Give it a rest

In a determined attempt to mess up people's holiday season, the Toronto Star has posted this article about the economic outlook for 2024. Since the Star has kept its paywall in place despite the recent shakedown of Google, I will assume you can't actually read it, so I will try to summarize for you.

The headline reads "Where is Canada's economy headed in 2024?  Brace yourself".  It's pretty clear where this is heading!  Perhaps readers should be reminded that the Star, along with many other media outfits, has been trumpeting an imminent recession since about May 2022, when the Bank of Canada started getting serious about policy tightening.  Sooner or later they will no doubt be right, but that doesn't make it a good piece of forecasting, any more than the people carrying "The end is nigh" posters can be regarded as good prophets.

Below the headline we read that "Even if the economy doesn't plunge into a deep, prolonged recession, the year ahead is still going to be painful for many households, economists say".  The first part of that is evidently worded so as to make it sound as if a "deep. prolonged recession" is pretty much baked in.  In fact that's precisely nobody's base case for the coming year, and it's certainly not the expectation of any of the economists quoted in the body of the article. 

The doom and gloom in the Star contrasts sharply with the media coverage of yesterday's Boxing Day sales, with TV news bulletins showing malls heaving with heavily-laden patrons. What's more, one of the fastest-rising sub-components in the most recent CPI report was the cost of package holidays; that wouldn't be happening if people weren't willing to splash out on non-essentials.  

If the Star and other media outlets still employed reporters who focused on business-related stories, maybe said reporters would realize that these things can't all be true at the same time. Those days, alas, are gone. There may indeed be a mild recession in the next little while; if it happens, the doom-laden tone of the media headlines will surely be something to behold. 

Christmas greetings!

 Merry Christmas and happy holidays to everyone who has been kind enough to read the blog this year.

Hoping (but not really expecting) that we can all enjoy a better and more peaceful year in 2024. 

Almost there

Today brought an early Christmas gift for Fed Chair Jerome Powell and his FOMC colleagues. Data from the US Bureau of Economic Analysis showed that the personal consumption expenditure (PCE) deflator fell 0.1 percent in November, its first month-on-month decline since the depths of the COVID pandemic in April 2020. That lowered the year-on-year increase to 2.6 percent. The core PCE deflator, which is the measure the FOMC follows more closely, rose 0.1 percent in November, but that served to lower the year-on-year increase to 3.2 percent from the 3.4 percent recorded in October. 

The Fed's 2 percent target specifically aims at controlling the consumer price index, but these improvements in the PCE deflators appear to indicate that policy is on the right track. Is the Fed close to achieving the almost mythical soft landing for the US economy?  Maybe so.  Revised data released on Thursday by the BEA showed that real GDP rose at a 4.9 percent annualized rate in Q3.  That's a slightly lower figure than the Bureau previously estimated, but it shows the economy still maintains considerable momentum even as inflation drifts slowly toward the target rate. 

This week's data certainly make it clear that the Fed tightening cycle is at an end, but they do not necessarily tell us much about when an easing cycle might begin. Arguably, the fact that the real economy is still moving ahead allows the Fed the luxury of waiting a little longer to start that cycle, just to be completely sure that CPI inflation is heading all the way back to the target.  The next FOMC announcement is due on February 1.  That will surely not bring a rate cut, though it may allow the Fed to start offering hints about timing, as it is set to table a "Statement on Longer-Run goals and Monetary Policy Strategy" on that day. Actual rate cuts may follow in Q2 of 2024, in line with the "dot plot" from the last FOMC meeting, which pointed to a total of 75 basis points in cuts for 2024 as a whole. 

Canada November CPI dashes rate cut optimism

Heading into today's release of consumer price data for November, Canadian markets were almost unanimously expecting the headline rate to fall below 3 percent year-on-year, which would put it inside the Bank of Canada's 1-3 percent target range. This expectation was driving hopes that the Bank might start cutting official rates in the first half of 2024. 

In the event, the data confounded those expectations. According to Statistics Canada, headline CPI came in at 3.1 percent year-on-year, exactly the same pace as in October. With further weakness in energy prices (both for gasoline and heating oil) putting downward pressure on the headline figures, most of the widely-followed special aggregates remained well above the target range, with all items except energy up 3.8 percent and all items except food and energy rising 3.5 percent, up from 3.4 percent in October. 

To be sure, there are a few positives in the data.  Most notably, the year-on-year rise in food prices slowed for a fifth consecutive month. although it still stands at 5.0 percent. Less positively, shelter costs continue to increase, rising 5.9 percent from a year ago, led by a 29.8 percent rise in mortgage interest costs. There was also a startling 26 percent rise in the cost of travel tours: evidently, even as Canadians tell pollsters that their financial situation is dire, they are still finding the cash for a winter break. Finally, looking at the Bank of Canada's three preferred measures of core inflation, we find that two of them rose at the same pace in November as in October -- and the only one that decelerated, "CPI-Common", seems to have fallen out of favour in the eyes of the Bank.

So where does all this leave the Bank and the markets?  Governor Tiff Macklem spoke to the Canadian Club Toronto late last week.  While it is not certain that he had an early sneak peek at today's data, the impact of the November CPI numbers can certainly be judged from what he had to say.  Specifically:

Inflation was 3.1% in October, but that remains well above the 2% target. And it’s too high in key categories of goods and services, like food and rent. 

That was certainly still true for the November data.  And...

We expect growth and jobs to be picking up later next year, and inflation will be getting close to the 2% target.

"Well above the 2 percent target" implies that even if CPI had moved into the target range in November, as markets had expected, the Bank would not have been impressed. And "later next year" implies that unless the real economy faces a severe setback, which is certainly not the Bank's forecasts, the rate cutting cycle is unlikely to start before mid-year. 

Canada's online news scam

Back in June, the Canadian government passed the Online News Act, which was aimed at shielding traditional media outlets from losing revenue to online platforms.  There is no question that the likes of Facebook and Google have been hoovering up a growing portion of the advertising revenue that had previously gone to newspapers and the like.  Rather than moving on from their advertising-based business models, the old media lobbied the government to introduce measures to force the newcomers to share the loot.

As soon as the Act came into effect, Meta/Facebook made it impossible to use their platform to link to traditional media outlets.  This complies with the Act, though hardly in the way that the government intended, and the ban remains in place to this day. Back during the wildfire season in early summer, the newspapers were full of stories that Facebook's intransigence was putting Canadians' lives at risk by depriving them of vital information.

Google took a less confrontational approach, and last month announced that it had agreed a deal that would see it pay C$ 100 million per year to the old media outlets in order to comply with the new law.  As the linked article above shows, details of who will actually get Google's money are now emerging, not without some wrangling. The Toronto Star quickly decided that the overall package was not adequate, which brings thoughts of gift horses and their mouths to mind.  The CBC lobbied for and appears to have been awarded a share of the pot, even though it already receives upwards of a billion dollars of taxpayers' money each year.   

Anyway, now that the deal is in place, presumably we can go onto Google and read stories in the Toronto Star or the Globe and Mail to our hearts' content, right? Don't be silly! If you try to read a story in the Star online you will still be faced with a demand to take out a subscription.  (Try it for yourself, here.)  You could, of course, have taken out that subscription at any time, before all of this nonsense started -- and yet somehow we are meant to believe that it was Google and Facebook that were the ones denying us access to the news. All that's changed is that the Star et al have found a way to get paid twice for being being the same mediocre* newspapers as before.  

Shameless shakedown or devious double-dipping?  Decide for yourself, but in the meantime don't believe everything you read in the newspapers. 

* It's almost Christmas so I'm feeling charitable. 

Fed on hold but no hint of cuts

To no-one's surprise, the US Federal Reserve today kept the Fed funds target rate unchanged at 5.25-5.5 percent.  The press release contains largely the same phraseology the Fed has been using in recent months: "Inflation has eased over the past year but remains elevated"; "The Committee remains highly attentive to inflation risks"; "The Committee is strongly committed to returning inflation to its 2 percent objective".  Only the phrase "has eased over the past year" is new. 

The media release also contains the standard warning of the possibility that "additional policy firming ....may be appropriate to return inflation to 2 percent over time". Completely (but not surprisingly) absent is any explicit hint that the Fed is ready to start thinking about the timing of rate cuts, but the "dot plot" of FOMC members' individual expectations for the Fed funds target certainly shows the way the Committee's thinking is heading. Only two FOMC members appear to think the target will remain at the present level through 2024. The median expectation is around 4.5 percent, with one member expecting the rate to fall below 4 percent.  The median then falls to about 3.5 percent in 2025 and still further in 2026, though it stays above the longer-run projection of 2.5 percent throughout the forecast period. 

Today's decision came one day after the release of CPI data for November, which showed that while headline inflation is well-behaved, some of the core measures are still increasing too fast for the Fed's comfort.  Headline CPI rose 0.1 percent in the month, with the year-on-year increase marginally lower at  3.1 percent. The data were heavily influenced by a 2.3 percent monthly decline in energy prices, which now stand 5.4 percent lower than a year ago, with gasoline down by 8.9 percent.  However, CPI ex food and energy rose 0.3 percent in the month, for a year-on-year gain of 4.0 percent, the same as in October. Service prices are proving particularly sticky, rising 5.5 percent year-on-year. 

There is no reason for the Fed to be in any rush to cut rates, given that the real economy and the jobs market are holding up well in the face of the tightening it has put in place so far. Barring some significant downside surprise for the real economy, rate cuts are unlikely to materialize much before the middle of 2024. 

Misery Index redux

A couple of US numbers appeared in the last two days that are a little hard to reconcile, but let's give it a shot.

First we have the US non-farm payrolls data for November, released by the BLS on Friday. The report showed that the US economy added 199,000 jobs in the month, sufficient to push the unemployment rate down to 3.7 percent.  The job gain is slightly below the average gain of 240,000 posted over the past twelve months, but is surely sufficiently large to give the lie to any suggestions that the US economy may be about to slip into recession, let alone that it is already in one.  Moreover, hourly earnings rose 0.4 percent in the month, to stand 4.0 percent higher than a year ago. That pace of wage gains is now higher than the headline inflation rate. 

That all sounds like good news, so how do we explain the second number: President Biden's approval rating among voters now stands at a mere 37 percent, according to CNN. Of course, a lot of factors enter into people's opinions of the President -- the Israel-Hamas war and the endless standoffs in Congress being but two of them -- but the most striking finding is that "Roughly seven in 10 respondents said they would rate the country’s current economic conditions as poor".

Seriously, people-responding-to-polls?  You and everyone you know has a job and wages are rising -- what's poor about that?  If we turn the clock back to the stagflation years of the late 1970s and 1980s, we discover that the distinguished economist Arthur Okun came up with something he called an economic discomfort index, which soon became known by the snappier moniker of "the misery index". It was very simple: the sum of the annual increase in headline CPI and the unemployment rate.  In an era when both unemployment and inflation could veer close to double digits, it was a useful shorthand way of showing just how bad things were.

Those bad days are, thankfully, long gone, and the misery index no longer seems useful. A rough calculation would show that the current value for it is close to 7 percent, a far cry from the 16 percent levels seen during the Ford and Carter presidencies -- and indeed, well below the level seen earlier in the Biden presidency.  What seems very clear is that in an economy where low unemployment is considered normal, the main factor that makes people feel miserable about the economy is inflation. This makes intuitive sense -- even in a severe recession, maybe 10 percent of the population will be affected by unemployment, whereas high inflation affects just about everyone. 

Now, it's true that the negative public opinion of Biden's economic management has diminished somewhat in recent months, which seems reasonable enough, given the steady decline in headline inflation. And yet 70 percent of the population is seemingly unimpressed. It is not easy to find a scientific explanation for this. However, one thing that long experience confirms is that people always and everywhere overestimate the current rate of inflation -- you would not find many Americans who believe that inflation really is close to 3 percent. 

Another factor is the growing role of social media as a news source. Lord knows, the traditional media have never been especially good at communicating economic data. However we now live in a world in which people get their economic updates from online experts who don't know the different between monthly and annual figures, or even worse, blowhards who assert without any evidence whatsoever that the official inflation figures are routinely rigged to understate the true picture. 

Good luck turning that around, Team Biden. 

Bank of Canada softens its tone

In line with market expectations, the Bank of Canada today kept its overnight rate target unchanged at 5 percent while maintaining its policy of quantitative tightening. The tone of the accompanying media release is noticeably less hawkish than in the recent past, reinforcing the growing perception that the tightening cycle is at an end.  However, there are no clear indications as to when the Bank may start cutting rates. A few key quotes:

• The global economy continues to slow and inflation has eased further...... Financial conditions have also eased, with long-term interest rates unwinding some of the sharp increases seen earlier in the autumn. That easing of financial conditions is, of course, a reflection of markets' perception that the tightening cycle is over, not just in Canada but in most major financial markets. 
• In Canada.....real GDP contracted at a rate of 1.1% in the third quarter, following growth of 1.4% in the second quarter. Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year......The labour market continues to ease: job creation has been slower than labour force growth, job vacancies have declined further, and the unemployment rate has risen modestly. Even so, wages are still rising by 4-5%. Overall, these data and indicators for the fourth quarter suggest the economy is no longer in excess demand. The comment about job creation being slower than labour force growth might be seen as slightly disingenuous: given the extraordinary rise in the labour force, it would be amazing if that were not so. Still, the overall tone of this analysis shows that the Bank is firmly convinced it is on the right track, tempered only by a slight degree of concern over wage growth. 
• The slowdown in the economy is reducing inflationary pressures in a broadening range of goods and services prices. Combined with the drop in gasoline prices, this contributed to the easing of CPI inflation to 3.1% in October. However, shelter price inflation has picked up, reflecting faster growth in rent and other housing costs along with the continued contribution from elevated mortgage interest costs. In truth, most of the recent decline in headline CPI has been gasoline-related, but the Bank is clearly seeing signs of improvement elsewhere. "Elevated" mortgage interest costs may soon begin to fall in response to the easing financial conditions noted earlier, and that process will of course accelerate as and when official interest rates start to decline. 

And in conclusion: Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed. Governing Council wants to see further and sustained easing in core inflation, and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.  This is little changed from the Bank's recent rhetoric.  Markets have been getting a little ahead of themselves in predicting the timing and extent of rate cuts, with one major bank predicting cuts of 150 basis points during 2024. The Bank of Canada likely does not see such speculation as productive, not least because of its potential effect on house prices. It is most unlikely that rates will come down as quickly as they went up.  

Canada employment: still chugging along

This is a rarity: Canada released its November employment data today, a full week ahead of the scheduled release of the corresponding US data. Statistics Canada reported that the number of persons employed rose by 25,000 in the month, but with the labour force growing rapidly as a result of immigration, the unemployment rate edged up again, reaching 5.8 percent.

The composition of the job gains was moderately encouraging.  The manufacturing sector reportedly added 28,000 positions in the month, more than reversing the loss posted in October;  construction added 16,000, adding to the previous month's strong gain. These gains were partially offset by job losses across the service sectors. Moreover. the private sector more than fully accounted for all of the month's job gains. One all-too-familiar wrinkle in the data: the number of persons self-employed reportedly fell by 25,000 or almost 1 percent in the month. The extreme volatility in this series means it can never be fully trusted. 

Media coverage of the numbers has tended to suggest that the rising unemployment rate over the past several months reflects the slowing -- dare we say it, recession-threatened -- economy. This is only part of the story. The 25,000 increase in employment in November is admittedly below the monthly average seen over the past year, which is in excess of 40,000, but it is still a healthy gain by historical standards. The bigger issue is rapid growth in the labour force, driven by high levels of immigration. The labour force has grown by an average of over 60,000 per month over the past year. While the monthly rise in  November was a more modest 36.000, the increase in the supply of labour still outpaced the ability of the economy to create new jobs. This pattern is likely to continue for some time. 

The rising unemployment rate certainly supports the case for the Bank of Canada to keep rates on hold, and maybe even start dropping hints about easing conditions in the not too distant future. There is one small complication, however: average hourly earnings rose 4.8 percent in the year to November, a pace that is clearly not consistent with getting inflation all the way back to the 2 percent target. It would be no surprise to see the Bank make specific reference to this when it publishes its next rate decision on December 6.*

* Mea culpa -- I originally gave the date for the rate decision as December 11. That is in fact the correct date for the December 2024 meeting, so at least you are ahead of the game! 

Recession watch update: there's no recession

Statistics Canada reported this morning that Canada's GDP edged down by 0.3 percent, or 1.1 percent at an annualized rate, in the third quarter of the year.  Since GDP growth for Q2 was originally also reported as a small decline, this means the economy is "officially" in a recession, right?  Well, no, because that decline in Q2 has been revised away, with real GDP now posting a 0.3 percent increase for the quarter.  So the media's much-longed-for recession remains evasive, and preliminary data suggest it will not arrive in Q4 either. 

The decline in real GDP in Q3 reflected several factors, some of which may well prove temporary. Exports were lower in the quarter, with the decline surprisingly led by a sharp fall in shipments of refined petroleum products. Although global oil markets are weak, this is unlikely to be repeated in the current quarter. There was also a marked slowdown in inventory accumulation, while household spending was flat. Housing construction increased for the first time since early 2022, a welcome development in light of the immigration-driven rise in population. All in all, the quarterly data depict an economy that is trending sideways rather than one that is poised to fall off a cliff.

Then there are the monthly data, which are always updated alongside the quarterly figures, although they are calculated on a somewhat different basis. StatsCan reports that real GDP grew 0.1 percent in the month, with a strong rebound in manufacturing output partly offset by reduced raw materials production. StatsCan also provided an initial estimate for October, showing that real GDP posted a 0.2 percent gain as raw materials extraction bounced back from the previous month's weakness.  The combination of the strong-ish "handoff" from September and the October gain means that the economy would have to post a significant decline in November and December to produce a decline in GDP for Q4 as a whole.  Yet again, then -- no recession for now.

The recessionophiles in the media and online, in Canada and elsewhere,  have recently started to talk about a "per capita recession". I know what this is and I daresay my esteemed readers do too, but I can't say it's a term that saw much use until the old-fashioned type of recession obstinately refused to show up.  That said, it's a meaningful concept, especially in Canada where population growth is currently so rapid.  Canada is unequivocally in a "per capita recession" right now, a development that likely goes a long way towards explaining the sour mood that voters express when they talk to opinion pollsters. "Per capita recession" equals falling living standards, something governments ignore at their extreme peril. 

Whether we are talking about GDP in the aggregate or on a per capita basis, today's data confirm that there is no likelihood of any further Bank of Canada tightening.  Talk of early rate cuts seems premature, however.  As long as real GDP is still edging forward, the Bank has the luxury of waiting to make sure that inflation really does come all the way down to the 2 percent target. 

Road to nowhere

Canada has been down this fiscal path before. Back in the 1980s, under a succession of deservedly  forgotten Conservative Finance Ministers, it was never quite the right time to rein in the budget deficit. That task eventually fell to the Chretien/Martin Liberal governments of the 1990s.  How they did it is not well recalled and is relevant to what the present government and its successors may find themselves facing in the next few years.  We shall come back to that. 

When Justin Trudeau came to power in 2015 he inherited a minute budget surplus from the Harper Conservatives. Trudeau had campaigned on a promise to run small deficits for a short period of time in order to boost growth. It quickly became apparent that the deficits would be neither as small nor as temporary as Trudeau promised -- and then came COVID.  The government correctly boosted spending sharply to cushion the pandemic's impact on the economy, and as revenues fell, the deficit skyrocketed to unprecedented levels.

Tabling her Fall Economic Statement on Tuesday afternoon, Finance Minister Chrystia Freeland alluded to the impact of COVID on the fiscal situation, citing the most severe economic slowdown since the Depression.  Here's the thing though: the downturn in the economy in the first half of 2020, severe though it was, lasted barely long enough to meet the "official" definition of a recession, i.e. two quarters of declining output.  By the second half of that year the economy was rebounding sharply, and a solid rate of growth was maintained through 2022.

The temporary spending schemes hastily put in place in 2020 were gradually unwound as the pandemic waned.  However, instead of bringing the deficit back under control, Trudeau and Freeland decided that the funds should largely be redeployed into new spending initiatives, so deficits remained far larger than originally projected. The Bank of Canada, and increasingly the business economics crowd, have been arguing ever louder that this fiscal stimulus directly contributed to the persistence of an above-target level of inflation, which in turn forced the Bank of Canada to raise interest rates substantially.

Thus we arrive at the economic background to yesterday's economic statement:  a slowing economy, sluggish growth in revenues, a raft of post-COVID spending commitments, urgent new spending needs (especially for housing) and the rapidly rising cost of servicing the soaring government debt.  Courtesy of higher interest rates that may well be in large measure the government's fault, debt service costs are set to rise so quickly that even if the government were prepared to contemplate meaningful spending cuts -- which it emphatically is not -- the deficit would still be an almost intractable problem.  

The actual content of the economic statement itself is pretty flimsy stuff. The Government's economic projections, as is usual these days, reflect those of non-Ottawa economists. In the base case, the economy is expected to avoid a recession by the skin of its teeth, with growth of just 0.4 percent next year. Inflation is expected to keep moving lower, which is of course not positive for the  revenue growth outlook.  Unemployment, which has already been moving higher in recent months, is expected to rise by almost another full percentage point next year, to 6.5 percent.

Under these assumptions, the base case forecast for the deficit in fiscal 2023/24 (ending in early April) is C$ 40 billion, just about identical to what was tabled in last Spring's budget.  Beyond this year, however, the situation looks markedly worse. In the budget, the deficit was projected to narrow fairly steadily over the five-year forecasting horizon, reaching C$ 14 billion by FY 2027/28. The new projection shows essentially no narrowing of the deficit in either of the next two fiscal years, and the deficit at the end of the planning horizon is now projected at C$ 18.4 billion.  "Downside scenario" numbers are of course considerably worse.

The Government can try to portray itself as being helpless in the face of adverse developments here, but that is not the whole story. The fiscal outlook table reveals that "policy actions" since the Spring budget have already added about $ 6 billion to the cumulative deficit over the first three fiscal years of the planning horizon.  Adding in the new measures announced by Freeland yesterday, the Government is now planning to boost spending by a cumulative C$ 20 billion over the full five-year horizon.  Presenting this as "fiscal prudence" is unlikely to convince many voters, let alone opposition politicians. 

That new spending is mainly focused on the housing sector, which faces something of a perfect storm as a result of rising mortgage rates and rapid population growth.  Provinces and municipalities are crying out for immediate help, but Trudeau and Freeland have perversely chosen to back-end-load the new funds. Much of the money will not be available until FY 2025/26 when, surely by pure coincidence, the next election is likely to be called. One measure that will take effect sooner is an attempt to crack down on the likes of Airbnb, but given the wiliness of buy-to-rent investors, it remains to be seen how much that can achieve.

It's a problem largely of the Government's own making. Suggestions that Canada will soon hit some kind of a "debt wall" are off the mark -- that need never happen to a sovereign currency issuer -- but the way out of the mess is hard to discern. How did Chretien and Martin pull it off back in the 1990s, and can the current hapless pair do the same?

The big innovation made by Paul Martin as Finance Minister was to shorten the planning horizon. His Conservative predecessors had always promised lower deficits in the "out years", but as budget succeeded budget, the reductions kept getting pushed into the future. Martin cut the horizon to two years but insisted that the spending ministries actually obeyed the targets that were set in each budget, with no backsliding. What had seemed an intractable problem was largely eliminated in less than a decade.

Ever since that time, Liberals have taken the occasional victory lap to remind people of how they cut spending in the 1990s.  One former minister even pitched up in London when I was living there, offering his deficit-slaying expertise to the Cameron government.  The problem with that is that it is not entirely true.  There were some spending cuts in the mid-1990s, but by the decade's end almost all categories of spending were as high or higher than they had been when Martin took on the job.  What really closed the fiscal gap was a startling rise in revenues, which soared by more than 60 percent over the course of the decade. For that, thank a strongly-growing US economy fueled by the low interest rate policies of the Greenspan Fed. 

That lesson from history is not an encouraging one for the Trudeau government.  The US economy has been outperforming Canada's and interest rates, though higher than they were two years ago, are still not high by historical standards.  Despite this relatively helpful background, Canada's fiscal situation has deteriorated sharply, mainly thanks to spending decisions consciously taken by the current economic team.  The next Finance Minister, be they Liberal or Conservative, is going to face a truly tough task. 

Apologies for the unusually long post, but it's depressing to see such a complete failure to learn the lessons of the past. 

Gimme shelter

Canada's headline CPI was virtually unchanged in October from the previous month -- up 0.1 percent unadjusted, down 0.1 percent seasonally adjusted -- according to new data today from Statistics Canada. This lowered the year-on-year rate to 3.1 percent for October from 3.8 percent in September, in line with market expectations. The data certainly reinforce the likelihood that the Bank of Canada's rate hike cycle is at an end, but the details show that it is still premature to be thinking about rate cuts. 

The main contributor to the sharp slowdown in the year-on-year headline rate was a 7.8 percent fall in gasoline prices.  If gasoline is excluded from the calculation, the fall in the year-on-year rate was much smaller, easing to 3.6 percent in October from 3.7 percent in September. It goes without saying that the Bank of Canada can claim little credit for falling gasoline prices, and in any case the situation in the Middle East means that further softness in this important component of the index cannot be relied upon.

In terms of the other main components of household spending -- food and shelter -- the story is rather less positive. Food prices ticked down by 0.1 percent in October but still stand 5.7 percent higher than a year ago.  This is significant,  given that food inflation peaked at more than 10 percent, but it is highly unlikely that this improvement owes much, if anything, to the Federal government's attempts at jawboning the major grocery chains into cutting prices.

The story for shelter is possibly even worse. Rents accelerated to an 8.2 percent year-on-year gain in October from 7.3 percent in September, while mortgage costs are more than 30 percent higher than a year ago. As a result, the shelter sub-index is the fastest rising component of the CPI, up 6.1 percent in the past year.  Given the importance of interest rates as a driver of shelter costs, this is one element of the overall CPI that can clearly be said to be within the Bank of Canada's control, although rapid population growth as a result of record high immigration is certainly not helping. 

The Bank of Canada's three preferred measures of core inflation all fell modestly in October. However,  their mean value is still only just below 4 percent.  Given the Bank's regular restatement of its intention to get CPI all the way back to the 2 percent target, it is apparent that rate cuts will not be on the agenda for many months yet.

So now we await Finance Minister Chrystia Freeland's Fall economic statement later today. Bay Street economists are increasingly outspoken in their view that rapid growth in government spending has been a major factor in driving interest rates higher -- see, for example, this article from Scotiabank. The Trudeau government is clearly starting to set out its stall for the next election, so an austerity budget is not on the cards.  However, any evidence of further fiscal profligacy will be quickly seized upon by the Conservatives. Expect any new initiatives to be focused on the housing sector, and expect Freeland to bend herself into a pretzel trying to argue that a deficit north of C$ 40 billion represents fiscal responsibility. 

Reading too much into single data points

Something business economists are taught to avoid is reading too much significance into individual data points about the economy.  Seasonal adjustments, measurement problems, weather and a host of other things mean it is very important to look at as many data points as possible before declaring a trend.  It's a lesson that seems to have been forgotten by quite a number of commentators as they looked at some important numbers this week.

On Tuesday the Bureau of Labor Statistics released consumer price index data for October.  The headline number was certainly encouraging: prices were unchanged in the month, which resulted in the year-on-year inflation rate easing to 3.2 percent from the 3.7 percent reported in September. Equity markets rallied hard on hopes that falling inflation would pave the way for the Fed to start cutting rates sooner rather than later.

A look behind the headline suggests that a more cautious interpretation of the data might be in order. The lower-than-expected headline print was largely the result of a 5 percent month-on-month decline in the price of gasoline.  That's not something that Fed policymakers can claim any credit for, and given the highly volatile situation in the Middle East, it's not something that can be counted on in the months ahead, even though a similar outcome now seems likely for November.

Other sub-components of the index were less positive from a policy standpoint. Both shelter and food prices rose 0.3 percent in October, with shelter prices up 6.7 percent higher than they were a year ago. CPI less food and energy stands 4.0 percent above its year-ago level.  Given that Fed Chair Jay Powell always insists that the Fed intends to get CPI all the way back to the 2 percent target, that suggests there is still some way to go before lower rates can be confidently predicted.  

Today the US Commerce Department provided its advance estimate of retail sales for October. The dollar value of retail sales (not adjusted for inflation) edged down by 0.1 percent from September, the first such  decline since March.  However, the monthly decline was actually smaller than markets had expected, given the very robust 0.7 percent increase initially reported for September. What's more, that September increase was actually revised higher to 0.9 percent, which means that the dollar value of retail sales in October was significantly higher than markets had foreseen, even if sales fell marginally in the month.

With the holiday shopping season yet to get fully underway -- Black Friday and Cyber Monday are still a week away -- it would be foolhardy to suggest that one month of not-actually-weak data on CPI and retail spending sets the stage for the Fed to start contemplating early rate cuts. We can be quite sure that that is not how the Fed sees it. 

Softer job growth in October

Both the Federal Reserve and the Bank of Canada have recently signalled that they are prepared to keep rates on hold for the time being, while waiting to assess the effect of their past tightening moves.  Both central banks have indicated that their future rate decisions will be, to use an old cliche, data dependent, with developments in the labour market very much front of mind. Employment data for October, released in both countries today, suggest that both banks may be able to avoid any further tightening. 

In the US, data from the Bureau of Labor Statistics show that the US economy added 150,000 jobs in October. This was below market expectations and marked a sharp fall from the 297,000 jobs added in September.  That September number was revised down from an initial estimate above 330,000.  The October number is also materially below the average monthly gain of 258,000 jobs created over the past twelve months. The unemployment rate ticked higher to stand at 4.9 percent. 

Importantly for the Fed, there is still no evidence of significant upward pressure on wages. Average hourly earnings rose a scant 0.2 percent in October, the same as in September. This brought the year-on-year rise to 4.1 percent, down from 4.2 percent a month earlier.  

In Canada the story is similar in many ways, but with the added complication that the labour force is growing extremely fast because of high immigration. After adding an aggregate of more than 100,000 jobs in August and September, the economy added only 18,000 positions in October.* With the labour force growing by almost 58,000 in the month, this pushed the unemployment rate up by 0.2 percentage points to 5.7 percent, by coincidence identical to its pre-pandemic level. 

The impact of immigration on the size of the labour force shows up even more starkly on a longer view. Since January, employment has grown by an average of 28,000 per month, but the monthly increase in the labour force has been over 80,000. It is thus no surprise to see the unemployment rate moving up steadily from the cyclical low of 4.9 percent reached in mid-2022. It is also worth noting that the Federal government seems to be realizing, however belatedly, that the current situation is unsustainable. It announced this week that it intends to stabilize immigration levels, although not until 2026.

As in the US, wage gains in Canada remain relatively restrained. The year-on-year rise in average hourly earnings slipped to 4.8 percent in October from 5.0 percent in September,  However, in light of numerous high-profile labour disputes in recent weeks (the Big Three auto makers, the St Lawrence Seaway and many others), this is something the Bank of Canada will continue to monitor closely.

All in all, these are Fed-and Bank-friendly numbers.  One month of data is far too little to declare a trend, but things do seem to be moving in the direction policymakers want. 

* Interestingly, the construction sector accounted for all of the net new jobs in the month.  Given well-founded concerns over where all the immigrants are supposed to live, this presumably counts as welcome news. 

Fed does the expected thing

As expected, today's meeting of the FOMC ended with the Fed deciding to keep its Fed funds target range unchanged at 5.25-5.5 percent. The press release starts with a recitation of economic developments that might, in the abstract,  point to the need for higher rates, but then explains why the Fed is content for now to see whether its past tightening moves are enough to get inflation back to the 2 percent target.

The first paragraph, quoted here in full, would need very little amendment if the outcome of the meeting had in fact been another rate hike:

Recent indicators suggest that economic activity expanded at a strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation remains elevated.

However, the release then goes on to list the Committee's rationale(s) for keeping things unchanged for now.  These include:

Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain.

and

In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

The FOMC is of course quick to restate its ultimate goal: The Committee is strongly committed to returning inflation to its 2 percent objective. Market participants now seem to have taken on board the message that rates are likely to stay at current levels for much longer than was previously anticipated, with a full return to the 2 percent target not anticipated until 2026. Whether further rate hikes will be needed to meet that goal is still an open question, but today's announcement makes it clear that further upside surprises in growth or employment could yet push the FOMC in that direction. 

As a pancake

Canada's real GDP was virtually unchanged in August from the previous month, according to data released this morning by Statistics Canada. The outcome was slightly below StatsCan's preliminary estimate of 0.1 percent growth.  With the newly-released preliminary estimate for September also showing next to no change, it seems possible that quarterly GDP figures, due for release on November 30,  will show that the economy was on the brink of an "official" recession in Q2 and Q3. No need (I hope) to repeat that the so-called "official" definition is loved by lazy journalists much more than by hard-working bloggers. 

Monthly GDP numbers are generally quite volatile, so it is remarkable to look at the data tables behind today's release and see the lack of any movement in GDP over the past four months.  After growing 0.2 percent in May, the economy edged lower in June, then posted almost no change at all in real terms in July or August.  Want proof?  Here are the actual numbers, in billions of chained C$:   June 2023: 2081.9 -- July 2023: 2081.8 -- August 2023: 2082.5.

Looking behind those very stable aggregate numbers does offer a couple of clues about what's going on in the economy. Goods producing industries have shown a decline in output in each month since April; the weakest sub-sector here is agriculture and forestry, which suggests that the impact of forest fires continues to influence the data. In contrast, service producing sectors grew marginally in July and August after a small decline in June. The growth in August was led by a strong rise in wholesale trade, which is unlikely to be sustained if the economy is indeed now on a much slower growth track. 

Today's data are entirely consistent with the forecasts published by the Bank of Canada in support of its rate decision last week. Indeed, the year-on-year rise in real GDP for August, at 0.9 percent, exactly matches the Bank's updated prediction for the full calendar year. The Bank's next fixed announcement date is December 6, so it will have access to the full Q3 GDP data when it makes its decision. Barring some unexpected bounce in growth in September, it is very hard to see how there will be any case for a rate hike at that time.

Lastly, a quick heads-up to one Benjamin Reitzes, an economist at Bank of Montreal. In this CBC article he is quoted as saying that the weak showing "will cause recession chatter to ramp up quickly".  I'm not sure where Benjamin hangs out, but all the Canadian media outlets I read have been screaming "recession" for the last eighteen months and more. Like the guys carrying "The end of the world is nigh" placards, they were always going to be right eventually. 

Bank of Canada: another hawkish hold

In line with market expectations, the Bank of Canada today kept its target interest rate unchanged at 5 percent, the second straight meeting with no adjustment in policy. However, as was the case at the previous announcement on September 6, the tone of the press release strongly suggested that the Bank may yet find it necessary to resume tightening, given the persistence of inflationary risks.

The media release is slightly longer than usual and largely reflects the analysis and forecasts provided in the quarterly Monetary Policy Report, also released today.  Some key points, with commentary:

The global economy is slowing and growth is forecast to moderate further as past increases in policy rates and the recent surge in global bond yields weigh on demand...... the composition has shifted, with the US economy proving stronger and economic activity in China weaker than expected. The shift in the composition of growth could prove significant for the Bank going forward. Given that the US accounts for more than 70 percent of Canada's external trade, a stronger US economy in and of itself adds at the margin to inflation risk in Canada. 

In Canada, there is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures..... In the labour market, recent job gains have been below labour force growth and job vacancies have continued to ease. However, the labour market remains on the tight side and wage pressures persist. Overall, a range of indicators suggest that supply and demand in the economy are now approaching balance. The tightness in the labour market is evidently contributing to wage pressures. something the Bank is especially anxious about. There is currently a strike on the economically vital St Lawrence Seaway that has seen the employers complain that the workers are looking for the same kind of wage increases that have recently been won by Canadian auto workers.  The Bank will be very watchful for such signs of a wage-price spiral, something that has been avoided so far. 

After averaging 1% over the past year, economic growth is expected to continue to be weak for the next year before increasing in late 2024 and through 2025. The near-term weakness in growth reflects both the broadening impact of past increases in interest rates and slower foreign demand......Overall, the Bank expects the Canadian economy to grow by 1.2% this year, 0.9% in 2024 and 2.5% in 2025. This would certainly represent the softest of soft landings. New monthly GDP data for August, due for release on October 31, are likely to suggest that the economy, having shrunk marginally in Q2, narrowly avoided a technical recession in Q3.

Higher interest rates are moderating inflation in many goods that people buy on credit, and this is spreading to services. Food inflation is easing from very high rates.....Near-term inflation expectations and corporate pricing behaviour are normalizing only gradually, and wages are still growing around 4% to 5%. The Bank’s preferred measures of core inflation show little downward momentum.....CPI inflation is expected to average about 3½% through the middle of next year before gradually easing to 2% in 2025.....the near-term path is higher because of energy prices and ongoing persistence in core inflation.  Recent volatility in monthly CPI data has evidently reinforced the Bank's view that progress back toward the 2 percent target will be slow from this point onwards. The forecast combination of negligible growth and sticky inflation over the next twelve months is a particularly tricky scenario for policymakers. 

The press release concludes with a clear warning:Governing Council is concerned that progress towards price stability is slow and inflationary risks have increased, and is prepared to raise the policy rate further if needed.  Despite this, commentary from Bay Street analysts suggests that most believe the tightening cycle is over, which is probably not something the Bank will be happy to see.  The Bank's Governing Council may privately think that they are done with tightening, but they surely don't want markets of the public feeling too confident about that just yet. 

Canada September CPI -- cause for a pause

Canada's headline CPI came in slightly below market expectations in September, with a 0.1 percent monthly decline (not seasonally adjusted) resulting in a year-on-year increase of 3.8 percent, down from 4.0 percent in August. That is still well above the Bank of Canada's 2 percent target, but in light of the Bank's recent rhetoric about the lags with which monetary policy operates, it looks safe to say that the Bank will keep its rate target unchanged at 5.0 percent at its Governing Council meeting on October 25. 

The slowdown in the year-on-year headline figure was broad-based, but the most eye-catching number is the deceleration in grocery price rises. This sub-component rose 5.8 percent in September, down from 6.9 percent in August and little more than half the peak of 11 percent posted a year ago.  So far, and so surprisingly, neither PM Trudeau nor Finance Minister Freeland has tried to claim credit for this.  Their little woodshed chat with the grocery store CEOs last month cannot possibly have affected this latest number, and it still seems possible that the politicians only called that meeting because they knew grocery price inflation was about to slow anyway. 

Looking briefly at the major special aggregates, it appears that CPI ex food rose 3.4 percent in the year to September, while CPI ex food and energy rose 3.2 percent.  All three of the Bank of Canada's preferred measures of core inflation slowed noticeably in the month: their mean value is now down to 4 percent. 

These numbers, though still way above the 2 percent target, suggest that the Bank is on the right track to get there eventually.  Given signs that higher mortgage rates are starting to take a severe toll on the housing market, there is no doubt that the Bank will keep rates unchanged next week.  However, it can be expected to reaffirm its willingness to raise rates again if the slow downward trend in inflation stalls or reverse. 

There is no bottom

Back in July 2019, when Boris Johnson was about to take up residence at 10 Downing Street, the excellent London blogger known as Diamond Geezer wrote that "Britain's worst-ever Prime Minister, who took over from Britain's worst-ever Prime Minister, will shortly be replaced by Britain's worst ever Prime Minister".  It's a good line, but it turns out that DG didn't know the half of it.  The UK has had two more worst-evers since Johnson left the scene, and the Tory party assembly line keeps throwing up ever more unsuitable candidates for the job.

Let's take them in order, starting with those DG was referring to:

First, from 2010 to 2018, was David Cameron.  He began his tenure by imposing austerity in response to the global financial crisis, which was, of course, exactly the wrong policy response.  Then, to appease his right-wing fringe, he promised a referendum om "Brexit".  He never thought the UK would vote to leave the EU and campaigned in a very desultory fashion for a "remain" vote.  When the leave side won the day, Cameron hightailed it out of office.

Cameron was succeeded by Theresa May, the UK's second female PM.  She held office from July 2015 to July 2019.  With the die cast for Brexit, she struggled mightily to appease the party's right wing while negotiating a deal that might actually work.  Two no-confidence votes later, she resigned after a draft agreement with the EU was rejected by Parliament.

Up next was Boris Johnson, who had worked hard behind the scenes to oust Theresa May. Once in office, he managed to ram through a Brexit deal he described as "oven ready", even though it has since proved to be nothing of the sort. He held office from July 2019 to September 2022.  The last two-and-a-half years were dominated by the COVID crisis, which was hardly Johnson's fault but did eventually trigger his demise.  He was ousted after it was shown that he had misled Parliament about a series of boozy parties held by his staff on Government premises while the whole UK was supposedly under a COVID lockdown. 

Here we move beyond DG's little list, to find Liz Truss replacing BoJo.  The less said of her tenure the better, and it's easy not to say much because she was only around for seven weeks.  An ideologically-committed  right-winger who seemed incapable of listening to advice, she nearly wrecked the UK's financial markets and resigned after losing an endurance test against a lettuce.

Next up was the current incumbent, Rishi Sunak, who is just coming up on a full year in office. Sunak is the UK's first Hindu PM, which is doubtless not a bad thing, but also the richest person to hold the office in modern times, which is probably not a good thing. In truth, Sunak has not pulled any of the dumb moves that characterized his predecessors on this list, but he has never won the full support of the more right-wing members of his party, and trails badly in opinion polls despite the lackluster performance of Labour leader Sir Keir Starmer. 

As and when the party decides to oust Sunak -- most likely after he loses a general election late next year -- the most likely replacement is Suella Braverman, current Home Secretary.  The anti-immigration crowd's favourite immigrant, the strident Braverman is the brains, if that's the word, behind the Government's bizarre and probably illegal scheme to relocate illegal migrants to the tiny, landlocked African nation of Rwanda. 

And lurking behind Suella is the worst of them all, the irrepressible, bibulous populist Nigel Farage. Despite not actually being a member of the Tory party, Farage contrived to dominate its recent annual conference, spouting the usual river of bile about...well, mostly about immigrants, actually, as is always the case when someone puts a microphone in front of his leering face.  It's hard to spot anyone worse than Farage looking to take over the party after him, but given the Tories' recent track record in selecting leaders, you wouldn't put it past them to find someone even worse when the time comes. 

RyanAirbnb

In this week's biggest news, we stayed at a hotel for the first time since the pandemic began. Times have certainly changed -- when we made our booking we were amazed to learn that our 3/4 star hotel in a major tourist area did not provide maid service during your stay. Re-use your towels, make your own bed!

I think you can trace this sort of thing back to the impact of low-cost airlines such as Ryanair, Southwest or Allegiant. Low prices, but also rock-bottom customer service, and in the case of Ryanair (I don't know about the others) a sizeable dollop of outright contempt for the paying customer. The ultra-low cost base of these carriers, coupled with people's natural lust for a bargain, has meant that "legacy" or full-service airlines have had to price match as much as they can, which means that service standards have inevitably converged toward the Ryanair level. My own worst-ever flying experience was not on Ryanair (which I have used several times) but on a Toronto-Miami trip with Air Canada's low-cost (not!) "Rouge" division.

If my recent hotel experience is in anyway typical, it seems as if the same sort of thing is happening in the hospitality sector. The rise of Airbnb has persuaded a lot of people to abandon traditional hotels, which in turn has forced those hotels to cut prices and service standards in order to remain competitive. My sister is an avid Airbnb fan; when she and her family came to stay with us a few years ago, we were startled to find that at the end of their stay, they stripped all the bed linen from the beds to be ready for laundry.  Apparently this is standard practice at Airbnb: who knew?

It seems as if the bloom is off the rose at Airbnb. Rapacious "hosts" have pushed prices and fees too high while still offering abysmal service.  Municipalities (with New York in the forefront) have realized that Airbnb is trashing their rental accommodation market and begun a belated crackdown. Airbnb may well have passed its peak, which is a good thing -- it's a global blight.  So far, however, there is no sign of the same happening at Ryanair and its ilk, which seem to go from strength to strength despite concerns over their impact on the climate. .  

Wow, and not necessarily in a good way

Opinion polls in both Canada and the US consistently show that the populace is deeply unhappy with the state of the economy.  The US media seem to make an effort to report economic developments accurately, but the Canadian media have been screaming recession for the better part of eighteen months, and large segments of the online commentariat have moved right on to pronouncing the onset of a full-on depression. The only conclusion we can really reach here is that for most people, inflation is the only economic statistic they really pay attention to, because the data on the real economy tell a very different story -- as today's employment reports underline in the strongest possible terms.

In Canada, StatsCan data show the economy followed the addition of 40,000 jobs in August with a further 64,000 in September, way above market expectations. So far this year, the average monthly rise in employment has been 30,000.  There are some oddities in the data, such as a major swing in educational employment from a sharp fall in August to a strong rise in September, something StatsCan attributes to seasonal adjustment.  Moreover, about 48,000 of the new jobs were part time in nature, though this should be weighed against the fact that over the past twelve months, the economy has added 474,000 full-time jobs.

These numbers are extraordinarily strong, especially in light of data that seem to show the economy almost stagnating in Q2 and Q3.  In one sense, however, they may not be strong enough.  Thanks to very high levels of immigration, the labour force grew by an estimated 72,000 in September, after growing more than 100,000 in August.  Even the remarkable job gains seen in recent months have been insufficient to absorb all of the newly-available workers; the unemployment rate was unchanged at 5.5 percent in September. 

Average hourly earnings rose 5.0 percent from a year ago, in line with the gain seen in the two preceding months.  This is undoubtedly too high for the Bank of Canada's comfort, but it is unlikely that there will be any change in official interest rates in the near term.

In the US, the BLS reported this morning that the economy added 336,000 jobs in September. This was far above market expectations and well above the already robust monthly average of 267,000 positions seen over the past year.  Revisions added a further 119,000 to the job gains posted for July and August.  The unemployment rate was unchanged at 3.8 percent.  Average hourly earnings rose only 0.2 percent in the month, bringing the year-on-year increase to 4.2 percent.  This is too high for the Fed's liking, though it is not quite as far above the inflation target as the corresponding number for Canada.

As is the case in Canada, it seems unlikely that today's data will lead to any shift in Fed policy in the near term, though that did not prevent a fairly panicky (though short-lived) market reaction. However, it seems clear that the Fed, and for that matter the Bank of Canada, will see little reason to contemplate rate cuts as long as the economy is strong enough to create jobs at the rate we are currently seeing.  The selloff in global bonds over the last couple of weeks seems to reflect that reality; it remains to be seen whether people answering calls from opinion pollsters can also be convinced. Probably not, if this CNN article is anything to go by. 

Not dead yet* (Canadian edition)

Ahead of this morning's release of GDP data for August, the Canadian media were quite ready to declare that the economy was already in deep doo-doo and that things could only get worse from here. Consider this article from the CBC website, loudly proclaiming that "the bad economic times have only just started".  Regular readers of this blog (or of the Canadian media) will know that this headline could have appeared any time over the past eighteen months, without ever actually being accurate.  Are things finally different this time?

StatsCan's data shows that real GDP was unchanged in July, after a 0.2 percent decline in June.  Weakness in goods producing sectors, particularly manufacturing, was offset by gains in service-producing sectors.  The monthly data continue to be noisy, making it tricky to determine the underlying trend. Most notably, sectors affected by wildfires in June -- mining, oil and gas, accommodation and food services -- rebounded in July.  Of the twenty sectors monitored by StatsCan, nine posted higher output in July.

So, with real GDP falling in June (and for Q2 as a whole) and not increasing in July, the stage is set for a relatively weak Q3.  StatsCan's preliminary estimate shows that GDP likely edged up by 0.1 percent in August, with further gains in service sectors offset by weakness in retail trade and oil and gas extraction. The sensible interpretation of today's numbers seems to be that the economy is muddling along rather than collapsing, with good months and less good months alternating. 

This has been the case since early this year and it looks likely to continue for some time yet, as the impact of Bank of Canada rate hikes continues to feed through the economy.  Whether this eventually produces the "official definition of a recession" that the media love so dearly -- two consecutive quarters of declining GDP -- remains to be seen.  But in any case, real GDP is arguably not the indicator the media and policy makers should be focused on right now.

Next Friday (October 6) we can expect to see employment data for September. Recall that in August, the economy added a robust 40,000 new jobs -- but the unemployment rate rose as high immigration added more than 100,000 people to the workforce.  The temperature of the debate over immigration has thankfully dropped slightly in recent weeks -- media have other things to think about, courtesy of Justin Trudeau's blunder-of- the-week club -- but the numbers coming into the country have not.  Even if the economy stays out of recession in the coming months, it is hard to see how it can possibly create enough jobs to absorb all those looking for work.  A steady rise in the unemployment rate would soon have politicians clamouring for rate cuts, something the Bank of Canada will be reluctant to provide unless inflation resumes its downward course. 

* I used this Monty Python quote as the title of a blog post way back in 2012, when I was still living in the UK. The post was about the media crying doom over the economy despite the absence of any hard evidence. There's a surprise. 

Five Eyes and Nazis

This has not been a good couple of weeks for the Justin Trudeau government....

Trudeau's visit to the G20 summit in New Delhi in mid-September seemed unusually tense. He spent very little time with his host, India PM Narendra Modi, skipped one of the formal functions and then got stranded in India for two days because his geriatric official aircraft needed emergency repairs. 

Soon after Trudeau's return to Canada, the reason for the coldness of his welcome in India became clear. Trudeau rose in the House of Commons to announce that Canada had intelligence connecting the government of India to the assassination in British Columbia of a prominent Sikh activist who favoured establishment of a separate Sikh state, "Khalistan". Unsurprisingly India did not react well, denying the allegation outright and launching a series of tit-for-tat measures that shows no signs of ending any time soon. 

Here's the thing: it now looks as though the intelligence on which Trudeau is relying was not provided by the Canadian security agency CSIS.  Rather, it came from an unidentified member of the "Five Eyes" intelligence sharing alliance. (In my long-ago diplomatic service days, Five Eyes was usually referred to in documents as "AUSCANZUKUS", which I expect the reader can figure out quickly enough).  Since it was the US ambassador to Canada that revealed this fact, the best guess is that the US actually originated the intelligence.

Whether or not that is the case, the near-silence of the other Five Eyes countries in supporting Trudeau here is remarkable, and highly chastening for a leader whose first public statement to the international community on being elected in 2015 was "Canada's back".  Back it may be; as important as India, it evidently is not. Nobody looks good here.  India is under a cloud of suspicion; CSIS has apparently been shown to be unable to monitor suspicious activities of foreign nationals within Canada's borders; Trudeau has gone out on a limb using intelligence that he probably cannot independently verify and has so far declined to make public; and the Five Eyes "allies" are letting Trudeau and Canada twist in the wind out of fear of offending Modi. 

While all this was unfolding, Canada received a visit from the peripatetic Ukrainian leader Volodymyr Zelensky, who followed up a speech at the UN General Assembly with meetings in Ottawa and Toronto.  In Ottawa, Zelensky addressed Parliament, and an array of prominent Ukrainian-Canadians were invited to attend.  One of these was a 98-year old WW2 veteran, Yaroslav Hunka, who received a personal ovation from the politicians and the rest of the assembled crowd as it was announced that he had fought against the Russians during the war. It does not seem to have occurred to anyone, but it came out soon enough, that those Ukrainians who fought the Russians back then were fighting alongside the Nazis -- and indeed, Hunka was not just a common-or-garden Nazi, but a full-fledged member of the Waffen SS. 

Cue outrage from all sides: the opposition parties in Parliament, of course, the Jewish community, and even the Kremlin, which surely took delight in this confirmation of its contention that the purpose of its "special military operation" in Ukraine was to de-Nazify the country. The search for a fall guy ramped up fast, with House of Commons Speaker Anthony Rota appearing to take full responsibility for the gaffe. Hurta lives in the riding represented by Rota, so that may indeed has been the source of the initial invitation.  But Hurta was granted a face-to-face meeting with Zelensky and Trudeau; given the level of security that surrounds both men, it is hard to believe that nobody looked into Hurta's past before approving his presence -- unless this is yet more evidence of the incompetence of CSIS.

And meanwhile on the domestic front, housing crises, mounting concern over immigration levels and anger over rising food prices continue to poison public opinion.  Any impression that Trudeau is in control of events vanished long ago; even he may soon realize that the only way to reset the agenda here is to call an election -- and if he prayed to be defeated, you could hardly blame him. 

Fed rate announcement: no change

 As expected, the two-day FOMC meeting ended with the Fed keeping the funds target unchanged at 5.25-5.50 percent.  The press release continues to talk of "solid" economic activity, "strong" job gains and "elevated" inflation. Overall, the wording is very little changed from the July FOMC, and seems to suggest that the tightening cycle is either at an end or at least very near to it. 

This extract from the longest paragraph of the release summarizes the Fed's by now well-established view on the outlook:

The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,

Today's meeting also produced an update of the periodic chart deck that allows us a more detailed insight into the FOMC's thinking. The Fed now expects real GDP growth to average very close to 2 percent in each of the next three years, in line with the economy's estimated growth potential. If this is achieved, it will be the textbook example of a soft landing. The PCE deflators, both headline and core, are expected to have a "2 handle" (i.e. to be "2 point something") starting in 2024 and to return to the actual 2 percent target by 2026. 

Then there is the famous "dot plot" that shows the expectations of FOMC members for the level of the funds target,  For now, a small majority of the Committee appears to expect one further rate hike before the end of 2023. However, only one member is looking for rates to move still higher in 2024, with most expecting rates to fall at least slightly during that year and to continue to decline after that.  In line with recent Fed rhetoric, there is nothing to support the idea that rate cuts will either come early or be very aggressive when they do come. 

The overall impression we can take from this is that while the Fed may not be ready to call "job done", it is very confident that it is on the right track and sees no need for a significant change of course.  If the economy really is set to grow at a rate in line with potential over the next three years, there is no obvious need to contemplate rate cuts until it is completely clear that inflation is heading back to the 2 percent target. Things can change quickly, as a prospective government shutdown, a possibly lengthy auto makers strike and uncertainty over the strength in oil prices make all too clear.  For now, however, it seems that any changes in Fed policy over the next six to twelve months will be in the nature of tweaks rather than sudden shifts. 

Canada CPI higher in August -- but not for food

Last week, Prime Minister Justin Trudeau summoned the heads of Canada's major grocery chains to a special meeting in Ottawa, threatening them with unspecified measures if they did not come up with a plan to curb rising prices. That meeting duly took place on Monday, although Trudeau was otherwise engaged and his deputy, Finance Minister Chrystia Freeland, could only be bothered to attend the meeting for two minutes. 

Given that grocery price inflation has been visibly slowing in recent months, why is the Government suddenly leaning on the retailers? We may have got an answer to that this morning. As part of the release of CPI data for August, Statistics Canada reported that grocery prices actually fell 0.4 percent month-on-month.  That dropped the year-on-year gain, which topped 11 percent earlier this year, to 6.8 percent, the lowest reading since January 2022.  Is it too, too cynical to assume that the government, with some kind of a heads-up from StatsCan about the data, leapt into action so as to be able to claim credit for something that was already well under way?  Perish the thought. 

The rest of the report, particularly the headline number, is less reassuring, though as usual there are special factors at play.  The headline number rose sharply to 4.0 percent in August from 3.3 percent in July, the second straight increase.  As was the case in July, the result was heavily influenced by base effects in the price of gasoline, which rose 4.6 percent in the month. This pushed the year-on-year change to a 0.8 percent increase in August from a 12.9 percent decline in July.  There is not much the Bank of Canada can do about that. 

On the other hand, shelter costs are definitely within the Bank of Canada's purview, and are continuing to add to overall inflation levels. Specifically, the mortgage interest cost index accelerated further in August to 30.9 percent year-on-year. StatsCan also observes that a higher interest rate environment, which may create barriers to homeownership, put upward pressure on the (rent) index.  Rents rose 6.5 percent year-on-year in August, up from 5.5 percent in July. 

The various special indices calculated by StatsCan serve to confirm the Bank of Canada's fears that getting inflation all the way back to the 2 percent target will be challenging. CPI ex food rose 3.5 percent year-on-year, while the index excluding food and energy rose 3.6 percent.  Moreover, two of the Bank's three preferred measures of core inflation, which had been edging lower for most of the year, moved slightly higher in August. 

There will be one more monthly CPI reading before the Bank of Canada's next rate setting, scheduled for October 25. For the moment, markets are seeing a 50/50 chance of another rate hike at that time.  Given that higher rates are contributing significantly to inflation (mainly via the shelter index), a further rate hike seems almost perverse. However, the Bank of Canada will have to weigh that against its own credibility and the credibility of the whole inflation targeting framework. 

The Hunter hunted

I don't normally comment on US politics here, unless it's relevant to something I'm writing about the US economy.  As a non-American I am cautious talking about a system of governance I still find hard to fathom, even though living just five miles from the border gives me a ringside seat. 

However, I just want to put down a few thoughts about the situation surrounding Hunter Biden.  It's striking to see the lengths to which CNN, in particular, is going in an effort to play down this feckless dolt's multitudinous transgressions and to minimize the possibility of any of this incriminating President Biden, even while admitting that there is plenty that just doesn't smell right.

The Biden camp admits that Joe Biden, while serving as Vice-President to Barack Obama, took part in phone calls with various actual or prospective business associates of Hunter. Yet supposedly, no business was ever discussed in these calls.  This stretches credibility an awfully long way, but let's assume for a second it's true. All that was discussed in these calls was the weather and the latest NFL odds.  

If that was indeed the case, what was the purpose of the calls?  It can only be an attempt by Hunter to use his father's exalted position to boost his own business prospects.  That's called influence peddling, and it worked: Hunter was paid a fat stipend to lend his name to a Ukrainian oil company, even though he likely could never have found Ukraine on a map and wouldn't know crude oil from Oil of Olay. 

If this was all indeed "only" influence peddling, what does that say about Joe Biden?  Shouldn't a man of his experience and in his exalted position have realized that this was a very ill-advised, indeed dumb thing to do?  It shouldn't take the wisdom of Solomon for Joe Biden to know that if any of this came out, it would make him look corrupt or at least stupid, neither of which is a good look for the most powerful man in the world.

Coming back to CNN for just a second, their take on the Republicans making so much of Hunter's problems and threatening to impeach President Biden is that it's just a ploy to divert attention from Donald Trump's mounting array of legal issues.  But you could equally look at it the other way round: it's only Trump's innumerable transgressions that make it possible for the Democrats to try to sweep the Biden family's issues under the rug. 

Running hard but still falling behind

So, first the good news. According to Statistics Canada, the Canadian economy added 39,900 new jobs in August. That was about twice as large as the reliably risible analysts' consensus.  Fully 32,200 of the new jobs created in the month were full time. As a result of the large increase in employment, the unemployment rate was unchanged at 5.5 percent, after edging higher in each of the previous three months.

If only that were the whole story.  Thanks to rapidly rising immigration, the working age population rose by fully 103,000 in the month.  This meant that despite the strong job numbers, the employment rate, which measures the number of persons over age 15 actually working, fell by 0.1 percentage points, to stand at 61.9 percent. Note that the employment rate is not the same as the more frequently quoted participation rate, which includes the unemployed as well as the employed in the calculation. That ratio also slipped by 0.1 percentage points in the month, to stand at 65.5 percent. 

This is not just a one-month phenomenon. The working age population has grown by an average of 81,000 per month so far in 2023. Making allowance for normal dependency and participation patterns, the economy would need to create an average of 50,000 jobs per month to keep the unemployment rate unchanged.  The actual average monthly increase in employment so far this year has been 25,000. Note that these numbers come directly from the StatsCan media release -- they are not calculations done by me or some other analyst. 

This hardly seems like a sustainable pattern. There is evidence of serious pressure on housing markets across the country, with the three levels of government -- Federal, Provincial and municipal -- all pointing the finger of blame at each other. Canada has always had sickeningly high numbers of "rough sleepers" on city streets, but that sad phenomenon seems likely to be worse than ever just as the cooler weather starts to arrive.  Yet there are few signs within the Federal government, which ultimately controls overall immigration levels, that anything will be done to address the problem.

What does all this mean for Bank of Canada policy? A strong rise in employment is hardly a recipe for stable interest rates, let alone rate cuts. And yet, the massive rise in the working age population makes it possible to argue, as at least one major bank economist has already done today, that the tightness in the labour market may actually be easing despite the job gains.  This is a difficult argument to sustain unless you have evidence that the qualifications of the new arrivals match those needed in the labour force.  

Only time will tell if that is the case, though it should be added that large segments of the Canadian economy, from agriculture to medicine,  would collapse overnight but for the presence of immigrants. Muddling through without any sort of plan may work out just fine in the end, but the imbalance between population growth and employment in today's numbers suggests things could very quickly turn sour. 

On hold, but not happy about it

Mainly in response to last week's report of a decline in GDP during the second quarter of the year, markets had scaled back almost to zero their expectations for a further rate hike at today's Bank of Canada Governing Council meeting.  The Bank did indeed keep its overnight rate target unchanged at 5 percent, but the assertive tone of most of the press release gives the strong impression that but for that GDP report, today would have brought another rate hike. Consider these quotes: 

"....with measures of core inflation still elevated, major central banks remain focused on restoring price stability".

"Recent CPI data indicate that inflationary pressures remain broad-based..... CPI inflation is expected to be higher in the near term before easing again. Year-over-year and three-month measures of core inflation are now both running at about 3.5%, indicating there has been little recent downward momentum in underlying inflation. The longer high inflation persists, the greater the risk that elevated inflation becomes entrenched, making it more difficult to restore price stability"

Neither of those statements sounds like a central bank that thinks its work is done, but the latest developments in the real economy clearly made it impossible for the Bank to justify another rate hike at this time:

"The Canadian economy has entered a period of weaker growth, which is needed to relieve price pressures..... Economic growth slowed sharply in the second quarter of 2023, with output contracting by 0.2% at an annualized rate.......Final domestic demand grew by 1% in the second quarter, supported by government spending and a boost to business investment. The tightness in the labour market has continued to ease gradually. However, wage growth has remained around 4% to 5%".

Is there perhaps a hint of a suggestion there that the Bank wishes the Federal Government was not making its job harder by continuing to boost public spending?  Sure sounds like it, though the Bank is always careful not to make political statements, at least in public. Politicians, alas, feel no such constraint: the Premiers of both British Columbia and Ontario penned very public letters to Governor Tiff Macklem in recent days, urging the Bank not to hike rates further. And in the wake of the Bank's announcement, Federal Finance Minister Chrystia Freeland has issued a statement welcoming the news. These are not welcome developments and it's to be hoped they do not set some kind of precedent. 

The final paragraph of the press release deserves to be quoted in full:

"With recent evidence that excess demand in the economy is easing, and given the lagged effects of monetary policy, Governing Council decided to hold the policy interest rate at 5% and continue to normalize the Bank’s balance sheet. However, Governing Council remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed. Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation. In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behavior are consistent with achieving the 2% inflation target. The Bank remains resolute in its commitment to restoring price stability for Canadians". 

Not to over-analyze that, but the fact that the "evidence" in the first sentence is described as "recent" rather than as, say, "growing" seems to underscore the importance of the GDP data in the Bank's decision today. The rest of the paragraph is just about as hawkish as anything the Bank has said over the past year and more; given that the Bank's definition of price stability continues to be the 2 percent target, it is clear that further rate hikes cannot be ruled out. Before the next rate setting date of October 25, we will see two more monthly sets of both employment and CPI data, as well as GDP data for August. It will take clear signs of weakness across that data set to take another rate hike off the table. 

The long-awaited recession??

So, is this the start of the long-awaited (and for the media, seemingly much-desired) recession in Canada? Statistics Canada reported this morning that real GDP fell at a 0.2 percent annualized rate in the second quarter of the year. It takes two quarters of declining GDP to meet the "official" definition of a recession, but weak monthly GDP data for June and July suggest that a further decline in Q3 is at least a possibility.

Before we look at the details, let's just pause to think about what a "0.2 percent annualized rate" looks like. StatsCan correctly states in its media release that "real gross domestic product (GDP) was nearly unchanged in the second quarter", not that the media will take any notice of that form of words.   If we "de-annualize" the number we find that it means real GDP in Q2 was 0.05 percent smaller than in Q1. That barely even qualifies as a rounding error, and it could well be eliminated (or, equally probably, revised to a larger decline) when updated estimates are available in a few months' time. 

Looking deeper into the data, we immediately see evidence that the Bank of Canada's aggressive rate hikes are having an impact on at least one segment of the economy. Housing investment fell 2.1 percent in the quarter; this was its fifth consecutive quarterly decline, which corresponds remarkably closely to the duration of the Bank's tightening moves. StatsCan calculates that this factor alone accounted for a 0.65 percent annualized rate of decline in real GDP, so aside from the decline in housing, real GDP would have risen at about a 0.4 percent annualized rate in the quarter.

It is worth spending an extra moment looking at the implications of this weakness in housing. Immigration levels into Canada are running at an unprecedented pace, led by surging numbers of foreign students, refugees and more conventional migrants. The country's population hit 40 million earlier this year and is set to grow by at least a million this year and next -- and there are suggestions that the numbers may in fact be undercounted. Unsurprisingly, this is putting great pressure on the housing market, as well as social services in general. The news that new housing construction plunged by 8.2 percent in Q2 could not have come at a worse time. 

Returning to the StatsCan data, we find a number of other contributors to slower growth. Business inventory accumulation slowed in the quarter, a development that may well be partly attributable to Bank of Canada policy, given the rising cost of carrying unsold goods. The trade sector was also a source of weakness, at least in a statistical sense, as growth in imports outpaced a very marginal rise in export volumes.

Growth in household spending was markedly lower in the quarter, posting a rise of only 0.1 percent after a gain of 1.2 percent in Q1. Interestingly, or perhaps ominously, per capita household spending fell 0.7 percent in the quarter, a development almost certainly linked to the large rise in population.  On a more positive note, real business investment rose 2.4 percent in the quarter after a prolonged bout of weakness. All in all, final domestic demand posted a rise of 0.3 percent in the quarter (about 1.2 percent annualized), a number that is in line with the previous quarter and that does not seem consistent with an imminent recession. 

As usual, StatsCan also posted new data on monthly GDP growth. Real GDP fell 0.2 percent in June, with both goods and services output falling.  Preliminary estimates show that real GDP was little changed in July, and it is this weak "handoff" from Q2 to Q3 that suggests overall weakness in growth could persist through the current quarter. That being said, it might be worth noting that the monthly data are particularly noisy at the moment. StatsCan notes that the severe forest fire season depressed output in a number of key sectors in June, and the prolonged port strikes in BC must also have had an impact. Experience suggests that the economy usually bounces back quickly from such events, but it may take some time for the impact on the monthly data to wear off.

Today's numbers represent the last major data point to emerge before the Bank of Canada's rate setting meeting on September 6.  Markets had been pricing in about a 25 percent chance of a further 25 basis point rate hike, but that now looks unlikely to happen.  Raising rates in the wake of a negative GDP report would be more than just a bad look for the Bank -- it would be bad policy.