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/060308d.jpg" width="353">
The Bank of Japan&#39;s Monetary Policy Board is in the midst of a two-day meeting that began Wednesday, March 8 and will conclude Thursday, March 9. It is widely expected that the Bank will initiate a shift away from its nearly five-year-old policy of &quot;quantitative ease&quot;, in which it sets a target for the amount of reserves in the banking system, regardless of banks&#39; demands for reserves. In the parlance of US monetary policy, the Japanese central bank has pumped an enormous amount of &quot;excess reserves&quot; into the banks. This target has recently been &yen;30-35 trillion each month-end.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060308e.jpg" width="353">
In the spring of 2004, this policy began, in an indirect way, to show results. The decline in the banks&#39; loans, which had become quite steep in 1998, started to moderate. Progressively smaller declines have been reported since. Finally, in data released just Wednesday morning Tokyo time, the first dramatic sign of some success appeared through a 0.2% year-on-year increase in bank loans, the first such positive year-on-year figure since September 1996, nearly nine-and-a-half years ago.
The magnitude of the easing strategy can be seen in a ratio of reserves to GDP: 5.3% in 2005, compared with just 0.6% in the mid-1990s. By contrast, in the US, banks&#39; reserves at Federal Reserve Banks have recently been a miniscule 0.4% of GDP, fairly comparable to the historic Japanese amount. More straightforward is a simple comparison of dollar amounts. US reserves at the Fed were about $44.7 billion in February, while Japan&#39;s banking system reserves were $260.1 billion, nearly 6 times as much.
Prices have finally stabilized on a year-to-year basis, as we have described here recently for Japan&#39;s core CPI, and now bank lending, which underwent a terrible wrenching owing to repeated recessions and the plunge in real estate values, has also finally turned upward, albeit by only a marginal amount. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/JAPAN/@J1/@J1.HTM">JAPAN</a></th>
<th scope="col">Feb 2006</th>
<th scope="col">Jan 2006</th>
<th scope="col">Dec 2005</th>
<th scope="col">Dec 2004</th>
<th scope="col">Dec 2003</th>
<th scope="col">Dec 2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Loans at Domestic Banks Mo. Avg, Bil.&yen;</td>
<td>383,337.3</td>
<td>384,191.2</td>
<td>383,955.8</td>
<td>385,178.6</td>
<td>298,020.4</td>
<td>419,652.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Yr/Yr % Change</td>
<td>+0.2</td>
<td>0.0</td>
<td>-0.3</td>
<td>-3.1</td>
<td>-5.1</td>
<td>-4.7</td>
</tr>
<tr class="odd">
<td class="firstcol">BOJ Reserves, EOM, Bil.&yen;</td>
<td>30,240.8</td>
<td>30,574.3</td>
<td>30,093.8</td>
<td>31,466.6</td>
<td>27,797.7</td>
<td>17,695.6</td>
</tr>
</tbody>
</table>
</body>
</html>

The Bank of Japan's Monetary Policy Board is in the midst of a two-day meeting that began Wednesday, March 8 and will conclude Thursday, March 9. It is widely expected that the Bank will initiate a shift away from its nearly five- [...]

Bank Lending "Grows" in Japan; First Time in More Than 9 Years

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060308a.jpg" width="353">
During early March the total number of mortgage applications recovered barely half of the prior week&#39;s decline. The 0.7% increase followed a 1.2% drop the prior week and left March&#39;s opening level 1.8% below the February average which fell 6.3% m/m.
The effective interest rate on a conventional 30-year mortgage rose to 6.55%, the sharpest w/w increase since late January. The effective rate on a 15-year mortgage also jumped, by twelve basis points to 6.27% and reached the highest level since mid-2002. Interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities and during the last ten years there has been a (negative) 82% correlation between purchase applications and the effective rate on a 30-Year mortgage.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060308b.jpg" width="353">
Purchase applications fell another 0.4% w/w after a 10.2% during all of February. The early March level is down 1.9% from the February average.
Evidence of housing market weakness was contained in the recent report from the National Association of Realtors that the number of homes for sale rose 2.4% during January. The increase reversed most of a decline during the prior month and left the number of pending home sales up by more than one-third from the year earlier level.
At the current sales level the months&#39; supply of homes on the market rose to 5.3, a record high for total home sales and the supply of single family homes on the market rose to a three year high of 5.2.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060308c.jpg" width="353">
During the last ten years there has been a 50% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales.
Applications to refinance rose 2.6% following little change the week earlier and began March 1.2% below the February average which fell 2.0% from January.
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>.
Postal Savings in Japan and Mortgage Markets in the U.S. from the Federal Reserve Bank of San Francisco is available <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-03.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<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">03/03/06</th>
<th scope="col">02/24/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>575.6</td>
<td>571.5</td>
<td>-18.3%</td>
<td>708.6</td>
<td>735.1</td>
<td>1,067.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>399.0</td>
<td>400.8</td>
<td>-11.7%</td>
<td>470.9</td>
<td>454.5</td>
<td>395.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,614.4</td>
<td>1,573.5</td>
<td>-25.8%</td>
<td>2,092.3</td>
<td>2,366.8</td>
<td>4,981.8</td>
</tr>
</tbody>
</table>
</body>
</html>

During early March the total number of mortgage applications recovered barely half of the prior week's decline. The 0.7% increase followed a 1.2% drop the prior week and left March's opening level 1.8% below the February average which [...]

Mortgage Applications Ticked Up But Interest Rates Jumped

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060308a.jpg" width="353">
During early March the total number of mortgage applications recovered barely half of the prior week&#39;s decline. The 0.7% increase followed a 1.2% drop the prior week and left March&#39;s opening level 1.8% below the February average which fell 6.3% m/m.
The effective interest rate on a conventional 30-year mortgage rose to 6.55%, the sharpest w/w increase since late January. The effective rate on a 15-year mortgage also jumped, by twelve basis points to 6.27% and reached the highest level since mid-2002. Interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities and during the last ten years there has been a (negative) 82% correlation between purchase applications and the effective rate on a 30-Year mortgage.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060308b.jpg" width="353">
Purchase applications fell another 0.4% w/w after a 10.2% during all of February. The early March level is down 1.9% from the February average.
Evidence of housing market weakness was contained in the recent report from the National Association of Realtors that the number of homes for sale rose 2.4% during January. The increase reversed most of a decline during the prior month and left the number of pending home sales up by more than one-third from the year earlier level.
At the current sales level the months&#39; supply of homes on the market rose to 5.3, a record high for total home sales and the supply of single family homes on the market rose to a three year high of 5.2.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060308c.jpg" width="353">
During the last ten years there has been a 50% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales.
Applications to refinance rose 2.6% following little change the week earlier and began March 1.2% below the February average which fell 2.0% from January.
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>.
Postal Savings in Japan and Mortgage Markets in the U.S. from the Federal Reserve Bank of San Francisco is available <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-03.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<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">03/03/06</th>
<th scope="col">02/24/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>575.6</td>
<td>571.5</td>
<td>-18.3%</td>
<td>708.6</td>
<td>735.1</td>
<td>1,067.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>399.0</td>
<td>400.8</td>
<td>-11.7%</td>
<td>470.9</td>
<td>454.5</td>
<td>395.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,614.4</td>
<td>1,573.5</td>
<td>-25.8%</td>
<td>2,092.3</td>
<td>2,366.8</td>
<td>4,981.8</td>
</tr>
</tbody>
</table>
Bank Lending "Grows" in Japan; First Time in More Than 9 Years 
by <a href="/comment/Stone.html">Carol Stone</a> March 8, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060308d.jpg" width="353">
The Bank of Japan&#39;s Monetary Policy Board is in the midst of a two-day meeting that began Wednesday, March 8 and will conclude Thursday, March 9. It is widely expected that the Bank will initiate a shift away from its nearly five-year-old policy of &quot;quantitative ease&quot;, in which it sets a target for the amount of reserves in the banking system, regardless of banks&#39; demands for reserves. In the parlance of US monetary policy, the Japanese central bank has pumped an enormous amount of &quot;excess reserves&quot; into the banks. This target has recently been &yen;30-35 trillion each month-end.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060308e.jpg" width="353">
In the spring of 2004, this policy began, in an indirect way, to show results. The decline in the banks&#39; loans, which had become quite steep in 1998, started to moderate. Progressively smaller declines have been reported since. Finally, in data released just Wednesday morning Tokyo time, the first dramatic sign of some success appeared through a 0.2% year-on-year increase in bank loans, the first such positive year-on-year figure since September 1996, nearly nine-and-a-half years ago.
The magnitude of the easing strategy can be seen in a ratio of reserves to GDP: 5.3% in 2005, compared with just 0.6% in the mid-1990s. By contrast, in the US, banks&#39; reserves at Federal Reserve Banks have recently been a miniscule 0.4% of GDP, fairly comparable to the historic Japanese amount. More straightforward is a simple comparison of dollar amounts. US reserves at the Fed were about $44.7 billion in February, while Japan&#39;s banking system reserves were $260.1 billion, nearly 6 times as much.
Prices have finally stabilized on a year-to-year basis, as we have described here recently for Japan&#39;s core CPI, and now bank lending, which underwent a terrible wrenching owing to repeated recessions and the plunge in real estate values, has also finally turned upward, albeit by only a marginal amount.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/JAPAN/@J1/@J1.HTM">JAPAN</a></th>
<th scope="col">Feb 2006</th>
<th scope="col">Jan 2006</th>
<th scope="col">Dec 2005</th>
<th scope="col">Dec 2004</th>
<th scope="col">Dec 2003</th>
<th scope="col">Dec 2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Loans at Domestic Banks Mo. Avg, Bil.&yen;</td>
<td>383,337.3</td>
<td>384,191.2</td>
<td>383,955.8</td>
<td>385,178.6</td>
<td>298,020.4</td>
<td>419,652.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Yr/Yr % Change</td>
<td>+0.2</td>
<td>0.0</td>
<td>-0.3</td>
<td>-3.1</td>
<td>-5.1</td>
<td>-4.7</td>
</tr>
<tr class="odd">
<td class="firstcol">BOJ Reserves, EOM, Bil.&yen;</td>
<td>30,240.8</td>
<td>30,574.3</td>
<td>30,093.8</td>
<td>31,466.6</td>
<td>27,797.7</td>
<td>17,695.6</td>
</tr>
</tbody>
</table>
</body>
</html>

Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060307d.jpg" width="353">
Foreign new orders for German manufactures rose 1.6% in January and were 16.2% above January, 2005. Even new orders from domestic sources, which were down slightly in January from December, were 5.7% above January, 2005. Year-to-year sales data were less dramatic, but still positive, with foreign sales 7.3% higher than January, 2005 and domestic sales, 0.9%. A breakdown of foreign orders between those from the Euro Zone and those from outside the Euro Zone is available from October, 2004 to date. In January, 2006, new orders from the Euro Zone declined 1.9% from December, but were 17.5% above January, 2005, Orders from countries outside the Euro Zone, rose 8.9% in January and were 15.1% above January, 2005.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060307e.jpg" width="353">
Because of the volatility in the sales and new order series, we have used three month moving averages to track longer term trends. The first chart shows the trend of new orders from, and sales to, foreign sources. New foreign orders have shown a particularly strong upward trend since early 2005. Currently, new foreign orders are running ahead of sales, suggesting there is support for continued increases in sales.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060307f.jpg" width="353">
The same trends are evident in the case of domestic new orders and sales, as shown in the second chart. Both domestic new orders and domestic sales, however, still lag well behind foreign new orders and sales. The third chart compares domestic and foreign sales. On a three month average basis, domestic sales in January, 2006 were barely--1.2%--higher than the January 2001 average. On the same basis, foreign sales were up 21.3% over the same period. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/GERMANY/@D6/@D6.HTM">German New Orders and Sales (2000=100)</a></th>
<th scope="col">Jan 06</th>
<th scope="col">Dec 05</th>
<th scope="col">Jan 05</th>
<th scope="col">M/M %</th>
<th scope="col">Y/Y %</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Sales</td>
<td>112.9</td>
<td>112.9</td>
<td>109.0</td>
<td>0.00</td>
<td>3.58</td>
<td>110.1</td>
<td>105.5</td>
<td>100.7</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Domestic&nbsp;</td>
<td>103.3</td>
<td>103.3</td>
<td>102.4</td>
<td>0.00</td>
<td>0.88</td>
<td>101.9</td>
<td>99.3</td>
<td>97.0</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Foreign</td>
<td>128.4</td>
<td>128.4</td>
<td>119.7</td>
<td>0.00</td>
<td>7.29</td>
<td>123.5</td>
<td>115.6</td>
<td>106.7</td>
</tr>
<tr>
<td class="firstcol">Total New Orders</td>
<td>119.5</td>
<td>117.6</td>
<td>107.8</td>
<td>1.62</td>
<td>10.85</td>
<td>111.5</td>
<td>105.1</td>
<td>99.0</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Domestic</td>
<td>104.6</td>
<td>104.8</td>
<td>99.0</td>
<td>-0.19</td>
<td>5.66</td>
<td>101.2</td>
<td>98.3</td>
<td>94.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Foreign</td>
<td>138.2</td>
<td>133.5&nbsp;</td>
<td>118.9</td>
<td>3.52</td>
<td>16.23</td>
<td>124.4</td>
<td>113.5</td>
<td>104.3</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Euro Zone</td>
<td>136.9</td>
<td>139.5</td>
<td>116.5</td>
<td>-1.86</td>
<td>17.51</td>
<td>120.3</td>
<td>n.a.</td>
<td>n.a.</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Non Euro Zone</td>
<td>139.4</td>
<td>128.0</td>
<td>121.1</td>
<td>8.91</td>
<td>15.11</td>
<td>128.2</td>
<td>n.a.</td>
<td>n.a.</td>
</tr>
</tbody>
</table>
</body>
</html>

Foreign new orders for German manufactures rose 1.6% in January and were 16.2% above January, 2005. Even new orders from domestic sources, which were down slightly in January from December, were 5.7% above January, 2005. Year-to-year [...]

Foreign Demand for German Manufactures Continues to Boost New Orders

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060307a.jpg" width="353">
Chain store sales added 0.2% during the opening week of March to the 1.5% surge during the prior period, according to the International Council of Shopping Centers (ICSC)-UBS survey.
The gain lifted the level of sales in early March 1.4% above the February average which rose 1.1% from January.
During the last ten years there has been a 47% correlation between the y/y change in chain store sales and the change in nonauto retail sales less gasoline.
The leading indicator of chain store sales rose 0.3% late in February and the average level of the leading indicator fell 1.6% during the month.
The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/surveyw/@S2/@S2.HTM">ICSC-UBS (SA, 1977=100)</a></th>
<th scope="col">03/04/06</th>
<th scope="col">02/25/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Total Weekly Chain Store Sales</td>
<td>470.1</td>
<td>469.0</td>
<td>4.3%</td>
<td>3.6%</td>
<td>4.7%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>


</html>

Chain store sales added 0.2% during the opening week of March to the 1.5% surge during the prior period, according to the International Council of Shopping Centers (ICSC)-UBS survey. The gain lifted the level of sales in early March [...]

Chain Store Sales Higher Again

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060307c.jpg" width="353">
For 4Q &#39;05, the decline in non-farm labor productivity was little revised at -0.5% versus the initial estimate of a 0.6% fall. It was the first decline in output per hour since 1Q &#39;01 and followed an average gain of 3.7% during the prior ten quarters. Consensus expectations had been for a slight upward revision to a 0.1% decline.
The initially reported slowdown in output growth which lowered productivity was moderated somewhat to 1.5% (3.7% y/y) from 4.7% during 3Q but hours worked rose slightly faster than initially estimated; 2.0% (1.2% y/y) versus a 0.4% 3Q rise.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060307b.jpg" width="353">
Growth in compensation costs was unrevised at 2.8% but the 5.5% rise during 3Q was upwardly revised. Unit labor cost growth of 3.3% was the quickest in a year though y/y growth of 1.3% represented an easing of cost pressures.
Factory sector productivity growth was revised upward to 4.7% (4.3% y/y) from 3.9% following a 3.7% gain during 3Q. Compensation growth of 1.8% (4.5% y/y) was little revised and unit labor costs in the factory sector fell 2.8% (0.2% y/y).
The implicit price deflator for the nonfarm business sector was revised slightly higher to 3.4% (3.1% y/y) from 3.2%.
Stop Paying More for Less: Ways to Boost Productivity in Higher Education from the Federal Reserve Bank of St. Louis can be found <a href="http://www.stlouisfed.org/publications/re/2006/a/pages/higher_education.html"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EC/@EC02/@EC02.HTM">Non-farm Business Sector</a> (SAAR)</th>
<th scope="col">4Q &#39;05 (Revised)</th>
<th scope="col">4Q &#39;05 (Prelim.)</th>
<th scope="col">3Q &#39;05</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Output per Hour</td>
<td>-0.5%</td>
<td>-0.6%</td>
<td>4.5%</td>
<td>2.5%</td>
<td>2.7%</td>
<td>3.4%</td>
<td>3.9%</td>
</tr>
<tr>
<td class="firstcol">Compensation per Hour</td>
<td>2.8%</td>
<td>2.8%</td>
<td>5.5%</td>
<td>3.8%</td>
<td>5.4%</td>
<td>4.5%</td>
<td>4.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Unit Labor Costs</td>
<td>3.3%</td>
<td>3.5%</td>
<td>1.2%</td>
<td>1.3%</td>
<td>2.6%</td>
<td>1.1%</td>
<td>0.0%</td>
</tr>
</tbody>
</table>
</body>
</html>

For 4Q '05, the decline in non-farm labor productivity was little revised at -0.5% versus the initial estimate of a 0.6% fall. It was the first decline in output per hour since 1Q '01 and followed an average gain of 3.7% during the [...]

Decline in 4Q U.S. Productivity Little Revised

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060307c.jpg" width="353">
For 4Q &#39;05, the decline in non-farm labor productivity was little revised at -0.5% versus the initial estimate of a 0.6% fall. It was the first decline in output per hour since 1Q &#39;01 and followed an average gain of 3.7% during the prior ten quarters. Consensus expectations had been for a slight upward revision to a 0.1% decline.
The initially reported slowdown in output growth which lowered productivity was moderated somewhat to 1.5% (3.7% y/y) from 4.7% during 3Q but hours worked rose slightly faster than initially estimated; 2.0% (1.2% y/y) versus a 0.4% 3Q rise.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060307b.jpg" width="353">
Growth in compensation costs was unrevised at 2.8% but the 5.5% rise during 3Q was upwardly revised. Unit labor cost growth of 3.3% was the quickest in a year though y/y growth of 1.3% represented an easing of cost pressures.
Factory sector productivity growth was revised upward to 4.7% (4.3% y/y) from 3.9% following a 3.7% gain during 3Q. Compensation growth of 1.8% (4.5% y/y) was little revised and unit labor costs in the factory sector fell 2.8% (0.2% y/y).
The implicit price deflator for the nonfarm business sector was revised slightly higher to 3.4% (3.1% y/y) from 3.2%.
Stop Paying More for Less: Ways to Boost Productivity in Higher Education from the Federal Reserve Bank of St. Louis can be found <a href="http://www.stlouisfed.org/publications/re/2006/a/pages/higher_education.html"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EC/@EC02/@EC02.HTM">Non-farm Business Sector</a> (SAAR)</th>
<th scope="col">4Q &#39;05 (Revised)</th>
<th scope="col">4Q &#39;05 (Prelim.)</th>
<th scope="col">3Q &#39;05</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Output per Hour</td>
<td>-0.5%</td>
<td>-0.6%</td>
<td>4.5%</td>
<td>2.5%</td>
<td>2.7%</td>
<td>3.4%</td>
<td>3.9%</td>
</tr>
<tr>
<td class="firstcol">Compensation per Hour</td>
<td>2.8%</td>
<td>2.8%</td>
<td>5.5%</td>
<td>3.8%</td>
<td>5.4%</td>
<td>4.5%</td>
<td>4.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Unit Labor Costs</td>
<td>3.3%</td>
<td>3.5%</td>
<td>1.2%</td>
<td>1.3%</td>
<td>2.6%</td>
<td>1.1%</td>
<td>0.0%</td>
</tr>
</tbody>
</table>
Chain Store Sales Higher Again 
by <a href="/comment/Moeller.html">Tom Moeller</a> March 7, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060307a.jpg" width="353">
Chain store sales added 0.2% during the opening week of March to the 1.5% surge during the prior period, according to the International Council of Shopping Centers (ICSC)-UBS survey.
The gain lifted the level of sales in early March 1.4% above the February average which rose 1.1% from January.
During the last ten years there has been a 47% correlation between the y/y change in chain store sales and the change in nonauto retail sales less gasoline.
The leading indicator of chain store sales rose 0.3% late in February and the average level of the leading indicator fell 1.6% during the month.
The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/surveyw/@S2/@S2.HTM">ICSC-UBS (SA, 1977=100)</a></th>
<th scope="col">03/04/06</th>
<th scope="col">02/25/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Total Weekly Chain Store Sales</td>
<td>470.1</td>
<td>469.0</td>
<td>4.3%</td>
<td>3.6%</td>
<td>4.7%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>
 Foreign Demand for German Manufactures Continues to Boost New Orders 
by <a href="/comment/Curley.html">Louise Curley</a> March 7, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060307d.jpg" width="353">
Foreign new orders for German manufactures rose 1.6% in January and were 16.2% above January, 2005. Even new orders from domestic sources, which were down slightly in January from December, were 5.7% above January, 2005. Year-to-year sales data were less dramatic, but still positive, with foreign sales 7.3% higher than January, 2005 and domestic sales, 0.9%. A breakdown of foreign orders between those from the Euro Zone and those from outside the Euro Zone is available from October, 2004 to date. In January, 2006, new orders from the Euro Zone declined 1.9% from December, but were 17.5% above January, 2005, Orders from countries outside the Euro Zone, rose 8.9% in January and were 15.1% above January, 2005.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060307e.jpg" width="353">
Because of the volatility in the sales and new order series, we have used three month moving averages to track longer term trends. The first chart shows the trend of new orders from, and sales to, foreign sources. New foreign orders have shown a particularly strong upward trend since early 2005. Currently, new foreign orders are running ahead of sales, suggesting there is support for continued increases in sales.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060307f.jpg" width="353">
The same trends are evident in the case of domestic new orders and sales, as shown in the second chart. Both domestic new orders and domestic sales, however, still lag well behind foreign new orders and sales. The third chart compares domestic and foreign sales. On a three month average basis, domestic sales in January, 2006 were barely--1.2%--higher than the January 2001 average. On the same basis, foreign sales were up 21.3% over the same period. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/GERMANY/@D6/@D6.HTM">German New Orders and Sales (2000=100)</a></th>
<th scope="col">Jan 06</th>
<th scope="col">Dec 05</th>
<th scope="col">Jan 05</th>
<th scope="col">M/M %</th>
<th scope="col">Y/Y %</th>
<th scope="col">2005&nbsp; </th>
<th scope="col">2004&nbsp;</th>
<th scope="col">2003&nbsp;&nbsp;</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Sales</td>
<td>112.9</td>
<td>112.9</td>
<td>109.0</td>
<td>0.00</td>
<td>3.58</td>
<td>110.1</td>
<td>105.5</td>
<td>100.7</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Domestic&nbsp;</td>
<td>103.3</td>
<td>103.3</td>
<td>102.4</td>
<td>0.00</td>
<td>0.88</td>
<td>101.9</td>
<td>99.3</td>
<td>97.0</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Foreign</td>
<td>128.4</td>
<td>128.4</td>
<td>119.7</td>
<td>0.00</td>
<td>7.29</td>
<td>123.5</td>
<td>115.6</td>
<td>106.7</td>
</tr>
<tr>
<td class="firstcol">Total New Orders</td>
<td>119.5</td>
<td>117.6</td>
<td>107.8</td>
<td>1.62</td>
<td>10.85</td>
<td>111.5</td>
<td>105.1</td>
<td>99.0</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Domestic</td>
<td>104.6</td>
<td>104.8</td>
<td>99.0</td>
<td>-0.19</td>
<td>5.66</td>
<td>101.2</td>
<td>98.3</td>
<td>94.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Foreign</td>
<td>&nbsp;138.2</td>
<td>133.5&nbsp;</td>
<td>118.9&nbsp;</td>
<td>3.52&nbsp;</td>
<td>16.23&nbsp;</td>
<td>124.4&nbsp;</td>
<td>113.5&nbsp;</td>
<td>104.3&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Euro Zone</td>
<td>136.9</td>
<td>139.5</td>
<td>116.5</td>
<td>-1.86</td>
<td>17.51</td>
<td>120.3</td>
<td>n.a.</td>
<td>n.a.</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Non Euro Zone</td>
<td>139.4</td>
<td>128.0</td>
<td>121.1</td>
<td>8.91</td>
<td>15.11</td>
<td>128.2</td>
<td>n.a.</td>
<td>n.a.</td>
</tr>
</tbody>
</table>


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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060306d.jpg" width="353">
Thailand released data on its fourth quarter Gross Domestic Product today. GDP in the fourth quarter was 4.71% above the fourth quarter of 2004. For the year as a whole, the increase in GDP was 4.48%, compared with a rise of 6.16% last year. Slower growth in private consumption, gross fixed capital formation and exports of goods and services outweighed the positive impacts of lower imports, higher inventory accumulation and a sharp increase in government consumption expenditures.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060306e.jpg" width="353">
With the release of Thailand&#39;s data, 2005 data for all the countries, except Pakistan and Vietnam, in the Haver Data Base EMERGEPR are now available. (Data for Pakistan and Vietnam are reported only on an annual basis. The latest data are for 2004.)
Growth in most countries was below that of 2004. The exceptions were China, India and Indonesia. Growth in China and India showed little trend during the year, but was maintained at high levels--above 7% for India and above 9% for China. While growth in Indonesia, averaged an increase in 2005, the trend throughout the year was downward.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060306f.jpg" width="353">
The quarterly trend of year over year growth varied. In Malaysia, as in Indonesia, the trend was downward as shown in the first chart. In Singapore, South Korea, the Philippines and in Taiwan, there was a definite upward trend during the year. The second chart shows the year to year percent change in GDP for South Korea and Taiwan.Growth in Hong Kong and Thailand, like India and China showed little trend during the year. The year to year percent changes in GDP for these countries are shown in the third chart. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/EMERGEPR/@PQ/@PQ2/@PQ2.HTM">Gross Domestic Product </a> &nbsp;Y/Y % Change</th>
<th scope="col">Q4 05 %</th>
<th scope="col">Q3 05 %</th>
<th scope="col">Q2 05 %</th>
<th scope="col">Q1 05 %</th>
<th scope="col">2005 %&nbsp;</th>
<th scope="col">2004 %</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">China</td>
<td>9.9</td>
<td>9.8</td>
<td>10.1</td>
<td>9.9</td>
<td>9.9</td>
<td>9.5</td>
</tr>
<tr>
<td class="firstcol">India</td>
<td>7.71</td>
<td>7.93</td>
<td>8.22</td>
<td>7.09</td>
<td>7.74</td>
<td>7.51</td>
</tr>
<tr class="odd">
<td class="firstcol">Hong Kong</td>
<td>7.38</td>
<td>7.82</td>
<td>7.35</td>
<td>6.57</td>
<td>7.28</td>
<td>8.60</td>
</tr>
<tr>
<td class="firstcol">Indonesia</td>
<td>4.92</td>
<td>5.67</td>
<td>5.64</td>
<td>6.21</td>
<td>5.60</td>
<td>5.06</td>
</tr>
<tr class="odd">
<td class="firstcol">Malaysia</td>
<td>5.12</td>
<td>5.25</td>
<td>4.35</td>
<td>6.20</td>
<td>5.23</td>
<td>7.14</td>
</tr>
<tr>
<td class="firstcol">Philippines</td>
<td>6.20</td>
<td>4.49</td>
<td>5.15&nbsp;</td>
<td>&nbsp;4.49</td>
<td>5.09&nbsp;</td>
<td>6.01&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">Singapore</td>
<td>8.45&nbsp;</td>
<td>7.60</td>
<td>5.70</td>
<td>3.57</td>
<td>6.35</td>
<td>8.72</td>
</tr>
<tr>
<td class="firstcol">South Korea</td>
<td>5.39</td>
<td>4.55</td>
<td>3.39</td>
<td>2.75</td>
<td>4.03</td>
<td>4.66</td>
</tr>
<tr class="odd">
<td class="firstcol">Taiwan</td>
<td>6.51</td>
<td>4.40</td>
<td>3.02</td>
<td>2.59</td>
<td>4.12</td>
<td>6.13</td>
</tr>
<tr>
<td class="firstcol">Thailand</td>
<td>4.71</td>
<td>5.40</td>
<td>4.54</td>
<td>3.26</td>
<td>4.48</td>
<td>6.16</td>
</tr>
</tbody>
</table>
</body>
</html>

Thailand released data on its fourth quarter Gross Domestic Product today. GDP in the fourth quarter was 4.71% above the fourth quarter of 2004. For the year as a whole, the increase in GDP was 4.48%, compared with a rise of 6.16% [...]

2005 GDP in Thailand: Last of Major Pacific Rim Countries to Report

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 fell 4.1% (-10.2% y/y) after a 2.9% decline. Nonpetroleum imports increased 6.0% (34.8% y/y) after holding steady 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 decreasing 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 2.6% 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 1.2% (1.7% y/y). Imported travel services fell 2.2% (5.3% y/y) while charges for use of intellectual property rose 1.0% (13.6 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

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Retail gasoline prices for all grades improved to an average $3.27 per gallon (-13.1% y/y) in the week ended May 5 and reversed the prior week’s easing to $3.26. Prices were $3.37 per gallon to begin the month but remained above their low of $3.13 in the week of December 9. An earlier high was $3.79 in the week ending April 22, 2024. The all-time high of $5.11 occurred in the week ending June 13, 2022. The retail price for on-highway diesel fuel eaed to $3.50 per gallon (-10.2% y/y) in the week of May 5 from $3.51 in the prior week. The latest diesel price stood well below a high of $4.63 in the week ending September 18, 2023 and a peak of $5.81 in the week ending June 20, 2022.

The price of West Texas Intermediate crude oil declined to $59.64 per barrel (-26.4% y/y) in the week ended May 2, after rising to $63.09 per barrel in the prior week. Prices remained below a high of $91.45 in the week of September 29, 2023. The cost of crude oil peaked at $120.46 in the week of June 10, 2022. Yesterday, the price was $57.13 per barrel. The price of European Brent crude oil declined to $63.50 per barrel (-25.9% y/y) in the week of May 2 from $67.92 in the previous week. Prices remained well below a recent high of $95.61 in the week of September 29, 2023 and compared to a peak of $127.40 in the week of June 10, 2022.

Natural gas prices improved to an average $3.09 per mmbtu (+88.4% y/y) in the week ended May 2, after falling to $3.00/mmbtu in the prior week. Prices remained well above a low of $1.40/mmbtu in the week of March 15, 2024 but below their peak of $9.56 in the week of August 26, 2022. Yesterday’s price was $3.26/mmbtu.

Gasoline demand rose 3.2% y/y in the four weeks ending April 25 following a 0.4% y/y decline in the prior four weeks. Demand for all petroleum products improved 0.3% y/y in the four weeks ending April 25 after a 0.4% y/y rise in the previous four-week period. Crude oil input to refineries eased 0.1% y/y in the four weeks ending April 25 after a 1.3% y/y decline in the prior four weeks.

Gasoline inventories slipped 0.7% y/y in the week ending April 25 after a 1.2% y/y rise in the week ending April 18. Residual fuel oil inventories fell 18.7% y/y in the week of April 25, after a 19.0% y/y fall in the prior week. Crude oil inventories rose 1.4% y/y in the week of April 25 after a 2.6% y/y rise in the previous week.

Measured in days’ supply, gasoline inventories fell w/w to 25.5 days in the week of April 25 from 26.4 days in the prior. The recent low was 22.9 days in the week of November 8. The supply of crude oil eased w/w to 27.9 days in the week of April 25 after three weeks at 28.3 days, and remained below a high of 31.9 days in the week of March 3, 2023.

These data are reported by the Energy Information Administration of the U.S. Department of Energy. The price and supply/demand data can be found in Haver’s **WEEKLY** & **USENERGY** database.

- Gasoline prices edge higher.
- Crude oil prices decline.
- Natural gas costs rise.

U.S. Energy Prices Remain Mixed in Latest Week

Robert Brusca

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Not many respondents are showing absolute slowing. Only five this month. Only six over the last three-months on average. The median total PMI score fell to 49.7 showing contraction in April from 51.1 in March. The average fared slightly better. The 12-months to 6-months to 3-months shows a moderate but consistent slowing. The breadth of slowing is wide with 60.9% of survey respondents slowing over 3-months compared to six months.

The percentile standings show the most strength for the BRIC group with reading above 50% (that marks the median). All other groupings have standings below the 50%, mark indicating that they are below their respective medians of the last four-plus years.

Over every horizon from 12-month to 6-month to 3-month, more than 50% of the respondents show a weakening (slowing) in their PMI responses.

Among the largest economies only Italy has a composite PMI standing above its median (above 50%).

Only 9 of 24 respondents have PMI ranked percentile standings above the 50% mark. That underlines the weakness in composite conditions and the breadth of the weakness.
 
Services sectors no longer are providing the lift to offset ongoing weakness in manufacturing. The differences among countries are narrowing.

Economic conditions across countries may be narrowing for several reasons, one being that the COVID period and then the shock reaction to Russia's invasion from Ukraine put all countries on the same timeline as central banks have been leaning against the shockwaves from those 2 events. As a result of those events, inflation flared but has more recently been falling. Still, inflation continues to be over the top of targets with the European Monetary Union right now making the most progress and Japan facing more late cycle weakness with excessive inflation than other countries in the mix.  More recently aggressive tariff policy the United States has put all countries on their back foot and puts everyone on notice that the future has become a lot more uncertain. Central banks that were progressing toward rate cuts now are worried about the possibility of more inflation from tariffs or from the possibility of recession from tariffs - tariffs up the ante on uncertainty as well as on risk.  What we see in this month's PMI statistics is a gradual continued erosion as the perceived risk here is that things get steadily but slowly worse as firms, investors, and consumers began to pull in their horns and prepare for something bad to happen not knowing what that might be.

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Global Composite PMIs Erode

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.

Economy in Brief: March 2006

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