Hiring Cools in January, but Q4 GDP Growth Remained Quite Solid!
The January employment report was mixed, with slower-than-expected hiring but an unemployment rate that unexpectedly fell.
- U.S. employers added 143,000 new jobs for the month, down from an upwardly revised 307,000 in December and below the 169,000 forecast.
- The unemployment rate fell to 4.0%, largely due to an uptick in the labor participation rate to 62.6%. The broader U6 unemployment rate held steady at 7.5%.
- Nearly two million people were added to the labor force as a result of annual adjustments for population growth and immigration.
- Job growth for January was concentrated in health care (44,000), retail (34,000), and government (32,000). Wage growth was also hotter than expected at 0.5% month-over-month (M/M) or 4.1% year-over-year (Y/Y).
Turning to the U.S. economy, we saw the following:
- The economy expanded at a 2.3% annualized rate in Q4, below the 2.5% expectation and 3.1% clip in Q3.
- For the full year, GDP grew 2.8%, compared with 2.9% in 2023.
- Contributions to Q4 2024 GDP were mixed. Personal consumption, net exports, and government spending added to GDP, while investment detracted from the Q4 figure.
- Consumption added 2.82% points to GDP, as both the services (1.45%) and goods (1.37%) components grew in 2024.
- Government spending added 0.42%, and net exports added 0.04%.
- On the downside, inventories fell in the latest quarter, deducting 1.03% from GDP.
Inflation Remains Stubborn, Manufacturing Finally Expands, but Services Weaken in January
The Fed’s preferred inflation gauge, the PCE Index, accelerated in December with a headline reading of 2.6% Y/Y. December saw a 0.2% increase M/M. Core PCE rose 0.2% M/M or 2.8% Y/Y. Food prices increased just 0.2% M/M, but energy jumped 2.7%. Durable goods prices, which include items such as aircraft, appliances, and electronics, fell 0.4%. While December’s PCE report was in-line with expectations, it showed that inflation remains above the Fed’s 2.0% target.
Source: U.S. Bureau of Labor Statistics
Manufacturing in the U.S. moved back into expansion territory with the ISM Manufacturing PMI hitting 50.9 in January versus December’s reading of 49.2. New orders, production, and employment all strengthened back above the important 50 level. Despite the rebound, challenges remain with companies closely monitoring potential tariffs and supply chain concerns. The ISM Services PMI eased in January with the headline reading falling to 52.8 from 54.0 in December. The production, new orders, and prices components all showed weakness last month.
Q4 Earnings Beating Expectations!
Through 40% of the Q4 earnings season, U.S. companies have once again exceeded expectations. EPS have grown 13.2% thus far, ahead of the 11.8% estimate and 77% of companies reported better than expected earnings. Significant contributions have come from companies in the communication services and technology sectors. Analysts project 14.3% EPS growth for 2025 and 13.7% for 2026.
Source: Capital Economics
Eurozone Growth Flatlines Again in Q4 Although Germany Shows Signs of Stabilizing in January
The eurozone reported flat economic growth in Q4, down from the 0.4% expansion in Q3 and the 0.1% estimate. Germany reported a contraction of 0.2% in Q4, France followed with a decline of 0.1%, and GDP growth in Italy was flat. On the flip side, Spain’s GDP surged 0.8% and Portugal’s jumped 1.5%. The ECB cut rates four times in 2024 to boost stagnant growth, and they began 2025 with another interest rate cut. The eurozone grew only 0.7% in 2024, well below the U.S. Inflation rose slightly in December to 2.5% Y/Y, largely driven by higher energy costs.
Eurozone business activity returned to growth in January, led by a rebound in manufacturing. The Eurozone Flash Composite PMI increased from 49.6 in December to 50.2 in January. The service sector fell to a two-month low at 51.4, but manufacturing strengthened to an eight-month high of 46.1. There were signs of improvement in the eurozone’s largest economy, with business activity in Germany stabilizing. However, economic growth in France, the eurozone’s second largest economy, contracted.
Are Stimulus Measures Working in China?
China’s factory activity slowed in January as export orders declined ahead of additional U.S. tariffs. The Caixin Manufacturing PMI declined from 50.5 in December to 50.1 in January. Domestic orders improved last month although new export orders declined. The employment sub-index also slumped to the lowest level in nearly five years, as businesses remained cautious amid economic uncertainty. China’s official Manufacturing PMI also declined into contraction territory last month (49.1).
After hitting a nine-month high in December, China’s official Non-Manufacturing PMI dropped to 50.2 in January (from 52.2 in December). After hitting a nine-month high in December, China’s official Non-Manufacturing PMI dropped to 50.2 in January (from 52.2 in December). Domestic orders, export orders, and employment all exhibited weakness. The annual inflation rate in China slipped to 0.1% in December, down from 0.2% in the previous month. This weakness highlights the mounting deflation risks, despite massive stimulus measures by the PBOC.
Source: Capital Economics
The Deepseek News Isn’t Slowing Down Spending Plans
The DeepSeek AI news from China rattled U.S. technology stocks that have spent hundreds of billions of dollars on AI and other capex projects.
Microsoft, Alphabet, Amazon, and Meta have reported combined capital expenditures of $246B in 2024, up from $151B in 2023. They forecast spending could exceed $320B this year as they compete to build data centers and fill them with clusters of specialized chips to remain at the forefront of AI large language model research. Capital spending amongst the Magnificent Seven stocks rose 40% in 2024 compared to just 5% for the remaining 493 stocks in the S&P 500. Earnings have also grown at a much faster clip in these mega-cap names over the past few years.
There is clearly more to play out globally with the competition over AI, but key U.S. tech companies show no signs of slowing their spending plans to stay ahead.
Source: Company reports and earning calls, FT calculations
Consumer Stress Continues to Mount
Consumer stress has intensified, with an escalating share of credit card holders making only minimum payments on their bills, according to a Philadelphia Federal Reserve report.
- The share of active holders just making baseline payments on their cards jumped to a 12-year high of 10.75%.
- Credit card delinquencies also jumped 10% Y/Y to 3.52%, albeit well below the 6.8% peak during the global financial crisis.
It is worth monitoring consumer stress moving forward, as higher interest rates could have a significant negative impact.
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