FrontierView recently launched The Lens, a weekly newsletter published by our Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business scenarios. Below is an excerpt from this week’s edition covering the latest developments in US employment and the deteriorating German economy. For the full complimentary newsletter, subscribe today.
September employment data shows a stable US economy
- Employment data in the US is at its strongest since the 2008 financial crisis. The unemployment rate declined to 3.5% in September, the lowest rate since 1969. Similarly, the prime-age employment-to-population ratio, another widely-used indicator, stood near its pre-crisis peak.
- But the momentum is slowing. Monthly nonfarm payroll increase was 136,000, slightly weaker than the 2019 average (161,000) and the 2018 average (223,000).
- Despite ongoing job gains and reports of worker shortages across much of the country, average hourly earnings showed little growth.
- New jobs concentrated in the service sector, particularly heath care; while manufacturing saw virtually no job gains.
These developments are in-line with our expectations. Despite trade disputes and a global manufacturing slowdown, overall US employment has remained resilient. Weak manufacturing growth has not spilled over into reduced demand for domestic services. At the same time, the softening momentum is not surprising, as labor scarcity has made it difficult to find qualified workers to fill job openings. Weaker employment growth will lead to weaker consumption growth, as fewer new workers will pull up overall consumption. This will lead to slightly slower US GDP growth in 2020, slipping from 2.1% in 2019 to 1.9% in 2020.
US consumption growth will slow slightly in 2020, but this does not mean the US market shows the same sorts of price sensitivity experienced elsewhere. US consumer confidence remains near all-time highs. Combined with ongoing wage growth, the US provides ample opportunities for premiumization. A looser domestic monetary policy environment makes it cheaper for consumers to finance purchases on credit, providing some growth opportunities to increase market penetration for consumer durables. But the picture looks quite different for export-oriented manufacturers, who have already felt the weight of the global slowdown, and will continue to see price and margin pressures.
Yang Liu, Junior Analyst for Global Economics and Scenarios
German manufacturing deteriorates, clouding the eurozone outlook
- In October, German industrial production moved further into contractionary territory, reflecting weak demand for German exports from countries outside the EU. Likewise, manufacturing production declined by 4% YOY in August and factory orders plummeted, dropping by 0.6% YOY the same month.
- In September, the German Ifo Business Climate Index stayed close to a record low, previously hit in 2012.
- Manufacturing purchasing managers’ index slid to a ten-year low, highlighting that businesses remain broadly pessimistic for 2020.
Market conditions in the manufacturing sector will continue to weaken into 2020, raising concerns of a recession. Industrial demand, especially for consumer durables, will remain sluggish throughout H1 2020 and will only gradually strengthen in H2 2020. On a positive note, consumer demand has risen, thanks to solid wage growth powered by supportive government measures. The German economy is expected to avoid a recession in 2019-2020 owing to solid performance in consumer, services and construction sectors.
Businesses in the industrial sector will make continued efforts to consolidate costs to maintain margins in a muted business environment. Firms should invest in better understanding their customers to inform product development and increase customer satisfaction.
Athanasia Kokkinogeni, Europe Senior Analyst
FrontierView clients: See our WEUR Monthly Market Monitor for further insights