Another Solid US Jobs Gain (ADP), Euro Area GDP Downgraded to Flat in Q4 2022
Economic news and commentary for March 8, 2023
US ADP Employment Report
The US ADP Employment Report saw job growth of 242,000 in February suggesting that the BLS is set to release another solid gain in employment on Friday. Large- and medium-sized businesses were the source of job growth, adding 308,000 jobs, while small business employment contracted by -61,000. The split by sector continues to be heavily weighted by the service sector where 190,000 jobs were added. In the goods sector, job growth was just 52,000, but this also contained a 43,000 increase in the manufacturing labor force, an industry that has been struggling per the ISM PMI and industrial production measures. ADP’s economist notes that the data reflects strong labor demand that is boosting the economy but also encouraging businesses to raise wages which is supportive of inflation. Despite that observation, wage growth did slow slightly. ADP's measure of wage growth for job-stayers slowed from 7.3% YoY in January to 7.2% YoY in February, and the measure of wage growth for job-changers slowed from 15.4% YoY in January to 14.3% YoY in February. The slight slowdown in wages looks to be mostly broad-based across both goods and services sectors. It is also interesting to note that the current report only revised the January number up by 13,000 to a revised total of 119,000 which still lags the BLS number by several hundred thousand. This could signal either that ADP numbers are not consistent with the BLS surveys or that a significant revision from the BLS could be on the cards for Friday.
Even if there are inconsistencies between the two reports, they seem to be in tune directionally. Today’s ADP report points to a strong labor market led by the strongest service sector businesses while smaller business hiring is a little bit weaker. On the wage front, there are very few signs that compensation growth is abating which is not good for the inflation outlook. Yes, job switcher wage growth saw a decent slowdown, but the impacts of the “Great Resignation” are fading, and firms are just trying to maintain a sizeable workforce to combat labor shortages. This jobs report is just one of many to come out before the next Fed meeting, but if its a precursor of what is to come, we could be looking at a 50 bps hike on March 22nd.
Euro Area GDP
The detailed account of GDP growth at the end of last year in the euro area reveals that its economy was slightly weaker than previously thought. Euro area Q4 2022 GDP growth was revised lower from the flash estimate of 0.1% QoQ to 0.0% QoQ in today’s release. This likely reflects the downward revision that was made in German GDP data, from -0.2% QoQ initially to -0.4% QoQ in the second estimate. Household consumption for the entire euro area fell -0.9% QoQ, and gross fixed capital formation deteriorated by -3.6% QoQ. These two segments made a total negative contribution of -1.2 ppts to headline GDP, offsetting the positive contributions from government consumption (0.2 ppts), net exports (1.0 ppts), and inventories (0.1 ppts). Employment growth in the quarter also saw a revision downward from 0.4% QoQ to 0.3% QoQ as productivity growth slowed to just 0.3% QoQ.
The detailed GDP data here suggests that the euro area is pretty much in a recession. Extremely weak consumer and business data did not lead to a contraction only because of favorable trade balances. And favorable trade balances only really came about because of a warmer-than-expected winter shielding Europe from a deepening energy crisis (imports fell -1.9% QoQ). Is there more pain to come? It seems more than likely that the answer is yes. The ECB has and will continue hiking interest rates, and consumption has only marginally stabilized. As for the business sector, supply chains are improving and price pressures on costs are starting to fade, but weak sentiment will keep inventory growth flat if not negative and export growth contained. Overall, it’s a recipe for another weak quarter in Q1 2023.
Still to come…
10:00 am (EST) - Bank of Canada Announcement
10:00 am - US JOLTS
10:30 am - US EIA Petroleum Status Report
2:00 pm - US Beige Book
6:50 pm - Japan GDP
8:30 pm - China CPI & PPI
Morning Reading List
Other Data Releases Today
German industrial production jumped 3.5% MoM in Jan but was still down -1.6% YoY. Intermediate goods (6.9% MoM) drove the gain while consumer (-1.8% MoM) and capital goods (-0.6% MoM) faltered. Energy-intensive production rebounded 6.8% MoM.
German retail sales (real) fell -0.3% MoM and -6.9% YoY in Jan. In nominal terms, sales were down -0.7% MoM but up 2.8% YoY. Monthly sales growth is still weak despite prices falling.
Italian retail sales (volume) increased 1.2% MoM in January but were still down -2.4% YoY. Food sales were up 1.9% MoM and, non-food sales were up 0.7% MoM.
The total value of retail sales grew 1.7% MoM and 6.2% YoY.
The US trade deficit grew 1.6% MoM to $68.3 bil in January with exports up 3.4% MoM and imports up 3.0% MoM. Consumer goods exports and imports both up $4.1 bil. Auto and capital goods imports up $3.1 bil and $1.4 bil respectively.
Canada's trade surplus grew $0.7 bil to $1.9 bil in Jan with exports up 4.2% MoM and imports up 3.1% MoM. Exports of food products surged 11.9% MoM, and auto exports jumped 8.2% MoM. Auto imports reach a record $11.0 bil, up 11.1% MoM.
Germany Industrial Production
German industry rebounds in January (ING) - Industrial production rebounded strongly from the December crash but weak retail sales show that growth optimism is still premature.
US
Powell: I Won't Back Down (BMO) - Channeling his inner Tom Petty, the Fed Chair is standing his ground, believing "there ain't no easy way out". Upside surprises in the next set of releases for payrolls (on Friday) and the CPI (Tuesday) could well see the Fed ramp back up to 50 bps in two weeks time, with more to come at subsequent meetings.
Fed nerves open the door to more hikes (ING) - The February FOMC meeting saw the Fed dial back to a 25bp incremental hike. Jerome Powell's testimony shows that opinion has shifted again with the strength in data suggesting the need for a higher ultimate policy rate and potentially faster rate hikes. Given long and varied lags the odds of a hard landing and an eventual policy reversal are rising.
Macro Insights: Bumpy inflation or bumpy Powell? (Saxo Bank) - Powell’s testimony to Congress started with a hawkish message. Market is now tilting in favor of a 50bps Fed rate hike this month and a terminal rate expectation of over 5.6%. Friday’s jobs data and next Tuesday’s CPI print will be key tests for whether a 50bps March rate hike gets cemented, but what is clear is that Powell’s shift to disinflation narrative in February was premature. Risk assets may remain under pressure if data stays hot, while the path of least resistance for the dollar is higher.
Globalization in Retreat: Implications for the U.S. Economy, Part V: Conclusions (Wells Fargo) - We believe the U.S. economy clearly would be affected by a reversal of globalization, but the effects likely would be marginal. However, this conclusion is predicated on the implicit assumption that the pace of reversal remains gradual, and that the global economy does not completely revert to its pre-1990's form. The effects on the U.S. economy likely would be more profound if an abrupt rupture in the geopolitical environment led to a sudden collapse in the integration of the global economy.
Europe
Euro Area Macro Monitor: Services comeback (Danske Bank) - Although leading indicators edged further away from recession territory during February, stagflationary dynamics still dominate the euro area macro environment.
Easy come, easy go (Allianz) - The impact of quantitative tightening on money, credit and market plumbing in the Eurozone.
Hard core: Underlying price pressures to extend ECB rate-hiking cycle (S&P Global) - Eurozone core inflation rates reached new record highs, according to February's flash Harmonised Index of Consumer Prices (HICP) data. With many of the alternative metrics in S&P Global Market Intelligence's Inflation Risk Dashboard also jumping, the European Central Bank's (ECB) policy rate-hiking cycle is likely to be extended well beyond the next meeting in March.
China
China - Impressions from the Annual NPC (ABN AMRO) - China Macro: 2023 growth forecast is in line with our expectation. Policy stance will be supportive, not abundant. Self-reliance, restoring confidence, and regulatory reform.
Canada
The Bank of Canada: Stuck in the Middle with You (TD Bank) - Here we are in 2023, observing a defiant consumer in the face of spiking interest rates and high inflation. Real consumer spending ended last year growing a robust 2%, and our TD Spend data predicts another decent clip to start this year (Chart 1). Long gone is the spring and summer cautiousness of last year that set in under the shock of high gasoline prices and peak inflation.
More Canadians are finding it difficult to meet food, shelter and other necessary expenses (Statistics Canada) - Canadians felt the impact of rising prices. Data from the Canadian Social Survey (CSS) show that the share of persons aged 15 and older living in a household experiencing difficulty meeting its necessary expenses trended upward from just under one-fifth (19%) in the summer of 2021 to just under one-quarter (24%) in the summer of 2022. By the end of 2022, more than one-third (35%) of the population lived in such a household.
Australia
AMW – How Australia compares on inflation and activity (NAB) - Is Australia different? is a key question for the outlook for rates given the US Fed looks like it will get its fed funds rate to >5.50% (markets price 5.64%). If the RBA lifts rates to 4.10% as is our central forecast, then that would mean a differential of at least 140bps. Such a large divergence has occurred once in the inflation targeting era. In real terms, it would be the largest on record using backward looking core CPI.
Manufacturing
Global growth renews in February amid service sector improvements (S&P Global) - The global economy saw a turnaround in February as activity rose for the first time in seven months, concluding the sequence of downturn. Service sector improvements, particularly in the consumer sector, coupled with a renewed global manufacturing production expansion, underpinned the latest positive change in global PMI readings.
Services
Surging demand for consumer services drives global economic expansion in February (S&P Global) - Detailed sector Purchasing Managers' Index (PMI) from S&P Global provide a unique deep-dive analysis of worldwide economic trends. The latest data showed a revival in global economic growth being driven by rising expenditure on consumer services activities, notably for tourism, recreation and travel. There are several areas of concern, however, which raise questions over the sustainability of this expansion.
Real Estate
Single-Family Market Share Continues to Shift from Large Population Centers (NAHB) - While nationwide single-family housing starts have slowed in the past year, the largest drop on a percentage basis is occurring in the densest counties, due to high housing costs. Meanwhile, multifamily growth was robust throughout much of the nation at the end of 2022, with the notable exception in high-density markets, according to the latest findings from the National Association of Home Builders (NAHB) Home Building Geography Index (HBGI) for the fourth quarter of 2022.
Commodities
Gold near key support as market mulls Fed hiking into recession (Saxo Bank) - Gold and especially silver slumped on Tuesday after Fed Chair Powell said the Fed was prepared to increase the pace of rate hikes and to a higher-than-expected level should incoming data continued to show strength.
Research
Digitalisation and productivity: gamechanger or sideshow? (ECB) - Is digitalisation a massive gamechanger which will deliver huge gains in productivity, or is it more of a sideshow with only limited impacts? We use a large balance sheet panel dataset comprising more than 19 million European firm-level observations to empirically investigate the impact of digitalisation on productivity growth via various previously unexplored channels and mechanisms.
Understanding the Cases for Economic Equity (St Louis Fed) - This blog post presents economic cases that each offer an analytical framework for understanding the importance of economic equity. The key conclusion of these cases is that persistent inequity has adverse effects and consequences for the entire economy, not just vulnerable people1 and low- and moderate-income (LMI) communities. Thus, everyone can gain from greater economic equity.
The Limited Role of Intergenerational Transfers for Understanding Racial Wealth Disparities (Boston Fed) - Transfers of wealth between generations—whether through inheritances or inter vivos gifts—are less important in explaining racial disparities in wealth than might be expected.
Subscribe to receive Econ Mornings every weekday at 9 am. More economic and finance content on Twitter, Reddit, and my website.