Louise Curley

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100104h.jpg" align="right" border="0" height="265" width="353">While
Indonesia has had extensive damage from earthquakes, it has so far
escaped a recession.&nbsp; The closest it has come was the fourth
quarter of 2008 when real gross domestic product increased at an annual
rate of only 0.80%.&nbsp; Subsequent increases have been 3.58% in
the first quarter of 2009, 5.49% in the second and 6.64 in the third
quarter. The annual rates of increase in real GDP over the past six
years are shown in the first chart.
Today, the consumer price
index for December was released.&nbsp;Inflation continues to be
well behaved although there has been a slight increase in the last two
months.&nbsp; The rate of inflation as measured by the year to year
increase in the seasonally unadjusted consumer price index was 2.78%
down from 11.06% in December of 2008.&nbsp; The course of inflation
in Indonesia is shown in the second chart.
Also released
today were Indonesia's exports, imports and balance of trade.&nbsp;
There has been a rising trend in the balance of trade from the 640
million USD deficit in October,2008.&nbsp; Exports at 11,562
million USD are below the peak level of 12,499 million USD reached in
June of 2008 and imports at 9,563 million USD are well below the peak
of 12,142 million USD reached&nbsp; in July 2008.&nbsp; The
third chart shows exports, imports and the balance of trade over the
past six years.
<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100104i.jpg" border="0" height="265" width="312">
<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100104j.jpg" border="0" height="265" width="312">
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col">INDONESIA</th>
<th scope="col">Q4 09</th>
<th scope="col">Q3 09</th>
<th scope="col">Q2 09</th>
<th scope="col">Q1 09</th>
<th scope="col">Q4 08</th>
<th scope="col">Q3 08</th>
<th scope="col">Q2 08</th>
<th scope="col">Q1 08</th>
<th scope="col">&nbsp;</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td colspan="10" class="firstcol"> Real Gross Domestic
Product</td>
</tr>
<tr class="odd">
<td class="firstcol">Q/Q Annual Rate of Change in
Real GDP&nbsp; (%)</td>
<td>--</td>
<td>6.64</td>
<td>5.49</td>
<td>3.58</td>
<td>0.80</td>
<td>6.08</td>
<td>7.50</td>
<td>6.75</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">&nbsp;</td>
<td>Dec 09</td>
<td>Nov 09</td>
<td>Oct 09</td>
<td>Sep 09</td>
<td>Aug 09</td>
<td>Jul 09&nbsp;</td>
<td>Jun 09</td>
<td>May 09</td>
<td>Apr 09</td>
</tr>
<tr class="odd">
<td class="firstcol">CPI Y/Y % Change (%)</td>
<td>2.78</td>
<td>2.41</td>
<td>2.57</td>
<td>2.83</td>
<td>2.75</td>
<td>2.71</td>
<td>3.65</td>
<td>6.04</td>
<td>7.31</td>
</tr>
<tr>
<td class="firstcol">Trade</td>
<td>Dec 09</td>
<td>Nov 09</td>
<td>Oct 09</td>
<td>Sep 09</td>
<td>Aug 09</td>
<td>Jul 09&nbsp;</td>
<td>Jun 09</td>
<td>May 09</td>
<td>Apr 09</td>
</tr>
<tr class="odd">
<td class="firstcol">Exports&nbsp; (Millions US
$)</td>
<td>--</td>
<td>11562</td>
<td>12108</td>
<td>9588</td>
<td>10257</td>
<td>9260</td>
<td>9135</td>
<td>8756</td>
<td>8872</td>
</tr>
<tr class="odd">
<td class="firstcol">Imports (Millions US $)</td>
<td>--</td>
<td>9563</td>
<td>9903</td>
<td>8288</td>
<td>8963</td>
<td>8161</td>
<td>7645</td>
<td>7165</td>
<td>6512</td>
</tr>
<tr class="odd">
<td class="firstcol">Balance (Millions US $)</td>
<td>--</td>
<td>1999</td>
<td>2205</td>
<td>1308</td>
<td>1294</td>
<td>1099</td>
<td>1490</td>
<td>1591</td>
<td>2362</td>
</tr>
</tbody>
</table>

</body></html>

While Indonesia has had extensive damage from earthquakes, it has so far escaped a recession. The closest it has come was the fourth quarter of 2008 when real gross domestic product increased at an annual rate of only 0.80%. [...]

Indonesia Avoids Recession

Tom Moeller

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100104e.jpg" align="right" border="0" height="265" width="353">Though its
rate of decline has moderated, construction spending has continued to
move lower. During November construction outlays fell 0.6% after a
little-revised 0.5% October shortfall. The latest decline left the y/y
change at -13.2% which was improved just modestly from the weakest
-15.8% September comparison. The latest decline about matched Consensus
estimates. Residential building activity renewed its decline with a
1.6% fall following a 4.8% October gain. The decline owed to a 4.1%
(-44.4% y/y) drop in multi-family building and a 3.9% (-2.8% y/y)
shortfall in spending on improvements. Single-family construction rose
1.3% (-25.2% y/y) for the sixth consecutive monthly increase. 
Nonresidential building activity was roughly unchanged after a steep
4.8% October decline. Since the 2008 peak, activity has fallen by
22.5%. Spending in the food &amp; beverage industry declined 44.1%
y/y while expenditures in the lodging were off by nearly one-half.
Commercial building overall fell 40.5% y/y while office building
dropped by more than one-third. Relatively moderate were the declines
in the education (-18.8% y/y), religious (-18.3% y/y) and health care
(-16.1% y/y) sectors.&nbsp;Factory sector spending (-7.0% y/y) was
buoyed by gains in the chemical and in the
computer/electronic/electrical sectors.In the public sector,
construction overall fell a modest 0.4% during November but y/y
expenditures rose despite lower tax revenues. Building activity on
highways &amp; streets fell 2.9% m/m but rose 5.7% y/y due to the
focus on infrastructure rebuilding. Public spending on health care
facilities increased a strong 12.2% y/y but building in the education
sector was off 2.6% y/y. The construction put-in-place figures are
available in Haver's USECON database.&nbsp;&nbsp;
<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100104f.jpg" border="0" height="265" width="312">
<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100104g.jpg" border="0" height="265" width="312">
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol">Construction
(%)</th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">September</th>
<th scope="col">Y/Y</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>-0.6</td>
<td>-0.5</td>
<td>-1.6</td>
<td>-13.2</td>
<td>-6.9</td>
<td>-1.6</td>
<td>6.3</td>
</tr>
<tr>
<td class="firstcol">Private</td>
<td>-0.7</td>
<td>-0.8</td>
<td>-2.4</td>
<td>-20.0</td>
<td>-11.1</td>
<td>-5.7</td>
<td>5.5</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Residential</td>
<td>-1.6</td>
<td>4.8</td>
<td>-0.6</td>
<td>-19.2</td>
<td>-29.1</td>
<td>-19.7</td>
<td>1.0</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Nonresidential</td>
<td>-0.0</td>
<td>-4.8</td>
<td>-3.7</td>
<td>-20.6</td>
<td>13.2</td>
<td>23.1</td>
<td>16.2</td>
</tr>
<tr>
<td class="firstcol">Public</td>
<td>-0.4</td>
<td>0.0</td>
<td>-0.1</td>
<td>2.7</td>
<td>5.6</td>
<td>13.1</td>
<td>9.3</td>
</tr>
</tbody>
</table>
</body></html>

Though its rate of decline has moderated, construction spending has continued to move lower. During November construction outlays fell 0.6% after a little-revised 0.5% October shortfall. The latest decline left the y/y change at [...]

U.S. Factory Inventories &Shipments Increase Again

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100104b.jpg" align="right" border="0" height="265" width="353">Improvement
in the U.S. factory sector continued last month from its nadir reached
twelve months earlier. The National Association of Purchasing
Management reported that its December composite index showed unexpected
strength with a rise to 55.9 from 53.6 during November. The latest
figure was the highest since April 2006 and it was up from the low of
32.9 reached last December. A more modest gain to 54.0 had been the
Consensus expectation. (Any reading above the break-even point of 50
suggests rising activity.) The ISM data is available in Haver's USECON
database. The positive factory-sector growth rate
suggested by the ISM index is in line with recoveries accompanying past
upturns from severe recessions. To mirror the strength of those
recoveries, however, the index still needs to rise to a level near or
above the level of 60.The new orders index showed the greatest m/m
gain with its increase to a high of 65.5 from 60.3 in November. Working
the other way, the export order index fell moderately to 54.5 from its
recent high. Nevertheless the index was up from its low of 35.5 last
December. During the last ten years there has been a 53% correlation
between the index and the q/q change in real exports of goods in the
GDP accounts. The employment index showed a smaller gain 52.0.
Nevertheless, the level indicated positive growth in factory-sector
payrolls. <img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100104c.jpg" align="right" border="0" height="265" width="353">
It has increased from a low reading of 26.1 last February.
Seventeen percent of respondents indicated higher payrolls versus only
seven percent last December. Eighteen percent indicated a lower level
of hiring versus fifty percent last December. During the last ten years
there has been a 90% correlation between the index level and the
three-month change in manufacturing payrolls. The production component
rose modestly to 61.8 but remained lower than its October high of 63.3.
During the last ten years there has been an 84% correlation between the
level of the production component of the composite index and the
three-month growth in factory sector industrial production. It
is appropriate to correlate the ISM index level
with factory sector output growth because the ISM
index is a diffusion index. It measures growth by using all of the
positive changes in activity added to one half of the zero change in
activity measures. <img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100104d.jpg" align="right" border="0" height="265" width="353">
A two point gain in the inventory
component to 43.4 recovered some of its November decline but it still
was down from the October high. Thirteen percent (NSA) of respondents
indicated that they were raising inventory levels versus 18% last
December. During the strong 2005 inventory accumulation 26% of firms
indicated that they were raising inventories. Thirty percent of
respondents indicated lower inventories.The separate index of prices
paid made up more than half of its November decline and was up from the
December low of 18.0. During the last twenty years there has been a 79%
correlation between the price index and the three-month change in the
PPI for intermediate goods.The ISM data are available in Haver's USECON
database.Monetary Policy and the Housing Bubble
is the title of yesterday's speech by Fed Chairman Ben S. Bernanke and
it is available <a href="http://www.federalreserve.gov/newsevents/speech/bernanke20100103a.htm">here</a>.&nbsp;
<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/SURVEYS/@S2/@S201/@S201.HTM">ISM
Mfg</a></th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">Dec. '08</th>
<th scope="col">2009</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Composite Index</td>
<td>55.9</td>
<td>53.6</td>
<td>55.7</td>
<td>32.9</td>
<td>46.3</td>
<td>45.5</td>
<td>51.1</td>
</tr>
<tr>
<td class="firstcol">&nbsp; New Orders</td>
<td>65.5</td>
<td>60.3</td>
<td>58.5</td>
<td>23.1</td>
<td>51.7</td>
<td>42.1</td>
<td>54.3</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Employment</td>
<td>52.0</td>
<td>50.8</td>
<td>53.1</td>
<td>29.9</td>
<td>40.6</td>
<td>43.2</td>
<td>50.5</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Production</td>
<td>61.8</td>
<td>59.9</td>
<td>63.3</td>
<td>26.3</td>
<td>50.3</td>
<td>45.2</td>
<td>54.1</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Supplier Deliveries</td>
<td>56.6</td>
<td>55.7</td>
<td>56.9</td>
<td>45.7</td>
<td>51.4</td>
<td>51.6</td>
<td>51.2</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Inventories</td>
<td>43.4</td>
<td>41.3</td>
<td>46.9</td>
<td>39.6</td>
<td>37.2</td>
<td>45.5</td>
<td>45.4</td>
</tr>
<tr class="odd">
<td class="firstcol">Prices Paid Index (NSA)</td>
<td>61.5</td>
<td>55.0</td>
<td>65.0</td>
<td>18.0</td>
<td>48.3</td>
<td>66.5</td>
<td>64.6</td>
</tr>
</tbody>
</table>
</body></html>

Improvement in the U.S. factory sector continued last month from its nadir reached twelve months earlier. The National Association of Purchasing Management reported that its December composite index showed unexpected strength with a [...]

ISM Manufacturing Series Show Broad-Based Gains

Robert Brusca

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100104a.jpg" align="left" border="0" height="265" width="353">
The PMI indices for MFG from Markit show an ongoing
improvement across the e-zone. The e-Zone index is still some 8.9
points from its cycle peak but it has risen by 18 points from its cycle
low. Greece at 10.6 points above its cycle low has had the smallest
recovery from its low point. The UK Germany and France have risen the
most from their respective low points but the UK stands the closest to
its cycle peak reading standing only 2.2 points below its cycle peak
reading in December. Spain, Greece and France are still the farthest
away from their respective cycle peaks.
In December among the countries in the table only Spain saw a
set back. This is marked improvement from November when five of these
countries experienced a set back in the month&#8217;s MFG PMI reading.
Spain&#8217;s index has fallen on balance over the last three
months. It is the only one in this group to do so. However Austria and
Greece rose by less than 0.5 points on balance over the last three
months compared to an e-Zone index rise of 2.3points. .The e-Zone
advance is now being led by improvements in Italy and in Germany but
all the e-Zone countries in the table above are advancing at a slower
rate than they had over six months (multiply the respective three month
gains by a factor of two to see this). The UK, an EU member, is an
exception to this trend as it is still accelerating.
Spain, Greece and Ireland are the only countries in the table
that are not back into pre-recession ranges for their MFG PMI readings
(levels). The UK is the only country that is near the top of its
pre-recession range in terms of its overall PMI index (March 2000- Jan
2008).
On balance the e-Zone is still making progress. Some
choppiness in the indices in this region is to be expected if the
recovery is going to continue but lose some of its gusto. If the
recovery is going to gain speed we will need to see these indices
continue to advance. The signals right now seem to favor a period of
consolidation and of continued but slow growth progress.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr><th colspan="9" scope="col"> Changes in Markit MFG Indices</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">Changes Mo/Mo</td>
<td colspan="3">Change on Frequency</td>
<td colspan="2">&nbsp;&nbsp;&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Dec-09</td>
<td>Nov-09</td>
<td>Oct-09</td>
<td>3Mo</td>
<td>6Mo</td>
<td>12Mo</td>
<td>From Peak</td>
<td>From Low</td>
</tr>
<tr>
<td class="firstcol">Euro-13</td>
<td>0.39</td>
<td>0.47</td>
<td>1.44</td>
<td>2.30</td>
<td>8.97</td>
<td>17.72</td>
<td>-8.9</td>
<td>18.0</td>
</tr>
<tr>
<td class="firstcol">Germany</td>
<td>0.25</td>
<td>1.40</td>
<td>1.39</td>
<td>3.04</td>
<td>11.81</td>
<td>20.03</td>
<td>-8.2</td>
<td>20.7</td>
</tr>
<tr>
<td class="firstcol">France</td>
<td>0.31</td>
<td>-1.21</td>
<td>2.62</td>
<td>1.72</td>
<td>8.85</td>
<td>19.80</td>
<td>-10.1</td>
<td>19.9</td>
</tr>
<tr>
<td class="firstcol">Italy</td>
<td>0.71</td>
<td>0.85</td>
<td>1.66</td>
<td>3.22</td>
<td>8.11</td>
<td>15.26</td>
<td>-9.2</td>
<td>16.2</td>
</tr>
<tr>
<td class="firstcol">Spain</td>
<td>-0.09</td>
<td>-1.02</td>
<td>0.48</td>
<td>-0.63</td>
<td>2.43</td>
<td>16.70</td>
<td>-12.3</td>
<td>16.7</td>
</tr>
<tr>
<td class="firstcol">Austria</td>
<td>0.88</td>
<td>-1.12</td>
<td>0.74</td>
<td>0.50</td>
<td>8.80</td>
<td>15.80</td>
<td>-8.0</td>
<td>17.7</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Greece</td>
<td>1.54</td>
<td>-0.72</td>
<td>-0.49</td>
<td>0.33</td>
<td>1.12</td>
<td>7.83</td>
<td>-10.6</td>
<td>10.6</td>
</tr>
<tr>
<td class="firstcol">Ireland</td>
<td>0.02</td>
<td>0.78</td>
<td>1.44</td>
<td>2.24</td>
<td>6.34</td>
<td>10.94</td>
<td>-7.6</td>
<td>15.6</td>
</tr>
<tr class="even">
<td colspan="9" class="firstcol">EU</td>
</tr>
<tr>
<td class="firstcol">UK</td>
<td>2.33</td>
<td>-1.16</td>
<td>2.94</td>
<td>4.11</td>
<td>6.87</td>
<td>18.53</td>
<td>-2.2</td>
<td>19.1</td>
</tr>
<tr class="odd">
<td colspan="9" class="firstcol">Percentile is over range since March
2000</td>
</tr>
</tbody>
</table>
</body></html>

The PMI indices for MFG from Markit show an ongoing improvement across the e-zone. The e-Zone index is still some 8.9 points from its cycle peak but it has risen by 18 points from its cycle low. Greece at 10.6 points above its cycle [...]

Manufacturing Is Digging Out

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100104a.jpg" align="left" border="0" height="265" width="353">
The PMI indices for MFG from Markit show an ongoing
improvement across the e-zone. The e-Zone index is still some 8.9
points from its cycle peak but it has risen by 18 points from its cycle
low. Greece at 10.6 points above its cycle low has had the smallest
recovery from its low point. The UK Germany and France have risen the
most from their respective low points but the UK stands the closest to
its cycle peak reading standing only 2.2 points below its cycle peak
reading in December. Spain, Greece and France are still the farthest
away from their respective cycle peaks.
In December among the countries in the table only Spain saw a
set back. This is marked improvement from November when five of these
countries experienced a set back in the month&#8217;s MFG PMI reading.
Spain&#8217;s index has fallen on balance over the last three
months. It is the only one in this group to do so. However Austria and
Greece rose by less than 0.5 points on balance over the last three
months compared to an e-Zone index rise of 2.3points. .The e-Zone
advance is now being led by improvements in Italy and in Germany but
all the e-Zone countries in the table above are advancing at a slower
rate than they had over six months (multiply the respective three month
gains by a factor of two to see this). The UK, an EU member, is an
exception to this trend as it is still accelerating.
Spain, Greece and Ireland are the only countries in the table
that are not back into pre-recession ranges for their MFG PMI readings
(levels). The UK is the only country that is near the top of its
pre-recession range in terms of its overall PMI index (March 2000- Jan
2008).
On balance the e-Zone is still making progress. Some
choppiness in the indices in this region is to be expected if the
recovery is going to continue but lose some of its gusto. If the
recovery is going to gain speed we will need to see these indices
continue to advance. The signals right now seem to favor a period of
consolidation and of continued but slow growth progress.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="9" scope="col"> Changes
in Markit MFG Indices</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">Changes Mo/Mo</td>
<td colspan="3">Change on Frequency</td>
<td colspan="2">&nbsp;&nbsp;&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Dec-09</td>
<td>Nov-09</td>
<td>Oct-09</td>
<td>3Mo</td>
<td>6Mo</td>
<td>12Mo</td>
<td>From Peak</td>
<td>From Low</td>
</tr>
<tr>
<td class="firstcol">Euro-13</td>
<td>0.39</td>
<td>0.47</td>
<td>1.44</td>
<td>2.30</td>
<td>8.97</td>
<td>17.72</td>
<td>-8.9</td>
<td>18.0</td>
</tr>
<tr>
<td class="firstcol">Germany</td>
<td>0.25</td>
<td>1.40</td>
<td>1.39</td>
<td>3.04</td>
<td>11.81</td>
<td>20.03</td>
<td>-8.2</td>
<td>20.7</td>
</tr>
<tr>
<td class="firstcol">France</td>
<td>0.31</td>
<td>-1.21</td>
<td>2.62</td>
<td>1.72</td>
<td>8.85</td>
<td>19.80</td>
<td>-10.1</td>
<td>19.9</td>
</tr>
<tr>
<td class="firstcol">Italy</td>
<td>0.71</td>
<td>0.85</td>
<td>1.66</td>
<td>3.22</td>
<td>8.11</td>
<td>15.26</td>
<td>-9.2</td>
<td>16.2</td>
</tr>
<tr>
<td class="firstcol">Spain</td>
<td>-0.09</td>
<td>-1.02</td>
<td>0.48</td>
<td>-0.63</td>
<td>2.43</td>
<td>16.70</td>
<td>-12.3</td>
<td>16.7</td>
</tr>
<tr>
<td class="firstcol">Austria</td>
<td>0.88</td>
<td>-1.12</td>
<td>0.74</td>
<td>0.50</td>
<td>8.80</td>
<td>15.80</td>
<td>-8.0</td>
<td>17.7</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Greece</td>
<td>1.54</td>
<td>-0.72</td>
<td>-0.49</td>
<td>0.33</td>
<td>1.12</td>
<td>7.83</td>
<td>-10.6</td>
<td>10.6</td>
</tr>
<tr>
<td class="firstcol">Ireland</td>
<td>0.02</td>
<td>0.78</td>
<td>1.44</td>
<td>2.24</td>
<td>6.34</td>
<td>10.94</td>
<td>-7.6</td>
<td>15.6</td>
</tr>
<tr class="even">
<td colspan="9" class="firstcol">EU</td>
</tr>
<tr>
<td class="firstcol">UK</td>
<td>2.33</td>
<td>-1.16</td>
<td>2.94</td>
<td>4.11</td>
<td>6.87</td>
<td>18.53</td>
<td>-2.2</td>
<td>19.1</td>
</tr>
<tr class="odd">
<td colspan="9" class="firstcol">Percentile
is over range since March
2000</td>
</tr>
</tbody>
</table>
ISM Manufacturing Series Show
Broad-Based Gains 
by <a href="/comment/Moeller.html">Tom
Moeller</a> January 4, 2010



<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100104b.jpg" align="right" border="0" height="265" width="353">Improvement
in the U.S. factory sector continued last month from its nadir reached
twelve months earlier. The National Association of Purchasing
Management reported that its December composite index showed unexpected
strength with a rise to 55.9 from 53.6 during November. The latest
figure was the highest since April 2006 and it was up from the low of
32.9 reached last December. A more modest gain to 54.0 had been the
Consensus expectation. (Any reading above the break-even point of 50
suggests rising activity.) The ISM data is available in Haver's USECON
database.
 The positive factory-sector growth rate
suggested by the ISM index is in line with recoveries accompanying past
upturns from severe recessions. To mirror the strength of those
recoveries, however, the index still needs to rise to a level near or
above the level of 60.
The new orders index showed the greatest m/m
gain with its increase to a high of 65.5 from 60.3 in November. Working
the other way, the export order index fell moderately to 54.5 from its
recent high. Nevertheless the index was up from its low of 35.5 last
December. During the last ten years there has been a 53% correlation
between the index and the q/q change in real exports of goods in the
GDP accounts.
 The employment index showed a smaller gain 52.0.
Nevertheless, the level indicated positive growth in factory-sector
payrolls. <img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100104c.jpg" align="right" border="0" height="265" width="353">
It has increased from a low reading of 26.1 last February.
Seventeen percent of respondents indicated higher payrolls versus only
seven percent last December. Eighteen percent indicated a lower level
of hiring versus fifty percent last December. During the last ten years
there has been a 90% correlation between the index level and the
three-month change in manufacturing payrolls.
 The production component
rose modestly to 61.8 but remained lower than its October high of 63.3.
During the last ten years there has been an 84% correlation between the
level of the production component of the composite index and the
three-month growth in factory sector industrial production. It
is appropriate to correlate the ISM index level
with factory sector output growth because the ISM
index is a diffusion index. It measures growth by using all of the
positive changes in activity added to one half of the zero change in
activity measures. 
<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100104d.jpg" align="right" border="0" height="265" width="353">A two
point gain in the inventory
component to 43.4 recovered some of its November decline but it still
was down from the October high. Thirteen percent (NSA) of respondents
indicated that they were raising inventory levels versus 18% last
December. During the strong 2005 inventory accumulation 26% of firms
indicated that they were raising inventories. Thirty percent of
respondents indicated lower inventories.
The separate index of prices
paid made up more than half of its November decline and was up from the
December low of 18.0. During the last twenty years there has been a 79%
correlation between the price index and the three-month change in the
PPI for intermediate goods.
The ISM data are available in Haver's USECON
database.
Monetary Policy and the Housing Bubble
is the title of yesterday's speech by Fed Chairman Ben S. Bernanke and
it is available <a href="http://www.federalreserve.gov/newsevents/speech/bernanke20100103a.htm">here</a>.&nbsp;
<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/SURVEYS/@S2/@S201/@S201.HTM">ISM
Mfg</a></th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">Dec. '08</th>
<th scope="col">2009</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Composite Index</td>
<td>55.9</td>
<td>53.6</td>
<td>55.7</td>
<td>32.9</td>
<td>46.3</td>
<td>45.5</td>
<td>51.1</td>
</tr>
<tr>
<td class="firstcol">&nbsp; New Orders</td>
<td>65.5</td>
<td>60.3</td>
<td>58.5</td>
<td>23.1</td>
<td>51.7</td>
<td>42.1</td>
<td>54.3</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Employment</td>
<td>52.0</td>
<td>50.8</td>
<td>53.1</td>
<td>29.9</td>
<td>40.6</td>
<td>43.2</td>
<td>50.5</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Production</td>
<td>61.8</td>
<td>59.9</td>
<td>63.3</td>
<td>26.3</td>
<td>50.3</td>
<td>45.2</td>
<td>54.1</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Supplier Deliveries</td>
<td>56.6</td>
<td>55.7</td>
<td>56.9</td>
<td>45.7</td>
<td>51.4</td>
<td>51.6</td>
<td>51.2</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Inventories</td>
<td>43.4</td>
<td>41.3</td>
<td>46.9</td>
<td>39.6</td>
<td>37.2</td>
<td>45.5</td>
<td>45.4</td>
</tr>
<tr class="odd">
<td class="firstcol">Prices Paid Index (NSA)</td>
<td>61.5</td>
<td>55.0</td>
<td>65.0</td>
<td>18.0</td>
<td>48.3</td>
<td>66.5</td>
<td>64.6</td>
</tr>
</tbody>
</table>

U.S. Factory Inventories
&amp;Shipments Increase Again 
by <a href="/comment/Moeller.html">Tom
Moeller</a> January 4, 2010



<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100104e.jpg" align="right" border="0" height="265" width="353">Though its
rate of decline has moderated, construction spending has continued to
move lower. During November construction outlays fell 0.6% after a
little-revised 0.5% October shortfall. The latest decline left the y/y
change at -13.2% which was improved just modestly from the weakest
-15.8% September comparison. The latest decline about matched Consensus
estimates.
 Residential building activity renewed its decline with a
1.6% fall following a 4.8% October gain. The decline owed to a 4.1%
(-44.4% y/y) drop in multi-family building and a 3.9% (-2.8% y/y)
shortfall in spending on improvements. Single-family construction rose
1.3% (-25.2% y/y) for the sixth consecutive monthly increase. 
Nonresidential building activity was roughly unchanged after a
steep
4.8% October decline. Since the 2008 peak, activity has fallen by
22.5%. Spending in the food &amp; beverage industry declined 44.1%
y/y while expenditures in the lodging were off by nearly one-half.
Commercial building overall fell 40.5% y/y while office building
dropped by more than one-third. Relatively moderate were the declines
in the education (-18.8% y/y), religious (-18.3% y/y) and health care
(-16.1% y/y) sectors.&nbsp;Factory sector spending (-7.0% y/y) was
buoyed by gains in the chemical and in the
computer/electronic/electrical sectors.
In the public sector,
construction overall fell a modest 0.4% during November but y/y
expenditures rose despite lower tax revenues. Building activity on
highways &amp; streets fell 2.9% m/m but rose 5.7% y/y due to the
focus on infrastructure rebuilding. Public spending on health care
facilities increased a strong 12.2% y/y but building in the education
sector was off 2.6% y/y.
 The construction put-in-place figures are
available in Haver's USECON database.&nbsp;&nbsp;
<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100104f.jpg" border="0" height="265" width="312">
<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100104g.jpg" border="0" height="265" width="312">
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol">Construction
(%)</th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">September</th>
<th scope="col">Y/Y</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>-0.6</td>
<td>-0.5</td>
<td>-1.6</td>
<td>-13.2</td>
<td>-6.9</td>
<td>-1.6</td>
<td>6.3</td>
</tr>
<tr>
<td class="firstcol">Private</td>
<td>-0.7</td>
<td>-0.8</td>
<td>-2.4</td>
<td>-20.0</td>
<td>-11.1</td>
<td>-5.7</td>
<td>5.5</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Residential</td>
<td>-1.6</td>
<td>4.8</td>
<td>-0.6</td>
<td>-19.2</td>
<td>-29.1</td>
<td>-19.7</td>
<td>1.0</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Nonresidential</td>
<td>-0.0</td>
<td>-4.8</td>
<td>-3.7</td>
<td>-20.6</td>
<td>13.2</td>
<td>23.1</td>
<td>16.2</td>
</tr>
<tr>
<td class="firstcol">Public</td>
<td>-0.4</td>
<td>0.0</td>
<td>-0.1</td>
<td>2.7</td>
<td>5.6</td>
<td>13.1</td>
<td>9.3</td>
</tr>
</tbody>
</table>

 Indonesia Avoids Recession 
by <a href="/comment/Curley.html">Louise
Curley</a> January 4, 2010



<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100104h.jpg" align="right" border="0" height="265" width="353">While
Indonesia has had extensive damage from earthquakes, it has so far
escaped a recession.&nbsp; The closest it has come was the fourth
quarter of 2008 when real gross domestic product increased at an annual
rate of only 0.80%.&nbsp; Subsequent increases have been 3.58% in
the first quarter of 2009, 5.49% in the second and 6.64 in the third
quarter. The annual rates of increase in real GDP over the past six
years are shown in the first chart.
Today, the consumer price
index for December was released.&nbsp;Inflation continues to be
well behaved although there has been a slight increase in the last two
months.&nbsp; The rate of inflation as measured by the year to year
increase in the seasonally unadjusted consumer price index was 2.78%
down from 11.06% in December of 2008.&nbsp; The course of inflation
in Indonesia is shown in the second chart.
Also released
today were Indonesia's exports, imports and balance of trade.&nbsp;
There has been a rising trend in the balance of trade from the 640
million USD deficit in October,2008.&nbsp; Exports at 11,562
million USD are below the peak level of 12,499 million USD reached in
June of 2008 and imports at 9,563 million USD are well below the peak
of 12,142 million USD reached&nbsp; in July 2008.&nbsp; The
third chart shows exports, imports and the balance of trade over the
past six years.
<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100104i.jpg" border="0" height="265" width="312">
<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100104j.jpg" border="0" height="265" width="312">
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol">INDONESIA</th>
<th scope="col">Q4 09</th>
<th scope="col">Q3 09</th>
<th scope="col">Q2 09</th>
<th scope="col">Q1 09</th>
<th scope="col">Q4 08</th>
<th scope="col">Q3 08</th>
<th scope="col">Q2 08</th>
<th scope="col">Q1 08</th>
<th scope="col">&nbsp;</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td colspan="10"> Real Gross Domestic
Product</td>
</tr>
<tr class="odd">
<td class="firstcol">Q/Q Annual Rate of Change in
Real GDP&nbsp; (%)</td>
<td>--</td>
<td>6.64</td>
<td>5.49</td>
<td>3.58</td>
<td>0.80</td>
<td>6.08</td>
<td>7.50</td>
<td>6.75</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">&nbsp;</td>
<td>Dec 09</td>
<td>Nov 09</td>
<td>Oct 09</td>
<td>Sep 09</td>
<td>Aug 09</td>
<td>Jul 09&nbsp;</td>
<td>Jun 09</td>
<td>May 09</td>
<td>Apr 09</td>
</tr>
<tr class="odd">
<td class="firstcol">CPI Y/Y % Change (%)</td>
<td>2.78</td>
<td>2.41</td>
<td>2.57</td>
<td>2.83</td>
<td>2.75</td>
<td>2.71</td>
<td>3.65</td>
<td>6.04</td>
<td>7.31</td>
</tr>
<tr>
<td class="firstcol">Trade</td>
<td>Dec 09</td>
<td>Nov 09</td>
<td>Oct 09</td>
<td>Sep 09</td>
<td>Aug 09</td>
<td>Jul 09&nbsp;</td>
<td>Jun 09</td>
<td>May 09</td>
<td>Apr 09</td>
</tr>
<tr class="odd">
<td class="firstcol">Exports&nbsp; (Millions US
$)</td>
<td>--</td>
<td>11562</td>
<td>12108</td>
<td>9588</td>
<td>10257</td>
<td>9260</td>
<td>9135</td>
<td>8756</td>
<td>8872</td>
</tr>
<tr class="odd">
<td class="firstcol">Imports (Millions US $)</td>
<td>--</td>
<td>9563</td>
<td>9903</td>
<td>8288</td>
<td>8963</td>
<td>8161</td>
<td>7645</td>
<td>7165</td>
<td>6512</td>
</tr>
<tr class="odd">
<td class="firstcol">Balance (Millions US $)</td>
<td>--</td>
<td>1999</td>
<td>2205</td>
<td>1308</td>
<td>1294</td>
<td>1099</td>
<td>1490</td>
<td>1591</td>
<td>2362</td>
</tr>
</tbody>
</table>

</body></html>

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

Largest October layoffs since 2003, led by technology

Subdued global shipping costs not yet pointing to supply chain problems

PMIs show still-elevated but slowing US inflation

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The Conference Board’s index of Consumer Confidence inched higher in April from an upwardly revised reading in March. The combined changes left the measure 1.1% higher than the preliminary tally in March. Despite the improvement, the index remained in the low end of the range for the current expansion. The index in April totaled 92.8, down from an average of 96.1 in 2025 and an annual cyclical high of 105.4 in 2023.

The Improvement in April reflected a pickup in the expectations component, which rose 1.7%. The current conditions component inched 0.2% lower. Overall views on current conditions slipped despite more favorable assessments of the labor market. The so-called measure of the jobs gap (share of respondents indicating that jobs are plentiful less the share saying that jobs are hard to get) rose 1.4 percentage points higher to 7.5%. The pickup reflected a drop in the share indicating that jobs are hard to get (down 1.5 percentage points to 19.8%). The share indicating that jobs are plentiful eased 0.1 percentage point to 27.3%.

Although expectations improved in April, from a long-term perspective they could be viewed as the more important factor restraining the headline measure of confidence. As shown in the left chart below, the expectations component of confidence shows considerably less volatility than the current conditions component does. The contrasting patterns suggest that individuals realize that the economy will undergo possibly sharp cyclical swings, but they expect conditions at some point to return to an underlying norm.

The current conditions index in the current cycle has indeed dropped noticeably, but it is still above the long run average (123.8 in April versus the average of approximately 108 from 1990 to 2025). The expectations component, as usual, has eased less than the current conditions component, but its shift has pushed the measure to the low end of its long-run range (72.2 in April versus an average of approximately 88).

Interestingly, concern about the labor market seems to be a factor affecting expectations. While current views on the labor market are favorable (plentiful less hard to get jobs gap of 7.5%), Individual are concerned about the future. The survey asks respondents if they expect more jobs or fewer jobs six months hence. The share indicating fewer jobs has moved well into the upper end of the historical range. Such observations in the past were typically seen only during recession (chart, below right). An unfavorable view on interest rates also seems to be playing a role in depressing the expectations component. More than 60% of respondents to the current survey expect higher interest rates 12 months from now.

The results from the Conference Board survey of consumers differ markedly from those of the University of Michigan Survey Research Center. The Michigan results show consumer sentiment at a record low, while the Conference Board index is only slightly below its long-run average. The difference most likely reflects the nature of the questions in the surveys. The Conference Board focuses on business and employment conditions, while Michigan emphasizes personal finances. The focus on finances, along with questions on inflation, probably picks up concerns about affordability.

The Consumer Confidence data are available in Haver’s **CBDB** database. The total indexes, which are indexed to 1985=100, appear in **USECON**, and market expectations are in **AS1REPNA**.

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- Expectations improved slightly in April, but are still subdued relative to norms.
- Moderately favorable view of current conditions.

Consumer Confidence: Modest Change in April

Winnie Tapasanun

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U.S. house prices were essentially unchanged m/m in February after rises of 0.2% in January (+0.1% initially) and 0.3% in December (unrevised), according to the Federal Housing Finance Agency (FHFA) House Price Index. February marked the first flat reading since September following four consecutive m/m increases. The HPI was at 441.43 in February, up 14.8% from its August 2022 low of 384.59. The year-on-year growth rate eased to 1.7% in February—the lowest since March 2012—from 1.8% in January (+4.1% in February 2025), down from a high of 6.9% in February 2024 and well below a peak of 18.5% in February 2022.

By region, February FHFA house prices showed a mixed performance. House prices fell m/m in February (vs. January) in four of the nine census divisions. Declines were led by Mountain (-1.1% vs. +0.4%), followed by Pacific (-0.5% vs. +0.6%), West North Central (-0.4% vs. +0.3%), and Middle Atlantic (-0.1% vs. +0.3%). To the upside, house prices rose m/m in four census divisions in February (vs. January): South Atlantic (+0.6% vs. -0.2%), East South Central (+0.2% vs. +1.2%), New England (+0.2% vs. +0.6%), and West South Central (+0.2% vs. -0.3%). Meanwhile, house prices in East North Central were virtually unchanged m/m for the second successive month in February following seven straight m/m gains.

Year-on-year house prices continued to rise in February in most regions, except Mountain, Pacific, and West South Central. The y/y growth rate accelerated in February (vs. January) in only two of the nine census divisions: East South Central (+4.0% vs. +3.2%) and South Atlantic (+0.9% vs. +0.4%). Meanwhile, house price growth decelerated y/y in February (vs. January) in four regions: New England (+3.1% vs. +3.9%), West North Central (+3.1% vs. +3.6%), East North Central (+3.8% vs. +4.5%), and Middle Atlantic (+4.2% vs. +4.5%). To the downside, Mountain (-0.7% vs. 0.0%), Pacific (-0.4% vs. -0.3%), and West South Central (-0.1% vs. -0.4%) posted y/y declines in February.

The FHFA house price index is a weighted purchase-only index that measures average price changes in repeat sales of the same property. An associated quarterly index includes refinancing the same kind of properties. The indexes are based on transactions involving conforming conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac. Only mortgage transactions on single-family properties are included.

The FHFA data are available in Haver’s **USECON** database.

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- February FHFA HPI 0.0% m/m; +1.7% y/y, lowest since Mar. ’12.
- House prices down m/m in four of nine census divisions, led by Mountain (-1.1%); up in four, driven by South Atlantic (+0.6%); flat in East North Central.
- House prices up y/y in six of nine regions, led by Middle Atlantic (+4.2%), but down in Mountain (-0.7%), Pacific (-0.4%), and West South Central (-0.1%).

U.S. FHFA House Prices Flat in February After Four Straight M/M Gains

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Early PPI reports in the monetary union show collective pressures building over the past year, with newly emergent pressures popping up strongly in March.

The sequence of monthly inflation observations for these five early reporters in March shows that inflation pressure has not been clearly building but did jump up suddenly in March. In February, before the Iran war, the median monthly PPI gain was -0.5%. In March, that jumped to +3.9% (median month-to-month gain). Monthly pressure does not show steady gains anywhere except moderately in Germany. Finland shows deceleration in progress (!) even through—especially through—March, as its PPI in March fell by 5.3%. But the whole Finish pattern is somewhat upside down, with prices up month-to-month by 6.2% in January and 2.9% in February. It is not a trend that is easy to understand.

However, the March monthly gains are strong enough to drive sequential inflation higher from 12-months, to 6-months, to 3-months across all early-reporting countries. Even the German ex-energy index shows acceleration on that profile.

On a year-on-year basis, two of the early reporters have PPI inflation below 2%. Finland has 12-month PPI inflation at 2.1%, but Italy and Spain have inflation much higher, up by 3.4% over 12 months in Spain and by 5.6% in Italy.

The PPI has been very well-behaved in the last few years. Looking at 12-month changes for the year ended in March, the median change for this group in 2025 was -0.1%, compared to -4.6% in 2024.

The chart shows the PPI flared sharply in 2021 and 2022, then fell quickly into line in 2023. Clearly, the inflation tune now is being called by oil prices, the same as for that spike prices in 2022 and 2023.

The hope is that the oil price bump up will not be as long-lived, that the war will end soon, with the Strait of Hormuz reopened, and that oil prices—and other inflation pressures—will sink back to prerevision norms relatively quickly. That could happen, but so could other outcomes so markets remain wary. One problem this time is the destruction of oil facilities and the shutting of oil fields that could cause high prices to linger longer.

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**A new dynamic**
However, there is now a new dynamic with the UAE leaving OPEC. OPEC has been a vehicle to harness common behavior to control oil prices mostly to keep them higher. While undermining OPEC (UAE pumps about 13% of OPEC capacity) at a time the U.S. oil prowess has risen, this defection will make it much harder for OPEC to control prices. When countries are not bound together, the incentive is for countries to cheat on their production quota. In a cartel arrangement, when many cheat, the output reduction does not hold, and oil prices fall. A cartel arrangement allows for supply control and reduction which raises prices. But once prices are up, each member has an individual incentive to cheat—to sell more than his quota share of oil at the higher price. But that undermines the cartel. So, this move, this exit of UAE from the cartel, will create instability in the OPEC by moving more production outside the OPEC framework, beyond its control. Unless the Saudis are willing to be the ‘swing man’ and cut back their output to keep prices on target—something the Saudis have been increasingly unwilling to do—OPEC will be in less control.

EMU PPIs Show Instant Pressure

Tian Yong Woon

In this week’s Letter, we cover the latest developments and implications of the Middle East conflict for Asia, while also making space for other important themes, including artificial intelligence (AI). The Middle East conflict remains in a no deal state coming out of the weekend, though some early Monday optimism emerged in Asian markets following Iran’s reported offer to reopen the Strait of Hormuz (chart 1). Nonetheless, as the Strait closure drags on, so too do the fiscal costs of domestic fossil fuel subsidies across Asia, which have been shown to move closely with crude oil prices (chart 2). While such measures offer direct relief by cushioning household energy costs, they remain difficult to sustain over the long haul.

Over the week, we also saw a further fraying in regional monetary policy trends, with the Philippines hiking its policy rate for the first time in about two years amid inflation concerns, while Indonesia stood pat on rates (chart 3). Investor attention is likely to remain fixed on monetary policy this week, with the Bank of Japan due to decide on policy. Expectations for an April hike have faded amid the persistent Middle East conflict, though yen weakness continues to present a source of concern (chart 4). The week also brings China’s latest PMI readings (chart 5), adding to the recent run of hard data accompanying the Q1 GDP release.

Beyond the Middle East conflict, the evolution of AI continues to demand close attention. Before geopolitical tensions took centre stage, AI was the dominant market narrative — and that enthusiasm has hardly faded. If anything, recent developments suggest the story is broadening: use cases are expanding, scalability is improving, and access is widening beyond large corporates to the mass market — increasingly spilling into the realm of physical AI. It may well be this persistent wave of optimism that is helping to underpin equity valuations, even as the geopolitical backdrop darkens (chart 6).

**The Middle East conflict**
About two months in, we remain stuck in the limbo of the US-Iran conflict, which has left the Strait of Hormuz largely closed and much of the world starved of the critical oil flows needed to power the global economy. The back and forth between the US and Iran has persisted in recent weeks, with both sides again failing to reach a peace deal over the weekend, though Monday’s news of Iran offering to reopen the Strait has revived some hope in markets. In truth, commodity and market valuations do not hinge so much on a peace deal itself, but rather on the resumption of oil flows through the Strait, something that could materialise even in the absence of a formal deal, though any agreement that includes and credibly delivers such a reopening would likely be warmly received by markets. Until then, market gyrations are likely to persist, with prices fluctuating in response to each new snippet of news. And until then, the world will continue both to be starved of, while gradually adapting to, the drip feed of oil flows emerging from the Strait.

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**The fiscal costs of the Middle East conflict**
As the Middle East conflict drags on, so too does the strain on fiscal resources across parts of Asia, as the costs of energy-related subsidy programmes continue to mount. While such programmes have an immediate, direct, and tangible impact in shielding households from surging energy costs, they are far from sustainable, particularly if oil prices remain well above targeted levels or stay elevated for an extended period. As chart 2 illustrates, the costs of these explicit subsidy programmes tend to rise closely with crude oil prices, as seen in India and Indonesia. Other measures adopted elsewhere, such as drawing down oil reserves, may be less fiscally costly, but are similarly difficult to sustain indefinitely. In both respects, the clock is ticking, and the world continues to hold its breath as the conflict drags on.

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**The latest central bank responses to the conflict**
Over the past week, Asia saw two central bank decisions. The Philippines’ (BSP) opted to deliver its first rate hike in about two years, while Indonesia’s (BI) chose to stand pat on policy rates and instead committed to stepped up FX intervention (chart 3). This latest round of decisions points to a further fraying of what had been a broad regional monetary policy consensus, namely that central banks would delay additional easing while maintaining a high bar for outright tightening. Domestic considerations, however, remain paramount. In the Philippines’ case, the central bank has moved to rein in inflation, which is already showing notable signs of price pass through stemming from disruptions linked to the Strait of Hormuz. That said, BSP is not the first in the region to buck the reluctance to tighten. Singapore’s central bank had already tightened policy in mid-April, albeit through its own distinct framework, given its use of the exchange rate rather than policy rates as the primary channel for monetary policy.

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**The week ahead**
Looking to the week ahead, a major central bank decision looms in Japan. Market expectations for the Bank of Japan to deliver a rate hike at its April meeting have ebbed amid the persistence of the Middle East conflict, to which Japan remains particularly vulnerable given its reliance on oil imports flowing through the Strait of Hormuz. At the same time, inflation in Japan has yet to become a major concern, with recent readings having picked up but not yet entering troubling territory. One potential source of concern, however, lies with the Japanese yen, which has remained on a weakening trend since early last year (chart 4). That depreciation has been one of the key arguments underpinning calls for further rate hikes.

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The week also brings China’s latest PMIs into focus. March saw a divergence between China’s official PMI readings, which improved, and the unofficial readings from RatingDog, which instead pulled back. Nonetheless, both official and unofficial gauges remained in expansionary territory (chart 5), with investors now watching closely to see whether that resilience can be sustained amid ongoing stresses from the Middle East, or whether offsetting drivers can continue to keep Chinese business sentiment and prospects buoyant.

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**Beyond the strait**
Moving beyond the Middle East conflict, a whole host of developments continue to unfold globally, many of which have in fact helped offset some of the pessimism wrought by the Strait’s chokehold. One such development is artificial intelligence (AI), which had dominated headlines before the outbreak of the conflict and continues to advance at breakneck pace. AI capabilities are still rapidly evolving, while practical applications, such as physical AI embodied in humanoid robots, are beginning to show broader and stronger use cases. Production of such robots is also becoming increasingly scalable and within reach not just for industrial complexes and healthcare, but for the mass market as well. It is perhaps growing optimism around these prospects that has helped keep equity valuations buoyant, even in the face of the festering conflict in the Middle East. Moreover, while concerns over AI-driven job displacement persist, new opportunities are emerging as well, particularly for AI adopters, with a growing share of job postings in Western economies increasingly referencing AI-related skills, as shown in chart 6.

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Asia

Economic Letter from Asia: Not Just About the Strait

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**The Distributive Trades Survey**

The U.K. Distributive Trades Survey for April 2026 and the look-ahead expectation readings for May paint an extremely soured outlook for the U.K. economy.

**Retail ranking**: Surveys for retail sales compared to a year ago, orders compared to a year ago, and sales evaluated for the time of year all have rankings near zero, which is the worst result on this timeline. This zero distinction applies to retail sales compared to a year ago. The best ranking is 11.6%; that is for sales evaluated for the time of year. Orders compared to a year ago have a 4.2 percentile standing. The stock-to-sales ratio—which is a completely different concept—shows that the inventory-to-sales ratio has a 29.9 percentile standing.

**Retail diffusion**: The raw April diffusion readings (up minus down diffusion) show that sales compared to a year ago slipped to a reading of -68 in April from -52 in March. Orders fell to -46 in April from -26 in March. Sales evaluated for the time of year fell to -32 April from -23 in March. All three measures weakened, and all three weakened decisively, resulting in extremely weak rankings. All of the rankings are executed on data back to 2002.

**Expectations for retailing**: The expectations readings for May show slippage again across all three metrics: expected sales compared to a year ago, expected orders compared to a year ago, and expected sales for the time of year. Expected sales compared to a year ago fell to -60 in May from -49 in April. Orders compared to a year ago declined to -45 in May from -30 in April, and sales for the time of year slipped to -43 from -19. In May, these readings have rankings in a 0.4 percentile standing for sales compared to a year ago, a 1.8 percentile standing for sales evaluated relative to the time of year, and a 4.6 percentile standing for orders compared to a year ago. These two panels on current and expected retail sales volumes are just simply terrible: weak monthly, weak in ranking terms, and showing slipping momentum.

The distributor trade series also provides data on the wholesale sector. While the wholesale sector is not quite as beat up as the retail sector, it's still extremely weak. There is no cause for any kind of hope that things are getting better based on wholesaling trends.

**Wholesaling**: The wholesale survey for sales compared to a year ago edged lower to -32 in April from -31 in March. Orders compared to a year ago remained at a reading of -41 in April. Sales evaluated for the time of year improved to a reading of -20 in April from -39 in March—a significant step up, but still very weak. The percentile standings for these three categories show sales compared to a year ago at the 8.8 percentile, orders compared to a year ago at the 5.6 percentile, and sales evaluated for the time of year at the 14.8 percentile.

**Wholesale Expectations**: The look-ahead observations, which provide expectations for wholesaling in May, show a similar constellation of readings, with sales compared to a year ago falling to -37 in May from -27 in April and orders compared to a year ago falling to -42 from -38, while sales evaluated for the time of year improved to  16 from  37. That category for wholesale sales improved both in April in real time and in May for expectations; however, it continues to have a very weak percentile standing, at the 17.9 percentile in May, while sales for a year ago have a 6.7 percentile standing and orders for a year ago have a 6.0 percentile standing.

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While some of the global PMI data have improved, these survey data for the U.K. are particularly dour. The war in Ukraine drags on, and there's a new conflict in Iran that has shut the Strait of Hormuz, creating energy problems for much of Europe. More broadly, supply chains have been harmed. In addition, the U.K. is undergoing a bout of political instability, as its Prime Minister is under pressure and a good deal of political uncertainty is being worsened by deteriorating economic performance.

Both the U.K. and the European Monetary Union had been showing some progress on inflation until the Iran war hit. Now, as the oil prices are up so sharply, headline inflation is going to be worse everywhere and there will probably be a bit more attention directed to the core inflation rate. However, the U.K. has had inflation too hot for a while, and it has failed to settle down. At its last meeting, the Bank of England’s Monetary Policy Committee warned that if the war was still ongoing at the next meeting, there would be a risk of a rate hike. So, it would seem that a rate hike is going to be in play unless the economy falls off a cliff first, which, based on the distributive trades data, is also something that could happen. The U.K. economy appears to be on very unsound footing, and what happens next is just about anybody's guess.

Economy in Brief: 2010

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Indonesia Avoids Recession

U.S. Factory Inventories &Shipments Increase Again

ISM Manufacturing Series Show Broad-Based Gains

Manufacturing Is Digging Out

Manufacturing Is Digging Out