Carol Stone, CBE

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050106b.jpg" width="353">
Confidence surveys in the Euro-Zone showed some slight erosion in December, according to data issued today by the European Commission. The most widely followed measure, industrial confidence, slipped from -3 to -4 (balance of favorable less unfavorable survey responses). Consumer confidence held steady at -13, and the overall Economic Sentiment Index fell 0.6%.
Press reports tended to emphasize the declines in these data, which, though modest, came in on the short side of expectations. The industrial confidence gauge, for instance, was forecast at -3 by market economists. At the same time, a quick glance at both the accompanying chart and table shows that the latest confidence data are far from weak by recent historical comparisons. The &quot;decline&quot; in Economic Sentiment still left it above the 2004 average and more than 3% above the year-ago level. Industrial confidence, at -4 in December, was similarly firmer than the year&#39;s average of -5 and the December 2003 reading of -8. Thus, it would seem important not to give excessive weight to this latest one-month movement in judging prospects for the European economy early in the new year.
Another issue discussed in press reports as impacting economic sentiment and confidence is the exchange rate. Since trade has very significant role in European economic activity, some argue that these survey results reflect the recent strength in the euro, which would be expected to slow those economies. We agree that&#39;s a logical position, but the actual performance of exchange rate and sentiment data don&#39;t bear this out. There is virtually no correlation between the euro and either the economic sentiment index or industrial confidence. As evident in the graph, for some periods, it does appear that swings in the currency drive sentiment, while at other times, the causation must run the other way. The correlation ratio is negative overall in the last 15 years, but over the last three years, currency and sentiment have been positively related. This is another example that seemingly straightforward rules of thumb about economic relationships don&#39;t always pan out.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
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<tr>
<th scope="col" class="firstcol">&nbsp;</th>
<th scope="col">Dec 2004</th>
<th scope="col">Nov 2004</th>
<th scope="col">Oct 2004</th>
<th scope="col">Dec 2003</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Economic Sentiment (Long-Term Average = 100)*</td>
<td>100.3</td>
<td>100.9</td>
<td>101.4</td>
<td>97.2</td>
<td>100.1</td>
<td>93.5</td>
<td>94.4</td>
</tr>
<tr>
<td class="firstcol">Industrial Confidence (Balance)*</td>
<td>-4</td>
<td>-3</td>
<td>-3</td>
<td>-8</td>
<td>-5</td>
<td>-10</td>
<td>-11</td>
</tr>
<tr class="odd">
<td class="firstcol">Consumer Confidence (Balance)*</td>
<td>-13</td>
<td>-13</td>
<td>-14</td>
<td>-16</td>
<td>-14</td>
<td>-18</td>
<td>-11</td>
</tr>
<tr>
<td class="firstcol">Exchange Rate ($/Euro)</td>
<td>1.3408</td>
<td>1.2991</td>
<td>1.2490</td>
<td>1.2286</td>
<td>1.2433</td>
<td>1.1309</td>
<td>0.9449</td>
</tr>
</tbody>
</table>
</body>
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Confidence surveys in the Euro-Zone showed some slight erosion in December, according to data issued today by the European Commission. The most widely followed measure, industrial confidence, slipped from -3 to -4 (balance of [...]

European Industrial Confidence Edges Lower in December

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050106a.jpg" width="353">
Initial claims for unemployment insurance rose 43,000 to 364,000 last week following a deepened 10,000 decline the week prior. Consensus expectations had been for 333,000 claims.
The increase probably was influenced by the difficulties of seasonal adjustment during the Holiday season.
The four week moving average of initial claims rose slightly to 333,000 (-7.3% y/y).
During the last ten years there has been a (negative) 82% correlation between the level of initial claims and the y/y change in payroll employment.
Continuing claims for unemployment insurance rose sharply for the second consecutive week, up 61,000 following an upwardly revised 53,000 increase the week prior.
The insured rate of unemployment remained at 2.2%, where it&#39;s been since early October.
Today&#39;s speech by Federal Reserve Board Governor Donald L. Kohn titled &quot;Crisis Management: The Known, The Unknown and the Unknowable&quot; is available <a href="http://www.federalreserve.gov/boarddocs/speeches/2005/20050106/default.htm"> here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">01/01/05</th>
<th scope="col">12/25/04</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>364</td>
<td>321</td>
<td>0.0%</td>
<td>343</td>
<td>402</td>
<td>404</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,840</td>
<td>-14.0%</td>
<td></td>
<td>3,531</td>
<td>3,570</td>
</tr>
</tbody>
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</body>
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Initial claims for unemployment insurance rose 43,000 to 364,000 last week following a deepened 10,000 decline the week prior. Consensus expectations had been for 333,000 claims. The increase probably was influenced by the [...]

Initial Unemployment Insurance Claims Rose Sharply

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/041231a.jpg" width="353">
Initial claims for unemployment insurance rose 43,000 to 364,000 last week following a deepened 10,000 decline the week prior. Consensus expectations had been for 333,000 claims.
The increase probably was influenced by the difficulties of seasonal adjustment during the Holiday season.
The four week moving average of initial claims rose slightly to 333,000 (-7.3% y/y).
During the last ten years there has been a (negative) 82% correlation between the level of initial claims and the y/y change in payroll employment.
Continuing claims for unemployment insurance rose sharply for the second consecutive week, up 61,000 following an upwardly revised 53,000 increase the week prior.
The insured rate of unemployment remained at 2.2%, where it&#39;s been since early October.
Today&#39;s speech by Federal Reserve Board Governor Donald L. Kohn titled &quot;Crisis Management: The Known, The Unknown and the Unknowable&quot; is available <a href="http://www.federalreserve.gov/boarddocs/speeches/2005/20050106/default.htm"> here</a>.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">01/01/05</th>
<th scope="col">12/25/04</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>364</td>
<td>321</td>
<td>0.0%</td>
<td>343</td>
<td>402</td>
<td>404</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,840</td>
<td>-14.0%</td>
<td></td>
<td>3,531</td>
<td>3,570</td>
</tr>
</tbody>
</table>
</body>
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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050105e.jpg" width="353">
Services activity in the Euro-Zone slowed progressively throughout 2004, according the latest PMI surveys published by NTC Research in London. The December index, at 52.65, rose a minimal 0.07 point from November&#39;s 15-month low. Notably, though, the components covering new business and expectations gained more distinctly in the month, hinting that better activity rates may develop during this New Year. Employment had a modest increase and managed to remain slightly in positive territory (above 50%).
The performance was mixed by country, but all the countries maintained at least some degree of net growth, that is, an index level above 50%. Germany and Italy backtracked a bit, but France and Spain experienced nice advances.
The companion manufacturing survey, which was published Monday, had a modest 1.00-point increase in Europe. The November level, as with the services sector, was the lowest in more than a year. The December increase may suggest that the contractionary impact of the strong euro and high energy prices is beginning to ease.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol">PMI Services Index</th>
<th scope="col">Nov 2004</th>
<th scope="col">Dec 2004</th>
<th scope="col">Change</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Euro-Zone</td>
<td>52.58</td>
<td>52.65</td>
<td>+0.07</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Employment</td>
<td>50.52</td>
<td>50.62</td>
<td>+0.10</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; New Business</td>
<td>50.70</td>
<td>51.32</td>
<td>+0.62</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Expectations</td>
<td>61.39</td>
<td>63.16</td>
<td>+1.77</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Germany</td>
<td>51.32</td>
<td>50.96</td>
<td>-0.36</td>
</tr>
<tr class="odd">
<td class="firstcol">France</td>
<td>54.01</td>
<td>54.86</td>
<td>+0.85</td>
</tr>
<tr>
<td class="firstcol">Italy</td>
<td>53.10</td>
<td>52.69</td>
<td>-0.41</td>
</tr>
<tr class="odd">
<td class="firstcol">Spain</td>
<td>52.26</td>
<td>53.03</td>
<td>+0.77</td>
</tr>
<tr>
<td class="firstcol">Memo: PMI Euro-Zone Manufacturing</td>
<td>50.43</td>
<td>51.43</td>
<td>+1.00</td>
</tr>
</tbody>
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Services activity in the Euro-Zone slowed progressively throughout 2004, according the latest PMI surveys published by NTC Research in London. The December index, at 52.65, rose a minimal 0.07 point from November's 15-month low. [...]

European Industry Shows Modest Pickup in December After Months of Slowdown

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050105c.jpg" width="353">
Mortgage applications virtually dried up during the latest week according to the Mortgage Bankers Association (MBA) Survey. A 10.6% decline during the last week of 2004 capped off several weeks of decline, dropped total applications to the lowest level since June and pulled the average level of activity during the year down nearly one third versus 2003.
Applications to purchase weakened notably and fell 13.7% to the lowest level since February. Nevertheless, the average level of purchase applications rose 15.0% last year versus 2003. During the last ten years there has been a 59% correlation between the y/y change in purchase applications and the change in new plus existing home sales.
Refi&#39;s fell a lesser 5.7% w/w but that followed a 7.9% decline the prior week and put an end to a year which saw applications to refinance halve versus 2003.
The effective interest rate on a conventional 30-year mortgage fell slightly to 5.94% versus an average 6.05% during 2004. The effective rate on a 15-year mortgage was 5.43% last week versus the 2004 average of 5.47%.
The Mortgage Bankers Association surveys between 20 to 35 of the top lenders in the U.S. housing industry to derive its refinance, purchase and market indexes. The weekly survey accounts for more than 40% of all applications processed each week by mortgage lenders. Visit the Mortgage Bankers Association site <a href="http://www.mbaa.org">here</a>.
The minutes of the latest Federal Open Market Committee meeting can be found <a href="http://www.federalreserve.gov/fomc/minutes/20041214.htm"> here</a>.
&quot;What Determines the Credit Spread?&quot; from the Federal Reserve Bank of San Francisco is available <a href="http://www.frbsf.org/publications/economics/letter/2004/el2004-36.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
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<thead>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">01/01/05</th>
<th scope="col">12/25/04</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>605.7</td>
<td>677.4</td>
<td>1.0%</td>
<td>735.1</td>
<td>1,067.9</td>
<td>799.7</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>417.3</td>
<td>483.8</td>
<td>4.0%</td>
<td>454.5</td>
<td>395.1</td>
<td>354.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,701.3</td>
<td>1,803.9</td>
<td>-3.1%</td>
<td>2,366.8</td>
<td>4,981.8</td>
<td>3,388.0</td>
</tr>
</tbody>
</table>
</body>
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Mortgage applications virtually dried up during the latest week according to the Mortgage Bankers Association (MBA) Survey. A 10.6% decline during the last week of 2004 capped off several weeks of decline, dropped total applications [...]

Total Mortgage Applications Down Sharply

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050105d.jpg" width="353">
According to Challenger, Gray &amp; Christmas, job cut announcements reported in December rose 4.3% from November and ended the year up 17.2% from a year earlier. Despite these gains, total job cut announcements in 2004 fell 15.9% versus 2003, down for the third consecutive year and were nearly half the peak level in 2001.
During the last ten years there has been an 86% (inverse) correlation between the three month moving average of announced job cuts and the three month change payroll employment.
Job cut announcements differ from layoffs. Many are achieved through attrition, early retirement or just never occur.
Increases in job cut announcements were widespread last month, although they halved in the E-Commerce &amp; Dot com industry and fell also in electronics and services.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S3/@S301/@S301.HTM">Challenger, Gray &amp; Christmas</a></th>
<th scope="col">Dec</th>
<th scope="col">Nov</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Announced Job Cuts</td>
<td>109,045</td>
<td>104,530</td>
<td>17.2%</td>
<td>1,039,175</td>
<td>1,236,426</td>
<td>1,431,052</td>
</tr>
</tbody>
</table>
</body>
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According to Challenger, Gray & Christmas, job cut announcements reported in December rose 4.3% from November and ended the year up 17.2% from a year earlier. Despite these gains, total job cut announcements in 2004 fell 15.9% versus [...]

Challenger Layoff Count Rose Further

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050105a.jpg" width="353">
The Business Activity Index for the non-manufacturing sector rose last month for the third straight period to 63.1 from 61.3 in November according to the Institute for Supply Management. Consensus expectations had been for little change at 61.0.
Since the series&#39; inception in 1997 there has been a 55% correlation between the Business Activity Index and the q/q change in GDP services plus construction.
The new orders index recovered most of the prior month&#39;s slight decline but at 60.3 remained well off the July high of 66.4.
The employment sub index was about unchanged at 54.9 which also is down from the high of 57.4 set in June. Since the series&#39; inception in 1997 there has been a 60% correlation between the level of the ISM non-manufacturing employment index and the m/m change in payroll employment in the service producing plus the construction industries.
Pricing power remained firm as indicated by the rise in the price index to 71.4, though the index has varied in a range between 67 and 74 since the spring.
ISM surveys more than 370 purchasing managers in more than 62 industries including construction, law firms, hospitals, government and retailers. The non-manufacturing survey dates only to July 1997, therefore its seasonal adjustment should be viewed tentatively.
Business Activity Index for the non-manufacturing sector reflects a question separate from the subgroups mentioned above. In contrast, the NAPM manufacturing sector composite index is a weighted average five components.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF03/@EF03.HTM">ISM Nonmanufacturing Survey</a></th>
<th scope="col">Dec</th>
<th scope="col">Nov</th>
<th scope="col">Dec &#39;03</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Business Activity Index</td>
<td>63.1</td>
<td>61.3</td>
<td>58.0</td>
<td>62.5</td>
<td>58.1</td>
<td>55.1</td>
</tr>
<tr>
<td class="firstcol">Prices Index</td>
<td>71.4</td>
<td>71.0</td>
<td>60.3</td>
<td>68.9</td>
<td>56.7</td>
<td>53.9</td>
</tr>
</tbody>
</table>


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The Business Activity Index for the non-manufacturing sector rose last month for the third straight period to 63.1 from 61.3 in November according to the Institute for Supply Management. Consensus expectations had been for little [...]

ISM Non-Manufacturing Index Up Again

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050105b.jpg" width="353">
Unit sales of light vehicles jumped 12.3% to 18.40M in December, the first m/m gain in three months. The jump was to the highest selling rate in over two years. Consensus expectations had been for sales of 16.9M.
Sales of light trucks surged 11.7% as both domestic (+11.9% m/m, +0.7% y/y) and imported (+10.2% m/m, +14.6% y/y) trucks benefited from aggressive price discounts.
Total auto sales jumped 13.0% m/m. Sales of domestic autos paced the gain with a 16.2% rise but domestic car sales in 2004 fell for the fifth straight year, down 26.3% since the recent peak in 1994. Sales of imported cars rose 5.7% in December and by 3.0% for the full year.
Imports&#39; share of the US market for new vehicles slipped to 20.0% in December but for the full year was about stable with 2003 at 19.9%.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED09/@ED0901/@ED0901.HTM">Light Vehicle Sales (SAAR, Mil. Units)</a></th>
<th scope="col">Dec</th>
<th scope="col">Nov</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>18.40</td>
<td>16.39</td>
<td>5.3%</td>
<td>16.88</td>
<td>16.69</td>
<td>16.81</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Autos</td>
<td>8.30</td>
<td>7.34</td>
<td>9.2%</td>
<td>7.49</td>
<td>7.62</td>
<td>8.07</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Trucks</td>
<td>10.11</td>
<td>9.05</td>
<td>2.4%</td>
<td>9.39</td>
<td>9.01</td>
<td>8.74</td>
</tr>
</tbody>
</table>
</body>
</html>

Unit sales of light vehicles jumped 12.3% to 18.40M in December, the first m/m gain in three months. The jump was to the highest selling rate in over two years. Consensus expectations had been for sales of 16.9M. Sales of light trucks [...]

U.S. Light Vehicle Sales Spurred by Incentives

USD/EUR exchange rate uncoupling from interest rate differential

Widespread downgrading of 2025 GDP outlook

Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

Wage growth slowing in the US and Euro area; elevated and sticky in the UK

Stagflation-lite: Blue Chip forecasts below-trend growth and elevated inflation

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

US and Japan ended 2024 on solid ground in contrast to Europe

US economy expected to outperform other major economies in 2025

Only modest evidence of AI-related surge in US productivity growth

Previous Trump tariffs fading. A boost from new tariffs ahead?

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

Economic activity is picking up in the US but remains lackluster abroad

Policy uncertainty has surged since the US national elections.

Recent turnaround in US economic surprises leading to increases in rate-cut expectations

The outlook has brightened in the US, while it has dimmed for other major economies

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

Blue Chip forecasters look for further significant monetary easing apart from Japan

Recent rise in global supply chain pressures could augur a pickup in global inflation pressures

Underperforming German economy generating increased policy uncertainty relative to Europe and the US

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The U.S. trade deficit in goods and services (BOP basis) in March grew to $140.5 billion after narrowing slightly to $123.2 billion in February, revised from $122.7 billion, after widening to $130.7 billion in January according to the U.S. Census Bureau. A $136.7 billion deficit was expected by the Action Economics Forecast Survey. Exports rose 0.2% (6.7% y/y) in March after increasing 2.8% in February. This was accompanied by a 4.4% rise (27.1% y/y) rise in imports which came after m/m stability in February. In Q1’25, the deficit grew to an average $131.4 billion, after rising to an average $83.3 billion in Q4’24.

The trade deficit in goods (BOP basis) widened to a record $163.2 billion in March from $147.9	 billion in February, revised from $147.0 billion. Goods exports (customs value) rose 1.4% (7.0% y/y) in March, after increasing 3.6% in February. The latest increase reflected an 8.2% (8.4% y/y) surge in auto exports which came after a 12.7% strengthening. A 3.5% (4.0% y/y) gain occurred in industrial supplies & materials exports which followed a 5.1% rise. Foods, feeds & beverage exports rose 6.6% (1.4% y/y) after declining in four of the prior five month. Working lower, capital goods exports fell 2.5% (+13.9% y/y) in March after a 4.8% increase and nonauto consumer goods exports were off 1.1% (+3.4% y/y) in March after a 2.4% gain.

Imports of goods increased 5.5% (31.4% y/y) in March after a 0.2% February easing. Imports of nonauto consumer goods imports surged 27.9% (56.0% y/y) following a 3.1% February gain. Auto imports rose 6.6% (8.7% y/y) after a 1.2% rise. Capital goods imports rose 4.2% (22.5% y/y) following a 1.1% rise. Foods, feeds & beverage imports eased 0.4% (+11.1% y/y) following a 2.0% weakening. Industrial supplies & materials imports declined 12.4% (+39.5% y/y) after weakening 4.6% in February. Petroleum imports by end-use rose 1.5% (-4.2% y/y) after a 2.2% decline. Nonpetroleum imports increased 6.0% (32.5% y/y) after slipping 0.4% in February.

The inflation-adjusted goods trade deficit (customs value) deepened to $150.9 billion in March from $136.9 billion in February. Real exports rose 1.6% (5.3% y/y) after a 3.0% February increase, while real imports rose 5.8% (29.8% y/y) in March following a 0.5% February slip.

The services trade surplus narrowed to $23.0 billion in March after increasing to $23.8 billion in February. It reached a peak of $25.7 billion in November of last year. Service exports fell 0.9% (+5.7% y/y) after a 0.8% decline in February. Construction services exports rose 1.0% (37.7% y/y) after increasing 2.0% in February. Travel services exports fell 7.1% (-3.7% y/y) and financial exports increased 0.9% (7.3% y/y). Transport exports rose 3.1% (2.4% y/y). Service imports eased 0.1% (+10.8% y/y) in March following a 0.8% gain. Maintenance & repair services declined 1.5% (+32.1% y/y) while imported transport services increased 3.1% (2.4% y/y). Imported travel services fell 7.1% (-3.7% y/y) while charges for use of intellectual property rose 0.2% (14.4% y/y).

The U.S. goods trade deficit with China narrowed to a seasonally adjusted $24.8 billion in March from $26.6 billion in February. Exports to China declined 8.2% (-10.5% y/y) while imports weakened 7.2% (-2.7% y/y). The deficit with the European Union deepened to a record $48.3 billion in March from $30.9 billion in February. Exports rose 10.9% (14.5% y/y) while imports soared 34.0% (65.4% y/y). The deficit with Japan deepened to $5.8 billion from $5.2 billion in February. Exports rose 1.8% (8.8% y/y) and imports rose 6.4% (9.9% y/y).

The international trade data, including relevant data on oil prices, can be found in Haver’s **USECON** database. Detailed figures on international trade are available in the **USINT** and **USTRADE** databases. The expectations figures are from the Action Economics Forecast Survey in **AS1REPNA**.

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- Goods deficit grows as imports surge ahead of tariff imposition.
- Exports edge higher, led by autos.
- Petroleum product imports fall as crude oil prices decline.

U.S. Trade Deficit Deepens to Record in March

Tian Yong Woon

This week, we focus on trade developments between the US and major Asian economies. Early indications coming out of US-India trade talks seem encouraging, with terms such as “forward most-favoured-nation” for the US and “zero-for-zero” tariffs appearing in news reports — terms which, if enacted, would represent a significant win for the US. India stands to benefit greatly as well if key exports to the US, such as pharmaceuticals (chart 1), receive substantial tariff relief. The benefits could be strongly mutual if a deal also grants the US greater access to India’s large auto consumer market, particularly for major US electric vehicle (EV) producers, given that EV adoption in India remains at a very early stage (chart 2).

Turning to South Korea, discussions also appear to be progressing at a healthy pace, although details remain limited and ongoing domestic political challenges continue to hinder substantive breakthroughs. Nonetheless, the South Korean won has shown signs of stabilisation, while local equity markets have remained buoyant (chart 3). Recent trade data for April has also provided some investor relief, as weak exports to the US were more than offset by a strong performance in semiconductor shipments (chart 4).

In Japan, the race to secure a trade deal with the US is well underway, with automotive exports expected to be a key focal point given their significance to Japan’s economy and the US being a major export destination (chart 5). China, however, remains a notable outlier, with formal trade talks with the US not yet underway. Still, the US-China trade relationship continues to be the most closely watched, given its scale and potential impact on global growth and trade dynamics. While markets await China’s official April trade data, early indicators such as port activity already suggest a decline in bilateral trade flows (chart 6).

**US-India trade talks**
US-India trade discussions have reportedly been progressing rapidly, with both sides having already finalized in April the terms of reference for talks, setting the stage for formal negotiations. One early sign of favourable momentum is India’s possible offering of a “forward most-favoured-nation” clause to the US. This would ensure the US always receives the most favourable tariff terms, ahead of any other trade partner. If enacted, this would be a significant win for the US and a major leap forward in the US-India trade relationship. Another reported breakthrough involves India’s reported proposal of “zero-for-zero” tariffs on steel, auto components, and pharmaceuticals—offered on a reciprocal basis up to a certain quantity. If agreed, this would be mutually beneficial, especially as pharmaceuticals remain one of the US economy’s key imports from India, as shown in chart 1. On a separate note, and more recently, India’s phone exports to the US have reportedly gained prominence. With steep US tariffs on China, firms like Apple are increasingly incentivised to accelerate production shifts to India.

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Additionally, India’s proposed “zero-for-zero” tariff plan for auto parts may galvanise US access to India’s large domestic auto market, which has remained comparatively insulated due to high import tariffs. Another area to watch in the trade talks is electric vehicle (EV) imports, especially given US EV giant Tesla’s continued interest in expanding into the Indian market. That said, EV adoption in India remains in its early stages by many measures. While India has an immense middle class with future sales potential, EVs accounted for only about 2% of new cars sold in 2023, as shown in chart 2. This is well below levels seen in other Asian economies like China, or leaders in this space like Norway, where nearly all new cars sold are EVs. Challenges remain in unlocking the domestic Indian market—particularly around affordability and the underdeveloped state of EV infrastructure.

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**US-South Korea trade talks**
Discussions on the US-South Korea trade front also appear to be progressing at a steady pace, with technical talks reportedly having concluded in Washington last week. However, details remain limited, and full-scale negotiations have not yet begun. Complicating matters is South Korea’s domestic political landscape. With the country heading into a snap presidential election on June 3, Vice Industry Minister Park has said there is no chance of a comprehensive deal being reached before then. Still, both sides have committed to working toward an agreement before the expiration of Trump’s 90-day reciprocal tariff pause on July 8. In financial markets, the won continues to swing but remains above its year-to-date lows (chart 3). Meanwhile, South Korean equities have been lifted by a softening in trade rhetoric from both the US and China, as well as optimism around the US-South Korea talks.

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Turning to the hard trade data, South Korea’s more complete April numbers offered some initial relief to investors. The economy still managed to post moderate export growth, surprising many, despite a nearly 7% y/y decline in exports to the US, as shown in chart 4. One of the key drivers was semiconductors, which recorded double-digit y/y growth for the second consecutive month. However, these figures likely do not yet reflect the full initial impact of the steep mutual tariffs between the US and China. Firmer indications may emerge in the coming months. By then, though, attention will likely have shifted toward the outcome of US trade talks with key partners, as the end of its 90-day reciprocal tariff pause draws near.

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**US-Japan trade talks**
Turning to Japan, there is a sense of cautious optimism, with Japan’s chief trade negotiator Akazawa expressing hope for a US-Japan trade deal by June, following the second and most recent round of talks held in Washington last week. A key point of interest is whether Japan can negotiate an exemption from the current 25% automotive tariffs imposed by the US. This is especially significant given the importance of the US as a destination for Japanese auto exports, as shown in chart 5, and the central role the sector plays in Japan’s broader manufacturing economy. Also worth noting is a recent clarification by Japan’s Finance Minister Kato, who walked back earlier remarks and stated that Japan will not use the sale of US Treasuries as a bargaining tool. The clarification may help defuse a potential point of friction between the two sides as trade discussions continue.

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**US-China trade developments**
Turning to US-China trade developments — while progress here has lagged, this relationship remains the most closely watched, given its potentially large impact if meaningful movement occurs. Recent messaging from both sides has softened, stepping back from the fiery exchanges and tariff escalations seen earlier in April, offering some interim relief for investors. China has reportedly exempted certain US imports from tariffs, including specific pharmaceutical and industrial chemical products. However, on US-China trade talks, they remain at a very early stage, with China merely “evaluating” the prospect of negotiations with the US. This suggests we are still far from anything resembling a formal deal. Investors are now closely watching for first-round effects of US tariffs, which are expected to appear in China’s April trade numbers due later this week. Early signs point to a slowdown. For example, vessel traffic at the Los Angeles–Long Beach port remains at range lows, hinting at reduced shipments from China.

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Asia

Economic Letter from Asia: Art of the Deal

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The U.S. ISM Services PMI rose to 51.6 during April, after falling sharply to 50.8 in March from 53.5 in February, according to today’s report by the Institute for Supply Management. The reading indicated service sector expansion for the tenth consecutive month, although the rate of expansion has slowed significantly. The index hit a recent high of 55.8 in October of last year and remains below the all-time high of 67.5 in November 2021. The Action Economics Forecast Survey expected 50.2 for April.

Haver Analytics constructs a composite index combining the services index and the manufacturing index released on Thursday. This index rose to 51.2 in Apri from 50.6 in March. The latest figure remains above its June low of 49.1.

Amongst the services component series, the employment index led last month’s improvement in the overall index. It rose to 49.0 after falling sharply to 46.2 in March. Higher employment was reported by a slightly improved 14.6% (NSA) of respondents while a lessened 16.4% reported a decline. The new orders index rose to 52.3 after falling to 50.4 in March. A higher 22.4% (NSA) of respondents reported a rise in orders while a lessened 15.3% reported a decline. Reporting slower delivery speeds, the supplier delivery series edged up to 51.3 in April after falling to 50.6 in March. Working lower, the business activity series declined to 53.7 after rising to 55.9 in March. A higher 26.2% (NSA) of respondents reported improved activity while a lessened 14.0% reported deterioration.

On the inflation front, the prices index surged to 68.9 in April after easing to 62.8 in March. A greatly increased 39.6% (NSA) of respondents reported higher prices while a lessened 1.9% reported lower prices. The index was increased from its December 2022 low 53.1 and stood at its highest level since October 2022.

Additionally, the new export orders index increased to 48.6 (NSA) in April following a decline to 45.8 in March from 52.1 in February. Just 14.8% of survey respondents reported higher exports while an increased 17.7% reported a decline. The imports index plummeted to 44.3 last month from 52.6 in March. A greatly lessened 4.7% of respondents reported higher imports while a doubled 16.2% reported a decline. The inventory change index jumped to 53.4, a six-month high. The order backlog index edged up to 48.0 in April after falling sharply to 47.4 in March. A lessened 12.2% of respondents reported higher backlogs while a fewer 16.2% reported a decline. These series are not seasonally adjusted and not included in the ISM Services PMI total.

The ISM Services PMI is a composite index consisting of four equally weighted diffusion indexes: Business Activity, New Orders, Employment, and Supplier Deliveries. A reading above 50 indicates expansion in the services sector, while below 50 suggests	 contraction. Supplier Deliveries is the only ISM index that is inversed; a reading above 50 indicates slower deliveries. The ISM figures are available in Haver's **USECON** database, with additional detail in the **SURVEYS** database. The expectations figure from Action Economics is in the **AS1REPNA** database.

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- Total index remains near nine-month low.
- Employment, new orders & supplier deliveries edge up. Business activity weakens. 
- Prices Index strengthens to roughly two-year high.

U.S. ISM Services PMI Edges Higher in April; Prices Strengthen

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Nonfarm payrolls increased 177,000 (1.2% y/y) during April after rising 185,000 in March, revised from 228,000, and 102,000 in February, revised from 117,000. Expectations had been for a 130,000 rise in the Action Economics Forecast Survey. The latest figure left the three-month average change at 155,000 in April, down from 232,000 in January.

Average hourly earnings rose 0.2% during April after unrevised increases of 0.3% in March and 0.2% in February. Earnings growth of 3.8% y/y was below the 5.9% high in March 2022.

The unemployment rate, measured in the household survey, held m/m at an expected 4.2% in April, and compared to 4.1% in February and 4.0% in January. It reached a low of 3.4% in April 2023. The unemployment rate, including employees working part-time for economic reasons plus all marginally-attached workers, eased to 7.8% in April from 7.9% in March.

In the **establishment survey**, private-sector employment rose 167,000 (1.2% y/y) after a 170,000 March increase. Factory sector jobs edged 1,000 lower (-0.7% y/y) following a 3,000 gain. Construction sector employment increased 11,000 (1.7% y/y), after rising 7,000 in March.

Private service-producing sector employment increased 156,000 (1.4% y/y) in April after improving 161,000 in March. Increases varied greatly amongst service sector categories. Private education & health sector employment rose 70,000 (3.4% y/y) last month following a 74,000 March increase. Leisure & hospitality employment rose 24,000 (1.3% y/y) after a 38,000 gain. Trade, transportation & utilities rose 32,000 (0.9% y/y) in April following a 25,000 March increase. Professional & business services employment rose 17,000 (-0.1% y/y) following a 3,000 rise while temporary help employment rose 3,600 (-3.9% y/y) following a 2,700 decline. Financial activities employment improved 14,000 (1.2% y/y) after a 6,000 gain. The number of information sector jobs held steady (-0.4% y/y) last month after falling 2,000 in March.

Government sector payrolls rose 10,000 (1.3% y/y) last month after increasing 15,000 in March. The number of local government jobs increased 13,000 (1.4% y/y) following a 17,000 gain. State government employment rose 6,000 (1.8% y/y) following a 2,000 March increase but federal government payrolls fell 9,000 (-0.3% y/y), the third consecutive monthly decline.

Private-sector average hourly earnings rose 0.2% (3.8% y/y) in April after increasing 0.3% in March. Earnings in the goods-producing sector eased 0.1% (+4.0% y/y) following a 0.6% gain. Earnings in construction rose 0.3% (3.6% y/y), after a 0.2% rise but factory sector earnings declined 0.3% (+4.3% y/y) after surging 0.8% in March. In the private services-sector, earnings rose 0.2% (3.7% y/y) in April for the third straight month. Information sector pay increased 1.0% (5.2% y/y) last month after easing 0.1%, and financial activities earnings rose 0.5% (4.3% y/y) for the second straight month. Trade, transportation & utilities sector pay increased 0.4% (3.4% y/y) after 0.6%. Professional & business sector earnings increased 0.1% (4.4% y/y) after 0.2% in March. Leisure & hospitality earnings held steady (+3.8% y/y) following a 0.6% March increase.

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The length of the average workweek held steady at 34.3 hours in April. The workweek in the goods-producing sector eased to 39.8 hours from 40.0 hours. The construction sector average workweek eased to 39.0 hours from 39.3 hours while the factory sector workweek moved lower to 40.0 hours from 40.2. The average workweek in the private service sector held at 33.2 hours. Professional & business service hours fell to 36.3 hours from 36.4 while trade, transportation & utilities hours improved to 34.3 from 34.0 hours. Private education hours rose slightly to 32.8, but leisure & hospitality held steady at 25.5 hours.

In the **household survey**, the unemployment rate held at 4.2% in April as employment rose 436,000 and the size of the labor force increased 518,000. The labor force participation rate edged up to 62.6% last month from 62.5% in March. It remained below the high of 63.3% early in 2020. The rate for teenagers declined to 36.9%. For workers aged 20-24, the rate held steady at 72.1%, up from 71.8% six months earlier. For workers aged 25-54 the rate rose to 83.6%, a five-month high. For individuals 55 and over, the rate improved to 38.4% in April.

The employment/population ratio for all workers in April rose to 60.0%. It remained below the peak reading of 61.1% in February, 2020 just prior to the pandemic.

The employment and earnings data are collected from surveys taken each month during the week containing the 12th day of the month. The labor market data are contained in Haver's **USECON** database. Detailed figures are in the **EMPL** and **LABOR** databases. The expectations figures are in the **AS1REPNA** database.

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- Job growth spreads across most sectors.
- Earnings growth trend decelerates.
- Jobless rate holds steady.

U.S. Job Growth Is Firm in April but March Gain Is Lessened

Winnie Tapasanun

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Total factory orders rose a slightly less-than-expected 4.3% m/m in March after rises of 0.5% in February and 1.8% in January, data from the U.S. Census Bureau showed. A 4.5% m/m March increase had been expected in the Action Economics Forecast Survey. The March reading was the third successive monthly rise and the largest since July 2024. The year-on-year rate accelerated to 6.0% in March, the highest since November 2022, from 2.3% in February. Notably, orders for nondefense aircraft & parts soared 139.0% in March following a 7.4% drop in February and a 92.9% surge in January. Factory orders excluding defense rose 4.8% (5.9% y/y), the largest of three straight m/m/ rises, after a 0.4% February increase. Factory orders excluding the transportation sector fell 0.2% (+1.1% y/y), the first m/m fall since August, after rising 0.3% in February, January and December.

Durable goods orders jumped 9.2% (11.9% y/y) in March, the third consecutive m/m gain and the biggest since July 2024, on top of a 0.8% increase in February (matching +9.2% m/m in the advance report on April 24). The March jump reflected m/m orders increases of 27.1% (the largest m/m surge since July 2024; 31.2% y/y) in transportation equipment, 1.1% (4.9% y/y) in primary metals, 0.5% (-0.4% y/y) in furniture & related products, 0.1% (2.5% y/y) in fabricated metal products, and 0.1% (0.9% y/y) in machinery. To the downside, durable goods orders for computers & electronic products (-1.3%; +2.7% y/y) and electrical equipment, appliances & components (-1.0%; +4.2% y/y) declined m/m in March.

Nondurable goods orders, which equal nondurable goods shipments, fell 0.3% (+0.4% y/y) in March, the first m/m fall since September, after a 0.1% uptick in February. The March fall reflected m/m drops of 2.4% (-9.3% y/y) in petroleum & coal products and 0.9% (-1.2% y/y) in apparel. To the upside, the following nondurable goods shipments rose m/m in March: leather & allied products (1.5%; 8.6% y/y), beverage & tobacco products (0.7%; 5.8% y/y), paper products (0.6%; 2.3% y/y), printing (0.3%; 3.8% y/y), textile mills (0.3%; 0.8% y/y), chemical products (0.2%; 5.4% y/y), plastics & rubber products (0.2%; 0.4% y/y), food products (0.1%; 1.8% y/y), and textile products (0.1%; 2.1% y/y).

Total shipments slipped 0.1% (+2.0% y/y) in March, the first m/m easing since October, after a 0.7% increase in February. Excluding transportation, shipments were virtually unchanged m/m (+1.1% y/y) in March following six straight m/m gains. Shipments of durable goods industries inched up 0.1% (3.8% y/y) in March, the smallest of four consecutive m/m increases, after a 1.3% advance in February. This reflected m/m durable goods shipments rises of 1.2% (5.6% y/y) in primary metals, 0.9% (0.1% y/y) in furniture & related products, 0.8% (-0.2% y/y) in nonmetallic mineral products, 0.4% (0.0% y/y) in machinery, 0.3% (1.8% y/y) in fabricated metal products, 0.2% (4.5% y/y) in computers & electronic products, 0.2% (-2.1% y/y) in wood products, and 0.1% (3.0% y/y) in electrical equipment, appliances & components. In contrast, durable goods shipments for transportation equipment (-0.5%; +7.3% y/y) and miscellaneous durable goods (-0.1%; +2.9% y/y) fell m/m in March following three successive m/m increases.

Unfilled orders rose 2.0% (2.3% y/y) in March, up for the eighth month in nine, after a 0.1% uptick in February. Excluding transportation, unfilled orders dipped 0.1% (+0.7% y/y) in March, the first m/m easing since May 2024, after holding steady in February. Backlogs of durable goods rose 2.0% (2.3% y/y) in March, reflecting m/m rises of 3.1% (3.1% y/y) in transportation equipment and 0.2% (2.4% y/y) in electrical equipment, appliances & components.

Inventories edged up 0.1% (0.9% y/y) in March, the fifth straight m/m increase, after rising at the same pace in the prior two months. Excluding transportation, inventories were up 0.1% (0.5% y/y) in March, the fifth consecutive m/m rise. Durable goods inventories ticked up 0.1% (1.0% y/y) in March after holding steady in February and January; nondurable goods inventories edged up 0.1% (0.8% y/y), the fifth successive m/m increase.

The factory sector data are available in Haver’s **USECON** database. The Action Economics Forecast Survey is in the **AS1REPNA** database.

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- March manufacturers’ new orders +4.3% m/m; +6.0% y/y, highest since Nov. ’22.
- Durable goods orders (+9.2%) jump m/m, while nondurable goods orders (-0.3%) and shipments (-0.1%) decline m/m.
- Transportation equipt. orders +27.1% m/m, w/ a 139.0% m/m surge in nondefense aircraft & parts orders.
- Unfilled orders +2.0%, the eighth m/m rise in nine months.
- Inventories +0.1%, the fifth consecutive m/m increase.

Economy in Brief: January 2005

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European Industrial Confidence Edges Lower in December

Initial Unemployment Insurance Claims Rose Sharply

Initial Unemployment Insurance Claims Rose Sharply

European Industry Shows Modest Pickup in December After Months of Slowdown

Total Mortgage Applications Down Sharply

Challenger Layoff Count Rose Further

ISM Non-Manufacturing Index Up Again

U.S. Light Vehicle Sales Spurred by Incentives