06 December 2022

Weekly global economic update

What’s happening this week in economics? Deloitte’s team of economists examines news and trends from around the world.

Ira Kalish

Ira Kalish

United States

Week of December 5, 2022

Central bankers talk the talk

  • In the world of central bankers, words can matter more than actual policy implementation. Investors sit on the edge of their seats awaiting the latest pronouncements by central bankers, which might provide hints about the future direction of policy. That fact was on display recently. John Williams, president of the Federal Reserve Bank of New York, and one of the three most important officials in the Federal Reserve system, said that the Fed is likely to continue raising its benchmark interest rate and that, as a result, the unemployment rate is likely to reach between 4.5 and 5.0% (it is currently 3.7%). He said that “inflation is far too high, and persistently high inflation undermines the ability of our economy to perform at its full potential.” He added that he expects the Fed to start cutting rates in 2024, assuming that inflation is coming down by then. Investors might have reasonably hoped for a different viewpoint. Inflation has decelerated lately by more than expected. This caused hope that the Fed might soon pause its tightening of monetary policy, thereby limiting damage to the economy. Williams’ comments suggest otherwise.

Meanwhile, other Fed leaders have said that the cost of not tightening remains higher than the cost of tightening. Fed Vice Chairman Lael Brainard said as much recently. In addition, Loretta Mester, president of the Federal Reserve Bank of Cleveland, said that “to be so far away from price stability really distorts investment decisions and peoples’ investments in their own education, and that has implications for the long-run health of the economy. If we allow inflation to continue at high levels, inflation expectations could start moving up again in the long-run horizon. And that would then raise the cost of getting back to price stability.” She placed considerable emphasis on the Fed’s role in anchoring expectations of inflation. This is important because, if expectations get out of hand, it can lead to changes in behavior that exacerbate inflation. Thus, Mester’s view appears to be that there is greater risk in pausing and avoiding recession than in continuing to tighten and causing a recession.

This viewpoint is not unique to the Federal Reserve. Christine Lagarde, president of the European Central Bank (ECB), said that the ECB is “not done” raising interest rates and that high inflation “still has a way to go.” Although eurozone inflation has not evidently peaked, there is hope that this might happen soon given a sharp decline in natural gas prices and evidence of easing supply chain difficulties. Yet Lagarde is clearly not yet moved by these events. She said that, although the ECB has already raised interest rates rapidly, they remain too low. Specifically, she said that current monetary policy remains accommodative and that only further rate hikes will likely suppress aggregate demand in the economy. That is because rates remain historically low. In addition, she noted that, although spot gas prices have fallen sharply, prices on futures markets have not. Thus, energy disruption remains a risk.

Favorable US economic data could lead to shift in monetary policy

  • US economic data for October indicates a surprisingly resilient economy combined with an easing of inflation. Employment continued to grow at a healthy pace in November, faster than most analysts anticipated. Wages decelerated. In addition, real (inflation-adjusted) consumer income increased in October. That, combined with a further decline in savings, led to a robust increase in real consumer spending, especially spending on durable goods that had previously been declining. It is likely that, in part, this reflected strong automobile sales now that the semiconductor shortage is easing. (I should add, for those interested, that my new car is ready for pickup now that the missing chip has been delivered. Thus, my own automotive transaction will be completed next week.)

First, a look at the employment report. There are two reports; one based on a survey of establishments, the other based on a survey of households. The establishment survey found that 263,000 new jobs were created in November, less than the 284,000 created in October, but still a healthy pace of expansion. Employment is up 3.2% from a year earlier. Most of the job growth was in services. Yet some services sectors experienced a loss of jobs. This included retail (especially department stores) as well as transportation and warehousing. Our own sector of professional and business services had very modest job growth. There was strong growth for leisure and hospitality, healthcare, and government.

The report also found that average hourly earnings for all workers were up 5.1% in November versus a year earlier, the second slowest pace of increase since 2021. This affirms that, although the labor market remains unusually tight (as evidenced by a high vacancy rate—see below), it is not generating an acceleration in wages that could be inflationary. On the contrary, annual wage gains are decelerating and remain well below inflation. On the other hand, wages were up 0.6% from the previous month, the strongest monthly gain since January 2022. This contradictory data suggests caution in interpretation.

Meanwhile, the government released its Job Openings and Labor Turnover Survey (JOLTS) for October. It found that the number of job openings fell from 10.687 million in September to 10.334 million in October. The vacancy rate (the share of available jobs not being filled) fell from 6.5% in October to 6.3% in November. The number and rate of vacancies is down sharply from a year ago, but both remain very high compared to recent history. Thus, the job market remains historically tight, but does show signs of easing.

The vacancy rates fell sharply for manufacturing, professional and business services, and for the Federal government. The vacancy rate increased for mining, wholesale trade, retail trade, and financial services while it remained unchanged for restaurants and hotels.

The separate survey of households, which includes self-employment, found that the size of the labor force declined modestly in November and that total employment declined as well. The unemployment rate remained unchanged at 3.7%, one of the lowest rates in the last half century.

Next, let’s look at the data on income and spending. In October, real disposable personal income increased 0.4% from the previous month. In addition, the household savings rate fell from 2.4% in September to 2.3% in October. The result was that real consumer expenditures increased 0.5% in October versus the previous month. Notably, this included a 2.7% increase in spending on durable goods, a 0.3% increase for nondurables, and a 0.2% increase for services.

The government also reported data on the Federal Reserve’s favorite measure of inflation, the personal consumption expenditure deflator, or PCE deflator. This measure was up 6.0% in October versus a year earlier, the lowest annual rate since December 2021. Prices were up 0.3% from the previous month. Excluding volatile food and energy prices, core prices were up 5.0% in October versus a year earlier, down from 5.2% the previous month. Core prices were up 0.2% from the previous month. This is consistent with data from the consumer price index which also indicates an easing of inflation. It is probably safe to say that inflation in the United States has already peaked.

The favorable data on jobs as well as income and spending means that the likelihood of an imminent recession for the United States has eased. Modest wage gains, combined with improvement in headline and core inflation in October, bode well for an easing of the pace of monetary tightening. Indeed, Fed Chairman Powell said last week that monetary tightening could be reduced soon. Specifically, he said that “it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.” On the other hand, he said that to defeat inflation, the Fed will need to keep rates at an elevated level “for some time.” Thus, the Fed is not about to reverse policy. Rather, Powell evidently feels that, given the trajectory of inflation, the Fed has probably gone almost far enough.

In response to Powell’s comments and recent economic data, bond yields in the United States have been declining. In fact, the yield on the 10-year Treasury bond is currently at the lowest level since mid-September, or roughly 3.5%. Recall that the 10-year yield had reached 4.27% as recently as the first week in November. In part, the decline in bond yields reflects a decline in investor expectations of inflation as indicated by the so-called breakeven rate. Investors evidently feel confident that inflation will come down quickly. The 10-year breakeven rate is now 2.36%. This means investors believe that inflation will average 2.36% over the coming decade, close to the Fed’s target and well below the current rate of inflation. 

Inflation in the eurozone stops accelerating

  • Inflation in the eurozone might be peaking. The latest numbers for November from the European Union (EU) suggest as much, although it is likely too early to draw a firm conclusion. Investors reacted with cautious optimism to the latest data, driving up equity and bond prices modestly on the assumption that the latest data portends a slightly slower pace of monetary policy tightening by the European Central Bank (ECB). 

Here are the numbers: the EU reports that, in November, consumer prices in the eurozone were up 10.0% from a year earlier, down from 10.6% in October. Prices were down 0.1% from the previous month, the first such decline since July 2021. The easing of inflation was entirely due to a deceleration in energy prices. Still, in November, energy prices were up 34.9% from a year earlier. 

Meanwhile, excluding volatile food and energy prices, core prices were up 5.0% from a year earlier, the same as in October following many months of acceleration. 

In addition, inflation decelerated in November in many important European countries. This included Belgium, Germany, Ireland, Greece, Austria, Portugal, and the Netherlands. Inflation remained stable in France and Greece but accelerated in Finland. The deceleration of inflation in Spain was especially pronounced, but core inflation in Spain accelerated.

Despite early evidence of a possible easing of eurozone inflation, the ECB remains committed to further tightening of monetary policy. Christine Lagarde, president of the ECB, is not yet ready to declare that inflation has peaked and worries that an inflationary psychology is taking hold. Moreover, she worries that the recent improvement due to a drop in energy prices could easily reverse. Still, investors evidently interpreted the news as boding a slightly less onerous tightening of monetary policy. 

Meanwhile, although the eurozone economy has decelerated and will likely soon slip into recession (if it hasn’t already), there are favorable factors that are limiting the damage to the regional economy. These include large government expenditures on energy subsidies for households and businesses and a greater-than-expected decline in energy prices. 

Global manufacturing industry contracts

  • The global manufacturing industry continued to contract in November, according to the latest purchasing managers’ indices (PMIs) from IHS Markit. A PMI is a forward-looking indicator meant to signal the direction of activity in the industry. It is based on sub-indices such as output, new orders, export orders, employment, pricing, inventories, pipelines, and sentiment. A reading above 50 signals rising activity. The higher the number, the faster the growth—and vice versa.

The global manufacturing PMI from Markit fell from 49.4 in October to 48.8 in November, indicating a sharper decline in activity. This was the lowest number in 29 months and the third consecutive month in which activity declined. The worsening of the number in November was largely due to a sharp drop in the United States and Japan. Both countries went from growth in October to decline in November.

Of the 30 countries polled by Markit, all but six had PMIs below 50, indicating declining activity. The six countries with above-50 PMIs were, in order, India, Russia, Kazakhstan, Australia, Thailand, Mexico, and Indonesia. The lowest PMIs belonged to Czech Republic, Taiwan, Poland, and Brazil. With the exception of India, all major countries indicated declining activity, although some saw a higher PMI than in October, indicating slower decline. The PMIs were 47.7 for the United States, 46.5 for the United Kingdom, 47.1 for the eurozone, 49.4 for China, 49.0 for Japan, and 41.6 for Taiwan. On the other hand, the PMI for ASEAN was 50.7, entirely due to growth in Thailand and Indonesia. All other ASEAN countries experienced decline, especially Myanmar.

Markit commented that “the decline in output was accompanied by a tick down in new orders as rising inventories have put the brakes on production. There was some positive news on the price front, however, as price pressures continued to ease. The delivery times index also improved, consistent with the signal from high frequency shipping cost indicators that show supply chain conditions normalizing.”

Cover image by: Sylvia Chang

Deloitte Global Economist Network

The Deloitte Global Economist Network is a diverse group of economists that produce relevant, interesting and thought-provoking content for external and internal audiences. The Network’s industry and economics expertise allows us to bring sophisticated analysis to complex industry-based questions. Publications range from in-depth reports and thought leadership examining critical issues to executive briefs aimed at keeping Deloitte’s top management and partners abreast of topical issues.

Ira Kalish

Ira Kalish

Chief Global Economist, Deloitte Touche Tohmatsu


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