Jobs Report (Dec 2022), Euro Area Inflation (Dec 2022)
Economic news and commentary for January 6, 2023
US Employment Situation
The US added 223,000 jobs in December, and the unemployment rate fell -0.2 ppts to 3.5%. Another solid gain in employment means that for the full year of 2022 employment rose by 4.5 million in 2022 (an average monthly gain of 375,000). In December, the number of long-term unemployed fell -146,000 to 1.1 million while the labor force participation rate grew 0.2 ppts to 62.3%. In terms of industries, the leisure and hospitality industry grew the most, adding 67,000 jobs. This was supplanted by increases of 55,000 in the healthcare industry and 28,000 in construction. The health addition to employment in December supports the narrative that labor demand is still strong; however, the advance in the labor force participation rate means that this doesn’t have to lead to further labor market tightness. Indeed, wage growth has started to decelerate with an increase of just 0.3% MoM. This resulted in a slowdown in the annual pace to 4.6% YoY, down from 4.8% YoY. This trend in wages was similar across both goods and services sectors: goods sector wages grew 0.4% MoM and 4.4% YoY, and service sector wages grew 0.3% MoM and 4.6% YoY.
This gradual decline is probably not going to be good enough for the Fed which will hope to see wages follow more closely with the cooling CPI and PCE inflation. In the end, its objective will be to suppress labor demand which has clearly not happened in the second half of 2022 like FOMC members projected. This December jobs report will reinforce the intentions to reach a Fed funds rate of 5% and potentially even 5.5% if wages and inflation prove to be stickier.
Euro Area Inflation & Retail Sales
Euro area inflation fell -0.3% MoM to 9.2% YoY in December, down from 10.1% YoY in November. After two months with double digit inflation, Europe sees the year end with a monthly decline to cool the annual pace back to the single digits. Crashing energy prices can be thanked for this. On a monthly basis, energy prices fell -6.5% MoM which led to another sizeable deceleration in the annual pace to 25.7% YoY which is down from its peak of 41.5% YoY set in October. Food price movement has been mixed across countries, but cumulatively, we see it was still positive, up 0.7% MoM to 13.8% YoY. This is similar to paces we have seen in the past and only advanced the annual pace by 0.2 ppts. The core inflation reading is a bit more troubling. Core inflation grew 0.6% MoM to 5.2% YoY after stalling at 5.0% YoY over the last two months. Ex-energy goods (+0.4% MoM) and services (+0.7% MoM) both advanced at the end of 2022 despite the ECB’s initial attempts to bring demand lower. The trend in services pricing suggests there is will still be some of that re-opening momentum in consumer spending that will make the component stickier. In a similar way, Russia’s continued war with Ukraine has prevented the clear resolution to supply chain constraints. Overall, it seems that peak in inflation in Europe is in, but the descent is going to gradual unless ECB policy tightening is intensified.
Euro area retail sales volume grew 0.8% MoM but were down -2.8% YoY in November. The euro area consumer, which is supposed to be grappling with a recession, is proving to be resilient in the last few months of 2022. Non-food and auto sales jumped 1.6% MoM and 1.0% MoM respectively to offset a -0.9% MoM decline in food spending. This partially offset a -1.5% MoM decline seen in October. While the underestimation of the financial strength of households in Europe is generally a good thing, it has made the fight against inflation that much more difficult. Because of that, the ECB will likely make the upcoming year tougher for consumers which will weigh on GDP growth in the region.
Germany Retail Sales & Manufacturing Orders
German real retail sales grew 1.1% MoM in Nov but were still down -5.9% YoY. Like we saw in the euro area level sales results, German consumers are showing their resilience in November especially given that sentiment in Germany has been so low in the last few months. For the full year of 2022, real retail sales are expected to have only fell -0.3% YoY over 2021. Thanks to inflation, this means that consumers spent 8.2% more than the previous year for just about the same volume of goods. This probably can’t be sustained into 2023 especially if the weakness of the manufacturing sector eventually leads to job loss and a dismantling of the strong financial position that households found themselves in the post-pandemic period.
German manufacturing orders fell -5.3% MoM and -11.0% YoY in November. Excluding large orders, manufacturing orders were slightly better, just down -2.9% MoM. The decline was steepest abroad as foreign orders fell -8.1% MoM including a -10.3% MoM decline in euro area orders. At home demand conditions were slightly better, domestic orders only fell -1.1% MoM. Looking at the types of orders, we see that capital orders careened -8.5% MoM lower while intermediate and consumer goods orders both only fell by less than 1%. To put this decline in context, in November German manufacturing new orders reached their lowest level since the worst few months of the pandemic, July 2020. If the consumer is showing its resilience, then manufacturing firms are showing their capitulation in the face of high energy prices, a higher cost of capital, and labor shortages. If the December number does not show improvement, we could be looking negative growth in Germany in Q4.
Still to come…
10:00 am (EST) - Canada Ivey PMI
10:00 am - US Factory Orders
10:00 am - US ISM Services Index
Morning Reading List
Other Data Releases Today
Canada added 104,000 jobs in December, and the unemployment rate fell -0.1 ppts to 5.0%. The participation rate increased 0.2 ppts to 65.0% in December. 8.1% of employees were absent due to illness or disability, up from 6.8% in November.
The S&P Global Japan Services PMI was 51.1 in Dec, up from 50.3 in Nov. This was the 4th consecutive monthly rise. Employment grew for the 11th month in a row. Selling prices grew at the fastest pace in 3 years.
The UK Halifax House Price Index fell -1.5% MoM but was still up 2.0% YoY in Dec. The average UK property now costs £281,272, down from £285,425.
The S&P Global UK Construction PMI fell to 48.8 in Dec, down from 50.4 in Nov. Commercial construction activity grew at the slowest pace in the last 4-months. Housing activity declined for the 1st time since Jul 2022.
The S&P Global Eurozone Construction PMI fell to 42.6 in December, down from 43.6 in November. The decline in home building was the sharpest since Mar 2013 (ex-COVID). The downturn in commercial activity was the strongest in around 2 years.
French household goods consumption (volume) grew 0.5% MoM but was down -5.2% YoY in Nov. Component breakdown: engineered goods up 1.1% MoM, energy up 0.6% MoM, and food up -0.2% MoM.
The EU Economic Sentiment Indicator grew 1.5 pts to 94.2 in Dec. The Employment Expectations Indicator edged down -0.4 pts to 105.9. The consumer sentiment index grew 1.4 pts to -24.4.
Inflation
Eurozone inflation back in the single digits (ING) - Inflation fell back to 9.2% in December but rising core inflation means that not much will sway the European Central Bank from the hawkish path it set out late last year.
Inflation fight not over yet (Danske Bank) - The inflation fight is not over yet. That was the key message from the December ECB meeting, were President Lagarde struck an unusually hawkish tone. ECB delivered the expected 50bp rate hike, but with a clear message that further ‘significant’ rate increases will be needed in 2023 to quell inflation pressures.
Euro-area inflation flash: momentum turn (Nordea) - Euro-area flash December inflation dropped to 9.2% y/y from 10.1% y/y in November. Expectations have been lowered through the week after the releases from the largest euro-area economies, but it is clearly lower than expected a few weeks ago.
Inflation fight continues as China reopens (Danske Bank) - Easing pandemic curbs in China, global recession fears and central bank rate hikes continued to drive markets during December. China stepped up its easing of Covid-19 restrictions on a nationwide basis and a clear shift has taken place in official communication, with emphasis on economic recovery.
Italian inflation slows in December (ING) - Positive developments in gas prices suggests that the peak in headline inflation might be behind us, but future declines will be slowed down by some inertia in the core component.
The Layers of Inflation Persistence (Liberty Street Economics, NY Fed) - To sum up, we find evidence of a decline in the size of the persistent component of core PCE inflation starting in September 2022. The decline follows a long period of high and essentially constant inflation persistence. Dissecting the layers of aggregate inflation provides further insights: core goods and core services ex-housing have been moderating since early 2022, reflecting the evolution of the common component, while housing has continued to move up, driven by its own sector-specific trend.
Trade
U.S. Trade Deficit Narrows Sharply in November (Wells Fargo) - The U.S. international trade deficit narrowed sharply in November amid a collapse in imports. While this presents some upside risk to Q4 GDP growth, the details suggest economic weakness is also starting to show up in trade flows.
Back To Deficit We Go (BMO) - Canada’s merchandise trade returned to modest deficit in November as energy exports were weighed by lower prices and weaker demand. More broadly, some of the deterioration came from lower prices for both exports and imports—the latter will help cool domestic inflation pressures.
Canadian trade (November); Dipping a toe into deficit waters (CIBC) - Canada's goods trade balance dipped a toe into deficit waters in November, with the $0.04bn shortfall coming against consensus expectations for a modest surplus of $0.5bn. However, with exports and imports both declining by similar magnitudes over the month, the surprise deficit stemmed mainly from a downward revision to energy exports in the prior month which dramatically narrowed the surplus for October (now $0.13bn relative to $1.21bn first reported).
Outlook
The 2023 Kickoff (Moody’s Analytics) - Moody’s Analytics baseline outlook calls for a recession-free 2023 in the U.S., though the pace of growth will slow demonstrably. Key to our forecast is the expectation that inflationary pressures continue to steadily moderate.
Auto
U.S. vehicle sales end 2022 on a soft footing (TD Bank) - While 2022 was a dismal year for vehicle sales, 2023 is expected to show some modest improvement, even with interest rates remaining elevated. Easing supply constraints should allow for North American production to completely normalize to pre-pandemic levels by the second half of this year – helping to bring more affordable supply to market. This will be a welcome development, as the current inventory mix heavily favors larger (more expensive) luxury models. With sales having undershot trend (16.5M-17M) in each of the last three years, there is considerable pent-up demand in the market, which should help to lift sales to somewhere in the 14.5M-15M range in 2023.
PMI Review
Global business activity contracts for fifth successive month as demand downturn accelerates (S&P Global) - Global business activity fell for a fifth consecutive month in December, with the rate of decline moderating slightly amid improved supply conditions but still rounding off the worst quarter since 2009 barring lockdown months. What's more, with new orders falling at an increased rate, the underlying demand environment appears to have deteriorated further.
Global downturn led by slump in financial services as borrowing costs ratchet higher (S&P Global) - Purchasing Managers' Index (PMI) from S&P Global provide a unique insight into worldwide economic tends, allowing the analysis of business activity by detailed sector in the world's principal regions. The latest data highlight how the global economy remained stuck in decline for a fifth successive month in December, with the downturn led by an increasingly steep deterioration in financial services activity. The latter was in turn led by a severe drop-in real estate activity, as well as a steep contraction of banking services.
Real Estate
House Prices and Rents in the 21st Century (Cleveland Fed) - We study the joint evolution of prices and rents of residential property. We construct indices for both rents and prices of renter-occupied properties and for prices of owner-occupied properties. We then decompose the change in the price of occupant-owned property into three components: (1) changes in rent, (2) changes in the relative prices of investor- and occupant-owned properties, and (3) changes in the price-rent ratio. We use a simple model to link our decomposition to different sources of variation in house prices. We argue that while the 2000s boom was plausibly driven by exuberant expectations, the boom of the 2020s more likely resulted from a preference shock.
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