00:00:05:12 - 00:00:26:23

Hello and welcome to our latest video #MacroMemo. As always, there's a lot to cover off. And so we'll start just with a review of U.S. economic data, which is now trickling out post shutdown. But we have to wait a while to get the last pieces of data before the holiday season.

We'll talk a bit of what corporate leaders are thinking and what they're talking about, and some economically linked themes that emerge from that.

We'll talk a bit about 2026. We certainly should. 2025 is almost complete. Let's think about some of the headwinds and tailwinds that may present themselves in the year ahead.

We'll go through some non-recessionary rate cutting cycles. And by that, I mean we're getting rate cuts right now, focusing on the U.S. here. We are not seemingly in a recession. That's the non-recessionary part.

What normally happens in that kind of scenario? So we'll talk about that.

We'll take a look at U.S. wages. We'll take a look at capital flowing into the U.S. This is a U.S.-heavy video clearly.

And then we'll talk for a moment at the end just about the Canadian economy, which is looking a little bit weaker than some of the official numbers would suggest.

00:01:05:17 - 00:01:24:00

So that's the plan. That sounds like too much, as I say it all out loud. Let's just jump our way right in.

And so just starting with U.S. economic data – again, it’s starting to trickle out. There was this big void during the shutdown. They're now playing catch up. We finally got September payroll data -- so the job numbers – and it’s a really mixed story there.

On the one hand, job creation was well above expectations. There were 119,000 new jobs. That was pretty good.

Despite that though, the unemployment rate rose. It rose to 4.4%. So more people just entered the labor force looking for jobs, which contributed to that. And that unemployment rate is the highest in the cycle. So really, you almost took what you wanted from that report.

00:01:45:12 - 00:02:03:08

We're going to have to wait now to get more high-quality official government data until mid-December, roughly speaking. And that's going to be too late for the Federal Reserve. It has a mid-December decision. It probably will cut rates despite that lack of information. But we get a flurry of numbers really over the second half of December and so we'll have a better sense of the job picture.

In fact, we'll get two numbers of that. We'll get one CPI figure (Consumer Price Index). We'll get Q3 GDP as well. And so, broadly speaking, we are, I would say, cautious optimists on the U.S. economy. We think that it may ultimately come in a little bit ahead of expectations over the next year or so.

And so I suppose one might aspire to apply that to the data that we're waiting on, as well. But do know in the meantime there could be a little bit more choppiness and volatility in markets, perhaps, over the holiday season, just as we're getting this data later and deeper into the season than normal.

00:02:38:00 - 00:03:07:21

Okay. Let's shift over to corporate commentary. So we take a look every quarter at S&P 500 corporate earnings calls and management discussions and that sort of thing. We’re just trying to tease out interesting, economically relevant themes from what those corporate leaders are saying. And there are some interesting trends in Q3.

We saw a significant drop in tariff mentions as a starting point, which I think makes sense as corporations become kind of more accustomed to the environment and as the rate of change slows a little bit on the tariff front.

They’re still talking about it quite a bit, but talking a lot less than a quarter ago. And that's been a multi-trend, a multi-quarter rather downward trend. Similarly, we saw a decline in talking about pricing strategies and margins. And we would interpret that as well to mean that companies have perhaps made the adjustments and tightened the belts that needed to be tightened in the context of tariffs.

00:03:27:00 - 00:03:48:02

And so, less concern about that going forward. Meanwhile there were increases in discussions of other subjects.

And so there was a big rise in talk about dividends and buybacks. And so I would say just loosely, that's a promising thought. That's usually happening when markets are fairly happy and companies are doing well.

There was also a big increase in talk about capital expenditures. And so you can argue that makes sense in an AI context. There's lots and lots of artificial intelligence CapEx in particular right now.

Also though, because of course, the U.S. recently implemented some accelerated depreciation policies, which make it more advantageous to do CapEx. So it makes sense they're talking more about that. What about AI itself?

00:04:06:16 - 00:04:29:03

What about machine learning and that sort of thing? Relatively steady comments, compared to the prior quarter, but I should emphasize still being talked about a lot, a lot more than, let's say, a year ago. And so still a central theme for corporate executives as well.

Okay. On to subject number three here. Let's talk about the focus on the tailwind side, the economic tailwinds we see for 2026.

And so here we are on the cusp of a new year. This conversation is tilted a bit toward the U.S., but it's also true for Canada. It's true to an extent for the rest of the developed world, as well. And really, the observation here is we are looking for somewhat of an improvement in growth in 2026 versus 2025.

And some of that is just 2025 was fairly challenging. And tariffs did damage and the U.S. shutdown did damage and so on. There was a lot of policy uncertainty. So some of those negative forces fade.

Equally though we do see some nice tailwinds that are brewing. And so the first one would just be monetary policy. We're getting central bank rate cuts that should help to boost growth over the year ahead.

00:05:07:01 - 00:05:25:19

Fiscal policy is in a similar position. We've gotten tax cuts to an extent. We've had more government spending to an extent. Deregulation. It depends on the country and so on. But loosely speaking, for 2026, we should see even more of a support for economic growth, we would say. So that's a helpful force as well.

Stock markets have been up. Now, I know the ultimate goal is to predict the stock market, not to observe what's already happened. But the fact that stocks have gone up so much means there's a positive wealth effect. So households are richer, they're able to spend a fraction of that. And so that should help to keep consumer spending going over the next year, even if the stock market didn't keep rising over the next year.

00:05:44:09 - 00:06:05:01

Similarly, oil prices are down over the past year. They're relatively tame by modern standards. So that would argue that that's just a decline in inflation pressures. It increases purchasing power. That's an economic positive.

And so with the exception, of course, of the energy sector and some energy intensive economies, in terms of producing we can say that's a tailwind as well.

And then let's not forget about artificial intelligence. And so we think CapEx growth may be slower in 2026 and 2025, but it should still be growth. And so we still see a tailwind coming from that.

Similarly, AI productivity: people lose sight of the main point of artificial intelligence, which is to make all businesses more efficient and make all humans perhaps operate at a higher level as well.

00:06:27:01 - 00:06:46:15

And so we should be expecting some productivity gains. It's always hard to say when that becomes clear in the data. It sometimes takes a surprisingly long time for new technologies to have that kind of effect. But we think maybe we're starting to see bits and pieces of that already.

And you look at some of the big tech giants, and they seem to think they can grow their revenues an awful lot in the next few years without adding more workers. And that's a code word, at least one way of delivering productivity gains.

And so, ultimately, we think that there could be pretty decent-looking growth in 2026. And in fact, we are above consensus in our forecasts for the major markets, including the U.S., the Eurozone and Japan as well.

00:07:06:14 - 00:07:28:23

Okay, let's pivot over to rate cutting cycles. So we're in one right now.

Quite a range of central banks have cut rates over the last two years or so. And many are still actively doing so, including the Bank of England, the U.S. Fed and the Bank of Canada.

Over the last 70 years there have been 16 U.S. monetary easing cycles. Of those 16, only six were soft landings. So 10 of them happened because really the economy was showing trouble, economy still descended into a recession.

The rate cuts were meant to help or buffer the blow or help the recovery. But they didn't avoid a recession.

This one looks like a soft landing. We're not forecasting recession. We think the economy is doing okay, if not perfectly right now. And so this is one of those six past historical episodes. And clearly, it's the preferable outcome.

If you can get rate cuts, which markets like, and an economy that's growing, which markets like, that's a pretty good story.

00:07:54:09 - 00:08:16:19

Indeed we can sort of quantify that and say over the prior six non-recessionary easing cycles in the U.S., the stock market usually rose about 37% over the two years after the first cut. We've only actually seen a 22% increase in the S&P 500 so far (in this cycle). So that would argue of course, plenty of other swirling considerations. But it would simplistically argue that there could be more room for the U.S. stock market to run.

Now, do note the six soft landings historically have not been perfect. In fact, four of them ultimately culminated in a recession three or so years later. So it wasn't as though you got another decade of happy growth. There were sometimes problems that emerged over time, but again, not of relevance necessarily for the next year or two.

And even as we compare some of the more successful past soft landing easing cycles, the mid-80s had one, the mid-90s had another.

There wasn't much private leveraging then. That's true in the U.S. today. There was a productivity boom then. That's true today.

I guess what I'm saying is that there are perhaps some parallels to the more successful soft landings in which the economy got to keep growing for a more considerable period of time.

00:08:58:20 - 00:09:15:01

Okay, let me get a quick one here. Just wage growth. So again, U.S.-focused. The reason wage growth matters so much is because we're getting almost no hiring on a trend basis. And so wages are the key to any kind of consumer spending growth. So if you're a retailer or a consumer, that is a big question.

Nominal wage growth in the U.S. (hourly wages) is running at 3.8% per year. It's actually pretty good. That's certainly well above the historical norm. But there's a twist, which is of course, inflation is running higher. So real wage growth is only about 0.8%. And maybe I shouldn't say only because 0.8% is about normal. So it's a normal rate of wage growth.

It does support some measure of real consumer spending growth – but maybe not especially exciting. And that would be our approximate description of the consumer spending outlook, with a bit of help perhaps coming from stock market wealth effects and from tax cuts as well.

Interestingly, within wages, within the consumer picture, let's acknowledge the K-shaped economy exists here too.

00:09:54:01 - 00:10:12:19

That is to say, you've got this bifurcated economy: one group doing well, one group doing less well – sort of like the letter K. And so the top income quartile is seeing pretty decent wage growth. The bottom income quartile has seen a fairly sharp deceleration over the last few years. It is now running cooler than the top quartile.

So the rich get richer and the poor get poorer. That seems to be the trend that we have right now. And there is some very genuine pain, across a range of economies, among lower income households, who are really not doing that well right now.

So unfortunately, that seems to be true also from a wage perspective. I should mention that is not universally true.

Now, higher income is, I'm sure, preferable at all times to lower income, but actually bottom quartile wage growth has been faster than top quartile, pretty consistently, over the prior number of years. And so this is a bit of a reversal from that.

The other interesting wage work we've done recently was just to look and recognize there has been a sharp reduction in illegal immigration into the U.S.

00:10:51:15 - 00:11:11:22

There has been some additional pressure in terms of deporting individuals. As a result, it stands to reason there may be fewer undocumented workers available in the U.S. labour supply. You can't really observe this directly, but indirectly we can say you would think that wage growth should be faster in the sectors that have lost, that really are most reliant on undocumented workers.

And so you might posit construction, accommodation and food services would be sectors where maybe wage growth should be faster right now because suddenly they've lost a lot of their inexpensive workers. And so we actually did some research into this. Interestingly, you really can't see it in the data yet.

Accommodation and food services wages are running unusually cool. Construction is a little bit faster than the national average wage growth, but cooler than it has been in prior years. And so really not that visible there.

Similarly, we looked at cities where there are a large fraction of undocumented workers versus those with fewer. Wage growth was not any faster in the cities with traditionally the larger fraction.

00:11:47:07 - 00:12:09:17

So we're still sort of waiting to see that affected theoretically should appear at some point.

Okay. Two more things for me. One would be capital flow. So the declining U.S. exceptionalism story is alive and well and certainly much discussed and concerns about polarization, and antagonism toward the rest of the world, and declining levels of fiscal stability and a number of concerns.

And so as a result, it's fair to say that maybe capital should be flowing out of the U.S. But is it? And so the answer is not really. U.S. still runs a current account deficit. That means the rest of the world is definitionally acquiring U.S. assets every day of the week. When we look at foreign net purchases of U.S. securities, it's quite strong.

It's been positive almost without fail over the last five years. When we look at foreign net purchases of U.S. equities, even, a little choppy – or sometimes negative, sometimes positive – actually quite positive right now, despite a lot of talk about rotating away from the U.S.  Maybe less surprisingly, we see a lot of foreign direct investment into the U.S. by foreign countries.

And so that makes sense because of course there is pressure to build in the U.S., both from a political standpoint and from a tariff sort of onshoring consideration standpoint. And maybe the one place where we have seen some shift, though it's a multi-year shift, is just foreign reserve managers are not in the business of actively buying U.S. treasuries right now. But they're holding steady. They're not selling. And, private foreign buyers are still buying treasuries.

And so we kind of walk away saying, in theory, you would think there would be this shift in money might flow a little bit out of the U.S. toward other markets. But in practice, actually, you would struggle to find that so far – though, again, I think ‘so far’ is key in that comment.

00:13:25:18 - 00:13:45:01

I'll finish with this: the Canadian economy certainly has struggled over the last year. It’s very exposed to U.S. tariffs and policy uncertainty in general. We actually got some strangely strong numbers recently. We had 2.6% annualized Q3 GDP for the U.S., 0.4% was expected. So this came in seven times stronger than expected. However, it really isn't as strong as it looks.

Unfortunately, domestic demand, was flat. Your imports fell a lot, which just in a weird mechanical way, is why GDP grew so much. We don't think this is the new normal growth rate. We still think it's a pretty sluggish growth rate, so we're a bit skeptical.

Similarly, the most recent two Canadian job numbers were up by more than 60,000 jobs a month, which is a huge number.

We're not convinced that is real and or sustainable. They are famously choppy numbers.

There is an alternative survey. It's very stale. So we only got the September number recently. It says September lost 58,000 jobs instead of adding more than 60,000. Both cannot be true.

Honestly, we would put more weight in the more pessimistic one because it does a better job of handling some of the immigration swings that have taken place recently.

And so we would say we think the Canadian economy is still fairly soft, despite those strong numbers – although we do expect some improvement in 2026.

Okay, I'll stop there. Hope you found this useful and interesting as always, and please consider tuning in again next time.