Central banks are preparing for pivotal meetings across the world this week. The new economic data paints a jarring chart showing strengthening labor and manufacturing markets across major global economies. The United States saw a surprise drop in nonfarm payrolls and a drop in private sector wage growth. The Eurozone was facing a double dip recession with a collapse in its composite and manufacturing purchasing managers’ indices (PMI). As for Asia, Japan saw a lift to exports and services PMI. The UK was in a difficult position, as the latest labor market data revealed a large decline in payrolls and an ever-increasing unemployment rate.
US Labor Market Shows Signs of Weakness
The US labor market data released for the month of October showed a deeply worrisome picture, with nonfarm payrolls dropping by 105,000 jobs. Most of the decrease was due to the loss of 157,000 government jobs. Yet this development represents a dramatic reversal in the historic employment equation. This drop in net new payrolls raises alarm bells over the labor market’s continued resilience. This new moment of uncertainty arrives as the economy approaches pivotal meetings among central banks.
Private sector wage growth showed a dismal trend, falling to 3.9% in October from 4.2% in September. This drop is a sign of possible headwinds to consumer spending, as wage growth would typically be associated with stronger spending capacity. The Federal Reserve’s dot plot indicates two rate cuts by 2026. This is a kernel of optimism, which could indicate that they’re concerned about future economic growth and inflationary pressures.
Despite ongoing labor market challenges, the US manufacturing sector improved on several fronts. The order-inventory balance has been much better since November, indicating that businesses are getting the inventory needed to match demand. This will be an important data point for policymakers to keep their eyes on as they look at the wider economic picture.
Eurozone Faces Economic Challenges
Meanwhile, across the Atlantic, the Eurozone is facing its own crisis. The December composite PMI also dropped to 51.9, down from 52.8 in November, suggesting a broad-based deceleration in economic activity. This troubling decline underscores the fragility of recovery efforts throughout the rest of the region.
The one bright spot was that the New Orders component, while still negative at 48.0, improved from November’s reading of 44.6. Any reading below 50 means the manufacturing sector is contracting which is raising further alarm about how sustainable this growth is in the months ahead. At the same time, the services PMI fell to 52.6 from 53.6, adding more evidence in support of the decelerating momentum in the Eurozone economy.
The Bank of England has predicted private sector wage growth of 4.2% in Q4. This dire forecast underscores the profound uncertainties still pervading the UK labor market. Recent statistics have now indicated that payrolls are waning and unemployment rates could be rising.
Developments in Japan and the UK
Japan’s economic data for November painted a slightly more optimistic picture than its Western rivals. The increase now puts the country’s overall export growth at 6.1% year-on-year. The driver of this unprecedented growth was mostly attributed to a softer yen and a rebound in exports to the US market. In addition, Japan’s services PMI soared to 52.1 from 51.3 in November, a sign of increasing optimism in the services industry.
The UK’s labor market is already beginning to crack. That’s completely at odds with the recent data – the November payrolls figure was a decrease of 38,000! Still, that caused the unemployment rate to jump from 4.4% to 4.6%. In November, average hourly earnings increased by a paltry 0.1% m/m, after seasonal adjustment. This paltry quarter point increase does nothing to allay fears of mounting wage pressures and does little to presume a robust economy.
The whole world will be watching with baited breath as the next UK CPI inflation print comes out. This data has the potential to greatly inform future monetary policy decision-making. Sweden The Origo survey will provide an early indication of future wage developments. Finally, it will begin to serve as a leading indicator for future labor market trends.