Divergence between the goods and services sectors has become a key theme for many economies. Generally speaking, the former is being impacted by protectionist trade policies and slowing global growth, while the latter has held up fairly well, helping to quell fears of a broader downturn. That could change, of course, so we’re on the lookout for any signs of weakness in manufacturing spilling over into other sectors of the economy. Data out of Germany this week leaned in that direction. The country’s industrial slowdown has become entrenched, and the latest services PMI showed the rest of the economy’s resilience might be waning. But we expect next week’s economic data will show that dynamic isn’t at play in Canada and the US just yet.
In Canada, services output was up more than 2% year-over-year in the first half of 2019 while goods production was lower. Next week’s July GDP report should show much of the same. We look for a decent gain in services—supported by an ongoing rebound in housing—offsetting softness in the manufacturing and energy sectors, leaving GDP up 0.1% in the month. For what it’s worth, July’s payroll employment data released this week featured one of the strongest increases in services employment in the last decade, while hiring in the goods sector was limited. The latter will also be in the spotlight in next week’s trade data. We expect Canada’s merchandise trade deficit widened for a third consecutive month as support from the energy sector fades and the weaker global backdrop keeps a lid on non-energy exports. Services exports, which aren’t featured in next week’s data but account for 17% of Canada’s overall exports, have been consistently strong.
In the US, divergence between goods and services has been evident in the ISM surveys. September’s readings are likely to reverse some of the previous month’s moves—we look for the manufacturing index to edge back above 50, while non-manufacturing should be slightly lower. But that would still leave the broader narrative of slow manufacturing and resilient services intact. That theme has also been evident in job growth, where manufacturing has accounted for 1/4 of the slowing in payroll growth relative to last year. We look for a 160,000 job gain in September, in line with the year-to-date pace, which should be enough to push the unemployment rate down slightly. We’ll also have an eye on wage growth given the economy’s growing reliance on consumers.
