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!