Euro Macro: Fall in temporary contracts adds to signs of upcoming slowdown in job growth – One of the few areas of strength in the eurozone has been the labour market. Indeed, in September, the ECB’s Governing Council noted that ‘robust employment growth and increasing wages continue to underpin the resilience of the euro area economy’. Indeed, employment was up by 1.2% yoy in Q2, down from its peak growth rates, but still healthy. Meanwhile, unemployment continues to drop. It was down to 7.4% in August from 7.5% in July, and down around 0.6 percentage points over the last year. Unfortunately, the labour market is a lagging indicator and the sharp slowdown in the economy is likely to become increasingly visible. Indeed, a number of good leading indicators of the labour market suggest a more significant slowdown is imminent. The employment index of the composite PMI fell to 51.4 in September, from 51.7 in August and compared to a level of 55.2 a year ago. It is consistent with job growth slowing to around 0.6% yoy in the next few months. Meanwhile, temporary employment is pointing to a sharper deterioration in labour market prospects over the next year. Temporary employment leads overall employment as it is the easiest and quickest way to adjust staff levels on the both the way up and the way down. Temporary employment has slowed sharply over the last year (in Q2 it contracted by 2% yoy) and it points to a sharp slowdown in total employment growth over the next year, as well as a significant rise in unemployment. This will make the slowdown in the eurozone economy more protracted than the ECB and consensus expects, in our view. (Nick Kounis)
US Macro: Strength in consumption looks unsustainable – Retail sales came in weaker than expected at -0.3% mom, while ‘core’ retail sales (ex-autos and gasoline) came in at 0.0% (ABN/consensus for both measures: +0.3%). However, upward revisions to August sales comfortably offset this weakness, particularly the ex-autos/gas measure, which was revised up to 0.4% from 0.1%. Indeed, retail sales for the full quarter expanded at a robust 6.0% annualised pace, down only modestly from the 7.7% growth registered in Q2. This implies Q3 private consumption growth of 3.0-3.5%, down from 4.7% in Q2. Such growth rates are unsustainable, in our view, particularly given the slowdown in monthly average payrolls gains, which have fallen to +161k in the year to date, down from +223k in 2018.
Looking ahead, we continue to expect the knock-on effects of a weaker manufacturing sector to drive a broader slowdown in the US, primarily via lower jobs growth. We expect payrolls growth to slow further over the coming months, with the monthly average perhaps dipping below +100k in 2020. While decent wage growth will cushion some of the blow, it will not fully offset the hit to aggregate income growth. As a result, we expect private consumption – 70% of the US economy – also to slow by the end of 2019 and into 2020. Combined with continued sluggishness in investment (which the ISM new orders index suggests if anything could intensify) and weaker government spending, we expect quarterly annualised GDP growth to slow to sub-trend rates of 1-1.5% by Q4 2019/Q1 2020. (Bill Diviney)