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/060309c.jpg" width="353">
We wrote yesterday in the midst of the monetary policy meeting of the Bank of Japan; we described the voluminous amount of reserves the BoJ has pumped into the banks. As widely expected, the Bank announced that it would reduce this level of reserves, pulling it back toward its more traditional amount. Because bank deposits are not near the levels permitted by the current volume of reserves, no immediate change in short-term interest rates is likely and the Bank indicates that the overnight call money rate should remain near zero.
However, the bank provided these reserves, a liability item on its balance sheet, by substantially increasing its assets, as evident in the first graph here. The BoJ&#39;s assets grew quite significantly during two periods of the last 10 years, late 1997-98 following the Asian currency crisis, and from the spring of 2001 through 2002. In this latter period, it bought huge quantities of government securities, particularly bonds, and it began outright buying of short-term commercial bills.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060309d.jpg" width="353">
So as the Bank sheds the excess reserves &quot;over a few months&quot;, it will be interesting to see what happens to interest rates on the assets the Bank will also shed. The Bank&#39;s statement says that it will continue buying long-term government bonds, and that its &quot;un-easing&quot; [our terminology] will occur in short-term money markets. So the Bank is attempting to minimize the impact on interest rates all together. Whether they succeed remains to be seen and it likely depends on the accompanying vigor in the Japanese economy.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060309e.jpg" width="353">
Meantime, after the Bank&#39;s announcement in mid-afternoon, markets were actually encouraged, seeing this change in policy as a &quot;vote of confidence&quot; in the Japanese economy. Stock prices rose, with the Nikkei-225 up a whopping 2.6% on the day. And bond yields were little changed, in fact easing ever so slightly. Notably, in addition, even as the BoJ has added significantly to its holdings of government bonds in recent years, yields on them have not moved much. Thus, the yield curve has remained upward sloping, suggesting that investors believed the Bank&#39;s policy would eventually work, as it appears to be doing.
[The BoJ accounts and aggregate open market operations are included in Haver&#39;s JAPAN database. Daily stock market indexes and interest rates are shown in INTDAILY.] 

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We wrote yesterday in the midst of the monetary policy meeting of the Bank of Japan; we described the voluminous amount of reserves the BoJ has pumped into the banks. As widely expected, the Bank announced that it would reduce this [...]

Bank of Japan To Implement "Un-Ease": A Follow-Up

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060309f.jpg" width="353">
Growth in total credit market debt outstanding surged 11.4% (AR) last quarter. Faster growth rates often occur during 4Q but that was the quickest since 2002.
The acceleration from 3Q was due to a jump in Federal Government borrowing at a 10.1% rate (7.0% y/y) versus 6.6% in 3Q.
Growth in household sector borrowing continued strong at a 13.2% rate. That was down from the heated pace of the prior quarter but it capped off the fastest yearly rate of household sector borrowing on record by edging out the 11.5% rate of growth during 2003.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060309g.jpg" width="353">
Home mortgage obligations grew at a 14.6% rate (14.1% y/y) last quarter capping the fourth consecutive year of double digit growth. Consumer credit growth slowed substantially to a 4.7% rate from 8.5% during 3Q and the 2.9% yearly rate of growth was the slowest since 1992, likely reflecting mortgage refinancings.
Household sector asset values rose at a 9.8% annual rate (8.5% y/y) during 4Q powered by a 14.0% (14.9% y/y) rise in the value of real estate holdings. Financial asset values rose 8.0% (5.6% y/y) due to an 11.2% (12.9% y/y) rise in the value of mutual fund shares but the value of corporate equities held directly fell 4.4% (-5.0% y/y).
The net worth of the US household sector in 4Q improved 2.3% (8.0% y/y) to a record $52.107 trillion. The gain, however, did not lift net worth as a percentage of income which fell slightly q/q to a still high 5.635 times income. During 2004 that ratio was 5.403 times.

<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/FFUNDS/@F2/@F201/@F201.HTM">Flow of Funds</a>&nbsp;</th>
<th scope="col">% of Total</th>
<th scope="col">4Q 05&nbsp; (AR)</th>
<th scope="col">3Q 05 &nbsp; (AR)</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
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</thead>
<tbody>
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<td class="firstcol">Total Credit Market Debt Outstanding</td>
<td></td>
<td>11.4%</td>
<td>8.1%</td>
<td>8.8%</td>
<td>8.8%</td>
<td>8.4%</td>
<td>9.2%</td>
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<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Federal Government</td>
<td>12%</td>
<td>10.1%</td>
<td>6.6%</td>
<td>7.0%</td>
<td>7.0%</td>
<td>9.0%</td>
<td>10.9%</td>
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<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Households</td>
<td>28%</td>
<td>13.2%</td>
<td>14.3%</td>
<td>11.7%</td>
<td>11.7%</td>
<td>11.2%</td>
<td>11.5%</td>
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<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Nonfinancial Corporate Business</td>
<td>14%</td>
<td>7.0%</td>
<td>4.4%</td>
<td>5.7%</td>
<td>5.7%</td>
<td>3.6%</td>
<td>2.2%</td>
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<tr class="odd">
<td class="firstcol">&nbsp; Financial Sectors</td>
<td>32%</td>
<td>11.9%</td>
<td>3.4%</td>
<td>7.5%</td>
<td>7.5%</td>
<td>7.6%</td>
<td>10.1%</td>
</tr>
<tr>
<td class="firstcol"></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Net Worth: Households &amp; Nonprofit Organizations (Trillions)</td>
<td>--</td>
<td>$52.107</td>
<td>$50.957</td>
<td>--</td>
<td>$52.107</td>
<td>$48.250</td>
<td>$44.127</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Tangible Assets</td>
<td>--</td>
<td>$25.558</td>
<td>$24.816</td>
<td>13.3%</td>
<td>$25.558</td>
<td>$22.556</td>
<td>$20.040</td>
</tr>
</tbody>
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Growth in total credit market debt outstanding surged 11.4% (AR) last quarter. Faster growth rates often occur during 4Q but that was the quickest since 2002. The acceleration from 3Q was due to a jump in Federal Government borrowing [...]

4Q Debt Fueled By Government Budget Deficit, 2005 By the Consumer

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060309b.jpg" width="353">
Initial claims for unemployment insurance rose 8,000 to 303,000 to the highest level since early January while the prior week&#39;s level was revised up slightly. Consensus expectations had been for a decline to 290,000 claims.
During the last ten years there has been a (negative) 75% correlation between the level of initial jobless insurance claims and the m/m change in payroll employment.
The four-week moving average of initial claims increased to 293,500 (-7.4% y/y), its highest level since mid-January.
Continuing unemployment insurance claims rose 29,000 following a revised 11,000 decline the prior week. It was the first increase in four weeks.
The insured rate of unemployment was stable at 1.9% for the fourth week.
Understanding the employment measures from the CPS and CES survey from the Bureau of Labor Statistics can be found <a href="http://www.bls.gov/opub/mlr/2006/02/art2full.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/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</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>
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</thead>
<tbody>
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<td class="firstcol">Initial Claims</td>
<td>303</td>
<td>295</td>
<td>-9.6%</td>
<td>332</td>
<td>343</td>
<td>402</td>
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<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,505</td>
<td>-7.0%</td>
<td>2,663</td>
<td>2,924</td>
<td>3,532</td>
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Initial claims for unemployment insurance rose 8,000 to 303,000 to the highest level since early January while the prior week's level was revised up slightly. Consensus expectations had been for a decline to 290,000 claims. During the [...]

Initial Unemployment Insurance Claims Highest in Two Months

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060309a.jpg" width="353">
The U.S. foreign trade deficit surged during January to $68.5B, another record, and far exceeded Consensus expectations for a deficit of $66.5B. The December deficit in goods &amp; services trade was revised slightly lower to $65.1B.
Overall imports rose 3.5% in January and the gains were quite broad, starting with a 5.6% (48.3%) spike in petroleum imports. That gain was bolstered by a 4.4% rise in crude oil prices (46.0% y/y) to an average $51.93 per bbl., the first m/m gain since September. Crude prices gave back roughly half of that increase last month and very recently fell even lower. The quantity of crude oil imports fell during January (-6.2% y/y) for the second consecutive month.
Imports of nonpetroleum products similarly were strong during January, rising 3.8% (11.2% y/y). The gain was led by a 3.8% (9.9% y/y) rise in capital goods and a 2.9% (5.6% y/y) increase in nonauto consumer goods. Imports of advanced technology products fell 8.1% (NSA, 15.2% y/y).
Total exports also were strong during January. A 2.5% increase was led by a 2.9% (16.3% y/y) gain in capital goods though exports of nonauto consumer goods fell 1.3% (+11.3% y/y). Exports of advanced technology products dropped 10.1% (NSA, +20.7% y/y) while exports of foods, feeds &amp; beverages jumped 11.2% (15.7% y/y).
With China the US trade deficit reversed most of an improvement during December and deteriorated to $17.9B ($201.6B for 2005) but y/y exports were up by more than one third. The trade deficit with Japan improved for the third straight month to $6.5B ($82.7B in 2005) though the trade deficit with the Asian NICs nearly doubled to $2.2B ($15.9B in 2005). The deficit with the European Union improved for the third consecutive month $9.7B ($122.4B in 2005) as imports fell 6.0% (+12.7% y/y).
During 2005, the total real value of US international trade (exports plus imports) rose to 27.2% of constant dollar GDP, up from 20.3% ten years earlier and was more than double the percentage during 1985.
Current account, remarks by Alan Greenspan, are available <a href="http://www.federalreserve.gov/boarddocs/speeches/2005/20050204/default.htm"> 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/USECON/@EE/@EE03/@EE03.HTM">Foreign Trade</a></th>
<th scope="col">Jan</th>
<th scope="col">Dec</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">Trade Deficit</td>
<td>$68.5B</td>
<td>$65.1B</td>
<td>$58.3B (1/05)</td>
<td>$723.6B</td>
<td>$617.6B</td>
<td>$494.8B</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Exports - Goods &amp; Services</td>
<td>2.5%</td>
<td>2.2%</td>
<td>12.0%</td>
<td>10.5%</td>
<td>12.6%</td>
<td>4.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Imports - Goods &amp; Services</td>
<td>3.5%</td>
<td>1.7%</td>
<td>14.0%</td>
<td>12.8%</td>
<td>16.6%</td>
<td>8.5%</td>
</tr>
</tbody>
</table>
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The U.S. foreign trade deficit surged during January to $68.5B, another record, and far exceeded Consensus expectations for a deficit of $66.5B. The December deficit in goods & services trade was revised slightly lower to $65.1B. [...]

U.S. Trade Deficit Surged Due to Higher Imports

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060309a.jpg" width="353">
The U.S. foreign trade deficit surged during January to $68.5B, another record, and far exceeded Consensus expectations for a deficit of $66.5B. The December deficit in goods &amp; services trade was revised slightly lower to $65.1B.
Overall imports rose 3.5% in January and the gains were quite broad, starting with a 5.6% (48.3%) spike in petroleum imports. That gain was bolstered by a 4.4% rise in crude oil prices (46.0% y/y) to an average $51.93 per bbl., the first m/m gain since September. Crude prices gave back roughly half of that increase last month and very recently fell even lower. The quantity of crude oil imports fell during January (-6.2% y/y) for the second consecutive month.
Imports of nonpetroleum products similarly were strong during January, rising 3.8% (11.2% y/y). The gain was led by a 3.8% (9.9% y/y) rise in capital goods and a 2.9% (5.6% y/y) increase in nonauto consumer goods. Imports of advanced technology products fell 8.1% (NSA, 15.2% y/y).
Total exports also were strong during January. A 2.5% increase was led by a 2.9% (16.3% y/y) gain in capital goods though exports of nonauto consumer goods fell 1.3% (+11.3% y/y). Exports of advanced technology products dropped 10.1% (NSA, +20.7% y/y) while exports of foods, feeds &amp; beverages jumped 11.2% (15.7% y/y).
With China the US trade deficit reversed most of an improvement during December and deteriorated to $17.9B ($201.6B for 2005) but y/y exports were up by more than one third. The trade deficit with Japan improved for the third straight month to $6.5B ($82.7B in 2005) though the trade deficit with the Asian NICs nearly doubled to $2.2B ($15.9B in 2005). The deficit with the European Union improved for the third consecutive month $9.7B ($122.4B in 2005) as imports fell 6.0% (+12.7% y/y).
During 2005, the total real value of US international trade (exports plus imports) rose to 27.2% of constant dollar GDP, up from 20.3% ten years earlier and was more than double the percentage during 1985.
Current account, remarks by Alan Greenspan, are available <a href="http://www.federalreserve.gov/boarddocs/speeches/2005/20050204/default.htm"> 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/USECON/@EE/@EE03/@EE03.HTM">Foreign Trade</a></th>
<th scope="col">Jan</th>
<th scope="col">Dec</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">Trade Deficit</td>
<td>$68.5B</td>
<td>$65.1B</td>
<td>$58.3B (1/05)</td>
<td>$723.6B</td>
<td>$617.6B</td>
<td>$494.8B</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Exports - Goods &amp; Services</td>
<td>2.5%</td>
<td>2.2%</td>
<td>12.0%</td>
<td>10.5%</td>
<td>12.6%</td>
<td>4.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Imports - Goods &amp; Services</td>
<td>3.5%</td>
<td>1.7%</td>
<td>14.0%</td>
<td>12.8%</td>
<td>16.6%</td>
<td>8.5%</td>
</tr>
</tbody>
</table>
Initial Unemployment Insurance Claims Highest in Two Months 
by <a href="/comment/Moeller.html">Tom Moeller</a> March 9, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060309b.jpg" width="353">
Initial claims for unemployment insurance rose 8,000 to 303,000 to the highest level since early January while the prior week&#39;s level was revised up slightly. Consensus expectations had been for a decline to 290,000 claims.
During the last ten years there has been a (negative) 75% correlation between the level of initial jobless insurance claims and the m/m change in payroll employment.
The four-week moving average of initial claims increased to 293,500 (-7.4% y/y), its highest level since mid-January.
Continuing unemployment insurance claims rose 29,000 following a revised 11,000 decline the prior week. It was the first increase in four weeks.
The insured rate of unemployment was stable at 1.9% for the fourth week.
Understanding the employment measures from the CPS and CES survey from the Bureau of Labor Statistics can be found <a href="http://www.bls.gov/opub/mlr/2006/02/art2full.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/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</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">Initial Claims</td>
<td>303</td>
<td>295</td>
<td>-9.6%</td>
<td>332</td>
<td>343</td>
<td>402</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,505</td>
<td>-7.0%</td>
<td>2,663</td>
<td>2,924</td>
<td>3,532</td>
</tr>
</tbody>
</table>
4Q Debt Fueled By Government Budget Deficit, 2005 By the Consumer 
by <a href="/comment/Moeller.html">Tom Moeller</a> March 9, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060309f.jpg" width="353">
Growth in total credit market debt outstanding surged 11.4% (AR) last quarter. Faster growth rates often occur during 4Q but that was the quickest since 2002.
The acceleration from 3Q was due to a jump in Federal Government borrowing at a 10.1% rate (7.0% y/y) versus 6.6% in 3Q.
Growth in household sector borrowing continued strong at a 13.2% rate. That was down from the heated pace of the prior quarter but it capped off the fastest yearly rate of household sector borrowing on record by edging out the 11.5% rate of growth during 2003.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060309g.jpg" width="353">
Home mortgage obligations grew at a 14.6% rate (14.1% y/y) last quarter capping the fourth consecutive year of double digit growth. Consumer credit growth slowed substantially to a 4.7% rate from 8.5% during 3Q and the 2.9% yearly rate of growth was the slowest since 1992, likely reflecting mortgage refinancings.
Household sector asset values rose at a 9.8% annual rate (8.5% y/y) during 4Q powered by a 14.0% (14.9% y/y) rise in the value of real estate holdings. Financial asset values rose 8.0% (5.6% y/y) due to an 11.2% (12.9% y/y) rise in the value of mutual fund shares but the value of corporate equities held directly fell 4.4% (-5.0% y/y).
The net worth of the US household sector in 4Q improved 2.3% (8.0% y/y) to a record $52.107 trillion. The gain, however, did not lift net worth as a percentage of income which fell slightly q/q to a still high 5.635 times income. During 2004 that ratio was 5.403 times.

<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/FFUNDS/@F2/@F201/@F201.HTM">Flow of Funds</a>&nbsp;</th>
<th scope="col">% of Total</th>
<th scope="col">4Q 05&nbsp; (AR)</th>
<th scope="col">3Q 05 &nbsp; (AR)</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 Credit Market Debt Outstanding</td>
<td></td>
<td>11.4%</td>
<td>8.1%</td>
<td>8.8%</td>
<td>8.8%</td>
<td>8.4%</td>
<td>9.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Federal Government</td>
<td>12%</td>
<td>10.1%</td>
<td>6.6%</td>
<td>7.0%</td>
<td>7.0%</td>
<td>9.0%</td>
<td>10.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Households</td>
<td>28%</td>
<td>13.2%</td>
<td>14.3%</td>
<td>11.7%</td>
<td>11.7%</td>
<td>11.2%</td>
<td>11.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Nonfinancial Corporate Business</td>
<td>14%</td>
<td>7.0%</td>
<td>4.4%</td>
<td>5.7%</td>
<td>5.7%</td>
<td>3.6%</td>
<td>2.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Financial Sectors</td>
<td>32%</td>
<td>11.9%</td>
<td>3.4%</td>
<td>7.5%</td>
<td>7.5%</td>
<td>7.6%</td>
<td>10.1%</td>
</tr>
<tr>
<td class="firstcol"></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Net Worth: Households &amp; Nonprofit Organizations (Trillions)</td>
<td>--</td>
<td>$52.107</td>
<td>$50.957</td>
<td>--</td>
<td>$52.107</td>
<td>$48.250</td>
<td>$44.127</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Tangible Assets</td>
<td>--</td>
<td>$25.558</td>
<td>$24.816</td>
<td>13.3%</td>
<td>$25.558</td>
<td>$22.556</td>
<td>$20.040</td>
</tr>
</tbody>
</table>
Bank of Japan To Implement "Un-Ease": A Follow-Up 
by <a href="/comment/Stone.html">Carol Stone</a> March 9, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060309c.jpg" width="353">
We wrote yesterday in the midst of the monetary policy meeting of the Bank of Japan; we described the voluminous amount of reserves the BoJ has pumped into the banks. As widely expected, the Bank announced that it would reduce this level of reserves, pulling it back toward its more traditional amount. Because bank deposits are not near the levels permitted by the current volume of reserves, no immediate change in short-term interest rates is likely and the Bank indicates that the overnight call money rate should remain near zero.
However, the bank provided these reserves, a liability item on its balance sheet, by substantially increasing its assets, as evident in the first graph here. The BoJ&#39;s assets grew quite significantly during two periods of the last 10 years, late 1997-98 following the Asian currency crisis, and from the spring of 2001 through 2002. In this latter period, it bought huge quantities of government securities, particularly bonds, and it began outright buying of short-term commercial bills.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060309d.jpg" width="353">
So as the Bank sheds the excess reserves &quot;over a few months&quot;, it will be interesting to see what happens to interest rates on the assets the Bank will also shed. The Bank&#39;s statement says that it will continue buying long-term government bonds, and that its &quot;un-easing&quot; [our terminology] will occur in short-term money markets. So the Bank is attempting to minimize the impact on interest rates all together. Whether they succeed remains to be seen and it likely depends on the accompanying vigor in the Japanese economy.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060309e.jpg" width="353">
Meantime, after the Bank&#39;s announcement in mid-afternoon, markets were actually encouraged, seeing this change in policy as a &quot;vote of confidence&quot; in the Japanese economy. Stock prices rose, with the Nikkei-225 up a whopping 2.6% on the day. And bond yields were little changed, in fact easing ever so slightly. Notably, in addition, even as the BoJ has added significantly to its holdings of government bonds in recent years, yields on them have not moved much. Thus, the yield curve has remained upward sloping, suggesting that investors believed the Bank&#39;s policy would eventually work, as it appears to be doing.
[The BoJ accounts and aggregate open market operations are included in Haver&#39;s JAPAN database. Daily stock market indexes and interest rates are shown in INTDAILY.] 

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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

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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>

US is big leader in global surge in private AI investment

Larger-than-usual income tax refunds this year are supporting consumer spending

Sharply rising share of AI-related jobs

Inflationary impact of surge in oil prices larger in Europe than in the US

Futures market thinks the price of oil will recede significantly over the next six months

Recent pickup in US defense orders could help support overall growth ahead

Cost of transporting crude oil has soared to series high

Market-based inflation expectations have not yet reflected recent surge in oil prices

Global equity markets are fearing a major economic disruption from soaring oil prices

Is recent drop in sentiment signaling softer growth ahead?

With the Iran conflict, geopolitical risk has soared to alarming levels

Soaring AI-related investment in US underpinning strong contribution of business spending to overall growth

AI-related outperformance of IP in Advanced Asia ex Japan

Resilient US economy pushing up Blue Chip 2026 outlook

US and China big leaders in adoption of AI models

Robust US demand for advanced technology products

China's export growth rotating away from the US

More pronounced upward revisions in countries more exposed to AI investment

Stable job openings and hiring rates point to cautious hiring

Global freight costs are on the rise while supply chain pressures are contained

Accelerating positive economic surprises in the G10 are boosting the global economy

Considerably more monetary ease expected from US and UK as Japan tightens

Tighter US immigration enforcement adversely impacting labor force

Economic policy uncertainty, while still elevated, is declining

Gradual disinflation and easier monetary policies across advanced economies

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Sandy Batten

260515r1.jpg

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Industrial production (IP) rose a much larger-than-expected 0.7% m/m in April, rebounding from an upwardly revised 0.3% m/m decline in March (previously -0.5% m/m), according to data released by the Federal Reserve Board. The Action Economics Survey looked for a 0.2% monthly gain. The y/y rate also rebounded in April, rising to 1.4% y/y after having fallen to 0.7% in March. IP has clearly trended up since late last year. Since November 2025, it has grown at a 3.6% annual rate. The current level of output is the highest since August 2019 but is still 1.5% below the November 2018 series peak.

Manufacturing output led the April rebound, rising 0.6% m/m (1.3% y/y) following an upwardly revised 0.1% monthly increase in March (previously -0.1% m/m). Mining output fell in April for the second consecutive month, edging down 0.1% m/m (+0.2% y/y) after a 1.6% monthly drop in March (revised down from -1.2% m/m). Utilities production rebounded in April, jumping 1.6% m/m (2.7% y/y) and more than offsetting a 1.4% monthly decline in March (revised up from -2.3% previously). The rebound in utilities output reflected a 1.1% rise in electricity production and a 7.3% monthly jump in natural gas distribution, the first monthly gain in four months.

Within manufacturing, durable goods production jumped 1.2% m/m (3.2% y/y) in April after having been unchanged in March. A 3.7% m/m rebound in motor vehicles and parts production, the largest monthly gain since May 2025, led the April increase. Motor vehicles and parts production had fallen 2.4% m/m in March. Production of computers and electronic products increased 1.5% m/m, the fourth consecutive monthly rise. Aerospace output rose 1.6% m/m in April, the third consecutive monthly gain and the largest since July 2025. By contrast, furniture production fell 1.8% m/m, the third consecutive monthly decline. 

Output of nondurable manufactured goods edged down 0.1% m/m (-0.6% y/y) in April, the first monthly decline in four months. Production of apparel and leather goods slumped 2.2% m/m on top of a 2.0% monthly fall in March. Chemical output fell 0.9% m/m in April, its first monthly decline in four months. Output of plastics and rubber products fell 0.9% m/m, the first monthly fall in four months. By contrast, production of petroleum and coal products rose 1.0% m/m in April, the same monthly increase as in March.

By market group, output of consumer goods rebounded in April, increasing 0.9% m/m (-0.2% y/y) following a 0.8% m/m decline in March. Production of business equipment surged 1.5% m/m (+6.0% y/y) in April, the largest monthly gain since March 2025. Output of construction supplies was unchanged in April from March (+1.2% y/y) following a 0.9% m/m gain in March. Materials production rebounded in April, rising 0.5% m/m (1.2% y/y) after a 0.4% m/m decline in March.

In special classifications, output of selected high-tech industries increased 1.0% m/m (+9.2% y/y) in April following a 0.5% monthly gain in March. The rebound in motor vehicles and parts production reflected a 5.3% monthly surge in vehicle output, the largest monthly gain since May 2025. Manufacturing output excluding selected high-tech industries rose 0.6% m/m in April, the largest increase since February 2025, following a 0.1% m/m increase in March. Manufacturing output excluding both selected high-tech industries and motor vehicles and parts advanced 0.3% m/m in April, the same monthly gain as in March.

Capacity utilization rose to 76.1% in April from 75.7% in March. The April reading was the highest since last August but was still 3.3%-points below its long-term (1972-2025) average. Manufacturing capacity utilization increased to 75.8% in April from 75.4% in March, 2.4%-points below its long-term average.

Industrial production and capacity data are in Haver’s **USECON** database. Additional detail on production and capacity utilization can be found in the **IP** database. The expectations figures come from the **AS1REPNA** database.



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- Total industrial output increased a much larger-than-expected 0.7% m/m in April with a small upward revision to March.
- Manufacturing output increased 0.6% m/m, led by a 5.3% m/m rebound in vehicle production.
- Mining output edged down 0.1% m/m, while utilities production rose 1.9% m/m.
- The headline rate of capacity utilization rose to 76.1% in April, its highest reading since last August but still well below its long-term average.


U.S. Industrial Production Jumped in April

Robert Brusca

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Industrial orders in Canada are back on an expansion path with orders growing 4.7% in March on top of a 6.9% gain in February. These statistics chronicle Canadian orders digging out from a hole they fell into early in 2026. Now the data show emerging sequential growth in Canadian orders, which are advancing 3.6% over 12 months at a 14.9% annual rate over six-months, and a 26.7% annual rate over three-months. Still, on the chart that plots the year-over-year growth rates these recent accelerated rates of growth appear as mere recoveries from what had been earlier weakness. It remains to be seen how much acceleration the Canadian economy will actually undergo.

Unfilled orders expanded in March for the second month in a row, growing 2.4% after growing 1.4% in February once again following the recovery theme.

Manufacturing shipments grew by 3% in March after growing 3.4% in February and after dropping sharply in January - again echoing the recovery theme. Durable goods show two months of increases with the March increase weak after a very strong rise in February. Motor vehicle output recovered very strongly in February, after falling at a 37.1% annual rate in January; motor vehicle output is up by 15% in March, a hefty growth rate but short of what was posted in February. Once again, we see an echo of the theme of recovery. However, shipments of durable goods excluding motor vehicles are less robust, after dropping 1.8% in January output rose by 3.8% in February and has fallen back, dropping by 1.1% in March, a small fly in the ointment of this recovery theme for Canada. And nondurable goods shipments saw a small increase in January of 0.2%, a flat February, and now an extremely strong, 5.6% month-to-month gain in March.

Canada's sequential growth rates are on the verge of showing broad acceleration. Orders clearly do accelerate from 12-months to six-months to three-months. Unfilled orders, however, accelerate over six-months compared to 12-months and then take a small step back over three-months to an annualized growth rate of 13.4% - a very small step back that is still far above the 12-month growth pace. Manufacturing shipments, too, show a small flaw in acceleration as the 6-month pace dips ever so slightly before logging a very strong 3-month pace. Durable goods then are an exception to the acceleration theme; however, nondurable goods get back on board with the strong acceleration move.

**Rankings**
The rank standings for these categories are based on annual growth rates and comparison with data extend back approximately 25 years. Orders have a 58-percentile standing, unfilled orders have a 57-percentile standing, while manufacturing shipments have a 62-percentile standing. Shipments for durable goods durables excluding motor vehicles and from motor vehicles as a stand-alone have rankings in their 30th- to 40th-percentiles, below their historic medians. (medians occur at a ranking of 50). However, nondurables have an extremely strong 80.5 percentile standing. The data are consistent, the recovery and progress with the exception that durable goods shipments that are not fully on board and languish below their historic median results. Ranking the data over six-month growth rates improves the results somewhat and brings motor vehicles on board for a growth rate that is above its historic median.

**Signs of improvement**
Goods-based industry shows signs of picking up even in March as oil prices were rising and industry was facing greater challenges. The US industrial production report for April, similarly, shows acceleration across the board, even as the economy continued to deal with the difficulties of rising oil prices. Of course, the Canadian US economies are closely linked; we would expect the manufacturing sectors to be performing with some degree of synchronization. However, there's no reason to be complacent about the outlook. Oil prices have continued to rise, the challenge to consumers is strong and across all countries. In the US special tax cuts enacted last year, which went into effect earlier this year, have helped to deliver extra money to consumers that have helped them deal with the oil price shock. But these were funds that were supposed to help stimulate the economy to higher growth and were planned by the President to help him with midterm elections coming later in the year. The US economy still has to deal with those realities with sharply divided political reality as well.

**Outlook**
The US acrimony with Canada has taken a back burner for a while. And as that has happened the Canadian economy has come back to life. However, Canada still has some problems with inflation although it also has a broader inflation target to accommodate some flexibility. And the prospect for more inflation because of global oil prices continues to hang in the balance. The results for March are encouraging but certainly not definitive. Canada has mounted a nice recovery after a period of difficulty earlier in the year but it's still hard to say what comes next.



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Canada

Canadian Industry Perks Up

Andrew Cates

**A Tug of War Between AI Hope and Geopolitical Shock**
The latest Blue Chip Economic Indicators survey highlights a growing divergence between economies benefiting from AI-driven optimism and those more exposed to the inflationary consequences of renewed geopolitical instability. Taiwan stands out as the clearest AI beneficiary, with growth forecasts revised sharply higher while inflation expectations have risen only modestly, reflecting surging semiconductor demand and continued investment in global technology supply chains. China also remains relatively resilient, supported by ongoing AI-related capital spending and stronger technology sectors. By contrast, the euro area and UK have seen much larger upward revisions to inflation forecasts alongside weaker or declining growth expectations, underscoring their greater vulnerability to the recent Middle East shock and higher energy costs. Korea sits somewhere in between: benefiting from the AI hardware cycle but still exposed to trade and energy headwinds. Overall, the chart illustrates the increasingly important push-and-pull shaping the global outlook: AI optimism and productivity hopes on one side, and geopolitical fragmentation, energy insecurity and supply-side inflation pressures on the other.

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**Forecasters See Contained Pass-Through**
Against this backdrop, our latest Blue Chip special question sought to gauge whether economists believe the recent rise in energy prices will remain largely contained — or whether it risks spilling more meaningfully into underlying global inflation dynamics. The results suggest forecasters have become somewhat less concerned about a broad and persistent inflationary impulse since April. A larger share of respondents in the May survey now expect only a “limited and temporary” pass-through into core inflation, while the proportion anticipating “moderate and persistent” effects has declined noticeably. Very few panelists expect significant second-round effects, implying that most still believe inflation expectations and wage-setting behaviour remain relatively well anchored. In part, this reflects confidence in central bank credibility and the view that softer global demand conditions will constrain firms’ pricing power. Yet the persistence of a sizeable minority still expecting moderate pass-through underscores the uncomfortable tension facing policymakers. 

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**Energy Reawakens as a US Inflation Driver**
While survey respondents generally expect only limited pass-through from higher energy prices into broader inflation, the latest US CPI data provide a reminder that the process may already be underway at the margin. April’s CPI report showed core inflation coming in slightly firmer than expected, suggesting underlying price pressures remain more persistent than many policymakers had hoped. The decomposition of CPI inflation highlights that services continue to dominate overall inflation dynamics, reflecting still-elevated wage and labour-intensive price pressures across the economy. However, the more notable recent development has been the renewed contribution from energy prices, which had previously acted as a disinflationary force through much of 2025. Food inflation has also remained comparatively steady, while non-energy goods prices continue to exert only modest upward pressure despite ongoing tariff and supply-chain concerns. Taken together, the data reinforce the idea that the US economy is not facing a classic demand collapse, but rather a more uncomfortable supply-side environment in which geopolitical energy shocks risk colliding with still-resilient domestic demand, AI-related investment spending and sticky service-sector inflation.

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**AI: The Powerful Counterweight to Geopolitical Headwinds**
If rising energy prices and geopolitical instability represent one major force shaping the current macroeconomic outlook, the extraordinary surge in AI-related investment represents the other. The latest data from Our World in Data show global private investment in AI accelerating sharply again in 2025, reaching close to $300 billion — more than double the level seen just two years earlier. The United States continues to dominate the global AI landscape, accounting for the overwhelming majority of private investment spending, while China and Europe remain considerably smaller contributors despite continued growth. The scale and speed of the 2025 increase is particularly striking given the broader backdrop of elevated policy uncertainty, trade fragmentation and concerns about slowing global productivity growth. In effect, the global economy is now being pulled in two competing directions: on one side, geopolitical tensions, supply-chain fragilities and more recent energy shocks are weighing on confidence and raising supply-side costs; on the other, AI enthusiasm is driving an enormous wave of capital expenditure, infrastructure build-out and technology-related demand. This helps explain why growth expectations — particularly in the US and parts of Asia — have remained comparatively resilient despite an increasingly uncertain global environment.

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**Industrial Winners and Losers in a Fragmenting Global Economy**
The divergence in industrial performance across advanced economies has become increasingly striking. Taiwan has emerged as one of the clearest beneficiaries of the global AI boom, with industrial production surging as semiconductor demand, data-centre investment and advanced electronics exports continue to accelerate. Denmark has also significantly outperformed, though for very different reasons, with the extraordinary global success of its pharmaceutical sector — particularly weight-loss and diabetes drugs — driving a powerful expansion in manufacturing output. By contrast, the UK and Germany have experienced a far weaker industrial recovery. In both cases, elevated energy costs and greater dependence on imported energy have weighed heavily on industrial competitiveness since the post-pandemic energy shock. Germany’s large manufacturing sector has been particularly exposed to higher natural gas prices and weaker external demand, while the UK has continued to struggle with a combination of high energy costs, weak productivity growth and subdued business investment. The chart highlights an increasingly important feature of the global economy: countries exposed to powerful structural growth themes such as AI or pharmaceuticals are pulling away from those still burdened by energy dependence and deteriorating industrial competitiveness.

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**China’s Pulse Is Picking Up Again**
China’s economic backdrop has shown clearer signs of improvement in recent months, with both the Citigroup Economic Surprise Index and the Yicai High Frequency Economic Activity Index moving higher. The rebound suggests that incoming data have begun consistently outperforming expectations after a prolonged period of disappointment. Part of the recent improvement likely reflects the cumulative effects of policy easing, including targeted fiscal support, infrastructure spending and further efforts to stabilise the property sector. Export demand has also remained more resilient than many expected, helped in part by the continued strength of global technology and AI-related supply chains. At the same time, improving domestic mobility and energy usage indicators point to firmer underlying activity momentum. The Yicai index itself is designed to provide a near real-time pulse of the Chinese economy using a basket of high-frequency indicators including subway usage, air pollution, coal consumption, freight activity, unemployment and bankruptcy trends. While China still faces significant structural headwinds — including weak household confidence, property-sector fragilities and deflationary pressures — the recent pickup suggests that growth momentum may be stabilising at a time when several other major economies are becoming more vulnerable to geopolitical and energy-related shocks.

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The global economy is still caught between two powerful and competing forces. On one side, the AI investment boom continues to support growth, industrial activity and equity markets, particularly in the US and parts of Asia. On the other, renewed Middle East tensions and higher energy prices are adding to inflation risks and broader policy uncertainty. The latest Blue Chip survey reflects this divide clearly: growth expectations have generally held up best in economies tied to AI-related investment and technology supply chains, while inflation forecasts have risen more sharply in more energy-exposed economies such as the UK and euro area (chart 1). Forecasters still largely expect only limited pass-through from higher energy prices into core inflation, although recent US CPI data suggest underlying price pressures remain somewhat sticky (charts 2 and 3). At the same time, the extraordinary continued surge in global AI investment — now approaching $300 billion annually — highlights the sheer scale of capital being deployed into semiconductors, data centres and digital infrastructure, particularly in the United States (chart 4). The divergence in industrial production trends also reinforces the growing gap between economies benefiting from structural growth drivers — such as Taiwan’s semiconductor sector and Denmark’s pharmaceutical industry — and those struggling with higher energy costs and weaker competitiveness, notably Germany and the UK (chart 5). Meanwhile, improving Chinese activity indicators suggest policy support and stronger technology demand may finally be helping to stabilise growth (chart 6). Overall, the world economy remains resilient, but increasingly uneven, with AI-related investment continuing to offset — though not eliminate — the drag from geopolitical fragmentation and rising energy insecurity.

Charts of the Week: The Tug of War

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Total retail sales rose a solid 0.5% m/m (4.9% y/y) in April on top of a slightly downwardly revised 1.6% monthly jump in March (previously 1.7%), according to data released by the U.S. Census Bureau. The Action Economics Forecast Survey looked for a 05% m/m gain. Excluding autos, other sales increased 0.7% m/m (6.3% y/y) in April following an unrevised 1.9% monthly jump in March. Expectations were for a 0.6% monthly increase. The strong performance in March and the additional solid gain in April put the April level up 7.8% at an annual rate from the Q1 average, providing a very solid start for Q2.

As expected, the continued rise in retail gasoline prices boosted gasoline sales further in April. Gasoline sales increased 2.8% m/m in April following a 13.7% m/m surge in March and accounted for more than 40% of the April increase in total sales. However, sales were solid even without gasoline sales. Total sales excluding gasoline rose 0.3% m/m in April versus a 0.7% monthly gain in March. Sales excluding both autos and gasoline increased 0.5% m/m in April following a 0.7% m/m rise in March.

The control group of sales (total sales excluding food services, autos, gasoline and building materials that the BEA uses to construct PCE in the national accounts) posted another solid increase in March, rising 0.5% m/m in April following an upwardly revised 0.8% m/m increase in March (previously (0.7% m/m). The solid performances of the control group sales in March and April provide a strong start to Q2. April control-group sales are 5.4% at an annual rate above the Q1 average, in line with the 5.7% annualized increase in Q1. Consumer spending remains surprisingly resilient notwithstanding the recent hit to disposable income from the marked increase in energy prices.

Sales across major sectors were varied in April. Consumers clearly spent more on necessities, owing largely to higher prices. Food sales increased 0.8% m/m in April on top of a 1.0% m/m rise in March. And as already noted, gasoline sales posted another outsized monthly increase. By contrast, department store sales slumped 3.2% m/m, clothing sales fell 1.5% m/m, auto sales declined 0.4% m/m and furniture sales fell 2.0% m/m. More encouragingly, sales of nonstore retailers rose 1.1% m/m, their fourth consecutive solid monthly gain. And sales at restaurants increased 0.6% m/m in April, their third consecutive monthly rise. Analysts frequently use restaurant sales as a barometer of consumer attitudes, believing that consumers would not eat out regularly if they were under serious financial stress.

Retail sales data can be found in Haver’s **USECON** database. The expectations figures are from the Action Economics Forecast Survey in **AS1REPNA**.


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- Total sales increase 0.5% m/m in April after a 1.6% monthly jump in March.
- Gasoline sales rose 2.8% m/m in April on top of a 13.7% surge in March.
- Auto sales fell 0.4% m/m after a 0.6% m/m rise in March.
- Excluding auto and gasoline sales, remaining sales increased by a solid 0.5% m/m in April versus a 0.7% m/m rise in March.
- Sales of the retail control group that is used to construct PCE rose 0.5% m/m in April and are 5.4% annualized above the Q1 average, providing a good start to Q2.


U.S. Retail Sales Slowed in April But Remained Solid

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance rose by 12,000 to 211,000 in the week ending May 9, from 199,000 in the week ending May 2, revised from 200,000. The four-week average rose 750 to 203,750 in the week ending May 9, from 203,000 the May 2 week, revised from 203,250. The Action Economics/Haver Analytics Survey looked for 205,000 claims to have been filed. 

The total number of unemployment insurance beneficiaries—also known as “continuing claims”—rose by 24,000 to 1.782 million in the week ending May 2, from 1.758 million in the week ending April 25, revised from 1.766 million. The four-week moving average declined to 1.781 million in the latest week from 1.788 million in the April 25 week. The four-week moving average reached the lowest level since May 2024. The insured unemployment rate rose back to 1.2% in the week of May 2 from the one-week dip to 1.1% in the April 25 week. It had been at 1.2% since the week of November 29, 2025.

The insured unemployment rate varied greatly across individual states and territories. In the week ending April 25, the highest unemployment rates were in Rhode Island (2.29%), New Jersey and Massachusetts (both 2.20%), and Washington (2.15%). The lowest rates were in Florida and Louisiana (both 0.31%), South Dakota (0.32%), Alabama and Arkansas (both 0.36%), North Carolina (0.38%), Tennessee (0.47%) and Iowa, Kansas and Virginia (all 0.48%). Rates in other notable states include California (1.99%), New York (1.66%), Illinois (1.56%), Pennsylvania (1.28%), and Texas (1.03%). These state data are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor itself, not the Bureau of Labor Statistics. They begin in 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in **USECON**. Data for individual states are in **REGIONW** back to December 1986.


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- New claims rose by 12,000 to 211,000.
- Continuing claims rose by 24,000 to 1.782 million.
- The insured unemployment rate was back up to 1.2% in the week of May 2, from the one-week dip to 1.1% the prior week.

Economy in Brief: 2006

Jump to:

Bank of Japan To Implement "Un-Ease": A Follow-Up

4Q Debt Fueled By Government Budget Deficit, 2005 By the Consumer

Initial Unemployment Insurance Claims Highest in Two Months

U.S. Trade Deficit Surged Due to Higher Imports

U.S. Trade Deficit Surged Due to Higher Imports

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

Mortgage Applications Ticked Up But Interest Rates Jumped

Mortgage Applications Ticked Up But Interest Rates Jumped