The ISM manufacturing index dropped to 48.2 in December

Week in review

Canada – Employment rose 23K in December according to the Labour Force Survey, better than consensus which was expecting an increase of just 10K. The jobless rate remained unchanged at 7.1% even though the participation rate fell a bit to 65.8%. The employment increase was due to selfemployment (+40K) which more than offset the decline in both the private sector (-9K) and government (-8K). Part-time employment was up 29K, while full time employment declined 6K. Total hours worked were up 0.3%. The goods sector jobs were essentially unchanged with gains in manufacturing and resources being offset by a drop in agriculture and construction. Services sector employment rose 23K driven by healthcare, educational services and finance among others but there was also weakness in accommodation/food services, trade and business services. Ontario (+35K) and Quebec (+13K) showed massive gains while all western provinces experienced declines.

The rebound in jobs observed in December is welcome but the details are less impressive. Most of the jobs added were parttime and in self-employment. With this morning’s release we get the full picture for 2015. Despite weak economic growth, the labor market has shown some resilience based on the LFS survey. In 2015, new jobs added were the highest in 3 years at 158K with a massive 96% being full-time explaining the resilience of the housing market. Services jobs more than offset weaknesses in the goods sector with its best performance in three years. However, we doubt the Canadian labor market will be able to match 2015’s performance this year especially if commodity prices do not stabilize.

The merchandise trade deficit narrowed to C$2 billion in November, from a revised C$2.5 billion deficit in the prior month (initially reported at –C$2.76 billion). The improvement was due to rising exports (+0.4%) and declining imports (-0.7%). Exports managed to rise despite slumping sales of energy (-6.6%) and aerospace products (-6.8%) which were more than offset by gains in autos, agriculture, metals, and forestry. The import decrease was due to energy, metals, electronic equipment and consumer goods. The energy trade surplus fell to C$3.8 billion, the lowest in over three years. However, the auto trade deficit narrowed a bit to C$ 0.6 billion (best since March 2008) which allowed the non-energy trade deficit to improve to C$5.8 billion, the best in four months. In real terms, Canada’s exports rose 0.6%, while imports dropped 1.4%.

United States – Non farm payrolls jumped 292K in December, much higher than the 200K expected by consensus. Adding to the good news were upward revisions to the prior months to reflect more complete data, which added 50K jobs. In December, the private sector added 275K jobs thanks to gains in services (+230K) and the goods sector (+45K). The increase in goods sector employment was due to construction again (+45K) and even manufacturing (+8K) which dwarfed a 12th consecutive drop in mining. The private services sector job gains were driven by health care and education (+59K), retailing, business services and leisure/hospitality. Government created 17K net new jobs with even some at the federal level. Average hourly earnings were flat. The employment diffusion index jumped to 64.4, the highest in a year.

Separately in the US, the household survey showed a 485K increase in employment for December. But the jobless rate remained unchanged at 5% as the participation rate moved up one tick to 62.5%. Full-time employment soared 504K. Both US employment reports were much better than expected. The job gains were impressive even more so considering the breadth of increases as evidenced by the highest diffusion index in twelve months. The services sector is booming and construction is also hiring in numbers, the latter perhaps helped by better fiscal space at the state and local levels (perhaps infrastructure projects). But not all is rosy. Mining continues to see declines in the aftermath of the oil price collapse. Moreover, wage inflation remains soft, i.e. hourly earnings are up just 2.5%.

For 2015 as a whole, the US economy managed to create 2.7 million jobs, of which 2.6 million were in the private sector. So, since 2014, the US has created 5.8 million jobs.

The ISM manufacturing index dropped to 48.2 in December, the lowest since June 2009. Consensus was looking for an increase. Production and new orders sub-indices were all in contraction territory, but less than a month ago. The new export orders sub-index jumped from 47.5 in November to 51.0 in December, recording its first reading above 50 since May 2015. However, the employment component dropped 3.2 points to 48.1. Prices paid fell further into contraction, at just 33.5, the lowest since April 2009. The non-manufacturing ISM index fell to 55.3 in December, below the 56 print expected by consensus. That’s the lowest non-manufacturing ISM since April 2014.

However, the business activity, new orders and employment sub-indices all rose being solidly into expansion territory.

Factory orders were down 0.2% in November after a downwardly revised 1.3% print in the prior month (previously reported as 1.5%). Durable goods orders were flat with both transportation and ex-transportation remaining unchanged in November. Excluding transportation, factory orders were down 0.3%. Factory shipments increased 0.2%, a first increase in 5 months. Factory inventories fell 0.3% in November and the inventory to shipments ratio remained at 1.35 months.

Construction spending fell 0.4% in November. The consensus was looking for an increase. The disappointment was compounded by a downgrade to the prior month to just +0.3% (from +1%). The decrease in November was driven by non-res construction (-0.8%) which dwarfed the increase in the residential sector (+0.2%).

The trade deficit narrowed to US$42.4 billion in November from US$44.6 billion in the prior month. The improvement in the trade balance was due to imports (-1.7%) falling faster than exports (- 0.9%). In real terms, exports fell 1.1%, while imports dropped 1.5%. The US trade data was better than expected, but the details of the report aren’t very reassuring. The “improvement” was due to imports falling faster than exports (the latter still hurting from the US dollar’s surge). The softer imports raise concerns about the sustainability of growth for domestic demand in the US.

World – In China, Caixin/Markit manufacturing PMI came in weaker than expected, slipping 4 ticks in December to 48.2. Adding to the negative tone of the report was the sharp drop in new export orders. Despite a first decline in three months, new export orders nonetheless remained well above the low reading seen earlier in 2015. The services purchasing manager`s index fell to 50.2 from 51.2 in November. The Caixin/Markit PMI composite index recorded its lowest reading since September 2015, falling to 49.4 in December from 50.5 the previous month.

In the Eurozone, the Markit composite purchasing manager`s index rose 1.1 points in December to 54.3, while the services index came in at 54.2 (+ 0.3 points) and the manufacturing index gained one tick to 53.2. In November, the Eurozone unemployment rate was 10.5%, down from 10.6% in the previous month. Retail trade volume decreased by 0.3% in the area between October and November. According to the Eurostat flash estimate, annual inflation was 0.2% in December and 0.9% excluding energy, food, alcohol and tobacco.

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