- The eurozone economic data flow is starting to improve, as tailwinds start to dominate…
- …with retail sales growing at fastest annual rate since 2007 and jobs PMI highest since July
- ADP private employment report shows steady improvement of the US labour market
This is not what a deflationary spiral is meant to look like
A lot of the focus on the eurozone economy has been on the risk of a deflationary spiral. This would be characterised by falling prices leading to consumers cutting back spending and further weakness in prices and so on. Yet the opposite dynamic appears to be in play. Falling prices – driven by the collapse in oil prices – are giving consumer spending a lift. Household purchasing power has improved and households have more to spend on other goods.
Reviving retail sales bode well for consumer demand
Indeed, retail sales rose by 0.3% in December after a 0.7% gain in November. Retail sales are a volatile number, but there are signs of an improved trend. Annual retail sales growth rose to 2.8% in December, the highest since March 2007. In the fourth quarter alone, retail sales were up by 0.9%. Meanwhile, car registrations were up by 2.1% last quarter, a sign that other areas of consumer demand are also doing well. This is why the oil-driven falls in consumer prices can be seen as ‘good deflation’.
Labour market is also improving
The fall in oil prices should be seen as a tax cut and a rather big one at that. It will provide support to consumer spending for a number of months, but then the effects will fade. For a sustained recovery, the labour market needs to improve. Fortunately, there are signs this is happening. The composite jobs PMI rose to 51 in January from 50.8 in December, the highest since July and before that September 2011.
Let’s not get carried away
Obviously, all this does not mean that the good times are back. The pace of job growth still looks relatively slow and wage growth is weak, reflecting high levels of unemployment. The output index of the composite PMI rose in January (to 52.6 from 51.4), but is consistent with a moderate recovery. So the data are far from upbeat. However, crucially, it looks like things are heading in the right direction. In addition, there are important tailwinds (the euro, oil, easing lending standards) which suggest growth will get stronger going forward.
Steady hiring in the US labour market
January’s private sector employment report, an appetizer for Friday’s employment data, increased by 213K, indicating that the labour market remains solid. This was a slightly slower increase than consensus expectations, but December’s report was revised up to 253K from a previously reported 241K.
Mid-sized firms take the lead this time
Mid-sized firms showed an increase of 95K jobs compared to 78K the previous month. All other firm segments showed a slight decline in employment gains. From an industry perspective, the largest expansion was in trade, transportation and utilities, increasing by 54K from 40k the previous month. The strong hiring in this segment could be related to the lower energy prices.
Our view on the labour market outlook remains positive
Despite the impact of the strong dollar on certain industries, we remain positive on the labour market outlook. On Friday, the employment report will be released and we expect an increase of 235K in total nonfarm payrolls. We expect to see some scaling back in employment in the energy-related industries. While hiring in this sector has grown rapidly it remains a small share of total US employment. Meanwhile, the unemployment rate should drop to 5.5% and we should see signs that wage growth is starting to firm.