The US labour market generated a much lower than expected 74,000 jobs in December according to the official report. However, there is evidence that it was depressed by bad weather and the data do not fit in with the general trend in the economy. This disappointment therefore does not make us doubt our view that the global economy is gaining momentum, that economic growth is more likely to surprise on the upside than on the downside and that we have started a period in which forecasters are likely to raise their forecasts.
Weather affected US payrolls
The US labour market generated merely 74,000 new jobs in December according to the official report. This was well below consensus and it certainly did not suit us, as we are looking for stronger data, not weaker ones. It is dangerous for optimists to dismiss disappointing data as outliers or aberrations, but in this case I am willing to take that risk. The payroll number was completely out of line with other evidence from the US economy, such as the ADP report and confidence indicators. Indeed, the statisticians reported that the disappointingly low number was caused by bad weather. Apparently, if the weather had not been so bad, the number would have been closer to the 200,000 that was expected. One wonders why economists had not noticed the weather and taken this effect on board when forecasting this number. Bloomberg had surveyed some 100 economists and the lowest forecast was 100,000. The ADP report, released a few days earlier, showed a gain of 238,000 of private payrolls. Why the official number was affected so badly by the weather and the ADP number was not, is unclear to me. It is also unclear to me why jobless claims have not shown a similar weather affected development either. Business surveys have recently been strong and have indicated a steady, if unspectacular, improvement in the labour market. Taking all this into consideration, we think that the payroll number for December was an aberration and will be corrected before too long. Having said that, the cold weather in the US in January, may also affect the January data, which are due out in February.
Other US data was generally positive. The trade deficit fell back sharply in November. The last time the deficit was smaller was in 2009, but then it was caused then by the recession. One has to go back to 2002 to find the deficit of a similar size in dollars. Measured as a fraction of GDP, one has to go back further. This will have been supportive of GDP growth in Q4.
Strong European data
European data was generally very encouraging last week. Eurozone retail sales improved in November. This series is volatile, so one needs to be careful when interpreting this data. However, on a year-on-year basis, retail sales were up the most since 2010 and to get a more sustained period of the growth rate shown in November, we have to go back to 2007.
The Economic Sentiment index of the European Commission, combining business confidence in various sectors and consumer confidence, rose for the eighth consecutive time in December. Sentiment in Spain, in particular, is improving. It would be really good news if that could be sustained.
German industrial orders and output were strong in November. This is supportive of our broader global view that the industrial sector picked up momentum towards the end of the year. Data on world trade have, so far, only improved modestly. However, various leading indicators for world trade are suggesting that a significant acceleration of growth is imminent. If that view is correct, output growth will get another boost.
Japanese leading indicators were also stronger than expected, suggesting that the economy is gaining momentum before the sales tax hike in April. Hopefully, the economy will have enough take-off speed not to be grounded again by the tax hike.