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.