Robert Brusca

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Even with the manufacturing PMI rebound for the EMU in January, the broad brush shows PMI averages over shorter periods are still declining. France is a minor exception. Spain is accelerating and is a major exception (fourth largest EMU member!). The Netherlands is an exception. Ireland is net weaker over three months compared to six months. Greece, Austria, Italy France, Germany and the overall EMU each show three-month averages below their 12-month averages. Only Spain is stronger over its three-month than over its 12-month average by one point or more. Relative strength is a low hurdle in the EMU.

The queue standings show Spain at a raw score of 54.8 in its 98th queue percentile. Ireland at a raw score of 55.1 has a standing in its 80th percentile. Greece with a raw score showing a decline at 48.3, nonetheless, shows a queue standing in its 72nd percentile. Perhaps Greece is an example of the expression, "Been down so long it looks like up to me."

The Big Three EMU members are disappointing one way or another as the German raw manufacturing score of 50.9 has a weak 46.6 queue percentile standing. France and Italy each have raw diffusion scores, showing shrinkage with France's standing in its 53rd queue percentile and Italy's in its 50th queue percentile. This month whatever strength there is resides outside the three biggest members.

Outside the EMU space, Sweden is decelerating while the UK and Denmark are prevaricating. All three have 12-month PMI averages in the 54th percentile range, however. 

China's official manufacturing PMI slipped below the breakeven 50 mark in January. That adds to some of the gloom over economic prospects. Not surprisingly, Russia's PMI also fell and is quite weak as sanctions are weighing it down. Its renewed activities (which it denies) in Ukraine do not make the Russian outlook any better.

However, the plot of EMU and U.K. PMIs shows that there is stabilization taking place. This could be a very important development ahead of the start of QE. If QE can launch in a stable environment, instead of one that is deteriorating, its chances of success are better. Of course, there is still price deterioration and yield deterioration and growth, while stable in some aggregates, is still quite uneven and distinctive by EMU members. But at least there are some ways of looking at Europe in which its ills do not look uniformly bad. 

The euro exchange rate continues to weaken and has dropped below its `equilibrium' or PPP value on my assessment of that metric. This means it is now undervalued based on EMU averages. Member by member there will be differences on this score because members have had unique inflation experiences. At this exchange rate, Germany will be exceptionally competitive while countries in Southern Europe where inflation has been much higher may not benefit as much. Having said that, Spain is faring quite well.


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Even with the manufacturing PMI rebound for the EMU in January, the broad brush shows PMI averages over shorter periods are still declining. France is a minor exception. Spain is accelerating and is a major exception (fourth largest [...]

EMU Mfg PMIs Rise in January on 'Small Country' Strength

Tom Moeller

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Personal consumption expenditures declined 0.3% during December
following little-revised readings of 0.5% and 0.3% during the prior two months.
The figure matched expectations in the Action Economics Forecast Survey. For the
full year, spending rose 3.9%, its largest gain in three years. Lower prices
provided an impetus for personal spending. The PCE chain price index fell 0.2%
during each of the last two months following no change in October. As a result,
the y/y change of 0.7% was the weakest since 2009.

Motor vehicles and parts purchases fell 2.0% last month (+12.0% y/y) in
constant dollars but that followed a 4.9% November surge. Furnishings &amp;
appliance spending slipped 0.2% (+6.9% y/y) on the heels of a 1.3% jump.
Recreational goods &amp; vehicles purchases rose 0.2%, but by an outsized 12.0%
y/y. Apparel purchases gained 0.5% last month (5.9% y/y) after a 3.2% jump. Real
services purchases were unchanged (2.0% y/y) following two months of 0.3%
increase, though spending on restaurants and hotels gained 0.9% (4.3% y/y) for
the second month in the last three.

Despite all this spending, the personal savings rate suffered little
deterioration last year. The full-year rate of 4.8% compared to 4.9% in 2013,
and the December rate edged back to 4.9%. Personal saving rose 2.8% during the
year.

Personal income rose an expected 0.3% during December (4.6% y/y)
following a like gain in November. For all of last year, income rose 3.9%,
roughly double the 2013 rise. Wages &amp; salaries inched up 0.1% (4.8% y/y) but
that followed a 0.6% rise. During all of last year, wages increased 4.3% after a
2.8% gain in 2013. Rental income gained 0.8% (7.6% y/y) pulling the full year
rise to 7.5%. Proprietors income rose 0.9% (5.3% y/y) and dividend income gained
0.4% (8.0% y/y) with improved corporate profitability. Interest income slipped
0.2% and fell 1.0% y/y with lower interest rates. Personal transfer receipts
increased 0.5% (5.6% y/y) rounding out a 4.4% rise during all of 2014, the
strongest rise in four years.

The 0.2% decline in the chain price index reflected a 5.2% drop (-11.9%
y/y) in energy prices while food prices rose 0.2% (3.0% y/y). Durable goods
prices were off 0.5% (-2.8% y/y) and nondurable goods prices fell 1.2% (-1.6%
y/y) with lower gasoline costs. Services prices ticked 0.1% higher (2.1% y/y).
The price index excluding food &amp; energy was flat m/m for the second straight
month and up 1.3% y/y.

The personal income &amp; consumption figures are available in Haver's USECON
database with detail in the USNA database. The consensus expectation
figures are in the AS1REPNA database.

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	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" scope="col" >Personal Income &amp; Outlays
 (%)</th>
 <th scope="col" >Dec</th>
 <th scope="col" >Nov</th>
 <th scope="col" >Oct</th>
 <th scope="col" >Y/Y</th>
 <th scope="col" >2014</th>
 <th scope="col" >2013</th>
 <th scope="col" >2012</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Personal Income</td>
 <td >0.3</td>
 <td >0.3</td>
 <td >0.4</td>
 <td >4.6</td>
 <td >3.9</td>
 <td >2.0</td>
 <td >5.2</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Wages &amp; Salaries</td>
 <td >0.1</td>
 <td >0.6</td>
 <td >0.3</td>
 <td >4.8</td>
 <td >4.3</td>
 <td >2.8</td>
 <td >4.5</td>
 </tr>
 <tr>
 <td class="firstcol" >Disposable Personal Income</td>
 <td >0.3</td>
 <td >0.3</td>
 <td >0.4</td>
 <td >4.5</td>
 <td >3.8</td>
 <td >1.0</td>
 <td >4.9</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Personal Consumption Expenditures</td>
 <td >-0.3</td>
 <td >0.5</td>
 <td >0.3</td>
 <td >3.6</td>
 <td >3.9</td>
 <td >3.6</td>
 <td >3.7</td>
 </tr>
 <tr>
 <td class="firstcol" >Personal Saving Rate</td>
 <td >4.9</td>
 <td >4.3</td>
 <td >4.5</td>
 <td >4.1 
 (Dec '13)</td>
 <td >4.8</td>
 <td >4.9</td>
 <td >7.2</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >PCE Chain Price Index</td>
 <td >-0.2</td>
 <td >-0.2</td>
 <td >0.0</td>
 <td >0.7</td>
 <td >1.3</td>
 <td >1.2</td>
 <td >1.8</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Less Food &amp; Energy</td>
 <td >0.0</td>
 <td >0.0</td>
 <td >0.2</td>
 <td >1.3</td>
 <td >1.4</td>
 <td >1.3</td>
 <td >1.8</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Real Disposable Income</td>
 <td >0.5</td>
 <td >0.4</td>
 <td >0.3</td>
 <td >3.7</td>
 <td >2.4</td>
 <td >-0.2</td>
 <td >3.0</td>
 </tr>
 <tr>
 <td class="firstcol" >Real Personal Consumption Expenditures</td>
 <td >-0.1</td>
 <td >0.7</td>
 <td >0.3</td>
 <td >2.8</td>
 <td >2.5</td>
 <td >2.4</td>
 <td >1.8</td>
 </tr>
 </tbody>
 </table>
 
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Personal consumption expenditures declined 0.3% during December following little-revised readings of 0.5% and 0.3% during the prior two months. The figure matched expectations in the Action Economics Forecast Survey. For the full [...]

U.S. Consumer Spending Logs Expected Decline; Savings Rate Firms

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Real GDP growth last quarter slowed to 2.6% (AR, 2.5% y/y) from 5.0% in Q3.
For all of 2014, growth of 2.4% compared to 2.2% and 2.3% during the prior two
years. The latest gain fell short of a 3.3% rise in the Action Economics
Forecast Survey.&nbsp;&nbsp;&nbsp;&nbsp;
Overall growth in final sales decelerated to 1.8% (2.2% y/y) from 5.0% as net
export deterioration sapped one percentage point from growth, reversing its
addition in Q3. The subtraction occurred as imports grew at an 8.9% rate (5.3%
y/y), outpacing export growth of 2.8% (2.0% y/y). Working the other way, faster
inventory accumulation raised GDP growth last quarter by 0.8 percentage points.
Growth in domestic final demand slowed sharply to 2.8% (2.8% y/y) from 4.1%.
Holding back growth was a lessened 1.9% rise (5.5% y/y) in business fixed
investment, down from 8.9% in Q3. The slowdown reflected a 1.9% decline (+4.7%
y/y) in equipment spending, off from double-digit growth in the prior two
quarters. Government spending also declined 2.2% (+0.7% y/y), held back by a
12.6% drop (-0.4% y/y) in defense. State &amp; local government spending growth
was stable at 1.3% (1.1% y/y).
Faster growth in consumer spending picked up some of this slack. A 4.1% rise
(2.8% y/y) in consumption was the strongest since Q1 2006. Quicker 4.4% growth
(2.3% y/y) in spending on nondurables reflected a 13.4% rise (3.9% y/y) in
apparel and a 12.3% gain (2.9% y/y) in gasoline &amp; fuel oil, spurred by lower
prices. Services spending also picked up to 3.7% (2.1% y/y) from 2.5%. It was
sparked by a 6.0% jump (3.7% y/y) in restaurants &amp; accommodations as well as
a 5.9% surge (0.7% y/y) in recreation. Durable goods purchases eased to 7.5%
growth (8.4% y/y) from 9.2%. Motor vehicles &amp; parts purchases slowed to 6.4%
(10.4% y/y) from 11.2% though spending on furnishings &amp; household durables
remained firm at 5.7% (6.3% y/y). 
Residential investment also grew at a slightly quicker 4.1% rate last quarter
(2.6% y/y), though this compares to double-digit growth in 2012 &amp; 2013.
The GDP chain price index was nearly unchanged (1.2% y/y) following a 1.4%
rise. The personal consumption price index fell at a 0.5% rate (+1.1% y/y). A
6.2% decline in the nondurable price index (-0.3% y/y) added to 3.6% decline
(-2.6% y/y) in the durables index. The services price index rose at a stable
2.0% rate (2.2% y/y). The PCE price index excluding food &amp; energy increased
at a 1.1% rate (1.4% y/y), its weakest rise Q2'13 
The latest GDP figures can be found in Haver's USECON and USNA
databases; USNA contains basically all of the Bureau of Economic
Analysis' detail in the national accounts, including the integrated economic
accounts and the recently added GDP data for U.S. Territories. The Action
Economics consensus estimates can be found in AS1REPNA.
Components of U.S. Financial Sector Growth, 1950-2013 from the Federal
Reserve Bank of New York can be found <a href="http://www.newyorkfed.org/research/epr/2014/1412anti.html">here</a>.
<table class="centered" border="0" cellspacing="0" width="1871">
 <thead>
 <tr>
 <th class="firstcol" scope="col" width="821"><a href="http://www.haverselect.com/dlx/USECON/@E7/@E701/@E701.HTM" ;>Chained
 2009 $, %, AR</a></th>
 <th scope="col" width="149">Q4'14 (Advance Estimate)</th>
 <th scope="col" width="149">Q3'14</th>
 <th scope="col" width="149">Q2'14</th>
 <th scope="col" width="149">Q4 Y/Y</th>
 <th scope="col" width="150">2014</th>
 <th scope="col" width="150">2013</th>
 <th scope="col" width="150">2012</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" width="821">Gross Domestic Product</td>
 <td align="center" width="149">2.6</td>
 <td align="center" width="149">5.0</td>
 <td align="center" width="149">4.6</td>
 <td align="center" width="149">2.5</td>
 <td align="center" width="150">2.4</td>
 <td align="center" width="150">2.2</td>
 <td align="center" width="150">2.3</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="821">&nbsp; Inventory Effect</td>
 <td align="center" width="149">0.8</td>
 <td align="center" width="149">-0.0</td>
 <td align="center" width="149">1.4</td>
 <td align="center" width="149">0.3</td>
 <td align="center" width="150">0.1</td>
 <td align="center" width="150">0.0</td>
 <td align="center" width="150">0.1</td>
 </tr>
 <tr>
 <td class="firstcol" width="821">Final Sales</td>
 <td align="center" width="149">1.8</td>
 <td align="center" width="149">5.0</td>
 <td align="center" width="149">3.2</td>
 <td align="center" width="149">2.2</td>
 <td align="center" width="150">2.3</td>
 <td align="center" width="150">2.2</td>
 <td align="center" width="150">2.2</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="821">&nbsp; Foreign Trade Effect</td>
 <td align="center" width="149">-1.0</td>
 <td align="center" width="149">0.8</td>
 <td align="center" width="149">-0.3</td>
 <td align="center" width="149">-0.6</td>
 <td align="center" width="150">-0.1</td>
 <td align="center" width="150">0.3</td>
 <td align="center" width="150">0.1</td>
 </tr>
 <tr>
 <td class="firstcol" width="821">Domestic Final Sales</td>
 <td align="center" width="149">2.8</td>
 <td align="center" width="149">4.1</td>
 <td align="center" width="149">3.4</td>
 <td align="center" width="149">2.8</td>
 <td align="center" width="150">2.4</td>
 <td align="center" width="150">1.9</td>
 <td align="center" width="150">2.1</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" colspan="7" width="1717">Demand Components</td>
 </tr>
 <tr>
 <td class="firstcol" width="821">Personal Consumption Expenditures</td>
 <td align="center" width="149">4.3</td>
 <td align="center" width="149">3.2</td>
 <td align="center" width="149">2.5</td>
 <td align="center" width="149">2.8</td>
 <td align="center" width="150">2.5</td>
 <td align="center" width="150">2.4</td>
 <td align="center" width="150">1.8</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="821">Business Fixed Investment</td>
 <td align="center" width="149">1.9</td>
 <td align="center" width="149">8.9</td>
 <td align="center" width="149">9.7</td>
 <td align="center" width="149">5.5</td>
 <td align="center" width="150">6.1</td>
 <td align="center" width="150">3.0</td>
 <td align="center" width="150">7.2</td>
 </tr>
 <tr>
 <td class="firstcol" width="821">Residential Investment</td>
 <td align="center" width="149">4.1</td>
 <td align="center" width="149">3.3</td>
 <td align="center" width="149">8.8</td>
 <td align="center" width="149">2.6</td>
 <td align="center" width="150">1.6</td>
 <td align="center" width="150">11.9</td>
 <td align="center" width="150">13.5</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="821">Government Spending</td>
 <td align="center" width="149">-2.2</td>
 <td align="center" width="149">4.4</td>
 <td align="center" width="149">1.7</td>
 <td align="center" width="149">0.7</td>
 <td align="center" width="150">-0.2</td>
 <td align="center" width="150">-2.0</td>
 <td align="center" width="150">-1.4</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" colspan="7" width="1717">Chain-Type Price Index</td>
 </tr>
 <tr>
 <td class="firstcol" width="821">GDP&nbsp;&nbsp; &nbsp;&nbsp;</td>
 <td align="center" width="149">-0.0</td>
 <td align="center" width="149">1.4</td>
 <td align="center" width="149">2.1</td>
 <td align="center" width="149">1.2</td>
 <td align="center" width="150">1.5</td>
 <td align="center" width="150">1.5</td>
 <td align="center" width="150">1.8</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="821">Personal Consumption Expenditures</td>
 <td align="center" width="149">-0.5</td>
 <td align="center" width="149">1.2</td>
 <td align="center" width="149">2.3</td>
 <td align="center" width="149">1.1</td>
 <td align="center" width="150">1.3</td>
 <td align="center" width="150">1.2</td>
 <td align="center" width="150">1.8</td>
 </tr>
 <tr>
 <td class="firstcol" width="821">&nbsp;Less Food/Energy</td>
 <td align="center" width="149">1.1</td>
 <td align="center" width="149">1.4</td>
 <td align="center" width="149">2.0</td>
 <td align="center" width="149">1.4</td>
 <td align="center" width="150">1.4</td>
 <td align="center" width="150">1.3</td>
 <td align="center" width="150">1.8</td>
 </tr>
 </tbody>
</table>

&nbsp;
Chicago Purchasing Managers Index Remains Weak; Prices
Collapse 
by <a href="http://haver.com/comment/Moeller.html">Tom Moeller</a>&nbsp;&nbsp;January
31, 2015
Chicago purchasing managers indicated that their January Business Barometer
Index ticked higher to 59.4 but remained down from 64.5 reached three months ago.
The reading fell short of expectations for 57.9 in the Action Economics Forecast
Survey. Haver Analytics constructs an ISM-Adjusted Index, comparable to
the overall ISM index to be released Monday. Our figure declined to 56.2, the
lowest level in six months. During the last ten years, there has been a 62%
correlation between the adjusted Chicago Purchasing Managers index and real GDP
growth.
The new orders index improved slightly to 61.6 but remained well below the
high of 70.8 in May. The order backlog figure also rose to 51.9 and remained
under the 59.6 high last May. Employment improved to 60.1, its highest level
since November 2013. During the last ten years, there has been an 82%
correlation between the employment figure and the m/m change factory sector
employment. The production series also improved moderately. Offsetting these
gains was a collapse in the inventories number to 40.1, its lowest level since
July 2013. The supplier delivery index also fell to 54.9, indicating the
quickest delivery speeds in six months.&nbsp;&nbsp; 
The index of prices paid collapsed to 44.2, the lowest point since the end of
the recession in 2009. Only 11 percent (NSA) of respondents reported paying
higher prices while 22 percent paid less.
The MNI Chicago Report is produced by MNI/Deutsche Borse Group in partnership
with ISM-Chicago. The survey covers a sample of over 200 purchasing
professionals in the Chicago area with a monthly response rate of about 50%. The
ISM-Adjusted headline index is calculated by Haver Analytics using these data to
construct a figure using the ISM methodology. The figures can be found in
Haver's SURVEYS database. The Consensus expectations figure is available
in AS1REPNA.
<table class="centered" border="0" cellspacing="0" width="1871">
 <thead>
 <tr>
 <th class="firstcol" width="1029">Chicago Purchasing Managers Index (%,
 SA)</th>
 <th scope="col" width="119">Jan</th>
 <th scope="col" width="119">Dec</th>
 <th scope="col" width="120">Nov</th>
 <th scope="col" width="120">Jan'14</th>
 <th scope="col" width="120">2014</th>
 <th scope="col" width="120">2013</th>
 <th scope="col" width="120">2012</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" width="1029">ISM-Adjusted General Business Barometer</td>
 <td align="center" width="119">56.2</td>
 <td align="center" width="119">58.5</td>
 <td align="center" width="120">60.7</td>
 <td align="center" width="120">57.0</td>
 <td align="center" width="120">59.4</td>
 <td align="center" width="120">54.3</td>
 <td align="center" width="120">54.8</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="1029">General Business Barometer</td>
 <td align="center" width="119">59.4</td>
 <td align="center" width="119">58.8</td>
 <td align="center" width="120">60.7</td>
 <td align="center" width="120">60.1</td>
 <td align="center" width="120">60.7</td>
 <td align="center" width="120">56.1</td>
 <td align="center" width="120">54.6</td>
 </tr>
 <tr>
 <td class="firstcol" width="1029">&nbsp;&nbsp;Production</td>
 <td align="center" width="119">64.1</td>
 <td align="center" width="119">62.7</td>
 <td align="center" width="120">66.2</td>
 <td align="center" width="120">61.4</td>
 <td align="center" width="120">64.5</td>
 <td align="center" width="120">58.3</td>
 <td align="center" width="120">57.6</td>
 </tr>
 <tr>
 <td class="firstcol" width="1029">&nbsp;&nbsp;New Orders</td>
 <td align="center" width="119">61.6</td>
 <td align="center" width="119">59.8</td>
 <td align="center" width="120">61.6</td>
 <td align="center" width="120">64.3</td>
 <td align="center" width="120">63.8</td>
 <td align="center" width="120">59.2</td>
 <td align="center" width="120">55.1</td>
 </tr>
 <tr>
 <td class="firstcol" width="1029">&nbsp;&nbsp;Order Backlogs</td>
 <td align="center" width="119">51.9</td>
 <td align="center" width="119">48.0</td>
 <td align="center" width="120">52.3</td>
 <td align="center" width="120">57.6</td>
 <td align="center" width="120">54.2</td>
 <td align="center" width="120">48.9</td>
 <td align="center" width="120">48.0</td>
 </tr>
 <tr>
 <td class="firstcol" width="1029">&nbsp;&nbsp;Inventories</td>
 <td align="center" width="119">40.1</td>
 <td align="center" width="119">55.5</td>
 <td align="center" width="120">61.4</td>
 <td align="center" width="120">51.0</td>
 <td align="center" width="120">56.0</td>
 <td align="center" width="120">45.7</td>
 <td align="center" width="120">51.4</td>
 </tr>
 <tr>
 <td class="firstcol" width="1029">&nbsp;&nbsp;Employment</td>
 <td align="center" width="119">60.1</td>
 <td align="center" width="119">56.4</td>
 <td align="center" width="120">56.3</td>
 <td align="center" width="120">53.4</td>
 <td align="center" width="120">56.0</td>
 <td align="center" width="120">55.6</td>
 <td align="center" width="120">55.3</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="1029">&nbsp;&nbsp;Supplier Deliveries</td>
 <td align="center" width="119">54.9</td>
 <td align="center" width="119">58.3</td>
 <td align="center" width="120">58.0</td>
 <td align="center" width="120">55.1</td>
 <td align="center" width="120">56.5</td>
 <td align="center" width="120">52.5</td>
 <td align="center" width="120">54.9</td>
 </tr>
 <tr>
 <td class="firstcol" width="1029">&nbsp;&nbsp;Prices Paid</td>
 <td align="center" width="119">44.2</td>
 <td align="center" width="119">58.1</td>
 <td align="center" width="120">59.6</td>
 <td align="center" width="120">64.0</td>
 <td align="center" width="120">61.0</td>
 <td align="center" width="120">59.9</td>
 <td align="center" width="120">62.2</td>
 </tr>
 </tbody>
</table>


</body>

</html>

Real GDP growth last quarter slowed to 2.6% (AR, 2.5% y/y) from 5.0% in Q3. For all of 2014, growth of 2.4% compared to 2.2% and 2.3% during the prior two years. The latest gain fell short of a 3.3% rise in the Action Economics [...]

U.S. GDP Growth Halves to 2.6% in Q4; 2014 Roughly Steady

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Chicago purchasing managers indicated that their January Business Barometer
Index ticked higher to 59.4 but remained down from 64.5 reached three months ago.
The reading fell short of expectations for 57.9 in the Action Economics Forecast
Survey. Haver Analytics constructs an ISM-Adjusted Index, comparable to
the overall ISM index to be released Monday. Our figure declined to 56.2, the
lowest level in six months. During the last ten years, there has been a 62%
correlation between the adjusted Chicago Purchasing Managers index and real GDP
growth.

The new orders index improved slightly to 61.6 but remained well below the
high of 70.8 in May. The order backlog figure also rose to 51.9 and remained
under the 59.6 high last May. Employment improved to 60.1, its highest level
since November 2013. During the last ten years, there has been an 82%
correlation between the employment figure and the m/m change factory sector
employment. The production series also improved moderately. Offsetting these
gains was a collapse in the inventories number to 40.1, its lowest level since
July 2013. The supplier delivery index also fell to 54.9, indicating the
quickest delivery speeds in six months.

The index of prices paid collapsed to 44.2, the lowest point since the end of
the recession in 2009. Only 11 percent (NSA) of respondents reported paying
higher prices while 22 percent paid less.

The MNI Chicago Report is produced by MNI/Deutsche Borse Group in partnership
with ISM-Chicago. The survey covers a sample of over 200 purchasing
professionals in the Chicago area with a monthly response rate of about 50%. The
ISM-Adjusted headline index is calculated by Haver Analytics using these data to
construct a figure using the ISM methodology. The figures can be found in
Haver's SURVEYS database. The Consensus expectations figure is available
in AS1REPNA.

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 <table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" >Chicago Purchasing Managers Index (%,
 SA)</th>
 <th scope="col" >Jan</th>
 <th scope="col" >Dec</th>
 <th scope="col" >Nov</th>
 <th scope="col" >Jan'14</th>
 <th scope="col" >2014</th>
 <th scope="col" >2013</th>
 <th scope="col" >2012</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >ISM-Adjusted General Business Barometer</td>
 <td >56.2</td>
 <td >58.5</td>
 <td >60.7</td>
 <td >57.0</td>
 <td >59.4</td>
 <td >54.3</td>
 <td >54.8</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >General Business Barometer</td>
 <td >59.4</td>
 <td >58.8</td>
 <td >60.7</td>
 <td >60.1</td>
 <td >60.7</td>
 <td >56.1</td>
 <td >54.6</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Production</td>
 <td >64.1</td>
 <td >62.7</td>
 <td >66.2</td>
 <td >61.4</td>
 <td >64.5</td>
 <td >58.3</td>
 <td >57.6</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;New Orders</td>
 <td >61.6</td>
 <td >59.8</td>
 <td >61.6</td>
 <td >64.3</td>
 <td >63.8</td>
 <td >59.2</td>
 <td >55.1</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Order Backlogs</td>
 <td >51.9</td>
 <td >48.0</td>
 <td >52.3</td>
 <td >57.6</td>
 <td >54.2</td>
 <td >48.9</td>
 <td >48.0</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Inventories</td>
 <td >40.1</td>
 <td >55.5</td>
 <td >61.4</td>
 <td >51.0</td>
 <td >56.0</td>
 <td >45.7</td>
 <td >51.4</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Employment</td>
 <td >60.1</td>
 <td >56.4</td>
 <td >56.3</td>
 <td >53.4</td>
 <td >56.0</td>
 <td >55.6</td>
 <td >55.3</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Supplier Deliveries</td>
 <td >54.9</td>
 <td >58.3</td>
 <td >58.0</td>
 <td >55.1</td>
 <td >56.5</td>
 <td >52.5</td>
 <td >54.9</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Prices Paid</td>
 <td >44.2</td>
 <td >58.1</td>
 <td >59.6</td>
 <td >64.0</td>
 <td >61.0</td>
 <td >59.9</td>
 <td >62.2</td>
 </tr>
 </tbody>
 </table>
 
</body></html>

Chicago purchasing managers indicated that their January Business Barometer Index ticked higher to 59.4 but remained down from 64.5 reached three months ago. The reading fell short of expectations for 57.9 in the Action Economics [...]

Chicago Purchasing Managers Index Remains Weak; Prices Collapse

Carol Stone, CBE

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The employment cost index for private industry workers rose 0.6% (2.1% y/y) in Q4'14, following an unrevised 0.7% Q3 rise. The Q3 number equaled expectations for a 0.6% rise in the Action Economics Forecast Survey. For 2014 as a whole, compensation costs were up 2.1% after 1.9% in 2013.

Wages & salaries of private industry workers also increased 0.6% (2.0% y/y) last quarter after their 0.7% Q3 rise. Most sectors hovered near the overall total: health care was the strongest at 0.8% (1.9% y/y), while construction (1.9% y/y), manufacturing (2.3% y/y), retail trade (2.4% y/y) and finance (1.8% y/y) all had 0.7% rises in the quarter. Information (2.0% y/y) and education (1.7% y/y) were both up 0.6%, with professional and business services up 0.5% (2.5% y/y), utilities 0.4% (2.5% y/y) and transportation 0.3% (2.5% y/y). Overall for 2014, wages and salaries gained 2.0%, the largest gain since 2008.

Benefit costs were up 0.6% (2.6% y/y) after a similar 0.6% Q3 rise. Reported by occupational group, natural resource, construction and maintenance workers had the largest benefit increase, 0.8% (3.5% y/y) with management & professional workers (2.7% y/y), sales and office staff (2.5% y/y) and service occupations (1.0% y/y) all up 0.6% in the quarter. Production and transportation worker benefits rose 0.5% (2.2% y/y). Private industry workers' benefits were up 2.3% for all of 2014, stronger than 1.9% in 2013.

Total compensation for state & local government workers rose 0.6% (2.1% y/y) in Q4 after three quarters with 0.5% each. In Q4, education workers' compensation gained 0.7% (2.0% y/y), health care and social assistance 0.6% (1.5% y/y) and public administration workers, also 0.6% (2.4% y/y). All state and local government worker compensation was up 2.0% for 2014 as a whole, not historically strong, but the firmest since 2009. 

The employment cost index figures are available in Haver's USECON
database. Consensus estimates come from the Action Economics survey, carried in
Haver's AS1REPNA database.

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 <table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" scope="col" >ECI- Private Industry Workers
 (%)</th>
 <th scope="col" >Q4'14</th>
 <th scope="col" >Q3'14</th>
 <th scope="col" >Q2'14</th>
 <th scope="col" >Q4 Y/Y</th>
 <th scope="col" >2014</th>
 <th scope="col" >2013</th>
 <th scope="col" >2012</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Compensation</td>
 <td >0.6</td>
 <td >0.7</td>
 <td >0.8</td>
 <td >2.3</td>
 <td >2.1</td>
 <td >1.9</td>
 <td >2.0</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;Wages &amp; Salaries</td>
 <td >0.6</td>
 <td >0.7</td>
 <td >0.8</td>
 <td >2.3</td>
 <td >2.0</td>
 <td >1.9</td>
 <td >1.8</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;Benefit Costs</td>
 <td >0.6</td>
 <td >0.6</td>
 <td >1.1</td>
 <td >2.6</td>
 <td >2.3</td>
 <td >1.9</td>
 <td >2.2</td>
 </tr>
 </tbody>
 </table>
 
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The employment cost index for private industry workers rose 0.6% (2.1% y/y) in Q4'14, following an unrevised 0.7% Q3 rise. The Q3 number equaled expectations for a 0.6% rise in the Action Economics Forecast Survey. For 2014 as a [...]

U.S. Employment Cost Index Moderates in Q4

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The unemployment rate turned lower in December in both the EU and EMU. This, despite a host of problems: weak PMI readings and the ECB on a glide path to its controversial QE plan. 

Of the 11 topically reporting members in the table, only three saw the unemployment rate rise over the last three months on balance. The unemployment rate fell in seven of these nations. On a lagged basis, unemployment fell in the U.K. and in Greece, too. Year over year the unemployment rate is lower in nine of these 11 counties, including EU member the U.K. and lagging Greece. 

On the surface the momentum looks constructive and of course it is. But it may not be quite what it seems. For Spain, Ireland, and Portugal, the unemployment rate has dropped over 12 months in the range of 1.5 percentage points to 2 percentage points, sizeable drops. Despite this progress, we are not speaking of normalcy any time soon. We are only speaking of making progress to a goal that is yet on a very distant horizon. That is except for one country, Germany.

The German unemployment rate has hit its low. From 2009 onward, this is as low as German unemployment has been. Compare that to the rest of the countries in the table where the unemployment rate is swimming in the top 10% (90th percentile) for four of them, the top 20th percentile for three of them; four including Greece. It is in the top 30th percentile for two more and in the top 35th percentile for Ireland, the best of the lot, excluding Germany, of course. Germany stands alone.

By comparison, the U.S. unemployment rate stands in its 47th percentile on this timeframe and Japan, like Germany, is seeing its lowest rate, but largely (like the U.S.) for demographic reasons.

The ECB's new QE program is yet to be launched. Its asset backed purchase program, which has been in place, seems to have borne little fruit. But most of the ECB's hopes are placed on QE. Still, QE is being launched in a hostile environment. Both ECB and German headline inflation rates have dipped below zero. Deflation is alive and stalking the EMU. True, the core inflation rates are still above zero allowing us the prevarication of saying so far it's just energy prices with weak inflation elsewhere. But as we well know, those deflation forces can spread. EMU economic growth is still weak.

Many EMU challenges lie ahead. Not the least of these is the wide gap between Europe's largest economy, Germany, and the rest of the euro area. The rest of the euro area looks like it belongs together, but Germany is like the cheese in the famer in the Dell rhyme. Germany stands alone. And because of that and since ECB policies are made for the euro area as a whole and not for a single member, Germany is going to see ECB policies implemented that are inappropriate for Germany. Germany is going to see a euro too weak, interest rates too low and QE too stimulative. We should be prepared for this in 2015. German forecasts for 2015 growth have been notched up by a tick or two. But Germany is set not just to grow a little bit faster but to progress toward overheating. The only brake for Germany would be to run a contractionary fiscal policy. And we may see that. Of course, that is the opposite of what the rest of Europe would like to see. 


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The unemployment rate turned lower in December in both the EU and EMU. This, despite a host of problems: weak PMI readings and the ECB on a glide path to its controversial QE plan. Of the 11 topically reporting members in the table, [...]

The Germans in the Dell: the Cheese and the Germans Stand Alone

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Real GDP growth last quarter slowed to 2.6% (AR, 2.5% y/y) from 5.0% in Q3.
For all of 2014, growth of 2.4% compared to 2.2% and 2.3% during the prior two
years. The latest gain fell short of a 3.3% rise in the Action Economics
Forecast Survey.

Overall growth in final sales decelerated to 1.8% (2.2% y/y) from 5.0% as net
export deterioration sapped one percentage point from growth, reversing its
addition in Q3. The subtraction occurred as imports grew at an 8.9% rate (5.3%
y/y), outpacing export growth of 2.8% (2.0% y/y). Working the other way, faster
inventory accumulation raised GDP growth last quarter by 0.8 percentage points.

Growth in domestic final demand slowed sharply to 2.8% (2.8% y/y) from 4.1%.
Holding back growth was a lessened 1.9% rise (5.5% y/y) in business fixed
investment, down from 8.9% in Q3. The slowdown reflected a 1.9% decline (+4.7%
y/y) in equipment spending, off from double-digit growth in the prior two
quarters. Government spending also declined 2.2% (+0.7% y/y), held back by a
12.6% drop (-0.4% y/y) in defense. State &amp; local government spending growth
was stable at 1.3% (1.1% y/y).

Faster growth in consumer spending picked up some of this slack. A 4.1% rise
(2.8% y/y) in consumption was the strongest since Q1 2006. Quicker 4.4% growth
(2.3% y/y) in spending on nondurables reflected a 13.4% rise (3.9% y/y) in
apparel and a 12.3% gain (2.9% y/y) in gasoline &amp; fuel oil, spurred by lower
prices. Services spending also picked up to 3.7% (2.1% y/y) from 2.5%. It was
sparked by a 6.0% jump (3.7% y/y) in restaurants &amp; accommodations as well as
a 5.9% surge (0.7% y/y) in recreation. Durable goods purchases eased to 7.5%
growth (8.4% y/y) from 9.2%. Motor vehicles &amp; parts purchases slowed to 6.4%
(10.4% y/y) from 11.2% though spending on furnishings &amp; household durables
remained firm at 5.7% (6.3% y/y).

Residential investment also grew at a slightly quicker 4.1% rate last quarter
(2.6% y/y), though this compares to double-digit growth in 2012 &amp; 2013.

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The GDP chain price index was nearly unchanged (1.2% y/y) following a 1.4%
rise. The personal consumption price index fell at a 0.5% rate (+1.1% y/y). A
6.2% decline in the nondurable price index (-0.3% y/y) added to 3.6% decline
(-2.6% y/y) in the durables index. The services price index rose at a stable
2.0% rate (2.2% y/y). The PCE price index excluding food &amp; energy increased
at a 1.1% rate (1.4% y/y), its weakest rise Q2'13 

The latest GDP figures can be found in Haver's USECON and USNA
databases; USNA contains basically all of the Bureau of Economic
Analysis' detail in the national accounts, including the integrated economic
accounts and the recently added GDP data for U.S. Territories. The Action
Economics consensus estimates can be found in AS1REPNA.

Components of U.S. Financial Sector Growth, 1950-2013 from the Federal
Reserve Bank of New York can be found <a href="http://www.newyorkfed.org/research/epr/2014/1412anti.html">here</a>.

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 <table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>
 
 <thead>
 <tr>
 <th class="firstcol" scope="col" ><a href="http://www.haverselect.com/dlx/USECON/@E7/@E701/@E701.HTM" ;>Chained
 2009 $, %, AR</a></th>
 <th scope="col" >Q4'14 (Advance Estimate)</th>
 <th scope="col" >Q3'14</th>
 <th scope="col" >Q2'14</th>
 <th scope="col" >Q4 Y/Y</th>
 <th scope="col" >2014</th>
 <th scope="col" >2013</th>
 <th scope="col" >2012</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Gross Domestic Product</td>
 <td >2.6</td>
 <td >5.0</td>
 <td >4.6</td>
 <td >2.5</td>
 <td >2.4</td>
 <td >2.2</td>
 <td >2.3</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp; Inventory Effect</td>
 <td >0.8</td>
 <td >-0.0</td>
 <td >1.4</td>
 <td >0.3</td>
 <td >0.1</td>
 <td >0.0</td>
 <td >0.1</td>
 </tr>
 <tr>
 <td class="firstcol" >Final Sales</td>
 <td >1.8</td>
 <td >5.0</td>
 <td >3.2</td>
 <td >2.2</td>
 <td >2.3</td>
 <td >2.2</td>
 <td >2.2</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp; Foreign Trade Effect</td>
 <td >-1.0</td>
 <td >0.8</td>
 <td >-0.3</td>
 <td >-0.6</td>
 <td >-0.1</td>
 <td >0.3</td>
 <td >0.1</td>
 </tr>
 <tr>
 <td class="firstcol" >Domestic Final Sales</td>
 <td >2.8</td>
 <td >4.1</td>
 <td >3.4</td>
 <td >2.8</td>
 <td >2.4</td>
 <td >1.9</td>
 <td >2.1</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" colspan="8" width="1717">Demand Components</td>
 </tr>
 <tr>
 <td class="firstcol" >Personal Consumption Expenditures</td>
 <td >4.3</td>
 <td >3.2</td>
 <td >2.5</td>
 <td >2.8</td>
 <td >2.5</td>
 <td >2.4</td>
 <td >1.8</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Business Fixed Investment</td>
 <td >1.9</td>
 <td >8.9</td>
 <td >9.7</td>
 <td >5.5</td>
 <td >6.1</td>
 <td >3.0</td>
 <td >7.2</td>
 </tr>
 <tr>
 <td class="firstcol" >Residential Investment</td>
 <td >4.1</td>
 <td >3.3</td>
 <td >8.8</td>
 <td >2.6</td>
 <td >1.6</td>
 <td >11.9</td>
 <td >13.5</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Government Spending</td>
 <td >-2.2</td>
 <td >4.4</td>
 <td >1.7</td>
 <td >0.7</td>
 <td >-0.2</td>
 <td >-2.0</td>
 <td >-1.4</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" colspan="8" width="1717">Chain-Type Price Index</td>
 </tr>
 <tr>
 <td class="firstcol" >GDP&nbsp;&nbsp; &nbsp;&nbsp;</td>
 <td >-0.0</td>
 <td >1.4</td>
 <td >2.1</td>
 <td >1.2</td>
 <td >1.5</td>
 <td >1.5</td>
 <td >1.8</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Personal Consumption Expenditures</td>
 <td >-0.5</td>
 <td >1.2</td>
 <td >2.3</td>
 <td >1.1</td>
 <td >1.3</td>
 <td >1.2</td>
 <td >1.8</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;Less Food/Energy</td>
 <td >1.1</td>
 <td >1.4</td>
 <td >2.0</td>
 <td >1.4</td>
 <td >1.4</td>
 <td >1.3</td>
 <td >1.8</td>
 </tr>
 </tbody>
 </table>
 
</body></html>

<!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.01 Transitional//EN">
<html><head>
</head>
<body>
	 
 
 
 
 
 <a href="/comment/150129f_big.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/150129f.png"></a>
 <a href="/comment/150129g_big.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/150129g.png"></a>
 
The National Association of Realtors (NAR) reported that pending sales of single-family 
homes declined 3.7% last month (+6.1% y/y) following a revised 0.6% November increase,
last month reported as 0.8%. For all of last year, pending home sales
declined 3.5% and reversed most of the 4.5% gain in 2013. These sales are
reported as an index with 2001=100. The December value was 100.7, down 20.7%
from the peak of 127.0 in April 2005. It nevertheless remained up by 30.6% from
the recession low of 77.1 in June 2010.

Home sales in the Northeast fell 7.5% last month (+6.3% y/y) and nudged 0.4%
lower for the full year. Sales in the West declined 4.6% in December (+6.3% y/y)
and were off 6.9% during all of 2014. Home sales in the Midwest fell 2.8% (+1.9%
y/y) and retreated 5.8% for the year. In the South, pending home sales declined
2.6% last month (+8.6% y/y) and fell 1.4% during the whole year.

The pending home sales figures are analogous to the new home sales
data from the Commerce Department. They measure home sales when the sales
contract is signed, not at the time the sale is closed. In developing the model
for the index, the NAR demonstrated that the level of monthly sales contract
activity parallels the level of closed existing home sales in the following two
months. The series dates back to 2001 and the data are available in Haver's PREALTOR
database.
 
 <table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>
	
 <thead>
 <tr>
 <th class="firstcol" scope="col">Pending Home Sales (%, SA)</th>
 <th scope="col">Dec</th>
 <th scope="col">Nov</th>
 <th scope="col">Oct</th>
 <th scope="col">Y/Y</th>
 <th scope="col">2014</th>
 <th scope="col">2013</th>
 <th scope="col">2012</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol">Total</td>
 <td>-3.7</td>
 <td>0.6</td>
 <td>-1.2</td>
 <td>6.1</td>
 <td>-3.5</td>
 <td>4.5</td>
 <td>11.3</td>
 </tr>
 <tr class="odd">
 <td class="firstcol">Northeast</td>
 <td>-7.5</td>
 <td>1.0</td>
 <td>0.5</td>
 <td>6.3</td>
 <td>-0.4</td>
 <td>6.1</td>
 <td>16.6</td>
 </tr>
 <tr>
 <td class="firstcol">Midwest</td>
 <td>-2.8</td>
 <td>-0.5</td>
 <td>-0.8</td>
 <td>1.9</td>
 <td>-5.8</td>
 <td>10.4</td>
 <td>17.7</td>
 </tr>
 <tr class="odd">
 <td class="firstcol">South</td>
 <td>-2.6</td>
 <td>1.3</td>
 <td>-1.1</td>
 <td>8.6</td>
 <td>-1.4</td>
 <td>5.4</td>
 <td>12.7</td>
 </tr>
 <tr>
 <td class="firstcol">West</td>
 <td>-4.6</td>
 <td>0.4</td>
 <td>-3.2</td>
 <td>6.3</td>
 <td>-6.9</td>
 <td>-3.6</td>
 <td>1.2</td>
 </tr>
 </tbody>
 </table>
 
</body></html>

The National Association of Realtors (NAR) reported that pending sales of single-family homes declined 3.7% last month (+6.1% y/y) following a revised 0.6% November increase, last month reported as 0.8%. For all of last year, pending [...]

U.S. Pending Home Sales Decline in December and for All of 2014

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

AI boosting US investment in data centers

US productivity growth has been significantly faster than in other major economies

Consumers' short-term US inflation expectations still elevated while longer-term expectations of financial markets are steady

US financial markets have gotten used to elevated policy uncertainty

FOMC now expects more rate cuts going forward than in June

China gaining ASEAN exports while US exports slump

Job openings less than the number unemployed in July for first time since 2021

Reaccelerating goods price inflation along with sticky services inflation clouds the outlook

Falling oil prices aren't pulling down inflation expectations, pointing to a boost from increased tariffs

Equity market exuberance outpacing macroeconomic data

Apart from Japan, Blue Chip forecasters expect further sizable monetary easing

US production rebounded in Q2, but demand continued to slow

US leader, Germany trailer for real GDP growth over past 3 years

Negative US inflation surprises leading G10 down

Deflation continues in China

Incoming data surprising on downside in US; positive surprises elsewhere

FOMC expects more inflation and less growth than in March

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The National Association of Realtors' Fixed Rate Mortgage Housing Affordability Index (HAI) improved 0.9% (3.6% y/y) to 106.2 in October after rising 4.7% in September, revised from 3.9%, following a 2.8% increase in August. The index level was the highest since February 2023. The level of home affordability was 18.1% higher than its low of 89.9 in October 2023, but 40.7% below the peak of 179.0 in April 2020.

The rise in October affordability occurred as the average mortgage rate fell to 6.33% from 6.43% in September. The fall in mortgage rates left them above their low of 6.26% in September of last year, though below a 7.70% high in October of 2023. They remained well above a December 2020 low of 2.73%. The median price of an existing single-family home rose 0.7% (2.2% y/y) to $420,600. That price compared to the record $438,600 in June 2025. In October, the principal plus interest payment eased 0.3% (+0.2% y/y) to $2,089 per month, down 9.6% from June’s record high of $2,311, but still well above the most recent low of $984 in February 2020. Monthly mortgage payments averaged a slightly lessened 23.5% of income during October, but remained well above a low of 14.0% of income in April 2020.

The change in housing costs in October was accompanied by a 0.5% rise (3.8% y/y) in median family income to $106,478 after falling 0.3% in September. Qualifying income declined 0.3% (+0.2% y/y) to $100,272, after falling for three straight months.

Housing affordability improved m/m in most of the country in October. The index in the Midwest, the country’s most affordable region, rose 1.5% (0.9% y/y) to 134.4. In the South, the index increased 0.7% (5.4% y/y) to 112.1, while the affordability index in the Northeast strengthened 1.1% (-1.4% y/y) to 93.7. Declining, however, was the affordability index in the West, where homes are the least affordable. The index eased 0.3% (+5.3% y/y) to 75.2 in October.

The Housing Affordability Index (HAI) equals 100 when a median-income borrower qualifies for an 80% mortgage on a median-priced existing single-family home. The HAI had exceeded 100 in each month since July 1990. It reached an all-time high of 213.3 in January 2013.

Data on Housing Affordability can be found in Haver’s **REALTOR** database. Median home sales prices are also available in **USECON**. Higher frequency interest rate data are found in **SURVEYS**, **WEEKLY**, and **DAILY**.

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- Mortgage rates continue to decline.
- Median income strengthens.
- Affordability improves in most of country.

U.S. Housing Affordability Edges Higher in October

Andrew Cates

**The Blue Chip Consensus**
Before turning to the risks that could unsettle the global outlook in 2026, it’s worth noting the backdrop against which those risks are emerging. The first chart shows that forecasters have, if anything, become more optimistic in recent months, raising their 2026 GDP projections across many major economies. The upgrades are most visible in Asia’s tech-focused economies, where the semiconductor and AI upturn is lifting expectations, but the US has also benefited from stronger-than-expected momentum and fading concerns that tariffs would deliver a major growth hit. In short, the starting point for the global outlook has improved—making the downside scenarios explored in the next few charts all the more important to test.

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**Policy divergence**
The second chart highlights one of the central risks to the 2026 outlook: monetary-policy calibration. Even as growth expectations have firmed, forecasters remain convinced that the major central banks still have a little further to go in their easing cycles. For both the Fed and the Bank of England, respondents expect additional rate cuts in early 2026, albeit with growing uncertainty about the exact timing and pace. The broader message is that the heavy lifting on disinflation is now largely done, and what remains are finer calibration risks—where cutting too slowly risks choking momentum, while cutting too aggressively risks undoing progress on inflation. The ECB outlook is far more fragmented. A large share of forecasters sees the next step as a cut—though not necessarily soon—but a meaningful minority lean toward a possible hike. At the opposite pole is the Bank of Japan. Unlike its peers, the BoJ is still expected to tighten policy, reflecting Japan’s firmer growth foundation and a more durable inflation process. This creates a notable US–Japan policy divergence, which has already influenced currency and bond-market behaviour and could become a larger global shock-transmission channel in 2026.

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**Financial market stress**
The third chart highlights another source of downside risk: the widening gap between financial-market calm and real-economy anxiety. The US VIX has spent most of the past year hovering near multi-decade lows, consistent with rich valuations, abundant liquidity and a broadly optimistic macro narrative. Yet measured global economic policy uncertainty remains unusually elevated, reflecting geopolitical fragmentation, shifting trade regimes, and highly uncertain fiscal trajectories. This disconnect matters. Periods in which markets price near-perfection while the policy environment deteriorates have often been precursors to sharp repricing episodes. With valuations stretched and volatility compressed, it would not take much—a policy misstep, a geopolitical shock, or a rapid shift in rate expectations—to trigger a correction big enough to destabilise confidence in 2026.

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**AI expectations**
Against that backdrop, our next chart highlights a more subtle but no less important vulnerability: expectations around AI-driven growth. While AI has undoubtedly been a powerful tailwind for market sentiment—and arguably a key reason why forecasters have nudged up 2026 growth projections—our survey suggests that most respondents believe financial markets are overestimating the likely economic gains. Only around a third think current expectations are broadly accurate; almost nobody believes markets are underestimating AI’s impact. This imbalance matters. When valuations are rich and optimism is heavily front-loaded, any disappointment in AI adoption, productivity gains or investment payoffs could unwind a meaningful chunk of the recent market strength. In other words, the same force lifting the outlook today could become a meaningful downside catalyst in 2026 if reality fails to keep pace with expectation.

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**Trade disruption** 
A further downside risk comes from the latent fragilities in global trade and logistics. The Baltic Dry Index has climbed sharply in recent months, hinting at firmer shipping demand and rising transport costs, even as the Global Supply Chain Pressure Index has edged lower. That combination is telling: headline congestion may not yet be building, but underlying pressures—tight vessel availability, shifting trade routes, selective port bottlenecks and stronger goods flows—are quietly re-accumulating beneath the surface. None of this resembles the acute disruptions of 2021–22, but the risk is that a seemingly contained system can tighten very quickly. For a global economy that remains vulnerable to cost shocks and production delays, any renewed squeeze in trade logistics would add another meaningful downside risk as we look toward 2026.

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**Geopolitical shocks** 
Geopolitical risk has eased from the extremes seen during the early stages of the Israel–Gaza conflict, but the broader backdrop remains far from settled. The global Geopolitical Risk Index is still running well above its pre-pandemic norm, and volatility is now being driven less by any single flashpoint and more by a crowded field of simmering risks. These range from an unstable Russia–Ukraine stalemate and intensifying U.S.–China strategic rivalry to ongoing tensions across the Taiwan Strait, a fragile security environment in the South China Sea, periodic flare-ups in the Caucasus and Sahel, and rising political strain ahead of multiple major elections in 2026. Venezuela’s increasing instability—both domestically and in relation to its border dispute with Guyana—adds another potential source of disruption, particularly for energy markets. While none of these risks is dominating headlines at present, history shows that geopolitical shocks rarely give advance warning. A sudden escalation in any of these theatres could easily unsettle trade flows, energy prices or investor sentiment—another meaningful downside risk as we approach 2026.

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As 2025 draws to a close, the global economy enters 2026 with a surprisingly resilient backdrop: equity markets are still trading near cycle highs, volatility is subdued, and consensus forecasts have been drifting upward in recent months—helped by a robust US economy, firmer momentum across Asia, and optimism that AI-related investment will continue to lift the medium-term outlook (chart 1). Against this relatively constructive starting point, we focus this week on the key downside risks that could challenge the consensus narrative next year: the possibility of monetary-policy miscalibration (chart 2); the gap between elevated policy uncertainty and unusually calm financial markets (chart 3); the risk that financial markets may be overestimating the gains from AI (chart 4); renewed strain in global trade (chart 5); and geopolitical tensions (chart 6). These risks do not dominate the baseline outlook, but they help frame the vulnerabilities that could matter if global conditions deteriorate. Next week, we will turn to the upside risks—the forces that could allow the world economy to outperform again in 2026.

<iframe data-testid="embed-iframe" style="border-radius:12px" src="https://open.spotify.com/embed/episode/0Nk11qt4bTvt9yn9hVzycv?utm_source=generator" width="100%" height="152" frameBorder="0" allowfullscreen="" allow="autoplay; clipboard-write; encrypted-media; fullscreen; picture-in-picture" loading="lazy"></iframe>

Charts of the Week: The Downside Risks

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The U.S. trade deficit in goods and services (BOP basis) narrowed to $52.8 billion in September from $59.3 billion in August, revised from $59.6 billion, according to the U.S. Census Bureau. The Action Economics Forecast Survey expected a deficit of $64.6 billion. The goods deficit fell to $79.0 billion in September from $86.1 billion in August, while the services surplus slipped to $26.2 billion from $26.8 billion in August. The real (inflation-adjusted) trade deficit in goods narrowed to $79.0 (2017$) in September from $83.7 billion in August. For all of Q3’25, the real deficit averaged $87.4 billion versus $87.7 billion in Q2, and thus it should be a modest addition to Q3 economic growth after a 4.8 percentage point addition in Q2.

Exports of goods & services rose 3.0% (5.7% y/y) in September following a 0.2% August slip. Goods exports (Census basis) strengthened 4.9% after a 0.8% slip. Nonauto consumer goods exports surged 19.1%. Industrial supplies & materials exports increased 12.1% while foods, feeds & beverage exports rose 3.4%. “Other” goods exports rose 7.6%. To the downside, capital goods exports excluding autos declined 5.3% while auto & parts exports fell 2.2%. Services exports eased 0.4%. Exports of financial services rose 1.4% while exports of maintenance & service repairs rose 0.8%. Exports of government goods and services rose 1.7%.

Imports of goods & services in September increased 0.6% (-3.7% y/y) after a 5.2% decline. Goods imports rose 0.7% (-5.9% y/y) in September after a 6.6% August decline. Nonauto consumer goods jumped 18.4% while industrial supplies & materials imports were little-changed. Elsewhere, imports fell. Capital goods excluding auto imports slumped 6.0%, auto imports fell 4.1% and food imports declined 1.6%. Total services imports rose 0.3% in September after a 0.3% decline. Maintenance & repair services increased 3.1%, construction service imports rose 1.1%, transport rose 1.5% but travel weakened 1.2%. Imports of government goods & services held steady.

By country, the goods trade deficit with China narrowed to $11.4 billion (SA) in September from $15.4 billion in August. Exports to China rose 1.8% while imports from China weakened 16.1%. The trade deficit with the European Union doubled m/m to $17.8 billion in September. Exports rose 13.2% but imports surged by one-third. The deficit with Japan declined sharply to $3.6 billion in September. Exports increased 7.9% while imports declined 12.7%.

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

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- Foreign trade deficit shrinks to lowest since June 2020.
- Surge in exports is driven by foods, industrial supplies & nonauto consumer goods.
- Minimal import increase is held down by fewer capital goods, autos & foods.
- Services surplus eases.

U.S. Trade Deficit Narrows to Five-Year Low in September

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance rose 44,000 to 236,000 during the week of December 6, after declining to 192,000 during the week of November 29, revised from 191,000. The four-week moving average of initial claims was 216,750, an increase of 2,000 from the previous week unrevised average of 214,750, which was the lowest level since January 2025.

Federal government employees initially filed 643 (NSA) jobless insurance claims in the week ended November 29, after 1,126 filed in the week ended November 22, revised from 1,125.

Continuing claims for unemployment insurance posted a sharp decline of 99,000 to 1,838,000 in the week ending November 29, from 1,937,000 the prior week, revised from 1.939 million. The four-week moving average decreased by 27,000 to 1,918,000 in the week ended November 29, from 1945,250 the prior week, revised from 1.945 million. The insured unemployment rate stood at 1.2% in the week of November 29, a decrease from 1.3% in the prior week.

Federal government employees continuing benefits fell to 12,732 (NSA) in the week ended November 22, from 17,862 in the week ended November 15, revised from 17,851.

The insured unemployment rate varied greatly across individual states and territories. In the week ended November 22, the highest unemployment rates were in New Jersey (2.18%), Washington (2.23%), Massachusetts (1.95%), Connecticut (1.83%) and Rhode Island (1.82%). The lowest rates were in Florida (0.27%), South Dakota (0.34%), North Carolina (0.39%), Louisiana (0.42%), Alabama (0.44%), Virginia and Tennessee (both 0.46%), and Arkansas and Nebraska (both 0.48%). Rates in other notable states include California (1.74%), New York (1.63%), Pennsylvania (1.46%), Illinois (1.45%), and Texas (1.07%). 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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U.S. Initial Claims for Unemployment Insurance Rose in Latest Week

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Sweden’s inflation rate has developed into a very interesting oddity as headline inflation as measured by the harmonized index of consumer prices (HICP), that is used in Europe, has come to diverge sharply from the Swedish national rate of inflation measured by its national CPI. The HICP inflation rate is 2.2% over the last 12 months; Sweden’s national rate is up by only 0.2%. If we rank each of these two inflation rates on data back to 2001, the rank of the HICP is in its 72.2 percentile while the rank of the national CPI is in only its 19.4 percentile, the lower one-fifth of its historic range of national inflation rates. These two rankings occur over the same periods and so there's nothing about the periodicity that's responsible for this; there's simply very different performance over the recent span.

**About measuring inflation**
The HICP was adopted in Europe once the monetary union was formed and the countries of Europe were not able to get together to decide how to treat housing costs, which are important element in the CPI. They had entered into CPIs in different countries in different ways at that point. In the United States, inflation statistics are often criticized because of the way the housing component fits into them. Housing has such a large weight in the U.S. inflation measure. U.S. housing costs consider the cost of running the house in terms of taxes and utility costs; they look at the rental equivalent values, and they also have an owner imputed rent for people who live in their own homes. Of course, owner equivalent rent is a made-up number; it's completely imputed. Because a lot of European mortgages are short-term and they reprice when the central bank changes its rate, it’s very important to be careful how interest rates are treated in the housing cost indexes in Europe. The central bank did not want to be in a position where it would be raising interest rates to fight inflation and causing inflation to be higher because they were raising the mortgage interest rates on homes and causing the cost of housing to go up. For this reason, the HICP measures do not include housing costs. As we can see in the Swedish details for this month, housing and fuel costs are down 3.1% year-over-year. If we look at the ranking of housing costs for year-over-year growth, we see that they rank in the lower 6.4 percentile and are one of the most important factors in driving the national CPI lower and, of course, that metric is absent from the HICP.

**Inflation is always rife with controversy**: All of this is simply just another way to point out that inflation, while we measure it and talk about it, it's a controversial subject. How we measure it does matter. However, for monetary policy purposes, if we construct a measure that is reasonable and if we follow it consistently over the years, it should give us good signals and a good way to measure inflation and engage monetary policy. Yet, very clearly, if there are two competing gauges, it could become a real problem to jump from one to the other because they track different circumstances.

**The current state of Swedish inflation**: Swedish inflation in November fell by 0.3% month-to-month after rising by 0.5% in October and falling by 0.1% in September. The diffusion, or breadth, of inflation acceleration was only 33.3% in November. It jumped up to 55.6% in October, but it had been lower in September at 33%. Looking at Swedish inflation over 12-month, 6-month, and 3-month periods, the HICP goes from 2.2% over 12 months to an annualized pace of 5.7% over 6 months and then back down to 0.5% over 3 months. The national CPI has the same sort of topography but different growth rates with the CPI up by only 0.2% over 12 months, accelerating to 1.5% over 6 months and then declining at a -0.9% annual rate over 3 months. Inflation diffusion over 3 months in the national index is only 11.1%, over 6 months it jumps up to 66.7%, and over 12 months it's at 44.4% which is below 50% marking inflation as having more deceleration than acceleration.

**Controlled inflation**: On balance, Swedish inflation appears to be under control using either method. The ranking for inflation by category shows high inflation for food & nonalcoholic beverages, education, other goods & services, and medical care. However, inflation is below its median pace and bears low rankings for clothing & footwear, housing, fuel & lighting, recreation & culture, and transportation. Inflation is always somewhat mixed across sectors. That’s another thing that makes it hard to pin down exactly what inflation is, because people who consume different baskets of goods are going to experience different inflation rates. However, Sweden appears to have its inflation situation under control whichever metric you look at. The chart makes it clear that after its spike during COVID, inflation has come back down to a reasonable long-term pace that appears to be close to something that the central bank would find acceptable. The recent rise in HICP inflation seems to be unwinding and year-over-pace is down to a moderate 2.2%.

Economy in Brief

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U.S. Employment Cost Index Moderates in Q4

The Germans in the Dell: the Cheese and the Germans Stand Alone

U.S. GDP Growth Halves to 2.6% in Q4; 2014 Roughly Steady

U.S. Pending Home Sales Decline in December and for All of 2014