Hello, and welcome to the Download. I'm your host, Dave Richardson, and it's our regular monthly visit with Canada's hardest working economist. Although we put him to work in between on a special edition covering what's going on in the Chinese economy. I encourage you to listen to that. That dropped in your regular podcast feed about a day or two ago. So go check that out. It's a little bit longer than the normal podcast, but well worth the listen. I can't stop him from working. You get him on a podcast, he wants to go longer because he just wants to chug away, put in extra work. Eric, you just never stop?

Dave, we were saying the key is to not listen to it on 1.5 times. I naturally deliver the 1.5 times speed all by myself.

Well, I know you get very excited because you've done a lot of work and you've foreseen a lot of what's been happening in China and where China is today, more so than other things. So I know this is an area of particular interest as it should be. It's arguably the most important economy on the planet over the last 25 to 30 years. So as it continues to evolve and become a more mature economy and policy changes in that, it's a pretty important topic. So I could see where you were just firing on all cylinders for that podcast.

Well, thanks for that, Dave. I appreciate it. I should say, we are certainly watching China all the time now. It's not just a niche or an occasional thematic subject. It's a constant watcher as some other countries that merit that treatment as well. We were just really expanding our India work recently. Not a perfect parallel— India isn't exactly the China of 25 or 30 years ago—, but there are some parallels there and it's set to be the fastest growing big country and we're going to see some interesting things happen there. Don't make me do a podcast on it. I'm not sure I've quite got the 45 minutes of fast-forwarded content for you, but nevertheless, it's a subject of interest and it's a really important country. And I think, as you know as well, it's one that our portfolio managers have been pretty keen on for a while at this point.

Coming soon: The Download, a special edition. «Eric Lascelles’ India. The next giant». But that's two years away, Eric?

We could do it anytime. Realistically, a little further to build up the full knowledge base or have someone else on, like some of those EM portfolio managers who are visiting regularly and know an awful lot.

Well, I may visit India myself in the interim, but let's get into the main topic for today. We're looking back a few days now on the US jobs. We're kind of in between here because we had the US jobs report on Friday, and the Canadian jobs report for August is coming up this coming Friday. But anything in that jobs report that struck you as unusual or is causing any market reaction that surprised you?

Well, the debate is, you got this 187,000-job creation number pretty close to the consensus. It was actually a little tiny bit over the consensus. The debate though is, is this the soft-landing signal? Because if we could keep clicking along at 150,000 or 200,000 jobs a month, it would be something close to ideal. If you could do that forever, it would be great. Or is this just another piece of evidence that the labor market is softening up with an eye towards outright decline in the coming months? And to be honest, the answer depends on what you're looking for. A bit like one of those Rorschach diagrams— I don't think I've pronounced that right—, in the sense that, as someone who's predicting a recession, I was looking at it and saying, okay, another sub-200,000, and look at those 110,000 net downward revisions to prior months. And it seemed to me like it was the latest piece of a puzzle towards an ever-weakening labor market. But in fairness, you couldn't quite conclude that with absolute precision. You could also say it's an okay job number; nothing to see here. I did note that the unemployment rate rose quite a bit. It rose from 3.5% to 3.8%. Now, these things can jump around, and I think as we've covered before, the unemployment rate doesn't come from the payroll survey, it comes from the labor force survey. It’s different and it can be jumpier and all sorts of complications. But bottom line is, historically when the unemployment rate has gone up by not a lot, in the realm of half a percentage point, it has historically been an unstoppable force and it's just kept going and turned into a recession. The point being you don't need much of an unemployment rate increase to not really trigger but signal that a recession is on its way. So that's a pretty big jump. We haven't hit the 0.5 percentage point. Sahm's law, I think is the name that's being given to it these days. But the bottom line is that was a big enough move that you're close to that threshold. So if we were to get the unemployment rate up again a couple of tenths next month, you would actually be hitting some of those thresholds. So that was interesting as well. Earnings or wage growth was 0.2%, which is a little weaker than expected. When I sum it up, to me, it was actually on the net soft and I didn't fully buy the this is the soft-landing-happening immaculately story.

Although we look at yields. Yields backed off on the report and then have continued their rise as we've gone through this week, particularly longer yields. So, as you say, we're just in one of those uncertain periods. That 150,000 to 200,000 is just that spot on place, if you could hold it forever. But you're generally moving up through that or coming down from higher levels and the trend is what we want to look at and where you're ultimately going to end up. And I think from most of your work and your thinking, it's moving in the direction of we're going to get a slowdown. I don't think anyone questions that, but it still looks more like a recession than not, doesn't it?

That's what we think. This is a probabilistic exercise. I don't get everything right and we can't guarantee that, but it does look to me still as though that story is on. And one way of thinking about it is that interest rates have gone up an awful lot, they may not go up much more. And so you might think, gee, that was the end of the bad stuff. But there are big long lags from rate hikes and higher interest rates through to the economy. And in fact, it was quite interesting, the bank of England governor Andrew Bailey was testifying recently to Parliament and he was saying quite clearly that in their view, the transmission lag is proving longer this cycle. And so this is not just us saying, wait, it's still going to happen. We just haven't seen the kind of economic hit yet from the higher rates and it's beginning to build now. And so there is a bigger drag to come, I guess is the point. And maybe that drag will be to a recessionary scale. In fairness, a lot of the economic data out there is still mixed. You still find perfectly fine things. We were talking just before this about how the ISM services index just came out, it looked fine. The ISM manufacturing looked weak, but a little less weak than the prior month. So we're not getting a full on swoon in that sense. Again, you have to be very careful not to cherry pick. It's so tempting to take the four bad things, and say, let me just talk about those four bad things. That's not a good way to forecast. You have to look at the full set of them, be as objective as you can. But one thing we really like to look at, because it really gives just a very granular look into the economy, is the Beige Book. The Beige Book sounds boring— maybe it is boring to non-economists, based on the color—, but nevertheless, it's an anecdotal summary of what's happening across the US economy. The way it works, you have twelve fed districts. Each of them goes and canvases businesses and they come back with a non-numeric summary of what's going on. And inevitably, not every district agrees and there's all sorts of messiness, but they do try to summarize it. And it just came out— it literally came out about an hour before we're speaking to this—, and it was for the months of July and August, released in early September. And it seemed to me it was pretty bearish, I have to say. It felt very late or end cycle in terms of what was happening. And so let me read to you a few extracts. One would be that the overall characterization of economic growth was modest. Most contacts in the tourism sector indicated that they were seeing what they viewed as the last stage of pent-up demand for leisure travel from the pandemic era. They thought that was now, in fairness, because the summer is also coming to an end. And so maybe that's easy. But still it's been a multiyear tourism boom and they seemed to think that was coming to an end. Other retail spending was described as slow, especially in the nonessential space. So that's of course where the spending wobbles first. Some districts were suggesting consumers may have exhausted their savings. We've seen those level of savings diminish to some extent, but consumers running out of steam, according to some districts. Demand for manufacturing goods was described as having waned. Job growth was called subdued. But to me, almost 200,000 doesn't feel that subdued. But maybe they're seeing some things that were not. And most contacts said that they expect slower wage growth. They said the second half of the year will be different. They're expecting wage growth to slow. So they think that the labor market is softening up in that regard as well. Most districts reported price growth was slowing. And profit margins were reportedly falling in several districts. And so it gets tricky. You got twelve districts; several say profit margins are falling. Technically, I guess the other nine could be seeing rising profit margins, though I think if that were happening, you'd hear something about it. So you have to think that the trend is towards lower margins. But I go through that, and I hear not so good things about the labor market, not so good things about consumers, not so good things about manufacturers, and profit margins and wage growth. And so to me it feels, again, very late or end cycle. It's consistent with the work that we're doing which suggests that we are seeing things not look as good. And whether that's an outright recession or just a period of softness, and whether it's a recession tomorrow or recession in the middle of next year, I don't think you could say with precision. But it seems to me that we're getting some softness here and we're sticking with that recession call.

And we've referenced on this podcast several times about what's going on with consumer debt, particularly credit card debt. And then I was looking at some of your work yesterday and you're starting to see some delinquencies pop up around that credit card debt in the US. Which is generally where we're going to percolate up first. But what was that data's point?

So that's it. Consumers have been leaning more on credit card borrowing, which you wouldn't think would be the natural inclination as rates rise, because what's the one variable interest rate that everyone's exposed to? That would be credit cards. And so they're doing it out of necessity, presumably, as they run out of those excess savings that they had accumulated across the pandemic. So we've seen credit card usage go up quite a bit. In the short run, of course, that just helps spending. It doesn't hurt spending, but it suggests maybe all is not perfectly well on the income spending dynamic. And as you say, we are now starting to see a notable increase in credit card delinquency rates in the US. This is a 30-day delinquency rate, but it's risen quite a bit. We have data that separates out the 100 biggest American banks from the rest. In terms of the rest, which would be the majority of the banks— but maybe not the majority of the money—, in terms of the smaller banks, the increase has been quite notable to the point that it's the highest we've seen going back 30 plus years. The highest credit card delinquency rate. That's not great for big banks. The top 100 banks, it's not the highest in 30 years; it's the highest in about ten years, though. It's higher than it was at any point during the pandemic, and it's a significant increase. And so, we're seeing something. We were just talking in a team meeting about this. We have this other chart and it's a 90-day delinquency rate and it's up a smidge, but it's not up a lot. And so the question is, is that other one going to jump in 60 days when the 30 day delinquency becomes 90 day? Or are people just struggling a little bit and missing every once in a while a credit card payment, but then making good when that paycheck comes in? And so you could interpret it a few ways, but I think, to be honest, the best way is to say, listen, this thing's rising quite a bit and so that is signaling some measure of distress and you would think it would be a limit on what consumer spending can do. Now, we did get consumer spending, personal income, personal spending data and so on for July not that long ago, and spending was strong in July; it was up 0.8% and so people were still spending. But here's the kicker, personal income was only up 0.2%. And so that was people outdoing what they could sustainably achieve. And I suppose the credit card growth speaks similarly and it seems to us that it's not sustainable. And by definition, that means the personal savings rate fell in the month and it's already very low indeed. It's just about the lowest rate we've seen going back several decades. So we think consumers have to cool it to some extent. And you refer back to that Beige Book as an example and talking about the tourism demand maybe being on its last legs and how demand for nonessential items is now weakening to some extent as well. I'm no expert and I'm not at all a corporate side analyst, but you can look at Foot Locker as an example, a seller of discretionary goods of footwear, and they've reported quite a drop off in demand and anticipated demand. And you see that across a variety of companies. So it seems the consumer is softening up and they're hanging on in some regards, but they're giving up the ghost in other ways.

Everyone who listens to us regularly— don't get us wrong, we would love nothing more than a soft landing and no recession— but what we try to do here is give you information, and you start to take a look at the numbers, and from Eric's perspective and our perspective overall, it looks like you're going to see some pretty significant softening. It's coming a little bit later than you would expect, but it's an unusual cycle and so I guess that's not too surprising. But it does suggest that in your investment portfolio you want to be pretty neutral or a little bit cautious at this point. And that's the way we're looking at the portfolios that we manage. It creates an opportunity. Whatever's happening economically is creating an opportunity in some part of the market. So we just need to make you aware of that so that you can make those decisions for you and your portfolio.

Well said.

There we go, Eric. So with that, let's stop it at that point because we're going to get you on again. And I've already teed up the excitement sometime in the next two years, a special report, «Eric Lascelles on India, the next giant». So everyone wait for that. But if not, we'll have Eric on pretty regularly between now and then. And Eric, thanks as always for your time.

My pleasure. Bye everybody.