US Economy's Resilience is 'Coming at a Cost,' Says Frances Donald

[00:00:00] Speaker 1: What a great question, Tom. So, first of all, I prefer... [00:00:03] Speaker 2: Can I go home now? [00:00:06] Speaker 1: Well, here's the thing. It's the most important question because we talk a lot about average hourly earnings. I like average weekly earnings a little bit more. That's the sum of how much to do work and how much to do bring home. [00:00:17] Speaker 2: I know, but what percentage of people are average... I mean, John Tucker is not measured in average hourly earnings. [00:00:22] Speaker 1: But here's the challenge. We historically, you're watching the U.S. consumer care about how much money are they making, but now in part because of retirees, in part because of interest income, in part because of those huge stock market portfolios, wages are only 50%. [00:00:36] Speaker 2: Five-zero. [00:00:37] Speaker 1: Of what income comes home. 50%, which means they're only half now. That's not distributed equally. You've got some consumers, mostly low- and middle-income consumers. They're much more reliant on their wage. And then you've got a segment of consumers who couldn't care less, Tom. They're getting their COLA adjustments from Social Security. Social Security is 20% of all income in the United States right now. It's inflation-adjusted interest income. Their stock market portfolios are doing great. [00:01:03] Speaker ?: That's fair enough. [00:01:03] Speaker 1: Because it is the most important question, Tom. And so we are overweighting wages, and we are not looking enough about how the fabric of the U.S. consumer is being transformed by all these other forms of income. She's bringing me to tears. [00:01:17] Speaker 3: I know. I mean, it's too much. Paul, I yield. Exactly. All right, so inflation, it just feels like the inflation story continues to rule over everything. What's your inflation call these days? How are you looking at it? Is it under control? Is it possible to get this thing under control? [00:01:35] Speaker 1: Tom, Paul, you know I've been here for a while. I do not like the inflation or the inflation path, and it is broadening. This is not just one story. This is 50% of the basket. X Shelter is growing more than 3%. That's not just one area. And I think what worries me is that there's still a lot in the pipeline. I mean, we've been believers that tariff price pressures are still coming through. Americans are still drawing down on inventories. They still have to import at higher tariff pressures. But that energy shock, it's showing up in things like freight shipping is up 37% year over year. Freight trucking, 17%. Someone's going to have to pay for that. We had the largest increase on record for toys last month. Toys. Why? They're heavily imported. I'm watching this. I have two kids. I want to know what's coming up at Christmastime. Why? Because you've got to move them. And there's tariffs on top of these things. So there is still pressure in the pipeline, and you're not going to get any relief from services. This is why 70 million Americans are about to get a 3.6% raise off those Social Security inflation adjustments. You know where they're going to spend that? Services. So you're not going to see any reprieve there either. So we have about 2.6% for this year and next year on core inflation. But PCE inflation, core PCE, can come in easily above 3% in the next month. This is not the right direction for inflation. And I think it's heavily informing how Americans are going to the polls in just a few weeks. [00:02:56] Speaker 3: Yep, that's what we're hearing. And if you're the Fed, if you see the numbers that you just talked about, does it, if them raising rates, is that going to help anything? [00:03:06] Speaker 1: Well, here's the challenge. There are two consumer groups in my mind. There are those ones we talked about that have wages, and they are very interest rate sensitive, but they're already depleted. We've already seen them pick up credit utilization. They're borrowing more, spending less. Delinquencies are starting to rise. But they're not the ones creating inflation in the system. And then the group you really want to slow from the demand side, they're going to maybe even benefit from higher interest rates. So the consumer itself is less interest rate sensitive, not the least of which we could talk about AI interest rate sensitivity to. [00:03:38] Speaker 2: Yeah, I look at this. Frances Donald with us right now with RBC. How do we get our nominal GDP from 5%, 6% and bring it down constructively? Do you envision that? [00:03:52] Speaker 1: Well, I'm pretty comfortable with the current growth rates in the U.S. economy, but I like the way you frame your question again here, Tom, because the resiliency we've seen in the U.S. economy is coming at a cost, and that cost is higher inflation and higher interest rates. And what particularly worries me about growth right now is not the level, it's just the composition. Half of it is coming from AI. And while we're long-term believers in AI as a trend, it means that you've got sort of one very thick part of the stool that is being held up by one core narrative. And so how do you bring down nominal GDP quietly? You'd have to deflate slowly in AI, and that's real hard to do. [00:04:36] Speaker 2: Francis Donald with us, perfect for Paul Sweeney, where the housing data out, and I'm going to editorialize here, Paul. It's just flat-out grim. The revision of housing starts, negative 2.6, becomes negative 5.9. Housing starts were a positive 1.9 and come in a negative 5.2. Oh, boy. And she's going to say that's a small part of the economy in that. But it's emotional. [00:05:07] Speaker 3: It is. Talk to us about the housing business, the real estate. It's important in the U.S., but it's even more important for your Canada. How do you think about just housing here? [00:05:15] Speaker 1: You know, one of my very first jobs as an economist was actually watching housing. And if you knew where housing was going and you knew where China was going, you knew where the U.S. was going. You'd get manufacturing and housing down. And now housing is like a tertiary data point in the U.S. And that's not because it's become less important. It's just because it's decoupled as a primary driver within the U.S. And we have things like government spending, high-income consumer, and AI that have just become the primary motors and engines for growth. [00:05:43] Speaker 2: But 114% of our people listening on SiriusXM Channel 121 across Canada and the U.S. do not agree it's a tertiary idea. We are living with our kids, with ourselves, with our parents. It's grim out there. [00:05:59] Speaker 1: It is not a tertiary idea. It's a primary component of the economy. It's no longer a primary driver of the economy. But to your point, and this is a theme you hear from so many economists, the real economy is not mapping onto the GDP number to the same extent. So you have rent prices that continue to climb, shelter prices, which continue to be an issue. And here's the challenge. Where we see inflation in the system are not things you can pivot away from. [00:06:24] Speaker 2: Okay, I'm going to get two things in here. Ten-year yield in six basis points, a 499-10-year. We're not there yet. But everybody's betting on a stable to higher yield of a 10-year. And it's giving me a Kevin Warsh that's coming in. What's a 499-10-year signal when we get there? [00:06:42] Speaker 1: Well, it means a little bit more tightening in the economy. But I think what's fascinating is you're asking me about the 10-year and not the Fed meeting next week, which, once again, I'm going to give you a hat trick, Tom. That's the third great question this morning. A little bit of a hockey reference. [00:06:55] Speaker 2: Okay, we're going to hat trick the Segui right now because Pharoah's over there interviewing the president of RBC. I'd rather talk to you because you have Canadians tickets. I don't think the Montreal Canadiens are as good as they were last year. They're winning, but every game is a drama. It's a theater. [00:07:12] Speaker 1: Tom, it was going so well for us. And now you've unwind all the gains with a comment against the Montreal Canadiens. [00:07:18] Speaker 2: No, but they're just not winning. Everything's a shootout. Everything's an overtime. [00:07:22] Speaker 1: Well, listen, we've got a lot going on in Canada. We've got a trade war and an energy shock. We've probably got higher rates coming through as well. So I think that's going to keep Canadians busy. And let's just hope our hockey team comes in better for us. [00:07:32] Speaker 3: At least Alberta's staying. [00:07:34] Speaker 1: Alberta, we did get some positive results. So Alberta separatist movement looks like it is not the overwhelming majority. So one of the risks for the Canadian story has now been diminished to a certain extent.