US labor market signals persistent softness
US labor market indicators weaken amid a government shutdown, UK growth stays muted despite GDP revisions, and Japan’s new Prime Minister signals modest stimulus as global uncertainty lingers.
Weekly highlights
Soft
Very weak
In line with expectations
Modest
Five-month low
Sharp slowdown
Solid sentiment
Very strong
8% fall in vehicle sales
US: Consistent messages of labor market softness
Please see here our special commentary on the US government shutdown.
We have been arguing for quite a while that the US labor market is not nearly as robust as the unemployment rate makes it appear. The release of the premier employment report has been delayed due to the government shutdown that began on October 1, but other reliable signals offer a consistent message of labor market softness. The Conference Board labor differential slipped 3.3 points to 7.8, the second-largest monthly decline this year and the lowest level since February 2021. Meanwhile, the hire rate in the JOLTS report dipped to 3.2%, only a hairbreadth above the Covid low and otherwise the lowest since 2012. The “slow hire” risks turning into a “no hire” narrative if this persists.
Yes, it will be good for the Fed to have updated labor market data in hand before the October 29 meeting (and they most likely will). However, there is more than enough information already available to justify another 25-basis-point cut at that meeting. If anything, we are watching with some anxiety to see how the data will reflect the end of the deferred retirement deal which about 75,000 federal employees took. In addition to the shutdown itself, this, too, will create data noise in coming weeks. Amid all the noise, however, the message is consistent and clear: the labor market needs some help from the Fed.
UK: Growth expected to stay weak
Final Q2 GDP data reveal that economic growth slowed to 0.3% in the second quarter, down from 0.7% at the start of the year. This modest rise was mainly fueled by government spending, as consumer spending held steady and business investment fell by 1.1%. Recent revisions, incorporating improved methodologies and an updated base year, led to a slight upward adjustment of GDP figures but did not alter the overall trend of subdued post-pandemic growth. The savings ratio climbed to 10.7%, indicating increased consumer saving; nevertheless, there is cautious optimism that rising sentiment could eventually boost spending, despite ongoing inflationary pressures and slow wage growth.
Looking ahead, the UK economic expansion is likely to remain subdued, with continued strain on household incomes and possible tax increases expected in the forthcoming Autumn Budget. Additionally, some households will face higher mortgage payments as fixed-rate deals come to an end.
September brought further hurdles for manufacturing, as the PMI slipped to a five-month low of 46.2 amid soft demand both domestically and abroad. Temporary factors, such as auto plant closures, affected activity, though these challenges are predicted to be short-lived. US tariffs and tax hikes remained barriers for exporters and domestic sales, prompting manufacturers to cut staffing costs. Although price pressures eased somewhat, it remains too early to determine more broad-based trends, with core goods inflation likely to remain stable for now.
The services sector echoed this slowdown toward quarter’s end, reflecting muted consumer confidence, deferred business investment, and lower export orders. Activity reached its own five-month low as new orders and employment dropped amid persistent uncertainty. As cost pressures diminish and the labor market weakens, the Bank of England may be influenced to consider a more accommodative monetary policy approach.
Japan: New leader
Sanae Takaichi was elected president of the ruling Liberal Democratic Party (LDP) over the weekend and is expected to succeed Shigeru Ishiba as Prime Minister following a formal Diet session on October 15. The LDP-Komeito coalition lost its majority in both the Upper and Lower houses over the past year, and Takaichi aims to restore public confidence.
Takaichi supports procyclical fiscal policy but has indicated her support for fiscal prudence during elections by removing a consumption tax cut from her policy pitch. The new government may adopt a moderately expansive approach, particularly as she prioritizes measures to address rising prices “first”. However, we do not anticipate a large supplementary budget package at this time, given the LDP’s limited political capital. Japan’s prudent fiscal stance remains notable, with the country recording the smallest increase in government debt among major economies since the pandemic.
We also do not foresee immediate risks to the Bank of Japan’s (BoJ) policy normalization. An October rate hike is plausible with current odds at 30%, and a hike is still expected within the next four months.
President Donald Trump is expected to visit Japan shortly after Takaichi assumes office, potentially highlighting Japan’s $550 billion investment commitment under the US trade agreement. Recent uncertainty over who holds ‘absolute discretion’ on the investment prompted Takaichi to clarify that she will not overturn the agreement but will assert Japan’s position should any issues arise.
The Q3 Tankan Survey by the BoJ showed resilient business sentiment for a second consecutive quarter, with strong capital expenditure plans, despite being conducted prior to the recent US trade deal. These findings are likely to reinforce the BoJ’s confidence in pursuing a near-term rate hike.
Sector-wise, sentiment improved modestly in automobiles and machinery, while weakening in accommodation services. Corporate profit expectations remained subdued, particularly in manufacturing, suggesting firms may continue absorbing elevated tariffs. Nonetheless, the capital expenditure diffusion index (DI) remained robust, with large enterprises planning a 12.5% increase in capex, supporting our view that investment will drive medium-term growth.
Corporate inflation expectations edged up, with firms anticipating a 2.4% rise over the next five years, up 0.1 percentage points. This gradual increase should support a firmer inflation outlook into next year. Governor Ueda maintained a cautiously optimistic tone, supported by growing confidence that US tariffs may not significantly disrupt Japan’s economic trajectory.
On the consumer side, retail sales declined by 1.1% MoM in August, missing consensus expectations. The drop was mainly due to a 7.8% contraction in vehicle sales, the lowest since December 2022. Other categories showed mixed results: home appliances rose by 2.6%, general merchandise by 2.9%, while food sales fell by 0.9%, indicating households may be adjusting spending in response to inflationary pressures.
Catch the whole story...
There's more to the Weekly Economic Perspectives in PDF. Take a look at our Week in Review table – a short and sweet summary of the major data releases and the key developments to look out for next week.