Job growth slows despite strong Q3 GDP data & falling inflation
U.S. employers added 199,000 new jobs to the economy in November, slightly ahead of the 190,000 estimate. The unemployment rate declined to 3.7% and the broader U6 unemployment rate fell from 7.2% to 7.0%. Average hourly earnings, a key inflation indicator, increased by 0.4% month-over-month (M/M) and 4.0% year-over-year (Y/Y). While job gains were solid last month, many of these gains came from government hiring and workers returning to work from recent strikes. Experts expect hiring to slow in 2024 alongside economic growth. Q3 GDP growth was strong, but the Atlanta Fed currently projects Q4 growth at just 1.2%. Consumer spending will be the key driver to monitor as it grew 3.6% in Q3 and accounts for nearly 70% of the U.S. economy.
Inflation slowed to a 3.1% annualized rate in November, down slightly from the prior month. Core CPI remained flat at 4.0% for the second straight month. Energy prices fell 2.3%, but food prices rose 0.2%, used car prices increased 1.6%, and the all-important shelter component rose 0.4%. While inflation has not yet hit the Fed’s 2.0% target level, it continues to trend lower and is below the rate of wage growth. Futures markets indicate the Fed is finished raising rates and imply five rate cuts in 2024.
Divergent PMI data highlights some cracks starting to form in business and consumer spending
The ISM Manufacturing PMI was flat in November at 46.7. New orders gained ground while production and employment weakened. All three major sub-components remain in contraction territory. Survey respondents cited a slowing global economy and elevated financing costs. The ISM Services PMI strengthened a bit in November with the headline number rising from 51.8 in October to 52.7. The production and employment components rose while new orders were flat.
Source: CNBC, U.S. Bureau of Labor Statistics
New orders for manufactured durable goods in the United States fell by 5.4% M/M in October 2023, reversing a 4.0% surge in September and significantly below market expectations of a 3.1% drop. It was the second-largest fall in durable goods orders since April 2020, and was driven mainly by reduced demand for transportation equipment. Orders for non-defense capital goods excluding aircraft, a closely monitored proxy for business spending plans, decreased by 0.1% in October. Retail sales in the U.S. increased by 0.3% M/M in November, up from October’s 0.2% decline. Sales held up despite a decline in gas station receipts. Core retail sales jumped 0.4% In November. Y/Y retail sales growth of 4.1% is above the 3.1% headline CPI rate.
Chapter 11 filings surge 141% in November
Corporations continue to deal with significantly higher interest expenses, which have risen sharply since early 2022. High level credit spreads remain tight, but coverage ratios have declined and distress ratios have risen across riskier credit. According to EPIQ, commercial Chapter 11 bankruptcy filings surged 141% Y/Y in November towards their long-term average. The rise in bankruptcy filings this year reflects the challenging economic environment resulting from the end of COVID stimulus, low interest rates, and strict lending terms. Lower quality companies are seeing squeezed margins from higher borrowing costs. Many of these companies have been propped up for years by ultra low-rate policy and government stimulus. Although corporate fundamentals remain solid, higher rates should eventually impact lower quality companies with already thin margins.
Source: Epiq Bankruptcy, Apollo
Consumer weakness leads to Japan’s Q3 GDP contraction
Japan’s GDP contracted 2.9% Y/Y in Q3, a sharp change from the 4.8% GDP growth seen in Q2. This decline is the sharpest decline in two years. Private consumption, which makes up more than half of the economy, fell 0.2% while business investment shrank 0.4%. Separate data showed inflation-adjusted real wages dropped 2.3% Y/Y in October to mark a 19th straight month of decline. With personal spending expected to remain weak, the BOJ has stressed its need to keep interest rates at ultra low levels until inflation picks up towards the 2% target and wage growth returns to the economy.
Source: Japan Cabinet Office
Eurozone economic weakness leading to falling inflation & perhaps a reversal in record low unemployment
Business activity in the eurozone continued to fall during November, according to flash PMI data, amid a further solid decline in new orders. Both output and new business have now decreased in each of the past six months. While all PMIs in the eurozone remain well below the vaunted 50 level that separates contraction from expansion, the composite and services gauges hit four-month and two-month highs, respectively, and the manufacturing PMI hit a six-month high. Annual inflation in the eurozone cooled to 2.4% in November from 2.9% in October. Core inflation also came in lower than expected, dropping to 3.6% from 4.2% in October. The unemployment rate in the eurozone remained at a record low of 6.5% in October, despite a contraction in Q3 GDP.
Increasingly troubling data coming out of China, urgent need for stepped up government stimulus
China’s official manufacturing PMI weakened to 49.4 in November from 49.5 in October. High tech and equipment manufacturing both recorded expansions. China’s non-manufacturing PMI weakened to 50.2 in November from 50.6 in October. In the non-manufacturing sectors, weakness in the service industries outweighed strength in construction. In particular, the business activity index of industries such as real estate, leasing, and business services stayed below 50, pointing to further contraction. Retail sales in China grew 7.6% Y/Y in October, industrial production rose 4.6% Y/Y, and fixed asset investment for the first ten months of 2023 grew by 2.9%. Real estate investment has declined 9.3% YTD. The Chinese property sector remains a weak spot for the economy, likely requiring further government support for stabilization and potential future growth.
While many central banks around the world are still trying to cool inflation, China is grappling with falling prices. CPI dropped 0.5% Y/Y in November, the biggest fall since the depths of the pandemic three years ago. The drop marked an acceleration in the rate of deflation from October, when the CPI fell 0.2% from a year earlier, and prompted calls for urgent action from the government to boost demand and prevent a downward spiral of prices. The country is being hit by falling food prices, weak demand, and declining global energy prices. Core inflation rose just 0.6% Y/Y, highlighting the need for more government stimulus to shore up demand and boost growth.
Source: National Bureau of Statistics of China
The charts and information in this presentation are for illustrative purposes only, and are based upon sources of information that Sunpointe, LLC generally considers reliable, however we cannot guarantee, nor have we verified, the accuracy of such independent market information. The charts and information, and the sources utilized in the compilation thereof, are subjective in nature and open to interpretation. FOR USE WITH INSTITUTIONAL INVESTORS AND INVESTMENT PROFESSIONALS ONLY. NOT FOR PUBLIC DISTRIBUTION. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.