Economy is in period of 'normalisation’: Economist

In response to the warmer-than-expected Purchasing Managers’ Index (PMI) data for June, RBC Capital Markets US Economist Michael Reid offers his insights on market outlooks.

Reid interprets recent economic indicators as „a continuing sign of normalcy.” Analyzing the retail sales report, he suggests the data reinforces the notion of economic normalization, coupled with a „slight pullback” in consumer spending. Regarding labor market dynamics, jobs reports indicated a mixed landscape, with some metrics suggesting „continuing growth” and others pointing to persistent weaknesses.

As markets face election-related volatility this year, Reid notes the impact of recent tariffs announced by the Biden administration. Regardless of the election outcome, he says, these measures will benefit some sectors, particularly the semiconductor industry, in the long run.

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This post was written by Angel Smith

Video transcript

Most of the inflation data indicated some moderation.

Most of the growth indicators seem to be OK. Perhaps retail is an exception.

I mean, what’s the big takeaway from all these numbers?

You know, for us, this is a continuing sign of normalization.

And we see it in many metrics.

As you mentioned, we saw retail sales coming in and if you look at the headline number, it was marginally profitable at 1/10th of the month.

But looking at the control group, an important group that feeds into the GDP estimate, it was slightly stronger at 410.

So it’s a sign that consumers are still spending.

But when you look in the context of the downward correction, which we saw in the previous month, it was not so strong.

So again, I think we’re starting to see some normalization and rebound in spending in the consumer space.

How does this relate to the labor market?

The lagging indicator depends on which data points you look at, but we’ve seen some cracks in the labor market.

Nevertheless, headline numbers continue to come in strong.

Absolutely.

You know, there’s a lot of debate about which labor market, which metrics to look at.

And, you know, especially if you look at things like stimulating the number of jobs, you’re looking at wages or the unemployment rate, um, they suggest, some potential weakness, um, not necessarily worrying, but, um, signs of labor market loosening.

The story continues

However, when you look at the wage number, it’s still strong, we’re still seeing strong gains and wage growth is still strong.

So there are signs that growth in the labor market will continue.

So I think this is something you wrote recently, and I think it’s interesting, the question is, is the labor market still tight or not?

So write big where you come out?

Surely.

And I think a certain way to think about this is in the context of normalization, what’s still going on in terms of the demographic picture.

And we talked about this in terms of consumer spending and what that means for retirement assets showing up in retirement and consumer spending.

But another area where it’s really important is in the labor market and there, what we’re seeing is an increase in the number of pensions and that’s creating jobs.

So when we think about where we’ll get the exact number for job openings based on the new normal, we think it should be higher than what we saw before the covid outbreak.

Yes, because we are now at that peak baby boomer retirement age.

Um, and as those people retire and leave the labor market, net new job creation creates jobs that don’t necessarily show growth.

Um, that’s what we see in the payroll number.

But it will also put downward pressure on the unemployment rate and upward pressure on wages.

Yes, it’s an election year.

We have been talking a lot about the election.

What kind of stress on economic data in a year like this, what are you looking for, you shouldn’t look hard at any other time.

You know, one of the things that I think is getting a lot of attention right now is around trade and specifically some of the tariffs that have been proposed.

We’ve seen Biden announce some that will be phased in over the coming years.

What I would like to see in particular is the charge around semiconductors.

Yes, there are many activities in the US that are supported by the CHIPS Act.

Yes, we are looking at many functions and non-residential structures.

Because those um fobs are still being built.

As those facilities are installed, we will see another tailwind in terms of investment in equipment.

And then once they come online, you should see an increase in employment in terms of people hired there, you know, start operations.

So whoever wins in November looks to be on track based on these big plans, tariffs and the rationing of some of the tariffs promised by former President Trump.

Should he contest elections?

How do you think?

Especially since we’ve already got paid waves.

How do you think about that?

Will those charges have an inflationary impact?

Yes, what Trump proposed was very broad.

Um and, we expect that primarily to hit a good spot, you know, we’re getting a lot of support in terms of this inflationary war.

So, you know, if you lose the inflation that we’ve seen in a good place, I think you’re looking at a slightly different picture for the Fed going into 2025. Inflation refers to reducing capacity.

And, more importantly, what does it mean for the labor market?