Weekly global economic update

Week of November 4, 2024

• US economic performance remains stellar
• US jobs market faces temporary constraints
• Eurozone economy picks up speed
• Eurozone inflation continues to ease
• Germany resists EU tariffs on Chinese EVs
• Mexico increasingly central to the US-China conflict

US economic performance remains stellar

• In the third quarter, the US economy continued to exhibit considerable strength, and the GDP report incorporated evidence of declining inflation. There are a few negative signs, but not sufficient to drive a significant slowdown.

The US government reported that, in the third quarter, real GDP grew at an annualized rate of 2.8% from the previous quarter. This was a bit slower than the 3% growth in the second quarter, but certainly far faster than the long-term ability of the economy to grow. 

Notably, real consumer spending grew at a stellar rate of 3.7%. This included an increase in spending on durable goods of 8.1%, nondurable up 4.9%, and services up 2.6%. Meanwhile, business investment remained robust. Nonresidential fixed asset investment grew at a rate of 3.3%. This included a 4% decline in investment in structures. However, this was more than offset by an 11.1% increase in investment in equipment but only a 0.6% increase in intellectual property. On the other hand, residential investment fell at a rate of 5.1%, the second consecutive quarterly decline.

Also, exports of goods and services grew rapidly at 8.9%, led by goods more than services. Imports were up at a rate of 11.2%, evidence of strong domestic demand. Finally, government purchases were up 5%, led by defense spending at 14.9%. Overall, the report indicated underlying strength. 

Going forward, there are a couple of reasons to expect real GDP growth to decelerate modestly. First, the delinquency rate on credit card debt is now relatively high. This will likely restrain the ability of consumers to continue making purchases of durable goods. Second, the GDP report indicated that real disposable personal income grew slower than real consumer spending. Consequently, the personal savings rate fell. This cannot go on forever. Third, the restrictiveness of monetary policy has resulted in a sharp increase in business bankruptcies. Although monetary policy is now easing, it remains tight. Bankruptcies can hurt investment and employment. Also, growing government debt, especially if the next US president implements a fiscal expansion, if perceived by investors as unsustainable, could lead to higher borrowing costs, thereby hurting investment. Finally, implementation of more trade restrictions would reduce consumer purchasing power and might ignite higher inflation, leading to tighter monetary policy than otherwise.   

Lastly, the GDP report included quarterly data on the Federal Reserve’s favorite measure of inflation: the personal consumption expenditure deflator, or PCE-deflator. In the third quarter, it was up from the previous quarter at an annualized rate of only 1.5%. This included declining prices of goods offset by only a 3% increase in the price of services. Moreover, the core PCE-deflator (excluding energy and food) was up at a rate of only 2.2%. 

• Following on its strong GDP report for the third quarter, the US government released data on personal income and consumer spending for September. It is the most recent picture we have of the consumer economy. Moreover, it includes data on the Federal Reserve’s favorite measure of inflation. Let’s look at the details.

In September, real (inflation-adjusted) disposable income (after taxes) was up only 0.1% from the previous month. Yet real consumer spending was up 0.4%. This means that households saved less in September than in August. That is, the personal savings rate fell from 4.8% of income in August to 4.6% in September. The savings rate has been steadily falling since a recent peak of 5.4% in January. It is not clear how long this trend will continue. The September rate is the lowest since last December. However, both real disposable income and real consumer spending were up 3.1% in September versus a year earlier. Thus, in the longer term, income and spending have moved together at a healthy pace.

Regarding consumer spending, real spending on durable goods was up 0.4% in September from the previous month, nondurables up 0.8%, and services up 0.2%.

Finally, the government released data on the Fed’s favorite measure of inflation. The PCE-deflator was up 2.1% in September versus a year earlier, the lowest level of headline inflation since February 2021. There was a decline in the prices of goods that was more than offset by a rise in the prices of services. Specifically, the price of durable goods was down 1.9% from a year earlier while the price of nondurables was down 0.8%. Meanwhile, the price of services was up 3.7%, the same as in July but down substantially from the recent past.

One reason for the low level of headline inflation was a sharp decline in energy prices in September. When volatile food and energy prices are excluded, the core PCE-deflator was up 2.7% from a year earlier, roughly unchanged over the past five months. Thus, underlying inflation has stabilized at a level slightly higher than the Fed’s 2% target. Still, the target is not meant to be a ceiling, but rather an average. As such, inflation appears to be under control. 

This latest report offers further support for the soft-landing scenario. Consumer spending remains healthy, although income growth has decelerated. Meanwhile underlying inflation is close to the Fed’s target. Consequently, it is reasonable to expect a continued easing of monetary policy, but at a moderate pace. It is also reasonable to expect some deceleration in economic activity. However, a recession is very unlikely.

US jobs market faces temporary constraints

• The October employment report from the US government indicated almost no job growth. Yet investors were not disturbed as there were special circumstances that led to the weak job growth. Specifically, there were two hurricanes in the Southeast region of the United States. In addition, there was a major labor strike at Boeing. The result was slow job growth of only 12,000. Yet this was not unexpected. Just a few weeks ago, Fed Governor Christopher Waller said that the hurricanes and strike “may reduce employment growth by more than 100,000 this month.” Evidently that is what happened. Moreover, investors failed to react, with bond yields and equity prices not moving significantly today. Let’s look at the details.

The US government produces two reports on the job market: one based on a survey of establishments; the other based on a survey of households. The establishment survey found that only 12,000 new jobs were created in October. More importantly, job growth in the previous two months was revised downwardly. Regarding the October numbers, there was a decline in manufacturing employment of 47,000, largely due to the strike at Boeing and its spillover effect on suppliers. In addition, employment fell modestly at retailing, leisure and hospitality, and transportation and warehousing. These declines were likely related to the hurricanes in the Southeast. Employment fell 47,000 in the professional services industry, mainly due to a drop in hiring at temporary help services, also related to the hurricane. Meanwhile, health care employment was up 52,300 while government employment increased by 40,000. 

The establishment survey also found that average hourly earnings were up 4% in October versus a year earlier, a jump from the previous month and the biggest increase since July. The acceleration in wages was likely due to the disruption from the hurricane, which reduced employment in low wage professions such as retailing and leisure and hospitality. The loss of these jobs boosted the average wage of existing workers. Even at 4%, wage growth is not a big contributor to inflation, especially given that productivity has been rising, which offsets the impact on prices from rising wages.

Also, the separate survey of households, which includes data on self-employment, found a sharp decline in the number of people participating in the labor force. In addition, employment declined commensurately, thereby allowing the unemployment rate to remain steady at 4.1%. This implies stability of the job market. 

It will take at least another monthly jobs report or more before we can make reasonable inferences about the state of the job market. 

• In the United States, the job openings rate continued to decline in September. This is the share of available jobs that are unfilled. It is a measure of the tightness or looseness of the job market. During the pandemic, the job openings rate soared as demand for labor remained robust while the supply of labor fell due to declining participation and immigration. In the past two years, the rate of participation by prime working-age people (25–54) has increased to the highest rate in a quarter century. Plus, immigration has risen. The result has been a sharp rise in the supply of labor, thereby causing the job openings rate to fall from a peak of 7.4% in March 2022 to 4.5% in September 2024. This is the lowest level since December 2020.

Notably, the current rate of 4.5% is relatively high compared to the prepandemic period. Prior to the pandemic, the highest job openings rate on record was 4.8%. Thus, one can reasonably state that the job market remains relatively tight. That, in turn, is consistent with the strong job growth seen in September. 

By industry, the highest job openings rate was in professional services (our industry), at 6.2%. Other high rates were found in hotels and restaurants as well as health care. Low rates were found in wholesale trade, retail trade, and manufacturing.

Eurozone economy picks up speed

• GDP growth in the Eurozone picked up speed in the third quarter. Real GDP was up 0.4% from the previous quarter, the fastest growth since the third quarter of 2022. To compare it to US growth, this was an annualized rate of 1.7% while US growth was 2.8%. The rebound is most welcome after a long period of sub-par growth. Now, with the European Central Bank (ECB) loosening monetary policy, there is hope that growth in 2025 will be significantly better than in 2024. 

By country, quarterly real GDP growth in the third quarter was 0.2% in Germany, 0.4% in France, 0% in Italy, and a stunning 0.8% in Spain. The latter is the fastest-growing large economy in Europe. Meanwhile, the slow growth in Germany remains a concern given Germany’s role as an engine of growth for Europe. Germany evidently has longer-term issues, especially given that real GDP is no higher than just prior to the pandemic. Finally, France’s strong growth was likely attributable to the impact of the Olympic Games during the summer.  

Eurozone inflation continues to ease

• Inflation in the Eurozone rebounded slightly in October but remained quite low. The consumer price index was up 2% in October versus a year earlier. While up slightly from the surprisingly low 1.7% inflation in September, it otherwise was the lowest level since June 2021. October prices were up 0.3% from the previous month. For the ECB, the rise to 2% should not be concerning. After all, the ECB’s target is 2%. It has evidently been achieved. 

Meanwhile, energy prices were down sharply. Thus, when volatile food and energy prices are excluded, core prices were up 2.7% in October versus a year earlier. Core prices were up only 0.2% from the previous month. In addition, while the prices of non-energy goods were up only 0.5%, prices of services were up 3.9% from a year earlier, the same as in September and not down much over the past five months. 

The persistence of service inflation, likely related to rising wages in a tight labor market, has been a source of concern for the ECB. Moreover, the absence of labor productivity growth in Europe has meant that wage gains quickly turn into price increases. Still, the ECB has begun to ease monetary policy, likely concerned that persistent tight monetary policy will weaken the economy. On the other hand, the relatively strong growth of GDP in the third quarter means that the Eurozone has achieved low inflation while the economy has started to rebound.

• One of the factors that held back Eurozone growth in recent years was reticence on the part of consumers. Despite having accumulated a large pool of excess savings during the pandemic, households have been very cautious. The European Union (EU) reports that, in the second quarter, real disposable household income per capita increased 0.4% from the previous quarter. Yet real consumer spending per capita increased only 0.1%. As a result, the savings rate increased from 15.3% in the first quarter to 15.6% in the second quarter. The savings rate increased in Germany, France, and Italy but fell in Spain. If, going forward, European households have greater confidence in the economy, they might start to boost the growth of spending—especially as interest rates come down.  

Germany resists EU tariffs on Chinese EVs

• The EU is implementing severe tariffs on imported electric vehicles (EVs) from China. This is an effort to protect Europe’s burgeoning EV industry, especially given the very low prices charged by Chinese producers. The EU says that Chinese producers are subsidized by their government. The Chinese producers say that they have achieved scalar efficiency through massive investment. Consequently, their costs are relatively low.

Meanwhile, Germany’s car makers are not happy. They indicate that the EU tariffs create the risk of a trade war. Moreover, they fear that such a war might be waged against them. Major German car makers are active in the Chinese market and want to retain their access to that market. Yet weak domestic demand in both Germany and China have led to declining earnings. A trade war could make things much worse. 

Mexico increasingly central to the US-China conflict

• Mexico is fast becoming an important factor in the ongoing tension between the United States and China. Mexico is party to the USMCA (US Mexico Canada Agreement), a free trade agreement that is the successor to NAFTA. As such, producing goods in Mexico offers easy access to the vast US market. Meanwhile, the United States has imposed substantial trade restrictions on China and could impose more going forward. Consequently, an increasing number of Chinese companies are setting up shop in Mexico, hoping to gain access to the US market. Moreover, they and other companies are taking advantage of Mexico’s relatively low labor costs and low costs of transporting goods to the United States. 

The Mexican Chinese connection has been growing rapidly. Chinese foreign direct investment (FDI) into Mexico was US$3.77 billion in 2023, double that of the year before. Also, by 2020, 21.2% of Mexican exports to the US had Chinese content, up from just 5% in 2002. To gain free access to the US market, the USMCA requires a minimum level of domestic content for Mexican exports. A Chinese company cannot simply reexport Chinese made goods to the United States through Mexico without facing tariffs.

As global companies reduce exposure to China and shift production to Mexico, there has been a shift in trade patterns. Today, Mexico is the largest exporter to the United States, having superseded China just last year. Going forward, the USMCA must be renegotiated in 2026. The role of Chinese companies in Mexico is likely to be a major issue in these negotiations. This must be of concern to Chinese companies currently investing in Mexico as well as those already active in Mexico. If the renegotiation results in restrictions on US-Mexico trade involving Chinese-made products, there would have to be a major unravelling of existing supply chains.