Ashleay: Welcome to the “In Your Interest!” podcast from iA Financial Group, where we discuss your need-to-know economic news and how it affects your finances. All this in under 10 minutes. My name is Ashleay. In this episode, Sébastien Mc Mahon, Chief Strategist and Senior Economist, tells us his top three most important economic indicators and explains how they affect the markets. Hi, Sébastien.
Sébastien: Hello, Ashleay.
Ashleay: So, Sébastien, can you help us understand economic indicators? I mean, we're bombarded with economic news. How can we determine what is relevant to help us make decisions and what is not?
Sébastien: Sure, I mean, the work of an economist or a portfolio manager like myself, it's all about sorting out the noise from the signals in the economic news that we get. So, there's economic news coming out every day in Canada, in the U.S., around the world. So, our job is mostly to figure out where we see turning points in the data points that we have. So for example, if we are in a long-term economic growth environment and the economic data that we see coming out is starting to change the tone, then we're going to be paying more attention to these new data points rather than those that confirm the trends. So, there's so many indicators out there and depending on the environment, we don't look exclusively at the same ones over and over.
Ashleay: Right. And what would you consider your top three?
Sébastien: Well, my top three in 2022 would be different than my top three, let's say five, ten years ago, and probably is different than the ones in 5 to 10 years. But currently what we're looking at mostly and I think the first one would be a staple through time, it's mostly employment, everything having to do with employment and unemployment rates and data on wages. So, employment remains, I think, on the top shelf. It's still the best indicator of the health of an economy. So, when you see jobs being created, that means that you have growth, that means that you have dynamism in an economy. That means that you are seeing the collective getting richer. That means that it is also more inclusive, so more people are joining the labour market. If you have a low unemployment rate, again, that shows inclusiveness. That shows also that you are going to be better at financing public services because more people are working. If you see a growth in wages, that means that there's more productivity likely. So all of these elements taken together, it's a very, very timely indicator also of economic growth, because you tend to have, for example, the data for employment in May, you tend to have it very early in June. So, it's a very timely indicator, very precious. So, it would be there on the top shelf.
Ashleay: Right. And these points might remind us of the surveys we get at home, for example, calls and whatnot. Do these contribute to the indicators?
Sébastien: Yeah, of course. So, surveys on confidence are something that's very important to look at. And right now, it's one thing that we focus a lot of energy on. So, consumer and business surveys that are done, they call households and they call heads of businesses like entrepreneurs. There's many surveys, small businesses, large businesses. So that kind of gives you a window to the future at the turning points. So, let's say you've been in an expansion for many, many years and then you start to see confidence turn lower. Usually that means that probably households, for example, will be maybe shying away from getting a new home built or just buying a new house or buying a new car or just buying some new furniture so they'll be keeping money in their pockets. And that's how you get economic slowdowns. For businesses, when you have more confident businesses, that means that there's going to be more hiring in the future, probably more investments, and not just investments to replace depreciation, really, investments in a new plant, maybe looking for growth opportunities. So, when you're starting to see less confidence from businesses, probably that means that over the next few months, you should have a slowing down of investment. And the reverse is that, you know, when you were in a recession and everything on the news looks bad, if you start to see a pickup in confidence in households and businesses, usually that's a good signal that maybe we've seen the worst and now it's time for a rebound.
Ashleay: Got it. So, this will most likely influence banks and loan rates, right?
Sébastien: Yeah, exactly. So central banks, the decisions that they make probably would be the last one here in the top three. Central bank decisions have been very important for the last 10 to 15 years, especially for the markets which we call the rent of money, so the cost of borrowing. So central banks, when they see the economy doing well, they tend to raise the leading rate to slow the economy down. Usually that's a headwind for the markets when they see the economy slowing down and they want to keep it afloat so they tend to cut the leading rate. So that's a tailwind for the markets. So, it's very important what central banks are doing for the next few years of the cycle, the next few months, next few quarters, but also for the markets. So, in the world that we live in here, central banks are very, very important for that. And our analyses are showing that it’s one of the best leading indicators of the global economy. So if you want to guesstimate what's going to happen, the direction that the global economy is going to take over the next few quarters, up to a year, looking at what collectively central banks are doing, if they're mostly collectively tightening monetary policy or easing monetary policy, that's a very strong leading indicator of the economy, of corporate profits, also of the stock market.
Ashleay: Thank you, Sébastien, for sharing so much constructive information about the markets.
Sébastien: Sure. Thank you.
Ashleay: Love this podcast? Want to know more about economic news? Follow our “In Your Interest!” podcast available on all platforms, visit the economic news page on ia.ca or follow us on social media.