(en anglais seulement)

Hello and welcome to our video #MacroMemo.

We'll talk about a number of key economic issues in the next several minutes:

• We'll talk about inflation, which has actually been cooperating quite nicely as the June data comes out.
• We'll talk a little bit about our latest thinking on recessions. Perhaps it might happen a little bit later, but we do still expect a recession, which I know is an open question in some quarters. We'll talk a bit about the run of data, including some softer labor data.
• We'll spend a moment thinking about the consumer and just what the outlook might be. We expect some softness there.
• We'll actually revisit a theme that we touched on late last year, which was the idea of society unraveling or being in decline. We just found a few new metrics to give us a greater sense of what's happening there. The conclusion is ultimately not optimistic, but maybe less pessimistic than you might think.
• We'll finish with a quick word or two on the British Columbia port strike, which will have some temporary economic consequences for Canada.

Inflation: Let's start with inflation. Inflation continues to improve, that has been a theme since the summer of 2022. So it's not a new theme, but it improved quite nicely in June.

To give you a sense of that, we saw the U.S. Consumer Price Index (CPI), the annual change, go from 4.0% to 3.0%. So a big drop. In Canada, it went from 3.4% to 2.8%.

Central banks broadly target 2.0% inflation. So you have central banks that are in the same ballpark, with Canada at 2.8%, a percentage point away, with the U.S. at 3%. That's certainly good news. Yes, it's a percentage point higher than the target, but it's a massive improvement on the 8% or 9% annual inflation rate peaks that occurred last summer. So this is a huge improvement.

We believe the improvement is mostly genuine. For instance, in the U.S., if you look at core inflation, which has been a little stickier, it's taken a little longer to come down. Core inflation rose by just 0.16% in June. That's versus May, to be clear, not versus the prior year. 0.16% is the softest single month we've gotten out of U.S. core inflation in two years.

So this was a genuinely softer print, which is good. It comes after three consecutive months of 0.4%. 0.4% is annualized up to about 5% annualized inflation, while 0.16% will get you to about 2%. That is an important step downward, not that it locks in the new number necessarily forever.

I can say when we slice inflation into a few components, goods-side inflation has been declining nicely for quite a while. In fact, technically there's slight deflation on the goods side as we unwind prior price increases. Service inflation ex-shelter (excluding shelter costs) has been turning lower for several months. It's not low, but it's clearly on a downward track. And now we can say that shelter costs are also starting to roll over and that's actually right on schedule.

If it seems confusing because home prices are reviving in a lot of these countries, there's a big, long lag. So what we're beginning to see is the decline from last year starting to show up in the data, that's just starting to hook over. But it's certainly good news. And as I said, it's on schedule as well.

When we look at the breadth of the inflation – that is to say, the fraction of things in the price basket that are rising quickly – that's come down quite a bit as well. For instance, at its worst in the U.S., you had fully a third of the things in the price basket on a weighted basis rising by 10% a year or more. That was last fall, and that's now declined to just 8% of the price basket rising 10% a year or more. So that's a big improvement.

The breadth is being solved, but we think more improvement can come. We think it'll be a slower pace in the coming months, we're not going to go from 3 to 2 next month, as an example. It's going to be a lot slower from here.

And I will give one key word of warning. As we've celebrated inflation coming down and we've seen the breadth has narrowed, we've seen it improving on a number of fronts, I will say there's been disproportionate help from lower gasoline prices.

When we look at inflation ex-motor fuel (excluding motor fuel/gasoline), it's still running in the U.S. at 5.3%. That's two and a half percentage points higher than the official number. We don't think gas prices come down forever, so that may vanish over time. The reality is that without that artificial helping hand, inflation is a little higher than it looks.

So there's still some work to be done, but that trend's improving too. It's just that there's two or three percentage points of inflation realistically to winnow out of the system before we can say we're back to normal, not just one percentage point.

It's fair to say that when you remove all the bad stuff, inflation looks good. When you remove all the good stuff, inflation looks bad. So I'm sensitive and wary of cherry-picking too much. But I think it is fair to say that gas prices won't fall like this indefinitely.

We have had a below-consensus inflation forecast for quite some time, and we still do. So we are optimists on the inflation front. Again, we're expecting further improvement.

We're not looking for a complete return to 2.0% this year, but you can argue that central banks are starting to accomplish their goals. The Bank of Canada has now raised its policy rate to 5%. That might be all they need to do. The U.S. Federal Reserve is scheduled to raise rates, in all likelihood, another quarter percentage point to about 5.5% before too long.

There's a bit more work to be done by some central banks, but it seems to me that what they're doing is starting to work – and they may be in the process of moving to the sidelines before too long.

Recession: Let's pivot from there, let's just talk through some recession musings. The first question is, do we still expect a recession or not?

We haven't had one yet. It's certainly taking its sweet time coming, if it is going to come. We still think a recession is more likely than not. We have various models and various approaches and they're still saying there should be a recession.

We have fairly sophisticated econometric models that say when rates go up by five percentage points, that is normally a recession. That's what the model predicts. We have rules of thumb and heuristics that say when the yield curve inverts or when inflation spikes or a variety of other things happen, you normally get a recession. We are seeing a fair number of those triggered now.

And then lastly, our business cycle work still says pretty convincingly that this is probably an end-of cycle moment. If not, it’s at least a late cycle moment, towards the end of the business cycle, which normally resolves in recession.

So we're sticking with the recession call, but I'll admit that the fact that it hasn't come yet means we've lost a little bit of conviction. We were talking about an 80% chance of a recession. Maybe we should call it a 70% chance. There are ways that it could be avoided, and a magical soft landing happens, but a recession is still more likely, we think.

The bigger question, though, is the subject of timing. When does this recession happen? We had been saying it would be in the third and fourth quarter of this year. You may notice we are in the third quarter right now. In fact, we are several weeks into the third quarter and we haven't gotten a recession yet.

It's still technically possible that we could, we don't have all the July data. We haven't even seen August and September, but the odds are diminishing as time passes. So we are shifting our formal call for recession from the third and fourth quarter of this year, to the fourth quarter of this year and the first quarter of next year. It still could happen this quarter, but it's just less likely, so we've made that shift out of necessity.

Economic data: Economic data may be supporting the recession call. The Institute for Supply Management (ISM) Manufacturing Index continued to fall in June. It’s consistent w­ith the manufacturing sector in contraction. It’s not quite weak enough to be consistent with a broader economy in contraction, but not that far either.

Payrolls/U.S. employment rose by 209,000. That's a perfectly fine number but I will say it is a downward trajectory. It is the weakest single month in two and a half years, which is surely worth something. It was a bit below the consensus, and the revisions to the prior two months subtracted almost 150,000 jobs off the prior two months of job creation. So you can't take away from the fact that there was still job creation and it was still at a reasonable rate. But it used to be an ebullient rate and it is slowing fairly significantly.

Canada’s story for June was somewhat different. Canada added 60,000 jobs. That's a good number for a much smaller population, but maybe not quite as strong as it looks for two reasons.

1. One was just that there was the loss of 17,000 jobs the prior month. So the trend isn't quite as friendly as it looks. These tend to be choppy numbers and you sort of have to blend them together.
2. The other thought is that Canada’s population is growing at a million people a year right now. So you need 50,000 jobs a month just to keep pace. And so 60,000 isn't the kind of barnburner it might have been a number of years ago.

Consumer spending: A quick word on the U.S. consumer, really on consumers more generally. We've seen eager, enthusiastic spending over the last several years, but things are starting to change. The eagerness of the spending is diminishing a little bit, even in the official numbers.

We know that stimulus checks have mostly vanished and been significantly spent. We know that inflation erodes purchasing power. We know that higher rates eat into disposable income. That’s being reflected in the fact that savings rates are now lower than normal versus higher than normal a few years ago. And credit card borrowing is really surging.

So we think consumers are feeling a little bit of pressure. Companies are starting to report that. It's been the case for the better part of a year that we've seen some people just shifting down-market in terms of cheaper products and cheaper retailers.

Now we're seeing, for instance, with Amazon Prime Day having occurred recently, the discounts were significantly steeper than in prior years. That reflects a sensitivity to price on the part of consumers and maybe a diminished willingness to spend at all costs. Disney is reporting that attendance at its amusement parks over the summer are significantly lower than normal, so people are splurging a little bit less.

We also know starting in August, specifically in the U.S. context, that student loan payments are set to resume. They were waived, they were canceled effectively for three years, and 45 million Americans will start paying an average of $400 a month as of August. That is going to significantly ding personal incomes, and to a lesser extent, compromise consumer spending.

Society in Decline: Let's talk about this notion of “society in decline.” Just to prep this, there’s a general notion or feeling out there that society is crumbling.

We first addressed this late last year and we looked at things like overdose deaths, homelessness, single parent households, divorce rates, and the crime rate. It wasn't that all of these things were great, but the conclusion was that things were not universally bad. Generally, they were actually a little better than feared or than expected. That was really the takeaway, not that everything was perfect, but it wasn't all going bad at the same time.

We've now really revisited that and looked at some additional variables, and I think the same conclusion ultimately holds. Nevertheless, we looked at a number of things, and probably a few more of them skewed negative this time. Fewer of them did last time. But again, they’re different variables. This is not a change, this is just additional information.

• The obesity rate, this is U.S. data, continues to rise. Certainly not a good thing, a bad marker for the population in general.
• The suicide rate has also been rising over time. Not great.
• The share of population with a disability is rising too. Though I should say if you control for age, because the population is aging, it was actually steady, but nevertheless it wasn't great.
• The share of the population with a mental health disorder is actually significantly down over the last decade. That was a surprise.
• The share of the population with a high school education, as you might expect, continues to soar. We're still seeing human capital rise quite impressively.

So there’s no easy way to quantify the relative importance of obesity versus education, or the suicide rate versus the crime rate. You just can't do it. They're apples and oranges.

I would say the latest set of indicators we looked at tilted a bit more negative than positive, though not universally. The prior set we looked at last year arguably did the opposite. It's a nuanced situation. At a minimum, we can say not everything is getting worse, but even that's probably a bit too pessimistic. Society is not obviously circling the drain, is the main takeaway. As an economist, that’s good news for the economy and the viability of the economy over the long run.

B.C. Port Strike: I'll finish very briefly with the British Columbia port strike. The workers at 30 B.C. ports all striked, they did so for 13 days. 63,000 shipping containers were backed up as a consequence of that action, about $10 billion in trade was disrupted.

This was a big deal. The economic damage is real. The damages may be smaller than you might think, though. It's not $10 billion off Gross Domestic Product (GDP) because $10 billion was the value of the goods not shipped, not the value-added of the ports. Those goods will still be shipped, albeit with a delay. I wouldn't want to underestimate the cost to businesses of not getting their products on time. That's a real hassle, that's a supply chain issue that's flared up temporarily in a Canadian context.

Realistically, we're talking about a couple of tenths chopped off GDP maybe in the month of July, recouping that over the span of a few months after that. We could see a hair more inflation in July and August than otherwise, but we’re temporarily not inclined to think this has a lasting effect. Though in fairness, only time will tell how quickly those ships can now be unloaded.

Thanks so much for your time, as always. I hope you found that interesting. And please tune in again next time.