(en anglais seulement)

Welcome to our latest video #MacroMemo. There's, as usual, quite a lot to cover off.

• We'll spend a bit of time acknowledging that the U.S. economy seems to be slowing. It was moving awfully quickly over much of the last few years and it's tentatively running a little bit more slowly.
• We're going to talk about insurance inflation, which sounds awfully random, I know, but it's been a nontrivial contributor to why U.S. inflation has been overheating. And so I want to dig into that and get a sense for where it might go from here.
• I'm happy to report we've also published our latest quarterly business cycle scorecard, so I'll walk you through that. Some slightly complicated but nevertheless interesting conclusions to share there.
• We'll just spend a moment on the Fed (U.S. Federal Reserve), which is the U.S. central bank. The Fed has maybe recalibrated and given us a better sense for just when interest rates might start falling and indeed whether they might start falling.
• We'll finish off just with a variety of very, very short subjects, just some interesting tidbits that I want to share with you that don't quite fit anywhere else.

That's our plan. Let's jump into the first of those.

U.S. economy: The U.S. economy is seemingly slowing. I should maybe step back one step and say the main concern for the last several quarters has tended to be too much inflation enabled by too much U.S. economic growth.

And I can say we're still nervous about the inflation side. Some of the inflation side is maybe improving a little bit going forward. But there’s still a reason for concern. We’re watching on the growth side and recognizing that part of the inflation is coming from perhaps a bit too much U.S. growth. It does now look as though U.S. growth is slowing somewhat.

I can say U.S. first quarter GDP (gross domestic product) came out and it was up 1.6% annualized. That's perfectly fine. That's still growth, but it is a lot less than the 3-5% growth that was being recorded in the second half of last year. Certainly digging into the details of that report, it even was a bit stronger than it looked.

But the point being, it's not racing forward anymore. Looking at the twin ISM (Institute for Supply Management) numbers, the manufacturing and service sector indices, I can say both of them recently dipped below 50. Fifty is the delineation point between growth and decline.

And so on that front I can say we're getting evidence these sectors are moving a bit more slowly as well.

On the job front, U.S. payrolls came out at 175,000 jobs, a perfectly respectable number of jobs in an absolute sense. Nevertheless, it was less than expected. 240,000 jobs were expected. It was also the weakest month of job creation in about six months. So we're seeing a deceleration, and that is signaling the economy's moving a bit more slowly.

The unemployment rate went up a little bit as well. Still fine, still consistent with economic growth, but less economic growth.

And what's fascinating about this is that the stock market has actually been celebrating some of this weaker economic growth. Certainly the payroll numbers in particular.

In terms of trying to understand that and sort out why that would be, well, just keep in mind, the big issue right now is too much inflation.

If you can get the economy moving a bit more slowly, it does improve your chances of inflation coming down. It improves the odds of rate cuts and therefore of the economy ultimately surviving some of the challenges that it faces right now.

Interestingly, just as an aside, we're getting this U.S. deceleration at the same time as the rest of the developed world which has, if anything, actually picked up a little bit.

The rest of the developed world was moving very slowly indeed across 2023 and seems to be perhaps accelerating slightly now. And so we find ourselves in this upside-down world right now in which global economic surprises are now positive. U.S. economic surprises have actually just shifted into slightly negative territory.

So it’s sort of fascinating to think about that U.S. exceptionalism story fading a little bit. Maybe that is an excuse for some of these other markets, risk assets like the stock market to perform a bit more strongly and maybe even to outperform the United States.

Insurance inflation: That brings us to insurance inflation. In general, we can say that there's too much inflation overall. We are seeing a little bit of evidence of that turning at the macro level. Some of the real-time metrics we examined suggests that inflation could start coming down in the next month. But still, the point is there's too much inflation out there. A lot of that – most of that – is service sector inflation.

In turn, much of that is shelter inflation. But there's something that's been broadly ignored and is ultimately a pretty big driver of service inflation as well, and that is insurance costs. In the U.S., auto insurance is up 22% over the last year. Home insurance is up 5% over the last year. These are big numbers. These are contributing as much as about a third of all excess U.S. inflation.

It's important to understand why that is and whether that might turn. In terms of why that is, part of the story is just that homes and cars are more expensive than they were three or four years ago. And so that in turn means more expensive insurance.

Some is that cars have become more costly to repair with more computer chips and hybrid engines and not enough mechanics and so on.

Car thefts have surged and that's a problem for insurance companies. So that's been costly as well.

Also natural disasters were unusually intense and there were many in 2023. And so that cost insurance companies quite a bit in a home context, but also in a vehicle context. The net result of all that is that insurance companies were paying $1.10 in payments for every $1.0 in premiums they were collecting. They were losing money in that proposition.

Regulators do get to control the cost of insurance, but insurance companies were actively leaving or threatening to leave certain states simply because they couldn't make money there. And so the insurance regulators have capitulated and we've seen these big price increases. We think maybe this is close to peaking – in part because the weather is unlikely to be quite as bad as in 2023.

That was an unusually bad year. We also see car thefts have peaked and are starting to fall. So that costs item, that line item could go down.

Regulators are unlikely to allow a second big round of price increases in short order, and this actually squares well with history, which is that insurance inflation usually peaks with a lag to overall CPI (Consumer Price Index).

We saw inflation peak a couple of years ago. It's normal for insurance inflation to peak a couple of years later. And so here we are potentially in the realm of that peak. We might actually see this starting to drive inflation a bit less in the coming months.

Okay, let's move on from there. Let's talk about the business cycle.

Business cycle: So we have this great quarterly business cycle scorecard. It focuses on the U.S., but it really says things about most of the developed world.

In terms of what it's saying this quarter, first of all, let me admit it's a messy reading. We have all sorts of variables voting for different points in the cycle, so there's not a complete consensus by any means.

There never is, but it's unusually messy this quarter. But we can say a few things. One of them is that we have seen a notable reduction in the number of ‘end of cycle’ and recession votes that come from the underlying variables. So the odds that the cycle is ending or that we're tipping into recession has arguably gone down.

That's consistent with our view that the recession risk has fallen below 50% over the last couple of quarters.

Conversely, at the opposite extreme, there is is still a significant minority of indicators that believe this is the start of a new cycle. And so that can't be completely ruled out. But I will say, whereas we had seen a big quarter-on-quarter increase in the number of variables making that case, we didn't see a further increase this quarter and it is still a minority of variables saying that.

So probably it’s not a brand-new cycle, though that we can't fully rule that out. Interestingly, in the middle, we see the biggest increase and the best claim as to where we are in the cycle is mid-cycle or late cycle. And so that's the most likely place. That's where we're getting the most votes. That's where we saw the biggest increase in votes.

And that makes sense in the sense that if there isn't a recession – and we think that may well be avoided – this isn't a new cycle. This is a continuation of the prior cycle. After all, unemployment is low, inflation is high. We're not in the classic positioning for a new cycle. And so if this is a mid- or late-cycle moment that is consistent with that view. It's arguing that we have maybe 2 to 5 years more growth, not the usual 6 to 10 years that might come with a new cycle.

By the way, that argues also for maybe moderate stock market returns, not the outsized returns that you would get earlier in the cycle or the losses that you often suffer at the very end of a cycle.

Interest rates and central banks: Okay, let's pivot to the Fed (U.S. Federal Reserve). So the Fed has been telling us different things. Late last year it was talking an awful lot about rate cuts and perhaps lots of them.

More recently, the thinking was Fed rate cuts could be entirely off the table or nearly so. We just had a Fed decision and they've recalibrated expectations and they've landed somewhere in the middle.

To be sure, there was no change in the policy rate in early May. They acknowledged inflation isn't fully cooperating. That's a hawkish thing. But ultimately the market took the announcement and the statement as a more dovish event simply because we already knew about the inflation.

We already knew that was too high. The Fed said instead, of greater relevance, the labor market is loosening, which they need to see to be in a position to cut rates. They also ruled out rate hikes.

That was never especially likely, but people were getting a little bit nervous that maybe the Fed would have to go up instead of down.

And they said we're not thinking at all about that option. So that was a useful thing. The Fed also said just from a timing perspective that the presidential election in November doesn't affect its actions. In other words, it's not going to pause simply because there was an election or concerns about optics.

So in turn, that September meeting date is seemingly in play and the Fed seems to be in a position where it thinks it might be getting closer to rate cuts.

And so the market has raced to price in a September rate cut and that seems reasonable to us. There was tentatively a December rate cut partially in there as well. That's probably about right.

Again, we had at one point the market pricing in almost no rate cuts. Now it's back up to around two. That's not a bad guess as to where the Fed goes from here: a gradual path downward in rates.

I'm going to finish with just some interesting items. They're not particularly connected, so I'll stay brief on them.

Unemployment rate: To begin with, what is a sustainable unemployment employment rate? We've seen the U.S. unemployment rate rise to 3.4% to 3.9%. What's normal? Was 3.4 normal? Is 3.9 normal? Is 5% normal?

We think a normal rate is probably 4-4.5% or thereabouts. It's a little higher than it might have been before the pandemic. And if you're in a slightly higher inflation environment, that's usually how things play out. The way I would view this is it's good that unemployment is rising. We're getting closer to a sustainable place.

So that's really a soft-landing argument.

U.S. election: Another item, the U.S. election is less than six months away now. It's getting awfully close, and it is still very close in terms of the expected outcome. The polls and betting markets we look at suggest it's nearly a dead heat between Biden and Trump.

That's, by the way, news in the sense that a few months ago you could say that Trump was a little bit ahead.

So it's looking very close. We don't yet know how that will play out.

China’s third plenum: I want to flag something else that's coming a little closer, albeit a few months away, and that's China's third plenum. It's been scheduled for July. That's a bit weird. Normally it would have been last fall and they just kept delaying.

This is an opportunity for China to lay out its five-year plan for the economy and for broader reforms. We don't know exactly what will be contained there.

We've heard some very approximate language. They're going to deepen reforms. They're going to promote modernization. I would challenge anyone to define that exactly. So we don't know exactly what the plans are.

We'll learn in July, of course. But you might imagine it will include more support for consumer demand, some stimulus to support the economy. And normally China does that on the supply side.

They might do it on the demand side this time. Arguably we’ll see some more housing market support. In fact, they're starting to do that kind of thing. Maybe also some encouragement for the stock market. I think they recognize the economy can't thrive if the stock market is struggling, which it really has been over the last few years.

Non-compete clauses: Another item in the U.S. and indeed that’s the final item: the U.S. Federal Trade Commission in the U.S. recently passed a ban on non-compete clauses.

So a non-compete clause more or less say that if you work for a company, you can't quit and work for another similar company or start your own similar company for a period of time and take the intellectual property of the first company with you. The U.S. federal government is trying to ban that. That's actually in theory a very good thing for innovation.

For example, Silicon Valley in California already has a ban on non-compete clauses and famously that's thought to be one of the reasons why Silicon Valley became such a hub for technology. People could form new businesses and they could transfer knowledge.

All sorts of competition resulted. And so in theory, this could boost U.S. productivity growth. That's the optimistic interpretation.

A pessimistic view would be that the incumbent big businesses don't like it because of course they then lose some of their intellectual property and some of their employees to other businesses. And so legal challenges are expected. It’s unclear whether the Federal Trade Commission has overstepped. But nevertheless, this might be something that pushes productivity a little bit further forward.

All right. As usual, I’ve maybe overdone things here and gone a bit too long. So I'll just say thanks so much for your time. I hope you found some of these things interesting and please tune in again next time.