from the Federal Reserve, but the pressure for the Bank to maintain a robust approach to tightening has certainly eased just a little.