Hello and welcome to our latest monthly economic webcast for September. My name is Eric Lascelles. I'm the chief economist for RBC Global Asset Management. Very happy to share with you our latest macro thinking. And indeed the title of this presentation is a measure of macro relief. And so what we're really referring to there is the idea that about a month ago, there was quite a lot of concern about the economy, whether we were suddenly tumbling into some sort of abrupt recession.

And that fear has faded, notably over the last month. Still, questions to be answered? Still risks, to be sure, but we are getting economic data that's holding together a bit better, and so that does constitute some relief. Let's jump right in, as we always do. We'll start with a report card. Within that report card, we'll just talk about some of the good and bad and interesting things going on.And that will be a nice framework for where we'll go over the rest of the presentation and so on. The positive side of the ledger, let's start with really the most important thing, the thing that was so profoundly broken a few years ago, which is inflation. And so inflation was extraordinarily high. Export inflation is no longer so extraordinarily high.

It is continuing to fall. So it's on the right trajectory. And I wouldn't say it looks normal, but it is looking less and less abnormal if that makes sense. And so that's that's certainly welcome. That then enables and has enabled central banks to begin moving. And so in the US the US has been one of the slower movers.

In fact technically, as I record this at the extreme end of August, we haven't yet had a fed rate cut yet. A lot of other central banks have, but they haven't gone yet. It looks as though they are now comfortable in the context of that inflation and some other things of initiating that rate cutting process in September. And so our best guess is a 25 basis point rate cut that would be consistent with what we're hearing, from the Jackson Hole summit, where a lot of very smart central bankers met and spoke and other inputs as well.

Then again, as I mentioned, worth, recognizing more broadly that the rate cutting story is very much alive elsewhere, in particular in the developed world. And if anything, it's gaining a bit of momentum. and so as an example, the Swedish central bank just cut for a second time. And in Canada, there looks to be a third rate cut in very early September and the list goes on.

So we are seeing that momentum build. the global economy is still growing. I've said that every month for a while. It's been true every month for a while. But I mention it normally. It would be just a default assumption, just because, again, there have been concerns about recession risks and so on. And we have some of those concerns, but for the moment we're not seeing those realized. So the economy is still alive. and really referring to the title of the presentation, the US economy did a little better, recently. So we've had some better economic data in the last 3 or 4 weeks that has taken the edge off and made people a bit less concerned.

So really, our base case economic forecast then remains loosely, at least unchanged, which is we're still looking for a soft landing, that is to say, an economy that might move a little bit less quickly, but that ultimately avoids recession. And that's still, we believe, the single most likely scenario on the negative side, shorter list that maybe means something. I'm not sure. but there are some negatives out there. One would just be to continue to observe that interest rates are still pretty high. They barely begun to decline on the central banking, short end of the curve up. They've declined notably, further out the yield curve, but still high by the standards of the last 15 years or so. So that does still impose some sort of, economic drag. It is still fundamentally painful. It's slowing growth, not adding to it. the U.S labor market probably merits particular attention. It's going to get some particular attention a bit later in this presentation. I'll speak to the labor market from a few perspectives. but it has maybe notably softened.

That's where I think some of the biggest economic concerns lie. So let's keep watching that and let's talk about that in a moment. let us acknowledge on the geopolitical side that risks are elevated. They've been elevated for years. They feel like they're always elevated, but they've been maybe particularly elevated, for a couple of years. Rose again, we think last fall, probably rose again a little bit over the last month, just to the extent that we have seen, further turmoil, maybe in particular in the Middle East and, in the Ukraine, Russia conflict, we have seen Ukraine pursue this other strategy in the context of invading Russian soil and raising some questions as to how, Russia might respond. And so, higher than the normal geopolitical risks. And we tend to frame that as being, well, you got to watch the price of oil here. There are scenarios in which, if these things were to intensify or deteriorate further, that the price of oil would have to go up and would have consequences for inflation, it'd be bad for global growth and so on, hasn't happened at this point, though.

In fact, I would say the price of oil has been remarkable, well behaved through all of the, through all of the events that have taken place in recent years. And so I wouldn't expect oil to spike. But there's there's that risk, and it's not a zero risk. And then on the Canadian front, and I'll speak to some of this a little bit later.

But the Canadian economy, has weakened, I would say a bit more than, than many others. There is a clear deceleration of foot and the Canadian unemployment rate is up by more than, a lot of other countries. And we have, I guess, just, not averted, but just ended. what was a rail work stoppage, which was set to be very costly and will now be just a little bit costly to the economy.

The Canadian economy is, is struggling to some extent right now. And I think I could say if it weren't for the extraordinary population growth taking place, which is very much a, a two edged sword. But nevertheless, if it weren't for that, the Canadian economy probably wouldn't be growing right now. And then on the interesting side of things, well, that US election gets ever closer.

I can hardly believe it when I say that as I'm recording this. At least we're just over two months away from the US presidential election, and indeed congressional elections on November 5th. I will talk a little bit, later, to, tariffs. And so the Trump tariff risk and, and he's talked a lot about that and what that could mean.

I'll also just flag that we have a bit of greater clarity on the Kamala Harris economic platform. She is, of course, the Democratic Party nominee. And so we need to think a bit harder. But what she's been proposing, and I guess to summarize, I can say that she's proposing some things very similar to what her predecessor and current President Biden has done and has proposed, but with a few other things.

And so she is proposing, in particular to, increase a child tax credit to help, families and, to effectively lower taxes via an earned income tax credit on low income and middle income families. So a lot of focus, you could say maybe on inequality in that mix. Also planning on targeting, what is being called price gouging at grocery stores.

And so, that sector will presumably be in focus and could well be a bit constrained also continuing a process of capping certain, drug prices and also a focus on housing as well. And the housing focus, is, I would say in, in, in some ways maybe not optimally directed to talking about money for home buyers, which we Canadians know just May makes home prices even higher as opposed to making them any really more affordable.

but also talking about 3 million more homes being built. And if she were able to target the supply side, that actually could be a useful thing. That would be a, an interesting, economic policy. So, we're getting a better sense for that. We're better able to compare and contrast the policies as they stand right now. there was a lot for a table of contents.

medium term fiscal challenges still certainly outstanding. We talked about this last month, but there are big deficits and big public debts out there that will eventually require a reckoning, if not quite yet. And then we also recently did our our US business cycle scorecard. It's a quarterly refresh. it still says the US is a mid-cycle or late cycle moment, suggesting a cycle that has perhaps a few years left, but not, many, many years left.

Okay, that was a lot. As always. Let's jump in. We'll start on the political side. and so let us talk about, where it stands. And so, blue is the Democrats. I guess you could say Kamala Harris now was was Biden there for a while? red is Trump. and so, I mean, what a fascinating journey this binge July in particular, I guess late June, through July was particularly wild.

And so you had a very poor debate performance by prior Democratic nominee, existing President Joe Biden. then there was this shocking assassination attempt on Donald Trump. And after those two events, Trump's popularity, I guess you could say the odds of winning is what you're seeing here, soared at one point, he was being given a 2 in 3 chance of winning the election.

That's when that red line peaked. and since then, it's really faded. So then, of course, Biden stepped aside. Harris stepped in. She's enjoyed a honeymoon. The honeymoon hasn't really stopped. we're through this Democratic Party national convention now. And, the blue line, that's that's Harris, is above the red line. So at this juncture, markets think that, the Democrats are a bit more likely to win the white House than the Republicans.

I should warn there are a number of different inputs. This is from predict it. There are some others that argue it's a bit closer. I have seen models arguing. It's a little further apart as well, though, so I don't think this is horribly wrong. But the takeaway to me would be it's still a close race. but at this point it's slightly more likely, the Democrats pick up the presidency.

So be aware of that. here's that platform preview that I've already stolen. Really, just about all of my thunder on this is maybe the backdrop, but I'm going to jump right to the bottom here, get that extra animation in place. And so, really to summarize on the Harris side, fiscally expansive, but the more spending, by the way, Trump fiscally expansive but via tax cuts.

And so, you can get into the weeds here and you can talk rightly about earned income tax credits and tariffs and all these other things. And we we certainly thought a lot about those at that granular level. but sometimes the single best predictor of what a candidate means for the economy is just do they plan on pumping a lot of money out into the economy or do they not?

And you can pump money out by spending. You can pump money out by cutting taxes. Not to say those are exactly identical from an economic standpoint. But, the big question for economists is will they be pumping money out? and of course, the US is already running such a big deficit, you hope it's not going to be a whole lot more money.

But I would say neither candidate seems to be particularly harping on the need for balanced budgets or the need to shrink the deficit, or anything like that. You got a very strong sense that each will deploy as much money as they are able to extract, from the Treasury, depending on what Congress gives them permission to do and what kind of mandate I guess they get from voters as well.

And so that's a point of strong similarity. you know, in neither situation is there, aggressive fiscal austerity that imposes a big drag on the economy? To be honest, the single biggest predictor, then, of how stimulative or restrictive these candidacies or these presidencies could be comes down to whether Congress ends up being, united behind the president or divided.

And right now, the best guess is divided, which will perhaps limit enthusiasms and means. A lot of the bullets here may not actually happen. That's how it usually works. a lot of things fall by the wayside. However, if there were to be a sweep, if Harris wins and it's a Democratic Senate House, or Trump wins, it becomes a Republican Senate and the House.

That's where you can talk about fairly profound things and maybe a bit more of a at least a short term economic boost. as it stands now, the Congress is expected to be divided. But, you know, the way this works is if one of the candidates were to enjoy a particular wave of support over the next couple of months, it's not inconceivable they drag the rest of the ticket with them in a way that does, unite Congress, behind them.

So that possibility does exist to the extent we do still care about exactly what the policies are, though, let's just maybe loosely and roughly go through some of those items at the bottom. And so, Harris, certainly the more environmentally friendly of the two candidates, probably the less business friendly, talking about higher corporate taxes, talking about price caps I mentioned earlier, in theory, to the left of Biden, that certainly how she campaigned as she was contesting for the Democratic nomination, four years ago or maybe five years ago at this point in time.

but, since then, she has seemingly tacked to the center. She does seem to endorse Biden's views. She does seem to display an element of pragmatism. And so I don't think it's all that useful to think of her as being further to the left of Biden. and as I mentioned, spending on child tax credit, earned income tax credit on housing would be some of the the landmark achievements she would seek to pursue if elected.

Trump side again, fiscally expansive. we've been inclined to think that Trump could be a short term economic positive in the context of tax cuts and deregulation being something that gets the stock market and businesses excited and revs them up. medium term, maybe, though an economic drag to the extent that he is pushing for tariffs and tariffs, by the way, don't require a lot of congressional support.

You can just kind of do them as the president within reason. and so, that is a drag, as I'll speak to in a moment. And he's talking about less immigration. And so that, in theory is a drag, talking about halting the Inflation Reduction Act. We'll see if that happens. But that, in theory, could be a, a drag as well. Certainly more generally, and this is abstracting from the economy, some autocratic kind of worries. If he were to be elected. It's hard to say what we should do with that, but just wanted to to flag that, rest of the world probably not as happy in a Trump presidency, if only simply because, tariffs go up against them and the products they are seeking to export, to the US.

Again, more on that in a moment. you could also maybe argue some extra geopolitical uncertainty to the extent that Trump is more of an isolationist. perhaps, than Harris, stock market might well, like Trump, stock market likes corporate tax cuts and deregulation, that's for sure. higher yields probably under Trump could be again in part by revving up the economy in that way.

In the short term. it could be in part because you often see effects like that, if tariffs are implemented because they add a bit to inflation, maybe positive for the dollar. But you know what? It's not actually all that clear. That's how it's playing out. So there's a big question mark there. So that's some of the ways we're thinking about this.

Stepping back I would just say this is a consequential election. They all feel consequential. But this is a pretty substantial economic, policy divide as it stands right now. And also it's a close race. So we we don't quite know how this goes. There is a forking path in front of us, and we just don't have a precise sense of of how it plays out at this point in time.

Most of the time, markets are pretty well-behaved. When elections happen, they react less than you would think they should, or the reaction is is fairly short lived. there's a recognition that, you know, that stores are in for the long game and presidents only get four years at a time, and future presidents can fix, things that get broken most of the time.

And so keep that in the back of your mind. I don't think this needs to be the investing theme. but it's something to think about. Okay. let's talk a bit more just about the tariff side. And so the tariffs. So if Trump is elected, it looks like there are going to be tariffs. You could debate just how big but it does look like there will be tariffs.

This is our economic modelling. We have a big fancy econometric model. And we're able to shock it by applying tariffs. And this is what it says. And so it's not perfect. And I doubt it works out exactly like this. But just to give you a sense, if the full Trump tariffs meaning 10% tariffs on the world, 60% on China, are implemented, you can see that first column shows you that, well, you know, everybody gets hurt here and then there aren't really too many winners in tariffs.

Maybe at the the company level, if you've just lost a foreign competitor, you're happy. but at the economy wide level, of course there then be an American consumer who's not happy at their loss of of choice and the extra price they might have to pay, or an unavailable product, or something like that. so our modeling would suggest the full tariffs do subtract quite materially from the US and China, and even more so from Canada and Mexico.

These are countries so connected to the US that if there were tariffs put up, that would be really damaging to them. ultimately the world economy grows 1.1 percentage points less quickly over the subsequent two years. Just to put that into perspective, this would be a visible hit. This would probably not be a recessionary hit. That's not a big enough hit to induce a full on recession that's spread over two years.

In case you're wondering, on inflation for full tariffs, you end up getting more inflation in the US. They've just decided to pay more for things by imposing what amounts to a tax and all the things that they import. and a lot of other countries end up with slightly lower prices, presumably because their economies are a bit weaker.

And that's the dominant force for them. I will mention, though, there's a good chance that if Trump is elected, the tariffs aren't as big as talked about. And so if you were to get a partial tariff scenario, as you would guess, everything gets kind of dial down. The damage is smaller. A lot of countries lose .2. 3% of economic growth over a couple of years.

And so this is one in which, well, you know, we don't want to lose that growth if we can help it. but it's it's manageable. It's not a, a huge hit. and, you know, markets wouldn't be too, too distressed. I wouldn't think, and so on. So if we got a smaller tariff, it's it's probably fine.

The bigger ones have a real hit, but maybe not to the tune of a, a full on recession. And that's that's the way we're thinking about it right now. who would likely be targeted? Well, we sort of already know that China is the country getting the most attention here. And, that actually makes sense when you look at the US trade deficit and you say, well, who's whose fault is it?

I don't think you should really think in terms of faults, because one country chooses to to spend more than it earns and the other chooses to earn more than it spends. And it takes two to tango. But anyhow, you know who's who, who's responsible, for part of the US deficit. And so the answer is China is responsible for almost a third of it.

Mexico is about a fifth of it. Germany is about a 10th of it or something like that. And everybody else's is smaller to varying degrees. Canada's pretty small. Only 1/20 of the US deficit is because candidate runs a small trade surplus, with the US. And so logically, you would think then that China and Mexico and, and, you know, Europe and Japan maybe get a lot of focus here.

But China by far the most of all. and then who's most affected. So this now says, okay, well, who actually is really reliant on the US economy to make their own economy run? so what share of your country's economy is just exporting specifically to the US? And so the answer here is, well, like nobody's 50% or anything, but, Mexico and Vietnam, the Vietnam is kind of the fascinating one.

They're not the neighbor of the US. They just have an economy that's very geared now to the US, they are both 26 or 27% of their economies. our, our US demand essentially. And so that's quite big. Canada's big two. It's 19.7%. Taiwan is is big to a bunch of Asian countries, kind of fascinatingly. And it hurts my brain, but I think the numbers square up and we did double check, take a look at China towards the bottom.

So China, perhaps the target, of US tariffs, only 2.4% of its economy is directly Americans buying Chinese things. And so that's a function of two things. One would be that, like a lot of really big economies, they are domestically, oriented. and so do they trade. They trade. But, you know, the great bulk of the economy is just buying their own stuff.

And so, that that dials it down. and then, you know, China does trade with a lot of other countries and other Asian nations and other partners and so on in a way that the US is a very important trading partner. But it isn't the only trading partner, unlike a Mexico, Canada kind of setup, where it is a dominant relationship.

So, kind of fascinating. So certainly if tariffs get hit, you worry about China. Of course. but, you know, China is not, as connected to the US as you might have a first guest. So be aware of that. just to confirm that China is perhaps the main tariff and this is the, the changing tariffs, dating back, to the late 20 tens and really dating back to the first Trump presidency and some of the initial tariff increases put on.

So that gold line is China's tariffs on US exports. And so you can see the gold line was above the blue line at the start of this whole thing back in 2018. So when the U.S was grumbling, they were not wrong to grumble about China in the context of China having sort of preferential trade access. So we saw the blue line then start to go up.

The thing is though, China then just responded and so the gold line went up too. and we are still in a position where the Gold Line is a little bit higher than the blue line. The unfortunate thing is just the tariffs are now sort of 20, 21, 22%, or maybe 19, sorry, a little under 20, but the tariffs are now, you know, 4 or 5 times bigger than they were in 2018.

And, and it's sort of still a situation in which, the US has not fully leveled the playing field. And so, unfortunately, it seems like it could well be a further tit for tat exercise in terms of raising tariffs on China and China, perhaps, reciprocating. Okay, let's move out of tariffs. with a sigh of relief, let's talk inflation just for a moment.

Just a check up, really. And so, global inflation was very high. Global inflation has come down a lot. It's still too high. It is still falling though. So there was a moment of concern last spring. The summer has been much better. it does look quite plausible that inflation continues to gradually settle. And so fears there have faded and it's opened up central bank rate cutting and all of those, nice things.

So that's quite important. I can say that, you know, one of the considerations, not the only one by any means, but one is whether economies are overheating. The US was the economy that maybe was overheating the most. These are five different ways of estimating the output gap. Essentially, when the output gap is over zero, the US economy's overheated.

When it's under zero, it's, you know, maybe under heated or running below its potential would be the way I would describe it. And so different ways of gauging that, not a directly observable variable. we did have some overheating a couple of years ago. Wasn't crazy. So again, I wouldn't say the inflation shock was all about overheating, but it was it was part of the story.

Of those five measures, we're now in a position where four to the five are declining. only one of the five is actually below zero. So only one says the US economy is now, you know, undercooked as opposed to overcooked. but four of the five are falling. I think in the next quarter or two, we can reasonably expect a couple more lines to go below zero.

And so you can say from an inflation standpoint, this was contributing to inflation because the economy was so hot. As the economy ceases to be hot, it makes sense that inflation ceases to be hot. So we are seeing this gradually move in the right direction. And that does help the cooling inflation story. And then this is really only helpful for the next couple of weeks but we certainly like to look at it.

So this is just real time inflation metrics for both the US and Canada. The blue line is the real time. It just kind of gives us a bit of a leading look at what the next big Lumpy Gold line might be. Those are the official monthly inflation numbers. And so we can say that, it looks as though the August data and perhaps even, inching our way beyond that, inflation is still in hand on the monthly, month over month change percent basis and perhaps even has room to, to decelerate a little bit, from July to August when the August data comes out in the next few weeks. So, looks like a moderate rate of inflation ahead.

So we'll take that and then a little aside in a Canadian direction, so Canadian inflation, ex shelter costs. So excluding housing, is the blue line. It looks great. It is below 2% already. It's been there for a while. It's stable. It's calm.

Everything looks pretty good there. We're no longer in a world where we're seeing these rapid price increases everywhere, which was the problem a few years ago. the remaining issue and the reason Canadian inflation is not 2.0% or even, you know, 1.5%, which is maybe closer to where the rest of the basket is, is shelter costs. So that that dashed gold line is still quite high, starting to fall, and that's necessary and useful, within shelter costs.

Home prices are pretty cool. That's not the issue. mortgage interest payments are rising quickly and expensive and, unfortunately, will continue to rise pretty quickly because we know people are going to be rolling mortgages in an expensive way over the next few years. The rate of increase is slowing, but it's still going to be a source of inflation.

But at least we understand that pretty clearly. It's kind of a mathematical exercise at this point in time, and that sources of inflation wouldn't stop the Bank of Canada from cutting, because rate cuts actually reduce mortgage interest payments. It's kind of the one thing where rate cuts reduce the source of inflation instead of increase it. So that's know not great and certainly not pleasant for anyone experiencing it.

But, it's not a reason why central banks can't pull rates down so that that's not the issue. And the issue that remains is rent. it's rent. Inflation is really high. it started cool a little bit ever so, ever so slightly. And so we're hopeful our models would suggest that process can probably continue. but it is undeniable that renting doesn't feel that way to renters, I'm sure.

But renting is still a lot cheaper than buying a home and paying the mortgage. And so there's still a gap there that does have some upward magnetic attraction to the cost of rent. To better align it with the cost of owning that same property. and so that's a consideration. Obviously, population growth has been really fast. And, and, and so that that also remains an upward pressure.

And so despite all that, our modeling does suggest we can see rent inflation start to cool off a very high level. and it started maybe to do that, but, it is still a source of heat. And to my eye, it is the biggest source of uncertainty in the Canadian inflation outlook. So we think inflation gets a little better, but that particular component is probably going to be sticky for a while. That brings us to central banks. and so, gosh, we're just kind of keeping a running tally of who's done what. and really from the perspective of who's now begun cutting as opposed to who's done it a few times. So Switzerland cut first of the developed countries in March and then Sweden in May, and Canada and the European Central Bank in June.

The UK joined the party in early August, so they are now going as well. We've now sort of circled around. You don't see this year. We circled around to the top, you might say. And so Sweden just cut a second time. Canada has already cut a second time as I've recorded this there. We think very close next week to cutting another time.

So they are set to be three rate cuts before September is over. In any event, the eurozone looks like it cuts the second time in September. So we're gaining some momentum here. and these are not just one off rate cuts. The experiments succeeded. Inflation kept coming down. They can keep cutting rates. We think, as I mentioned earlier, the US looks like they will very likely cut in September.

The market is waffling a bit between whether it's a standard 25 basis point cut. It could be bigger. unless something kind of goes pear shaped in the next few weeks, we would think that it would be a 25 basis point cut. And then it looks as though these central banks, most of them at least, can continue to cut rates through to the end of the year.

It's plausible to think that many of them will be cutting at every opportunity, or at most opportunities. And so rates can come down a little faster than would have been assumed, say, earlier in the summer. And we would assume that's 2025 equally presents the potential, presuming all of this continues to play out, economically, as we think, that there will be room for some further easing and we can start to get policy rates maybe toward the end of next year, closer to a kind of neutral levels.

And by the way, nobody knows exactly what that is, but maybe it's a number that looks like, you know, for the US in the low threes and for some other countries more like three or something like that, or even a bit below, percent, that is, Japan, by the way, different story altogether. We'll save that for another day.

Okay. Let's talk broadly about the economy. So we are still thinking in a scenario context. You know, let's acknowledge we don't have all the answers here. And we believe a soft landing is on track. We assign it a 60% likelihood. You can kind of guess what the hard landing odds are based on that. So we think there's a 40% chance of of a hard landing of a recession.

But we do believe the soft landing is more likely. why do we think that? Well, you can see the list right there. And so the economy is still growing. That's important. we think that, you know, even if we do see some pain from the, you know, lingering higher interest rates, there's room for the economy to decelerate without suddenly being in a recession.

Right. You can slow from 3% growth to 1.5% growth. And that's still not even all that close to a recession. developed world growth, outside of the US is continuing. and so, you know, when people express concern specifically about the US and I can't deny some of the data hasn't been great. But equally, I say, if Europe's growing and if if Canada is still growing even and so on, these are all places with much more rate sensitivity than the US.

They should be the ones hurt more by high interest rates. It's hard for me to sort of logically think of why the US would be the economy to tumble into recession here, so that argues the economy keeps growing. we believe we are moving past the period of maximum risk, at least by historical standards. So historically, I think it's 27 months from the first rate hike to the first recession.

Historically, that would point, I believe, to an April recession. We didn't get one in April. We are now a number of months beyond that period of maximum risk. The gap from the last rate hike, which was, I think, last July, I should say a year ago, July, through to a recession. Historically, it's been about nine months.

That would have also said if you were going to get a an on schedule recession, it should have happened, a number of months ago. Now there's a lot of, imprecision to that kind of data. So that doesn't guarantee much. But it does tell us in theory, the risk is shrinking, not growing, at least from a timing perspective; so that's that's nice.

Central banks, of course, have started to cut rates since you're removing the very headwind that we're all worried about, which is welcome. And we do have some recessions signals that have reversed, you know, gosh, in a number of indicators we look at, had been predicting recession and they're no longer predicting recession.

So we feel pretty good about the soft landing story just to acknowledge that forecasting is an imprecise science. You know, we can't rule out a hard landing. That risk might even be a little bit higher than it was a few months ago. Just because we do see some labor market softness. And, you know, really it is because interest rates are still high monetary tightening hits with a lag. And so we're still feeling some pain even if the pain is diminishing there. we can just observe economic growth is slowing even though it's okay. we can see some debt distress. It's still fairly contained. But you do have, you know, rising delinquency rates, notably so far for credit card and auto loan delinquency and maybe more, more, more gradually in slight for mortgage delinquencies.

But nevertheless, that exists. some recession signals are still intact. we did get another one. recently that that triggered, and so we can't fully rule that out. I will say, if we were to stumble into a recession, we'd be pretty soft, a pretty, pretty mild. Pardon me. and pretty short as well. And so, I wouldn't want to think that would be the dominant theme, but nevertheless, we feel like a soft landing is most likely. let's support that idea. So, you know, global economic activity. These are purchasing manager indices. have they, have they decelerated recently. They have you can see that downward arrow on the right side. but they're still okay. They're still at a fine level. They're still in the realm of what you've been used to over the last few years, which, you know, notably was not a recession.

We do see global flight activity starting to ease a little bit, though so choppy, you can kind of debate that last reading maybe raises some questions, but, you know, we had seen a multi-year period in which global flights were just rising, rising, rising. And now they've sort of peaked and they're falling a little bit. I would say two things, though.

And so one would just be that, well, you know, we are now also, not coincidentally, back to a normal level of global commercial flight. So you can see where they sat back in early 2020. And so maybe this is just a natural point. You can't expect this to rise rapidly forever. the other thought would just be yeah, we do think that.

And anecdotally, consumers are spending a bit less money on discretionary items on tourism and travel right now. And so that makes sense. And we do believe the consumer is going to be a bit more cautious. But that's distinct from saying the consumer is is in big trouble, which we don't think, therein, labor market is attracting a lot of attention.

I'll show you maybe the more worrying chart next. But, you know, weekly jobless claims, undeniably the freshest, most, you know, on time way of keeping track of what's happening. And so we've seen these jobless claims rise. So that's a bad thing. People have lost their jobs and they're making claims for benefits. so it's been rising.

But you know what? first of all, it's still pretty low. Quite low, actually. second of all, we saw an increase last summer, and then it didn't go anywhere. It came back down. So it's possible there's just some seasonal distortions. And third, actually the last few weeks have tentatively gone back down a little bit. So it's not even clear whether this trend continues.

To be honest, I do think it's likely that this starts to rise a bit again, but I would just say it's happening in a sufficiently calm way that I still think we can talk about this. Is being, a soft landing, getting to a sustainable labor marketplace, as opposed, as opposed to suddenly racing our way into, into big labor market problems.

And then just maybe this is the one to watch a bit more closely. So lots going on here. I'll just start with the blue line, which we've shared in the past, which is that's just the US unemployment rate. U.S unemployment rate has increased, increased pretty notably at this point. historically, it's hard to avoid recessions when the unemployment rate has increased by this much.

Every time it's gone up by half a percentage point. You can see, historically you've had a recession almost all the time. So that's concerning. That's one of the recession signals that's recently triggered, by the way. however, you quite rightly, people are pointing out that this one maybe is a little bit different than some of the others.

And so the gold line here, is the employment rate. So the employment to population ratio, and so the idea here is it's just the percentage of the population that's working. You might have that it's not just the opposite of the unemployment rate. It's not actually the unemployment rate isn't the percentage of the population that's not working.

It's a percentage of the people who want to work who's not working. So there's kind of an important distinction. The gold line, by the way, is inverted just to confuse you, but to make it consistent where up is bad, the employment rate hasn't deteriorated as much. And so what's going on here is the main reason that the blue line is up is because more people have decided to look for jobs.

Not so much because companies are hiring fewer people. And so we think that's the more benign reason, if that makes sense. And historically, you would need that employment rate to deteriorate more, considerably more before you got to a recession signal there. So certainly labor market is cooling. We think perhaps it can be stabilized before too long. And that that's kind of the burning question.

It's why we're paying such a close attention to the labor market. Okay. just to make you feel good and, you know, to speak to, recession signals that have gone away for a while there, we had aggressively tightening lending standards by US banks toward businesses. That was the up arrow towards the right side of the screen. and then we seen those lending standards really begin to reverse significantly.

And there was a waffle for a moment or a wobble, really. And with the latest print shows, again, a further improvement down is good here. and so, it doesn't look like banks are behaving in a way that suggests that there's a recession around the corner. And so that's important. let's finish with a couple Canadian thoughts.

So this is the Canadian economy. The blue line is just GDP growth year over year. So the annual change. And so don't get too perturbed that the blue line has come down. I mean it could never stay up with the fours and fives. That was pandemic recovery mode. And so that was temporary. but it's come down a lot and it is now pretty soft, I would say in an absolute sense. and so, you know, the economy is weak and it is decelerating. So that's the first thought. but really it's the gold line that's even more concerning, which is, if you look at GDP per capita, so you just divide by the population.

You say, well, what about the average person? Is the average person buying fewer things? Is the average person producing fewer things? The answer is they are that gold line is below zero. and so that's not great. the reason the economy is still growing is we happened to have added so many more people all at the same time.

And so it's papering over the fact that the average person is feeling worse and behaving cautiously and so on. You know, it doesn't make me feel great that that gold line is, you know, not a whole lot higher than it was during some historical recessions. Now, not to say that therefore the suffering right now is equal to that of a recession, because it's not because one of the big sources of suffering in a recession is large scale job losses, which we just haven't had, and then that does its own lasting damage, and people can't pay mortgages and all sorts of cascading problems that aren't happening now because we are not seeing big job losses. but nevertheless, it does it does speak to a country that is doing poorly. and so that is a source of, of concern right now. and indeed, maybe within that, and I'm going to finish with this, when we look at unemployment in Canada.

So first of all, that blue line, is up a fair bit. That's the overall unemployment rate. It bottomed at 4.8%. It's 6.4% now. So that's a fair sized increase. Bigger jump than the US has felt that's for sure. and so, you know weakening no longer a strong labor market. but the gold line is youth unemployment.

So that's aged 15 to 24. It's always higher. It's just youth are less skilled and have less job attachment. And they haven't had time to make the right match with employers and things. So it's always higher, in a lot of summer jobs and things where it's just trickier getting in and out constantly. Now, not a lot of tenure, but it bumps around more as well normally. But the increase in that gold line recently has been particularly acute. So in other words, youth unemployment is doing even worse than normal relative to what overall unemployment is doing. And so some of that is just, hey, the economy slowing, unemployment goes up. Some of that is when the economy slows.

It often hits discretionary sectors like tourism and food services more. Guess where a lot of young people work? And so, it's naturally more but but the move is even bigger than that. And, and so we would posit that, a fair chunk of the increase is also because there's been this incredible surge of immigration, much of it's come through temporary, resident programs.

A fair chunk has been low skill, temporary resident programs, which directly competes with a lot of young people who don't yet have many skills in the workforce. a lot has been through international students who are also looking for jobs on the side to pay for tuition. Also generally in, kind of low skill type jobs. And so we think all that immigration has particularly hurt youth unemployment.

I can say, that we have seen some incremental policy changes on this front dating back, gosh, at the start of the year and even a little bit before, we did just in the week, at least I'm recording this here, further developments out of a, a Liberal Party meeting. And so the government is planning on really further tightening up, the, the unskilled temporary worker channel in particular.

And so perhaps this then ceases to be as acute of an issue. But nevertheless the problem lingers and it's going to take some time, I think, for immigration, to settle. And I think the government, recognizing that public attitudes have really turned, is talking at this point, not just about scaling back the temporary, programs, but also actually potentially targeting a lower permanent immigration number until things settle and the housing market has a chance to catch up and unemployment has a chance to settle and some other things look a little bit more normal in Canada.

Okay. well, on that slightly somber note, thanks so much for spending some time with me. If you found this interesting, you can always follow along and something closer to real time via formerly Twitter. Now X there's our handle or on LinkedIn. We publish a lot or just go straight to the source which is rbcgam.com/insights and lots of research, including by other really smart people at RBC Global Asset Management other than me. So please feel free to do that. And again, thanks for your time. I hope you found it interesting. Wish you well with your investing and please tune in again next month.