US Labor Market Surprises Again, 50 bps Hike Now Firmly on the Table
Economic news and commentary for March 10, 2023
US Employment
The US added 311,000 jobs in February to make for another strong month in the labor market. Importantly, the small downward revisions of -21,000 in December (to 239,000) and -13,000 in January (to 504,000) confirm that the labor market is really as hot as it is. Despite the nice jobs gain, the unemployment rate ticked up 0.2 ppts from the extreme low of 3.4% to 3.6%. The increase in the unemployment rate was caused by an increase of 242,000 in the number of unemployed and a 0.1 ppt increase in the labor force participation rate. This puts the labor force participation rate up 0.3 ppts from a year ago, a welcome change that will continue to help cool off the labor market. The service sector continues to be the driver of labor market strength, adding 245,000 jobs, well over the 20,000 added in the goods sector and 46,000 added in the government sector. The leisure and hospitality industry added another 100,000+ jobs with the education and health services industry not far behind at 74,000. Despite weakness in the manufacturing industry, it still posts marginal employment gains, adding 20,000+ jobs in each of the last three months. As expected, strong labor demand has led to further wage growth. The general level of average hourly earnings grew 0.2% MoM to an annual increase of 4.6% YoY which is higher than the 4.4% YoY reported in January. However, there was some upward pressure from base effects.
Regardless, there is little evidence that the labor market is weakening. Some of the underlying data suggest there is a more complicated trend to decipher as unemployment measures did advance in February, but the increase in the labor force is the likely explanation there. While a growing labor force helps to loosen labor market tightness, it will do little to stem economic strength derived from growing consumer disposable income which drives inflationary pressures. And in fact, wage growth is still strong which is putting more money in the hands of consumers to spend (which they’ve been very willing to do in the post-COVID era). This report will support the narrative of a 50 bps rate hike later this month by the Fed, and the CPI report next will be key in confirming that pace. That being said, I see little reason to expect the US economy to enter a recession in the first half of 2023, and a higher terminal rate will likely be needed to make that more likely in the latter half of 2023.
UK GDP
UK GDP grew 0.3% MoM in January after falling -0.5% MoM in December. At first glance, the improvement in output in January was likely a result of the sharp weakness in December where services struggled (fell -0.8% MoM). In the three months to January, GDP was unchanged. The main driver of the increase in GDP was the services sector which grew 0.5% MoM, contributing 0.43 ppts to headline growth. Education activity bounced back 2.5% MoM following a -2.6% MoM decline at the end of 2022, and transport & storage services also saw a strong month, up 1.6% MoM, recovering from postal strikes. Additionally, arts & recreation activity improved 3.4% MoM as football returned to normal following the World Cup. The production sector represented more of the weakness in the economy, falling -0.3% MoM. Manufacturing output was down -0.4% MoM with a slight majority (7/13) of its sub-sectors seeing contractions. Notably, the manufacture of basic pharmaceutical products and pharmaceutical preparations contributed -0.31 ppts, with growth falling by -4.7% MoM. To top off the weakness in industry, the construction sector contracted at a rate of -1.7% MoM, the weakest growth since June 2022. The main contributors to the monthly decrease were seen in infrastructure new work and private new housing, which decreased -6.5% MoM and -3.0% MoM, respectively.
The slight growth in UK GDP in January appears to be deceiving. The services sector did grow but much of that growth was due to sectors rebounding from weak a December or returning to normal due to unusual activity (postal strike, World Cup football delay). The industrial sector provides a better picture of the UK economy which is struggling to cope with interest rates. This is especially evident in the construction sector's performance. The good news is that it looks like a recession is still being avoided as the quarterly rate of GDP growth through January managed to be flat. However, the favorable month-to-month effects in this month won’t be there to support growth in February, so I expect a slight decline in that report. This will set up Q1 2023 GDP growth to be a slight contraction as the Bank of England’s tightening settles into the economy and the impact of elevated prices lingers.
Still to come…
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Morning Reading List
The Bank of Japan keeps its rates unchanged and asset purchase plans the same. The BoJ sees CPI inflation "decelerating" towards the middle of 2023 as energy and import price pressures wane despite higher inflation expectations.
Japan's PPI fell -0.4% MoM to 8.2% YoY in February, down from 9.5% YoY in January. Export prices grew 0.3% MoM, import prices fell -0.9% MoM.
Amongst many flat & declining indexes, power and gas prices fell -6.3% MoM but were still up 33.9% YoY.
Japanese real household spending was down -0.3% YoY in Jan, up from -1.3% YoY in December. Goods spending was down -1.0% YoY (-0.7% YoY previously), and services spending increased 3.1% YoY (0.8% YoY previously). Income fell -1.7% YoY, the 4th straight YoY decline.
No revisions were made to German CPI growth in February at 0.8% MoM and 8.7% YoY (flat from 8.7% YoY in January). Food inflation topped energy inflation at 21.8% YoY and 19.1% YoY respectively. Core inflation ticked up 0.1 ppt to 5.7% YoY.
The UK trade balance improved £4.3 bil to -£19.3 bil in January with exports down -1.8% MoM and imports sharply down -8.7% MoM. EU imports of UK machinery and non-EU imports of UK energy and machinery both fell sharply in January as global demand withers.
France's trade balance improved €0.5 bil to -€13.6 bil in January as imports fell (-€0.8 bil) more than exports (-€0.3 bil). The energy balance improved by €0.4 bil on lower energy imports and a slight increase in energy exports.
Italian PPI fell -7.5% MoM to 11.1% YoY in January as energy prices fell a sharp -21.3% MoM. Outside of energy, consumer goods prices grew 0.8% MoM with durables up 1.2% MoM and non-durables up 0.8% MoM.
India's industrial production grew 0.8% MoM and 5.2% YoY in January. Manufacturing production was up a meager 0.1% MoM while mining and electricity production saw stronger gains. Capital goods production was up 5.2% MoM and 11.0% YoY.
Canadian employment held steady in February (+22,000; +0.1%), and the unemployment rate was unchanged at 5.0%. Average hourly wages rose 5.4% (+$1.69 to $33.16) on a year-over-year basis in February, compared with 4.5% (+$1.42) in January (not seasonally adjusted).
Bank of Japan Announcement
Macro Insights: Bank of Japan on hold – yen at the mercy of US data and risk sentiment (Saxo Bank) - Bank of Japan Governor Kuroda’s last meeting ended without any surprises as policy settings were left unchanged. While incoming data will be key to watch for what tweaks the next governor Ueda can bring, the near-term focus shifts to US data on non-farm payrolls and inflation, as well as the extent of fallout in the US banking sector as the market appears to be a panic mode after SVB’s hasty fundraising.
UK GDP
Surprise UK growth rebound means technical recession could be avoided (ING) - The UK economy grew faster than expected in January, though underlying volatility in the data means that GDP is effectively flatlining. Lower gas prices mean that any recession is likely to be very modest now – and may technically be avoided altogether.
Europe
ECB Watch: Heavy hiking (Nordea) - The ECB will hike by 50bp next week and likely signal such pace of hiking will continue in May. Given high market expectations and Lagarde’s aim of finding as strong backing for the decision as possible, markets may interpret the message dovishly.
Powell opens the door for 50bp hike in March; Changes to ECB scenario (ABN AMRO) - We have upwardly revised our forecast for the peak in the ECB’s policy rates, while maintaining the view that a rate cut cycle will begin within a year. We now expect the ECB to raise its deposit rate to a peak of 3.75% at the middle of this year, with 50bp of rate hikes at each of the March and May meetings, followed subsequently by a 25bp increase in June.
Euro macro notes: Housing market: bending, but not breaking (Danske Bank) - Cracks have started to appear in the euro area housing market. We think further
downside lies in store and the delayed impact of monetary tightening is an
important factor for our subdued euro area growth outlook in 2023/24.
Swedish GDP: A good start (Nordea) - Statistics Sweden’s monthly GDP indicator for January was up by 2.0% m/m and by 2.0% y/y. The January reading indicates that GDP may rise in Q1. This is in contrast to our view that GDP will decline in Q1 both on the quarter and over the year. The Riksbank’s call for Q1 GDP is -0.2% q/q and -0.3% y/y.
US
Fifth District Firms Report Cautious Optimism Going Into 2023 (Richmond Fed) - The COVID-19 pandemic and its aftermath have required constant shifts in how businesses operate. Not surprisingly, uncertainty has been a theme among many firms in the Federal Reserve Bank of Richmond's business outreach in the last few years. To better understand what firms are expecting for 2023, we asked them for their outlook and the strategies they might take to prepare for possible economic scenarios.
The velocity of money does not suggest a U.S. recession is imminent (Saxo Bank) - We are not in the recession camp. We believe that as long as the velocity of money is rising, the likelihood of a U.S. recession is low this year.
Part of a Cycle: A Recession Primer (TD Bank) - Recession chatter has prompted numerous questions about recessions, and how they are predicted. In this primer, we demystify what a recession is, and what we are looking for to determine if that is where the economy is headed.
Forward-Looking Policy in a Real-Time World (San Francisco Fed) - Restoring price stability is a key part of the Fed’s mandate, and it is what the American people expect. Achieving it will take time and a broad view of economic conditions. Policymakers have to respond to an economy that is evolving in real-time and prepare for what the economy will look like in the future. The following is adapted from remarks by the president of the Federal Reserve Bank of San Francisco to Griswold Center for Economic Policy Studies at Princeton University on March 4.
Asia Pacific
India: Another solid year ahead for the economy (ING) - Good growth momentum, strong credit growth and a supportive budget environment provide a positive backdrop, though the Reserve Bank of India (RBI) still has work to do to tame inflation.
China | Which economies are to benefit from industry relocation? (BBVA) - In the aftermath of the COVID-19 pandemic, the trend of industry relocation away from China is gaining momentum, at least in certain sectors. By analyzing China’s trade patterns through the lens of the global supply chain, the note attempts to identify the potential winners.
Australian housing market update: March 2023 (NAB) - A subtle 0.3% rise in Sydney dwelling values was the most significant driver of the national deceleration, however, the loss of downwards momentum was broad-based.
Inflation
Inflation Persistence: Dissecting the News in January PCE Data (Liberty Street Economics, NY Fed) - This post presents updated estimates of inflation persistence, following the release of personal consumption expenditure (PCE) price data for January 2023. The estimates are obtained by the Multivariate Core Trend (MCT)… The current release of the MCT implies a significant upward revision in estimated inflation persistence. The MCT stands at 4.9 percent for the month of January following an increase in December, as shown in the solid blue line in the chart below. Importantly, the MCT curve has moved up relative to the estimates reported in our February 7 post. What happened?
Weekly Pricing Pulse: Marginal gain for commodities amid subdued trading (S&P Global) - The Material Price Index (MPI) by S&P Global Market Intelligence increased 0.1% last week, its first rise since mid-January. The increase was mixed with only six of the ten subcomponents climbing. The MPI still sits 30% lower year on year (y/y).
Tales of the Unexpected (DWS Group) - Inflation looks set to remain quite sticky, with more interest rate hikes to come. This makes for a rather challenging environment for many risky assets.
Global Food Crisis May Persist, With Prices Still Elevated After Year of War (IMF) - One year after Russia’s invasion of Ukraine upended agricultural commodity markets, food prices remain elevated even after retreating from their record highs in early 2022.
Real Estate
Cost of Constructing a Home in 2022 (NAHB) - The NAHB recently published its latest Cost of Construction Survey. Results show that 60.8% of the average home sale price consisted of construction costs, essentially unchanged from the 61.1% posted in 2019. Since the inception of this series in 1998, this was the fourth time construction costs represent over 60% of the total price of the home (2013: 61.7%, 2015: 61.8%, and 2019: 61.1%).
Outlook
Our forecasts: Mild down- and mild upturn (DWS Group) - DWS Group provides its updated economic forecasts for March 2023.
Inside corporate earnings (Allianz) - With no major revenue growth likely in the first half of 2023, protecting margins will be the top priority. Cost-cutting strategies such as restructuring and personnel rightsizing should continue in the near term, notably in the US, where profitability is declining more rapidly. However, we still expect further capital expenditures in 2023, mostly in sectors where a switch towards sustainable projects is needed the most (automotive, energy and utilities).
Research
Why Are the Wealthiest So Wealthy? A Longitudinal Empirical Investigation (St Louis Fed) - We use Norwegian administrative panel data on wealth and income between 1993 and 2015 to study lifecycle wealth dynamics, focusing on the wealthiest households. On average, the wealthiest start their lives substantially richer than other households in the same cohort, own mostly private equity, earn higher returns, derive most of their income from dividends and capital gains, and save at higher rates.
Week Ahead
US inflation, ECB rate setters meeting and UK jobs report (S&P Global) - Another action-packed week follows US Fed chair Jerome Powell’s testimony to Congress and the US jobs report, with special attention on the upcoming US inflation figures due for February. The European Central Bank and Bank Indonesia will also update monetary policy, while more China data, including industrial production and retail sales, are anticipated. Other data highlights include UK employment numbers, Norway and New Zealand GDP, and India’s CPI.
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