US Jobs Report and ISM Services Review, German Industrial Production (Nov 2022)
Economic news and commentary for January 9, 2023
Germany Industrial Production
German industrial production grew 0.2% MoM in November but was down -0.4% YoY. The struggle continues for the manufacturing sector in Germany, but in November, we see a temporary pause in the weakening. Commodities and business goods production both bounced on the month, intermediate goods production grew 1.1% MoM and capital goods production grew 0.7% MoM, but lower expectations of consumer demand led to a decline in consumer goods production which fell -1.5% MoM. Also offsetting the downtrend was construction production which fell -2.2% MoM. As energy prices volatility eases, we should see some improvement in the operations of energy-intensive firms. The November report found that production in the energy-intensive industrial branches increased by 0.2% MoM, a slight improvement on the dismal annual pace of production growth of -12.9% YoY. With production growth reported at -0.4% MoM, the industrial sector of the German economy has made a slightly negative contribution to Q4 GDP growth so far.
Euro Area Employment
The euro area unemployment rate was 6.5% in November, unchanged from October. There was a slight increase in the number of unemployed. up 10,000, but it did little to move the needle on record low European unemployment. The more volatile youth unemployment rate did tick up from 15.0% to 15.1%. At the country level, there has not been any major moves in unemployment rates suggesting that the labor shortages which the ECB are concerned about are entrenched in the entire euro area economy. Following from that, wage growth has continued to be robust and shown only minor signs of abating as labor demand continues to roar. Just like in the US, the euro area should close the year out at record low unemployment, something that would have been largely unexpected after the ECB set the tone with its intention to frontload rate hikes.
Still to come…
12:30 pm (EST) - US Investor Movement Index
3:00 pm - US Consumer Credit
6:30 pm - Japan Household Spending
Morning Reading List
Other Data Releases Today
France's trade balance improved to -€13.0 billion with imports down -€1.5 billion and exports down -€0.4 billion. The energy balance improved by €1.4 billion as energy imports fell.
US Jobs Report
Another solid US jobs report, but cracks are showing (ING) - The US added 223,000 jobs and the unemployment rate returned to cycle lows, but there are signs that a turn is coming. A fifth consecutive drop in temporary help employment is a warning signal while softer wage inflation suggests labour market dynamics are shifting. With business surveys pointing to recession, tougher times are coming.
December Jobs Report: A Late Arriving Gift (Wells Fargo) - The December employment report was generally encouraging. Nonfarm payroll growth slowed modestly but remained solid with a 223K monthly gain. More importantly for Fed officials worried about the inflation outlook, wage growth cooled in December, and the labor force participation rate ticked higher for both prime age (25-54) and older (55+) workers. Despite the directional improvement in labor supply, the labor market remains exceptionally tight. The unemployment rate fell two tenths of a percentage point to 3.5%, matching its lowest level on record since 1969. It will take more than just this report to convince the FOMC that supply and demand in the labor market are in healthy balance.
US Labor market: hope on the wage front (CIBC) - The Fed might have to wait a little longer to see the degree of cooling in the labor market that it is looking for in order to put an end to its hiking cycle, with the December data sending mixed signals. The 223K December job gain was a little above the 203K consensus expectation, but a 28K negative revision to the prior two-month job tally leaves total employment broadly where expected.
Markets Rally Big on Slower Wage Gains (HilltopSecurities) - U.S. businesses added the fewest jobs to company payrolls in two years, while the unemployment rate fell back to a five-decade low, but it was unexpectedly soft earnings growth and a rise in the labor force participation rate that has sparked a major rally in the bond market this morning.
Nonfarm Payrolls Increased 223,000 in December (First Trust Portfolios) - On the surface, the job market looks good. But the details of today’s report warn of trouble ahead. First the good news. Nonfarm payrolls rose 223,000 in December, beating the consensus expected 203,000 and ending the year with a total gain of 4.5 million. Meanwhile, civilian employment, an alternative (although more volatile) measure of jobs that includes small-business start-ups, rose 717,000 in December, ending the calendar year with a total gain of 3.2 million.
Wage Growth Slowing (NAHB) - Job growth slowed in recent months, but the overall labor market remains tight. In December, total nonfarm payroll employment increased by 223,000, and the unemployment rate ticked down to 3.5%, back to its lowest point before the pandemic. However, in a positive sign for inflation, wage growth slowed to a 4.6% year-over-year gain, the slowest pace since August 2021.
U.S. Jobs: Gifts For All (BMO) - The U.S. jobs report had a little something for everyone: plenty more jobs and better job prospects for the unemployed, but also somewhat slower wage growth and a pullback in work hours that suggests the economy is losing steam. Alas, a hawkish Fed will likely fret more about the ongoing tightness in labour markets.
Employment slows modestly in December, while the unemployment rate returns to 50-year low (TD Bank) - After oscillating in a very narrow range of 256k-269k in recent months, the pace of hiring took a modest step lower in December. Based on a three-month moving average, employment growth has slowed by over 125k jobs per-month since the Fed began rapidly tightening monetary policy last May but continues to run at a pace well above population growth.
Economic Growth Remains on a Positive Trajectory, For Now (Wells Fargo) - During December, payrolls rose by 223K while the unemployment rate fell to 3.5% and average hourly earnings eased 0.3%. Job openings (JOLTS) edged down to 10.46 million in November. ISM manufacturing fell to 48.4 in December, while the services index unexpectedly dropped to 49.6. Construction spending increased 0.2% in November. The U.S. trade deficit narrowed to $61.5 billion in November.
US ISM Services
Drop in ISM Services Overstates Weakness: The Peculiar Challenges of Running a Service Business in Today's Economy (Wells Fargo) - Recession is coming according to our forecast, but this does not mark the start of it. The bottom falling out of service sector activity in today's ISM speaks to the peculiarities of managing a business amid still-high prices, a still-tight labor market and a not fully fixed supply chain.
ISM Services Index Recorded Sharp Deterioration at the End of 2022 (TD Bank) - The ISM services index fell 6.9 percentage points to 49.6 in December from 56.5 in November. This marked the first time that the index fell into contractionary territory (below the 50-point threshold) since May 2020. The headline print came in significantly below market expectations for a mild pullback to 55.1.
Services Stumble (BMO) - The U.S. services sector unraveled quickly at the end of 2022, unexpectedly contracting amid a cloudy economic outlook. Meanwhile, labour market conditions remain heated but may be losing some steam.
The ISM Non-Manufacturing Index Dropped to 49.6 in December (First Trust Portfolios) - The ISM Services index surprised sharply to the downside for December, now matching the ISM Manufacturing index in contraction (below 50) territory. Looking at the survey comments, companies cited a general slowdown in orders. That can be seen in the movement from the new orders index, which dropped to 45.2 from 56.0 in November.
Canada Jobs Report
Canada's labour market caps off a strong year with another big gain (TD Bank) - 2022 was a banner year for the Canadian labour market. The economy gained 381 thousand jobs, while the unemployment rate has remained right around the historical low of 4.9% established in the spring. This helped wages rise by over 5% y/y during the back half of the year, incentivizing more people to enter the workforce.
Cdn Jobs: Happy New Employer (BMO) - While it's always dangerous to read too much into a single Canadian jobs report, it's safe to conclude that the economy still had some serious zip at the end of last year. True, the labour market is typically the last to turn when conditions soften broadly, but there is precisely zero hint of any such softening in the jobs data. At the very least, today's robust results support the view that the BoC will hike rates again later this month.
Europe
Eurozone labour market still going strong with unemployment at 6.5% (ING) - The eurozone unemployment rate was unchanged in November despite economic conditions pointing to contraction. This leaves the labour market historically strong, but also makes it a key risk for second-round inflation effects for the ECB.
German industry stagnates at too low level (ING) - Industrial activity in November provided more evidence that the economy did not fall off a cliff in the fourth quarter but was not strong enough to avoid a contraction either.
China
China Catches COVID (Northern Trust) - China was first into the pandemic, and will likely be the last to exit. The COVID-19 virus initially came to prominence in Wuhan, a city of 11 million that is 500 miles west of Shanghai. Chinese authorities were anxious to isolate cases, and so they moved to lock down the city and enforced strict contact tracing.
Real Estate
How increases in housing costs impact households (ONS) - Mortgage interest rates started to increase during 2022, this is likely to make borrowing more expensive for those with fixed rates deals coming to an end in 2023. Those with variable rate mortgages and private renters are also facing higher housing costs.
Supply Chain
Global Supply Chain Pressure Index: The China Factor (Liberty Street Economics, New York Fed) - In a January 2022 post, we first presented the Global Supply Chain Pressure Index (GSCPI), a parsimonious global measure designed to capture supply chain disruptions using a range of indicators. In this post, we review GSCPI readings through December 2022, and then briefly discuss the drivers of recent moves in the index. While supply chain disruptions have significantly diminished over the course of 2022, the reversion of the index toward a normal historical range has paused over the past three months. Our analysis attributes the recent pause largely to the pandemic in China amid an easing of “Zero COVID” policies.
Consumption
Holiday Shopping Season: What Recession? (Northern Trust) - While e-commerce spending remained strong, Americans also shifted back slightly to spending at brick-and-mortar stores for a more traditional holiday shopping experience. In-store sales grew 12% year over year on Black Friday. Traffic in stores rose 7% over the same time period. All these are signs that the U.S. economy closed the year positively.
Markets
A tug of war in financial markets (Danske Bank) - 2023 has arrived and it looks set to be another interesting year for financial markets. Diverging forces are at play leaving markets in a tug of war between different drivers.
Working From Home
Breaking the RTO Plateau (Northern Trust) - As the new year unfolds, more managers will contemplate less sociable requirements to return to the office (RTO), setting minimum attendance requirements. Bosses who have taken a hard line in favor of RTO cite the needs for collaboration, cross-training and building culture. While intuitive, these are hard goals to quantify. And lease payments are difficult to justify for vacant offices.
The Week Ahead
US and China inflation, UK GDP, plus Bank of Korea meeting (S&P Global) - The coming week will see a number of key releases including US and China CPI data and China’s trade numbers. In Europe, the UK publishes its monthly GDP figures for November while the eurozone’s unemployment and industrial production statistics will also be due.
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