Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070115a.jpg" width="353">
The Leading Index of the major 7 OECD economies rose 0.2% after a like gain during October but earlier month&#39;s increases were revised lower. The index&#39;s six month growth rate dropped to 1.1% from 1.6% as a result of the revisions.
During the last ten years there has been a 64% correlation between the change in the leading index and the q/q change in the GDP Volume Index for the Big Seven OECD countries.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070115b.jpg" width="353">
The U.S. leading indicators increased 0.2% for the second month but September&#39;s gain was revised down sharply to a slight decline. The index&#39;s six month growth rate as a result was halved to 1.0%, down from growth rates above 4% at the beginning of 2006. The correlation between the leaders&#39; growth rate and U.S. real GDP growth has been a high 73% during the last ten years.
The leading index for the European Union (15 countries) rose 0.1% for the third month in the last four. The modest gains dropped the index&#39;s six month growth rate to 2.0%, half the growth of earlier in the year. During the last ten years there has been a 59% correlation between the change in the leading index and the quarterly change in the European Union GDP volume index.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070115c.jpg" width="353">
The German leading index rose a firm 0.5% increase in November but the 0.5% increase first reported for October was revised to 0.2%. That pulled the leaders&#39; growth to 3.5%, less than half its earlier growth. During the last ten years there has been a 32% correlation between the change in the German leading index and the quarterly change in GDP volume.
The Italian leading index fell for the fourth month in the last five and lowered the series&#39; six month growth rate to -2.1%.
A French leaders also dipped 0.1% but six month growth in leaders held steady at a moderate 2.3%. During the last ten years there has been a 54% correlation between the leaders&#39; growth rate and growth in France&#39;s real GDP.
The leading index in Japan rose 0.1% for the third consecutive month. Nevertheless the index&#39;s six month growth rate remained negative at -0.9%. The leaders&#39; correlation with Japan&#39;s real economic growth has been a meaningful 41% during the last ten years.
The Canadian leaders surged 1.5% after October&#39;s 0.9% jump. The leaders&#39; six month growth rate consequently surged to 6.9%, its best since 2002, due to higher share prices in Toronto. The correlation of the leaders&#39; growth with Canadian real GDP has been 49% during the last ten years.
The UK leaders rose a modest 0.2% for the second month and the six month growth rate increased to a low 1.4%. During the last ten years there has been a 36% correlation between the leaders&#39; growth rate and U.K. real GDP growth.
The latest OECD Leading Indicator report can be found <a href="http://www.oecd.org/dataoecd/5/21/37913250.pdf">here</a>.
OECD Warns Climate Change Is Threatening Europe&#39;s Skiing Trade is available <a href="http://www.oecd.org/document/22/0,2340,en_2649_201185_37825494_1_1_1_1,00.html"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/OECDMEI/OECDMEI.HTM">OECD</a></th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Composite Leading Index&nbsp;</td>
<td>105.45</td>
<td>105.23</td>
<td>1.5%</td>
<td>102.79</td>
<td>102.30</td>
<td>97.80</td>
</tr>
<tr>
<td class="firstcol">&nbsp;6 Month Growth Rate</td>
<td>1.1%</td>
<td>1.0%</td>
<td>--</td>
<td>0.7%</td>
<td>3.5%</td>
<td>2.6%</td>
</tr>
</tbody>
</table>
Growth in New Orders for Ships and Electric Power and for Export Exceed Growth in  Japanese Headline Series for New Orders  
by <a href="/comment/Curley.html">Louise Curley</a> January 15, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070115d.jpg" width="353">
The Economic and Social Research Institute (ESRI) of the Cabinet Office in Japan announced today that new orders for machinery were well above expectations. On a seasonally unadjusted basis new orders were 19.3% above November, 2005 and on a seasonally adjusted basis were 14.22% above October.
Orders are reported in total in the month they are received even if they are very large and will not be completed for several months; as a result, the series tends to be extremely volatile. ESRI publishes a &quot;Headline&quot; series which excludes two of the most erratic components--ships and electric power. The seasonally unadjusted series for total orders and the seasonally unadjusted Headline Series are shown in the first chart. On a seasonally unadjusted basis the Headline series was 0.7% above November, 2005 and the seasonally adjusted series was 3.8% above October.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070115e.jpg" width="353">
With data through November, we have a good idea of how the current year is fairing vis-&agrave;-vis 2005. Total orders for the period January through November, 2006 were 27,963.3 billion yen or 12.6% above the 24,841.8 billion yen in the comparable period in 2005. This represents a substantial increase over the 4.35% increase in 2005 over 2004. The Headline Series shows a different picture. The eleven month total of Headline orders was 11,721.5 billion yen in the current year or only 4.77% above the 11.188.1 billion yen recorded in the January to November period of 2005. Moreover, the indicated increase for 2006 is well below the actual increase of 7.11% in 2005. It would appear that ships and electric power have provided much of the growth in total orders this year. However, the difference between total new orders and the Headline series includes foreign and government orders as well as ships and electric power.
In the second chart showing seasonally adjusted foreign and government orders, it is clear that foreign orders have been an important part of the growth in total orders while government orders have played a slightly negative role.

<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">JAPAN NEW ORDERS &nbsp; (Bil Yen, ex where noted)</th>
<th scope="col">Nov06</th>
<th scope="col">Oct 06</th>
<th scope="col">Sep 06</th>
<th scope="col">J-N 06</th>
<th scope="col">J-N 05</th>
<th scope="col">J-N 06/ J-N 05%</th>
<th scope="col">2005 %</th>
<th scope="col">2004 %</th>
<th scope="col">2003 %</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total New Orders NAS</td>
<td>2,482.7</td>
<td>2,081.5</td>
<td>3,069.2</td>
<td>27,963.3</td>
<td>24,841.8</td>
<td>12.6</td>
<td>4.35</td>
<td>4.24</td>
<td>15.05</td>
</tr>
<tr>
<td class="firstcol">Y/Y percent change</td>
<td>19.27</td>
<td>-32.18</td>
<td>39.20</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">Total New Orders SA</td>
<td>2,804.6</td>
<td>2,455.6</td>
<td>2,319.4</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol"> M/M percent change </td>
<td>14.22</td>
<td>5.87</td>
<td>-12.95</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">Headline Series NAS</td>
<td>994.7</td>
<td>861.5</td>
<td>1,305.3</td>
<td>11,721.5</td>
<td>11,188.1</td>
<td>4.77</td>
<td>7.11</td>
<td>4.43</td>
<td>10.68</td>
</tr>
<tr>
<td class="firstcol">Y/Y percent change</td>
<td>0.70</td>
<td>-1.18</td>
<td>-14.7</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">Headline Series SA</td>
<td>1,064.2</td>
<td>1,025.4</td>
<td>997.5</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol"> M/M percent change </td>
<td>3.78</td>
<td>2.80</td>
<td>-7.26</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol"> Foreign New Orders </td>
<td>1,302.5</td>
<td>1,088.4</td>
<td>795.8</td>
<td>11,382.1</td>
<td>9024.7</td>
<td>26.23</td>
<td>6.85</td>
<td>9.43</td>
<td>37.08</td>
</tr>
<tr>
<td class="firstcol"> Public New Orders </td>
<td>229.5</td>
<td>209.0</td>
<td>223.4</td>
<td>2,625.2</td>
<td>2,674.9</td>
<td>-1.82</td>
<td>9.80</td>
<td>-6.44</td>
<td>-5.13</td>
</tr>
</tbody>
</table>
</body>
</html>

The Leading Index of the major 7 OECD economies rose 0.2% after a like gain during October but earlier month's increases were revised lower. The index's six month growth rate dropped to 1.1% from 1.6% as a result of the revisions. [...]

OECD Leaders Rose

Carol Stone, CBE

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070112f.jpg" width="353">
Industrial production in India was strong again in November, extending a long but irregular uptrend in the industrial sector of that rapidly emerging economy. According to the Central Statistical Organization, IP was up 5.5% in the month and 14.4% on the year. The CSO data are not seasonally adjusted. The month-to-month comparison quoted here is taken from seasonal adjustment performed by Haver Analytics. Because the month-to-month movements are very erratic, our discussion below covers yearly growth trends both in the latest month and over a longer period.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070112g.jpg" width="353">
Marked acceleration of even heavy industry is evident in the categorical breakdown. Basic metals and alloys surged by 25.4% over November 2005, a third consecutive month of 20%-plus yearly gains. Machinery excluding transport equipment expanded 17.3% in November and the last six months have run 14.9% ahead of the comparable year-ago period. Nonmetallic mineral products have a similar pattern, with November up 17.7% and the last six months up 13.8% on the year-ago period.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070112h.jpg" width="353">
Among &quot;softer&quot; products, rubber, plastics and petroleum expanded 23.2% in November and 13.1% in the six-month period. This follows a particularly weak performance over the prior five years. Cotton textiles, the kind of manufacturing often associated with India, had experienced a long period of little or no growth, but has lately staged a comeback. By November 2006, production here was up 18.3% from November 2005 and the six months are up 13.5% from the same time in 2005.
The service sector in India remains far larger than manufacturing, measured by gross value added. But these gains in industrial production show a significant diversification of the Indian economy. While every nation need not be a major player in world metals markets or motor vehicles, the breadth of recent gains -- especially the return of strength in textiles -- gives a firmer foundation for further development.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">India (NSA, yr/yr % changes)</th>
<th scope="col">Nov 2006</th>
<th scope="col">Oct 2006</th>
<th scope="col">Sept 2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">General Industrial Production &nbsp; (SA, FY93=100)</td>
<td>250.9</td>
<td>237.9</td>
<td>245.5</td>
<td>216.7</td>
<td>200.8</td>
<td>185.2</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Mo/Mo % Chg, SA</td>
<td>5.5</td>
<td>-3.1</td>
<td>1.9</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Yr/Yr % Chg, NSA</td>
<td>14.4</td>
<td>4.4</td>
<td>11.4</td>
<td>7.9</td>
<td>8.5</td>
<td>6.6</td>
</tr>
<tr>
<td class="firstcol">Manufacturing</td>
<td>15.7</td>
<td>3.8</td>
<td>12.0</td>
<td>9.0</td>
<td>8.9</td>
<td>7.1</td>
</tr>
<tr class="odd">
<td class="firstcol">Cotton Textiles</td>
<td>18.3</td>
<td>9.7</td>
<td>14.7</td>
<td>9.1</td>
<td>7.4</td>
<td>-5.3</td>
</tr>
<tr>
<td class="firstcol">Rubber, Plastic, Petroleum</td>
<td>23.2</td>
<td>7.7</td>
<td>15.7</td>
<td>3.9</td>
<td>1.2</td>
<td>7.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Basic Metals &amp; Alloys</td>
<td>25.4</td>
<td>20.9</td>
<td>20.0</td>
<td>13.8</td>
<td>4.3</td>
<td>10.9</td>
</tr>
<tr>
<td class="firstcol">Machinery ex Transport</td>
<td>17.3</td>
<td>2.1</td>
<td>14.2</td>
<td>11.5</td>
<td>24.3</td>
<td>8.3</td>
</tr>
</tbody>
</table>
</body>
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Industrial production in India was strong again in November, extending a long but irregular uptrend in the industrial sector of that rapidly emerging economy. According to the Central Statistical Organization, IP was up 5.5% in the [...]

Broad Industrial Production Advance in India

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070112e.jpg" width="353">
Total business inventories rose 0.4% in November following a downwardly revised 0.2% October gain. Consensus expectations had been for a 0.3% rise and over the last three months the 0.3% average increase was the slowest since September of last year.
During the last ten years there has been a 57% correlation between the y/y change in business inventories and the change in factory sector industrial production. Using quarterly figures, there has been an 84% correlation between the change in real private nonfarm inventories and production.
Business sales rose 0.5% (4.0% y/y), the first increase in three months. Wholesale sales led the gain with a 1.0% (7.95 y/y) pop and retail sales rose 0.6% (4.3% y/y). Factory shipments ticked up 0.1% (0.7% y/y). As a result the inventory to sales ratio was stable at 1.30 for the third month. 
Retail inventories fell for the third straight month but excluding autos they rose 0.3%. General merchandise inventories rose 0.2% (2.9% y/y) and have been accumulating strongly since May. Clothing store inventories surged 1.6% (9.7% y/y), the third month of strong gain. Furniture inventories fell for the second month with a 0.2% decline (+4.3% y/y).

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED06/@ED0601/@ED0601.HTM">Business Inventories</a></th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>0.4%</td>
<td>0.2%</td>
<td>6.9%</td>
<td>4.4%</td>
<td>7.6%</td>
<td>-1.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Retail</td>
<td>-0.3%</td>
<td>-0.2%</td>
<td>4.0%</td>
<td>2.7%</td>
<td>6.7%</td>
<td>3.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Retail excl. Autos</td>
<td>0.3%</td>
<td>0.2%</td>
<td>4.6%</td>
<td>4.5%</td>
<td>7.1%</td>
<td>1.9%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wholesale</td>
<td>1.3%</td>
<td>0.4%</td>
<td>10.1%</td>
<td>7.1%</td>
<td>9.8%</td>
<td>1.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Manufacturing</td>
<td>0.2%</td>
<td>0.3%</td>
<td>7.1%</td>
<td>4.0%</td>
<td>6.9%</td>
<td>-7.4%</td>
</tr>
</tbody>
</table>
</body>
</html>

Total business inventories rose 0.4% in November following a downwardly revised 0.2% October gain. Consensus expectations had been for a 0.3% rise and over the last three months the 0.3% average increase was the slowest since [...]

U.S. Inventory Accumulation Up A Bit

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070112c.jpg" width="353">
Higher petroleum prices fueled a 1.1% jump in overall import prices last month which was about double Consensus expectations for a 0.6% gain. 
The increase occurred as petroleum import prices surged 4.8% in December after sharp declines during the prior three months. So far in January the price of WTI crude oil has fallen roughly six dollars (-10%) from the $62.03 per bbl. averaged in December and yesterday&#39;s price was down ten dollars to $51.89.
Less petroleum import prices rose 0.4% in December and the prior month&#39;s increase was revised up to 0.9% from 0.7%. During the last ten years there has been a 66% (negative) correlation between the nominal trade-weighted exchange value of the US dollar vs. major currencies and the y/y change in non oil import prices. The correlation is a lower 47% against a broader basket of currencies.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070112d.jpg" width="353">
Prices for nonoil industrial supplies &amp; materials surged 1.5% (4.5% y/y) after a 4.0% November spike. Prices for nondurable industrial supplies less petroleum rose 2.6% (-5.8% y/y) after an upwardly revised 8.9% November jump. Prices for durable industrial supplies &amp; materials rose 0.7% (14.7% y/y).
Capital goods prices ticked up 0.1% (0.4% y/y) and excluding a 0.1% (-3.6% y/y) decline in computers, capital goods prices rose 0.2% (2.2% y/y) in December. Prices for nonauto consumer goods rose 0.2% (1.2% y/y).
Export prices rose 0.7% as agricultural export prices surged 2.2% (13.2% y/y) but nonagricultural export prices rose 0.5% (3.8% y/y).
The Adjustment of Global External Imbalances: Does Partial Exchange Rate Pass-through to Trade Prices Matter? from the Federal Reserve Board is available <a href="http://www.federalreserve.gov/pubs/ifdp/2006/850/ifdp850.pdf">here</a>.
The Internationalization of the Dollar and Trade Balance Adjustment from the Federal Reserve Bank of New York can be found <a href="http://www.newyorkfed.org/research/staff_reports/sr255.pdf">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E807/@E807.HTM">Import/Export Prices (NSA)</a></th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Import - All Commodities</td>
<td>1.1%</td>
<td>0.5%</td>
<td>2.5%</td>
<td>4.9%</td>
<td>7.5%</td>
<td>5.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Petroleum</td>
<td>4.8%</td>
<td>-1.2%</td>
<td>6.2%</td>
<td>20.7%</td>
<td>37.6%</td>
<td>30.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Non-petroleum</td>
<td>0.4%</td>
<td>0.9%</td>
<td>1.7%</td>
<td>1.7%</td>
<td>2.7%</td>
<td>2.6%</td>
</tr>
<tr>
<td class="firstcol">Export- All Commodities</td>
<td>0.7%</td>
<td>0.4%</td>
<td>4.6%</td>
<td>3.6%</td>
<td>3.2%</td>
<td>3.9%</td>
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Higher petroleum prices fueled a 1.1% jump in overall import prices last month which was about double Consensus expectations for a 0.6% gain. The increase occurred as petroleum import prices surged 4.8% in December after sharp [...]

U.S. Import Prices Jumped

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070112a.jpg" width="353">
US retail sales in December rose 0.9% though the sales gain during the prior month was lowered to 0.6% from 1.0% reported initially. The latest increase again easily beat Consensus expectations for a 0.6% rise.
Excluding autos, retail sales jumped a larger 1.0% last month, though the November gain was lowered to a still firm 0.7% from 1.1%. Sales by motor vehicle &amp; parts dealers rose 0.3% (3.6% y/y) after a downwardly revised slight decline in November, as new unit vehicle sales did rise 4.4% in December.
Sales at gasoline service stations jumped 3.8% reflecting the 3.7% recovery in gasoline prices to $2.31 per gallon.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070112b.jpg" width="353">
Nonauto retail sales less gasoline in November jumped 0.7% (6.2% y/y) though the November gain was revised lower to 0.5% from 0.9% reported initially. During the fourth quarter these sales rose at a 3.7% annual rate, the versus 4.2% during 3Q.
Sales of discretionary items were generally firm last month. Sales at furniture, home furnishings &amp; appliance stores jumped 1.8% (11.1% y/y) after an upwardly revised 2.8% November spike. Sales at electronics &amp; appliance stores surged 3.0% (15.0% y/y) after a 5.8% November surge. Apparel store sales gained 0.6% (5.5% y/y) after two months of decline and general merchandise store sales rose 0.9% (5.4% y/y).
Building material sales fell 1.1% (-0.8% y/y), the eighth decline in the last nine months. Sales of nonstore retailers (internet &amp; catalogue) rose a modest 0.3% (7.9% y/y) but restaurant and bar sales jumped 2.3% (9.3% y/y).

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">&nbsp;</th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol"><a href="http://www.haverselect.com/dlx/usecon/@ED/@ED04/@ED0401/@ED0401.HTM">Retail Sales &amp; Food Services</a></td>
<td>0.9%</td>
<td>0.6%</td>
<td>5.4%</td>
<td>6.3%</td>
<td>7.2%</td>
<td>6.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Excluding Autos</td>
<td>1.0%</td>
<td>0.7%</td>
<td>5.8%</td>
<td>7.5%</td>
<td>8.3%</td>
<td>7.2%</td>
</tr>
</tbody>
</table>


</html>

US retail sales in December rose 0.9% though the sales gain during the prior month was lowered to 0.6% from 1.0% reported initially. The latest increase again easily beat Consensus expectations for a 0.6% rise. Excluding autos, retail [...]

U.S. Retail Sales Firm At Yearend Led By Electronics

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070112a.jpg" width="353">
US retail sales in December rose 0.9% though the sales gain during the prior month was lowered to 0.6% from 1.0% reported initially. The latest increase again easily beat Consensus expectations for a 0.6% rise.
Excluding autos, retail sales jumped a larger 1.0% last month, though the November gain was lowered to a still firm 0.7% from 1.1%. Sales by motor vehicle &amp; parts dealers rose 0.3% (3.6% y/y) after a downwardly revised slight decline in November, as new unit vehicle sales did rise 4.4% in December.
Sales at gasoline service stations jumped 3.8% reflecting the 3.7% recovery in gasoline prices to $2.31 per gallon.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070112b.jpg" width="353">
Nonauto retail sales less gasoline in November jumped 0.7% (6.2% y/y) though the November gain was revised lower to 0.5% from 0.9% reported initially. During the fourth quarter these sales rose at a 3.7% annual rate, the versus 4.2% during 3Q.
Sales of discretionary items were generally firm last month. Sales at furniture, home furnishings &amp; appliance stores jumped 1.8% (11.1% y/y) after an upwardly revised 2.8% November spike. Sales at electronics &amp; appliance stores surged 3.0% (15.0% y/y) after a 5.8% November surge. Apparel store sales gained 0.6% (5.5% y/y) after two months of decline and general merchandise store sales rose 0.9% (5.4% y/y).
Building material sales fell 1.1% (-0.8% y/y), the eighth decline in the last nine months. Sales of nonstore retailers (internet &amp; catalogue) rose a modest 0.3% (7.9% y/y) but restaurant and bar sales jumped 2.3% (9.3% y/y).

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">&nbsp;</th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol"><a href="http://www.haverselect.com/dlx/usecon/@ED/@ED04/@ED0401/@ED0401.HTM">Retail Sales &amp; Food Services</a></td>
<td>0.9%</td>
<td>0.6%</td>
<td>5.4%</td>
<td>6.3%</td>
<td>7.2%</td>
<td>6.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Excluding Autos</td>
<td>1.0%</td>
<td>0.7%</td>
<td>5.8%</td>
<td>7.5%</td>
<td>8.3%</td>
<td>7.2%</td>
</tr>
</tbody>
</table>
U.S. Import Prices Jumped 
by <a href="/comment/Moeller.html">Tom Moeller</a> January 12, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070112c.jpg" width="353">
Higher petroleum prices fueled a 1.1% jump in overall import prices last month which was about double Consensus expectations for a 0.6% gain. 
The increase occurred as petroleum import prices surged 4.8% in December after sharp declines during the prior three months. So far in January the price of WTI crude oil has fallen roughly six dollars (-10%) from the $62.03 per bbl. averaged in December and yesterday&#39;s price was down ten dollars to $51.89.
Less petroleum import prices rose 0.4% in December and the prior month&#39;s increase was revised up to 0.9% from 0.7%. During the last ten years there has been a 66% (negative) correlation between the nominal trade-weighted exchange value of the US dollar vs. major currencies and the y/y change in non oil import prices. The correlation is a lower 47% against a broader basket of currencies.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070112d.jpg" width="353">
Prices for nonoil industrial supplies &amp; materials surged 1.5% (4.5% y/y) after a 4.0% November spike. Prices for nondurable industrial supplies less petroleum rose 2.6% (-5.8% y/y) after an upwardly revised 8.9% November jump. Prices for durable industrial supplies &amp; materials rose 0.7% (14.7% y/y).
Capital goods prices ticked up 0.1% (0.4% y/y) and excluding a 0.1% (-3.6% y/y) decline in computers, capital goods prices rose 0.2% (2.2% y/y) in December. Prices for nonauto consumer goods rose 0.2% (1.2% y/y).
Export prices rose 0.7% as agricultural export prices surged 2.2% (13.2% y/y) but nonagricultural export prices rose 0.5% (3.8% y/y).
The Adjustment of Global External Imbalances: Does Partial Exchange Rate Pass-through to Trade Prices Matter? from the Federal Reserve Board is available <a href="http://www.federalreserve.gov/pubs/ifdp/2006/850/ifdp850.pdf">here</a>.
The Internationalization of the Dollar and Trade Balance Adjustment from the Federal Reserve Bank of New York can be found <a href="http://www.newyorkfed.org/research/staff_reports/sr255.pdf">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E807/@E807.HTM">Import/Export Prices (NSA)</a></th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Import - All Commodities</td>
<td>1.1%</td>
<td>0.5%</td>
<td>2.5%</td>
<td>4.9%</td>
<td>7.5%</td>
<td>5.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Petroleum</td>
<td>4.8%</td>
<td>-1.2%</td>
<td>6.2%</td>
<td>20.7%</td>
<td>37.6%</td>
<td>30.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Non-petroleum</td>
<td>0.4%</td>
<td>0.9%</td>
<td>1.7%</td>
<td>1.7%</td>
<td>2.7%</td>
<td>2.6%</td>
</tr>
<tr>
<td class="firstcol">Export- All Commodities</td>
<td>0.7%</td>
<td>0.4%</td>
<td>4.6%</td>
<td>3.6%</td>
<td>3.2%</td>
<td>3.9%</td>
</tr>
</tbody>
</table>
U.S. Inventory Accumulation Up A Bit 
by <a href="/comment/Moeller.html">Tom Moeller</a> January 12, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070112e.jpg" width="353">
Total business inventories rose 0.4% in November following a downwardly revised 0.2% October gain. Consensus expectations had been for a 0.3% rise and over the last three months the 0.3% average increase was the slowest since September of last year.
During the last ten years there has been a 57% correlation between the y/y change in business inventories and the change in factory sector industrial production. Using quarterly figures, there has been an 84% correlation between the change in real private nonfarm inventories and production.
Business sales rose 0.5% (4.0% y/y), the first increase in three months. Wholesale sales led the gain with a 1.0% (7.95 y/y) pop and retail sales rose 0.6% (4.3% y/y). Factory shipments ticked up 0.1% (0.7% y/y). As a result the inventory to sales ratio was stable at 1.30 for the third month. 
Retail inventories fell for the third straight month but excluding autos they rose 0.3%. General merchandise inventories rose 0.2% (2.9% y/y) and have been accumulating strongly since May. Clothing store inventories surged 1.6% (9.7% y/y), the third month of strong gain. Furniture inventories fell for the second month with a 0.2% decline (+4.3% y/y).

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED06/@ED0601/@ED0601.HTM">Business Inventories</a></th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>0.4%</td>
<td>0.2%</td>
<td>6.9%</td>
<td>4.4%</td>
<td>7.6%</td>
<td>-1.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Retail</td>
<td>-0.3%</td>
<td>-0.2%</td>
<td>4.0%</td>
<td>2.7%</td>
<td>6.7%</td>
<td>3.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Retail excl. Autos</td>
<td>0.3%</td>
<td>0.2%</td>
<td>4.6%</td>
<td>4.5%</td>
<td>7.1%</td>
<td>1.9%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wholesale</td>
<td>1.3%</td>
<td>0.4%</td>
<td>10.1%</td>
<td>7.1%</td>
<td>9.8%</td>
<td>1.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Manufacturing</td>
<td>0.2%</td>
<td>0.3%</td>
<td>7.1%</td>
<td>4.0%</td>
<td>6.9%</td>
<td>-7.4%</td>
</tr>
</tbody>
</table>
Broad Industrial Production Advance in India 
by <a href="/comment/Stone.html">Carol Stone</a> January 12, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070112f.jpg" width="353">
Industrial production in India was strong again in November, extending a long but irregular uptrend in the industrial sector of that rapidly emerging economy. According to the Central Statistical Organization, IP was up 5.5% in the month and 14.4% on the year. The CSO data are not seasonally adjusted. The month-to-month comparison quoted here is taken from seasonal adjustment performed by Haver Analytics. Because the month-to-month movements are very erratic, our discussion below covers yearly growth trends both in the latest month and over a longer period.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070112g.jpg" width="353">
Marked acceleration of even heavy industry is evident in the categorical breakdown. Basic metals and alloys surged by 25.4% over November 2005, a third consecutive month of 20%-plus yearly gains. Machinery excluding transport equipment expanded 17.3% in November and the last six months have run 14.9% ahead of the comparable year-ago period. Nonmetallic mineral products have a similar pattern, with November up 17.7% and the last six months up 13.8% on the year-ago period.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070112h.jpg" width="353">
Among &quot;softer&quot; products, rubber, plastics and petroleum expanded 23.2% in November and 13.1% in the six-month period. This follows a particularly weak performance over the prior five years. Cotton textiles, the kind of manufacturing often associated with India, had experienced a long period of little or no growth, but has lately staged a comeback. By November 2006, production here was up 18.3% from November 2005 and the six months are up 13.5% from the same time in 2005.
The service sector in India remains far larger than manufacturing, measured by gross value added. But these gains in industrial production show a significant diversification of the Indian economy. While every nation need not be a major player in world metals markets or motor vehicles, the breadth of recent gains -- especially the return of strength in textiles -- gives a firmer foundation for further development.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">India (NSA, yr/yr % changes)</th>
<th scope="col">Nov 2006</th>
<th scope="col">Oct 2006</th>
<th scope="col">Sept 2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">General Industrial Production &nbsp; (SA, FY93=100)</td>
<td>250.9</td>
<td>237.9</td>
<td>245.5</td>
<td>216.7</td>
<td>200.8</td>
<td>185.2</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Mo/Mo % Chg, SA</td>
<td>5.5</td>
<td>-3.1</td>
<td>1.9</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Yr/Yr % Chg, NSA</td>
<td>14.4</td>
<td>4.4</td>
<td>11.4</td>
<td>7.9</td>
<td>8.5</td>
<td>6.6</td>
</tr>
<tr>
<td class="firstcol">Manufacturing</td>
<td>15.7</td>
<td>3.8</td>
<td>12.0</td>
<td>9.0</td>
<td>8.9</td>
<td>7.1</td>
</tr>
<tr class="odd">
<td class="firstcol">Cotton Textiles</td>
<td>18.3</td>
<td>9.7</td>
<td>14.7</td>
<td>9.1</td>
<td>7.4</td>
<td>-5.3</td>
</tr>
<tr>
<td class="firstcol">Rubber, Plastic, Petroleum</td>
<td>23.2</td>
<td>7.7</td>
<td>15.7</td>
<td>3.9</td>
<td>1.2</td>
<td>7.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Basic Metals &amp; Alloys</td>
<td>25.4</td>
<td>20.9</td>
<td>20.0</td>
<td>13.8</td>
<td>4.3</td>
<td>10.9</td>
</tr>
<tr>
<td class="firstcol">Machinery ex Transport</td>
<td>17.3</td>
<td>2.1</td>
<td>14.2</td>
<td>11.5</td>
<td>24.3</td>
<td>8.3</td>
</tr>
</tbody>
</table>


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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070111e.jpg" width="353">
Employment in Australia grew 45,000 in the month of December, about the same as in November and far above the consensus expectation of 15,000 given in one news service forecast survey. This put the year-to-year growth rate at 3.0%.
The number of Australians unemployed rose 2,200 following a 3,800 increase in November. But these small increases still left the total unemployed right at 500,000, among the lowest since the early months of 1990. The resulting unemployment rate remained at 4.6% for a third consecutive month, the lowest in the almost-29-year history of these labor force data.
This labor market performance is impressive as it accompanied a rise in the participation rate from 64.78% to 64.95%, near the all-time high of 65.02% reached in September. [The Bureau of Statistics publishes the participation rate rounded to one decimal place. We calculated the rate from labor force and population series so we could see more precise changes.]<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070111f.jpg" width="353">
Further, in Q4, separate data reported Wednesday show job vacancies at an all-time high of nearly 164,000, up more than 21% from the year-ago period. as seen in our second graph, much of the strength is in Western Australia -- Perth -- perhaps owing to growing trade in Indian Ocean territories. Queensland also shows gains. The two greatest population centers, New South Wales (Sydney) and Victoria (Melbourne) are seeing a steady number of reported job vacancies.
So the Australian labor market is doing well and, with rising vacancies, perhaps can sustain that track.
These data are contained in Haver&#39;s &quot;ANZ&quot; database and in &quot;G10&quot;.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">AUSTRALIA (Months Seas Adj)</th>
<th scope="col">Dec 2006</th>
<th scope="col">Nov 2006</th>
<th scope="col">Oct 2006</th>
<th scope="col">Dec 2005</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Unemployment Rate (%)</td>
<td>4.6</td>
<td>4.6</td>
<td>4.6</td>
<td>5.2</td>
<td>4.9</td>
<td>5.1</td>
<td>5.5</td>
</tr>
<tr>
<td class="firstcol">Employment (000s)</td>
<td>10337</td>
<td>10293</td>
<td>10250</td>
<td>10035</td>
<td>10190</td>
<td>9987</td>
<td>9677</td>
</tr>
<tr class="odd">
<td class="firstcol">Change(000s)/Yr- to-Yr % Change</td>
<td>+45</td>
<td>+43</td>
<td>-32</td>
<td>3.0</td>
<td>2.0</td>
<td>3.2</td>
<td>2.1</td>
</tr>
<tr>
<td class="firstcol">Participation Rate (%)</td>
<td>64.95</td>
<td>64.78</td>
<td>64.61</td>
<td>64.39</td>
<td>64.70</td>
<td>64.44</td>
<td>63.57</td>
</tr>
<tr class="odd">
<td class="firstcol">Job Vacancies (000s)</td>
<td colspan="3">164 (Q4)</td>
<td>135 (Q4)</td>
<td>154</td>
<td>140</td>
<td>124</td>
</tr>
</tbody>
</table>
</body>
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Employment in Australia grew 45,000 in the month of December, about the same as in November and far above the consensus expectation of 15,000 given in one news service forecast survey. This put the year-to-year growth rate at 3.0%. [...]

Big Gain in Australia Employment; Unemployment Remains at All-Time Low

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070111c.jpg" width="353">
The 4Q &#39;06 Composite Business Index published by the Manufacturers&#39; Alliance/MAPI fell for the third straight quarter, to 54 from 64 in 3Q &#39;06. The figure was the lowest since early 2002.
During the last ten years there has been a 69% correlation between the Composite Index Level and quarterly growth in US factory sector output.
The current orders index dropped sharply to 66, the lowest since 2002 but the 4Q export orders index rose and recouped declines in the prior two quarters. During the last ten years there has been a 59% correlation between the export orders index and quarterly growth in real US exports.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070111d.jpg" width="353">
The profit margins index fell sharply to 62 versus an average 65 last year, its lowest level since 2Q &#39;05.Capital spending intentions for the coming year, however, improved. During the last ten years there has been a 75% correlation between the capital spending index a q/q growth in business investment.
The survey of 60 senior financial executives representing a broad range of manufacturing industries reflects the views on current &amp; future business conditions. The business outlook index is a weighted sum of shipments, backlogs, inventories, and profit margin indexes.
For the latest US Business Outlook from the MAPI click <a href="http://www.mapi.net/html/prelease.cfm?release_id=2517">here</a>.
U.S. Economic Outlook - Remarks by Michael H. Moskow, President and Chief Executive Officer, Federal Reserve Bank of Chicago are available <a href="http://www.chicagofed.org/news_room/speeches/2007_01_10_corridor.cfm"> here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/surveys/@SE/@SE.HTM">Manufacturers&#39; Alliance/MAPI Survey</a></th>
<th scope="col">4Q &#39;06</th>
<th scope="col">3Q &#39;06</th>
<th scope="col">4Q &#39;05</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
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<td class="firstcol">Composite Business Index</td>
<td>54</td>
<td>64</td>
<td>74</td>
<td>66</td>
<td>70</td>
<td>76</td>
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The 4Q '06 Composite Business Index published by the Manufacturers' Alliance/MAPI fell for the third straight quarter, to 54 from 64 in 3Q '06. The figure was the lowest since early 2002. During the last ten years there has been a 69% [...]

MAPI Business Outlook Survey Fell Again

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

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

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Tian Yong Woon

In our Letter this week, we explore Asia in two parts. The first reviews key developments from the past week, focusing on snap election outcomes in Japan (chart 1) and Thailand (chart 2), both of which delivered victories for incumbent parties and helped reduce near-term political uncertainty.

The second, and larger, section builds on last week’s discussion of Asia and AI, shifting the focus to AI’s potential impact on the region from an end-user perspective. On the upside, Asia stands to benefit meaningfully from the eventual large-scale adoption of AI-powered robotics, reflecting the region’s relatively high share of manufacturing value added (chart 3). That said, important considerations remain, including the cost viability of transitioning towards humanoid robotics given the sizeable upfront capital expenditure involved. Beyond manufacturing, AI adoption could also deliver gains in healthcare, particularly as many Asian economies grapple with ageing populations—implying a growing care burden alongside a shrinking domestic caregiver base (chart 4). However, regulatory, ethical, and implementation challenges persist. 

At the same time, the AI transition will likely displace certain jobs, making this a race not only of adoption but of adaptability, where education—while an imperfect proxy—offers some insight into which economies may be better positioned to adjust (chart 5). Finally, bureaucratic frictions also matter (chart 6), although even traditionally more bureaucratic economies have begun introducing fast-track frameworks to avoid falling behind in what could prove to be a pivotal transition reshaping the regional, and potentially global, economic landscape.

**Japan’s snap election**
Following a snap election held on Sunday, Japanese Prime Minister Takaichi’s Liberal Democratic Party (LDP) secured a historic landslide victory, winning a more than two-thirds majority in Japan’s 456-seat Lower House. The LDP’s coalition partner, the Japan Innovation Party, also expanded its presence to 36 seats. The outcome suggests that Takaichi’s political gamble to capitalise on strong opinion polling has paid off. While the election result has removed a key source of near-term political uncertainty for Japan, attention now turns to the policy agenda enabled by the government’s newly strengthened mandate. Among the first expected moves, Takaichi appears set to proceed with a temporary food tax pause, reducing the 8% consumption tax on food to 0% for two years. This proposal reinforces the perception that her policy stance is fiscally accommodative, even as critics raise concerns around fiscal discipline and long-term sustainability. As for the market reaction, Japanese equities rallied on stimulus expectations, bond yields rose on prospects of increased issuance to fund higher spending, while the yen recorded only muted net moves (chart 1)—prompting some speculation that some intervention may have taken place.

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**Thailand’s snap election**
Thailand also held snap elections last Sunday, which saw the incumbent deliver a strong showing at the polls. Unlike Japan’s election outcome, however, the scale of the increase in the incumbent Bhumjaithai (BJT) Party’s parliamentary footprint came as a surprise to many observers. That said, despite these sizable gains, the BJT Party fell short of an outright majority, securing 193 of the 500 seats in parliament, implying that a coalition government will likely still be required to pass legislation smoothly. Thai equities and the baht nevertheless rallied on the election results (chart 2). Attention now turns to whether—and how—Prime Minister Anutin will follow through on key campaign promises, including the revival of a popular shopping subsidy programme. While such measures would provide a near-term boost to consumption, they would also raise concerns around fiscal sustainability. Beyond the parliamentary vote, Thai voters also approved a proposal to replace the constitution. If pursued, this could pave the way for deeper structural reforms to Thailand’s economy.

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**AI’s (potential) impact on Asia**
We now turn to the longer, second part of this week’s letter, where we examine AI’s potential impact on Asia. In contrast to last week’s discussion, the focus here is on Asia’s role as an end-user of AI, rather than its position within the global AI supply chain. While AI broadly promises substantial productivity gains if deeply embedded across economies, one sector where Asia may benefit disproportionately is manufacturing. This reflects the relatively high share of manufacturing value added in GDP across many Asian economies compared with the global average (chart 3). In particular, Asia stands to reap significant productivity gains through the widespread adoption of AI-powered robotics. Cost, however, remains a key consideration: relative to the overall cost of human labour, AI-enabled robots have yet to become unequivocally competitive once high upfront capital outlays are taken into account. That said, recent advances in humanoid, AI-enabled robots have demonstrated increasingly broad and sophisticated capabilities in replicating human tasks, including delicate and precision operations. Over time, this could meaningfully alleviate a persistent structural challenge facing many advanced Asian economies—ageing populations and the associated labour constraints.

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Digging deeper into the ageing population challenge faced by many Asian economies, another area where AI and robotics could play a meaningful role is healthcare. Ageing societies face a twin burden: a rising number of elderly individuals requiring care alongside a shrinking pool of working-age caregivers, absent offsetting labour inflows. One proxy for this imbalance is the old-age dependency, which, as shown in chart 4, is already relatively high in several Asian economies, including China, Japan, and South Korea. That said, adoption remains at a very early stage. Significant barriers to widespread deployment persist, including regulatory and ethical considerations, high implementation costs, and questions around the consistency, reliability, and safety of AI-enabled systems in delivering healthcare-related tasks.

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**Asia’s challenges in AI adoption**
That said, the outlook is not entirely positive for Asia in the context of widespread AI adoption. As with previous waves of transformative technology, AI will inevitably render some jobs—at least in their current form—obsolete, even as it creates new roles and reshapes others. This implies that many Asian economies will need to navigate a significant structural adjustment in their labour markets, as certain types of work are displaced while demand for new skill sets emerges. How effectively Asia manages this transition will be critical in determining whether its economies move ahead of—or fall behind—the global shift towards AI. At present, and using education quality as a rough proxy, some Asian economies appear better positioned to manage this adjustment than others. As illustrated in chart 5, economies such as China, Singapore, Japan, and South Korea seem relatively well placed to absorb and adapt to the coming changes. That said, education quality is only an imperfect indicator. Other factors will also matter, including the capacity to rapidly retool and reskill the workforce, as well as the inclusiveness of the transition. Ensuring that lower-skilled and more vulnerable segments of society are not left behind will be an important determinant of the long-term economic and social outcomes of AI adoption across the region.

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Another potential hurdle relates to bureaucratic costs, which—when elevated—can act as a meaningful source of friction in the adoption of new AI-driven technologies. On this front, some Asian economies stand out for having comparatively low bureaucratic burdens, notably Singapore, Taiwan, and South Korea, while others, such as Vietnam, the Philippines, and China, tend to lag (chart 6). That said, as with many broad-based indicators, this picture masks important nuances. Several of these economies have introduced industry-specific—particularly AI-focused—fast-tracking initiatives aimed at accelerating development within targeted domestic sectors. Even so, in an increasingly competitive and intensifying global race to adopt AI and capture its economic upside, we may see a growing tendency toward an “adopt first, regulate later” approach in the years ahead. This is likely to persist unless and until major incidents or heightened concerns emerge that materially slow the pace of AI adoption.

260210T6.jpg

Asia

Economic Letter from Asia: Of Ballots and Bots

Robert Brusca

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Japan's economy watchers index has flattened out and backed off slightly for the current and future outlooks depending on the time horizon that you seek. However, what's clear is that the index reached the low point around the middle of last year, has been rebounding and now the rebound has either run out of gas or slowed after the index has rebuilt itself considerably.  

It is certainly too early to get pessimistic on Japan's economy, with Prime Minister Sanae Takaichi having just won a significant - essentially a landslide - snap election that she called after recently having been elected. The LDP would appear to be back in the driver's seat, and she has her sights set on more fiscal stimulus and expanded military spending. She is apparently much more on the same wavelength as Donald Trump in the United States. Mr. Trump was an Abe supporter, and Ms. Takaichi is a disciple of Mr. Abe.

At the moment, Japan would seem to have a groundswell of support behind the government and that government is set to try to rekindle some growth which could potentially put the Bank of Japan in a more decisively defensive track as far as setting rates and potentially raising rates.

**Economy watchers index is trending**
In January, the economy watchers index backed off for the second month in a row. However, it still has a percentile standing in its 51-percentile, slightly above its median standing since early-2005. The headline and all the components have standings above their respective 50th percentiles on this timeline, with the exception of housing, services, and employment; three readings that are extremely important to consumers. Housing has a 26.1 percentile standing, services (the employment sector) have a 45.8 percentile standing, while employment has a 22.9 percentile standing. Despite the otherwise solid and strong set of readings, there are these three significant flies in the ointment. Corporate Japan is doing extremely well with corporations having a 66.8 percentile standing; manufacturers and nonmanufacturers, separately, each come in with readings in their mid-to-upper 60th percentiles.

**The future index**
The future readings from the economy watchers index show continued but slight increases over the last few months. Only two future readings weaken month-to-month: housing and employment—once again two key readings as far as consumers are concerned. However, in terms of current monthly diffusion readings, the assessment of households, retailing, housing, and employment all have current diffusion values below 50, indicating net declines rather than increases. The percentile standing is for the future index are, like those for the current index, generally upbeat - and generally stronger than for the current indexes - with the future headline posting a 66.4 percentile standing in January. However, like the current index, the standing for housing is at its 21.3 percentile and the standing for employment is at its 30th percentile, both well below the neutral level that would place the ranking at the 50th percentile. Corporations show high readings, higher for the future indexes than for the current index standings. There also are high readings and standings for eating and drinking places as well as services. It's good to see services come up with a strong rating since it creates hope for the future for employment because services are the core employment sector. It will be interesting to see how this value changes in the coming months as Takaichi’s new policies are implemented and take hold.

**Summing up**
On balance, the economy watchers index has been firm to strong. There is some slight give-back in the current index in terms of trend. But beyond the index, there's more immediate reason to be more positive because Japan has just executed a very decisive and pro-growth snap election that is going to put the new Prime Minister Takaichi and strong control of the economy at a time where she seeks to cement economic strength. These elections were just completed over the weekend, and we will see the results reflected in data in the weeks and months to come.

260209.jpg

Japan

Economy Watchers Indexes Show Firmness; Impact of Takaichi Election to Come in Months Ahead

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With the December report, Germany’s production and some of the early European industrial production data reveal a good deal of chaos in terms of the embedded trends. On the month, German industrial production fell by 1.9%, with consumer goods output up by 0.5%, capital goods output falling by 5.3%, and intermediate goods output falling by 1.2%. Among the early reporters in the monetary union—France, Spain, and Portugal—only Spain showed an increase in manufacturing IP in December; however, Spanish industrial production is notoriously volatile.

**Broader IP trends in Germany and elsewhere in Europe**
As for other early industrial production reporters, both Sweden and Norway showed strong-to-solid gains in December and each of them showed two-months of gains in a row. Beyond that, sequential growth rates from 12-months to six-months to three-months show accelerating growth in German consumer goods output against decelerating growth for intermediate goods. Real manufacturing output and real sales show mixed results- no clear trends; however, real manufacturing orders in Germany are off the map strong. 

**German manufacturing/industrial Surveys**
German industrial surveys from the IFO for manufacturing shows persistent weakening as well as for IFO manufacturing expectations, and in the EU Commission industrial index in the last three months. More broadly, Germany shows some modest but ongoing step up all of these based on average levels from 12-months to six-months to three-months for IFO expectations and the EU Commission industrial readings with mixed results for other survey readings.

**IP trends in Europe**
For the early reporting EMU members France, Spain, and Portugal, who report industrial production trends, each show mixed monthly trends against ongoing decelerations for manufacturing output over the broader sequential periods (12-month, to 6-month, to 3-month). However, for other Europe, Sweden and Norway, manufacturing trends are steadily accelerating on this broader timeline.

**A feeling of ‘Deja- What?’**
These combinations of opposed trends mixed with a lack of trends leave us with this sense of confusion about what's going on in manufacturing. For Germany, the extreme strength in orders is reassuring since orders should be forward-looking rather than backward-looking or even contemporaneous. But orders can also be a fickle series and so we'll have to watch it to see if the trends for German orders hold up.

**Current quarter-What’s been happening now**
In addition, current quarter growth for Germany actually looks quite good with industrial production up 3.7% at an annual rate in the current quarter, led by output increases in manufacturing against a decline in the intermediate goods output. Real orders in the quarter are surging at a 44% growth rate, while real sales in manufacturing only had a 0.1% uptick at an annual rate. The industrial indicators for Germany in the quarter show weakness or flatness with the only exception being IFO manufacturing expectations that advanced by a small amount. The three EMU members who report industrial production data show positive growth in the just-completed quarter except for Portugal where industrial production is falling at a 2.9% rate in the fourth quarter. Sweden and Norway, European countries but not monetary union members, show a strong 22% annual rate gain in Sweden against the 3% annual rate decline in Norway.

260206.jpg

**Rankings**
**How growth rates stack up…**
Moving away from short-term trends, the rankings of growth rates of these various metrics using 12-month growth rates on data back to 2006, show below-median growth rates for German industrial production and all three of its major sectors. All of them have rankings below the 50% mark where the median resides. Germany’s manufacturing output growth rate is below its median as is the growth of real sales; and once again real manufacturing orders break out and show a stunning 90th percentile standing, extremely strong compared to other growth rates on this period.

**Indicator rankings are poor**
However, the survey based industrial indicators for Germany, ranked based on their index levels, are all extremely weak and much weaker than German sector or other German metrics. The strongest indicator reading is the 29th percentile standing for IFO manufacturing expectations while the current ZEW index, IFO manufacturing index, and the EU Commission industrial readings, all reside below their 15th percentile. The survey rankings suggest that industrial sentiment is in much worse shape than activity and growth.

**IP elsewhere in Europe**
However, the growth ranking of manufacturing industrial production for the reporting EMU members and other European members are all quite solid, with percentile standings ranging from the 66th up to the 93rd percentile.

**Summing up**
From these data, Germany emerges as the weak economy compared with historic norms based on industrial production growth and indicator readings. However, there's a glimpse of positivity from the growth of real orders, and at the same time, some concern about ongoing sentiment for manufacturing in Germany as distinct from actual performance.

Germany

German IP Reveals Chaotic Trends

Andrew Cates

**The Global Monetary Policy Consensus**
The latest Blue Chip Financial Forecasts survey points to a notably more balanced global monetary policy outlook over the coming year. In contrast to the pronounced easing bias that dominated much of the past two years, expectations are now more symmetric, with a similar number of central banks projected to raise rates as to ease policy. Japan is seen delivering further tightening, while Canada is expected to initiate an interest rate hike in coming months. In Australia’s case, this tightening guidance was reinforced this week, with the Reserve Bank lifting its policy rate by 25 basis points. Elsewhere, and in contrast, the euro area, UK and US are expected to move in the opposite direction.

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**US manufacturing activity**
The second chart underscores the recent improvement in US economic momentum, highlighted by an unexpected surge in the January ISM manufacturing PMI. After spending much of the past year hovering below the 50 threshold consistent with stagnation, the index jumped sharply back into expansionary territory, signalling a renewed pickup in industrial activity. This rebound has coincided with a broader run of stronger-than-anticipated US economic data, as reflected in the upswing in the Citigroup Economic Surprise Index. Together, these developments point to a US economy that continues to display notable resilience, complicating expectations of monetary easing in the near term.

260205Z2.jpg

**US Bank Lending Standards and Financial Stress** 
The next chart turns to US financial conditions, highlighting the latest readings from the Senior Loan Officer Opinion Survey. The net proportion of banks tightening lending standards on corporate loans and mortgages is now more modest by historical standards, and well below the extremes seen during past episodes of financial stress. Some easing in credit headwinds has occurred alongside relatively subdued readings on the OFR Financial Stress Index, which continues to hover below its long-run average. Together, these indicators suggest that the US financial system has continued to avoid the kind of acute stress typically associated with sharp slowdowns in credit availability—helping to underpin the recent resilience in economic activity.

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**Semiconductor Sales**
The fourth chart highlights the renewed surge in global semiconductor sales, with momentum strengthening sharply over recent months across the Americas, China and the broader Asia-Pacific region. After the cyclical downturn in 2022–23, sales have rebounded to fresh highs, reflecting a powerful revival in demand for advanced chips and related technologies. This upswing has taken place amid intense investor preoccupation with artificial intelligence, with expectations that AI adoption will drive a sustained wave of capital spending on data centres, cloud infrastructure and high-performance computing. In contrast, semiconductor sales in Europe remain comparatively subdued, reflecting the region’s smaller footprint in high-end chip manufacturing, weaker industrial demand, and the ongoing impact of slower economic growth. While semiconductors are inherently cyclical, markets have increasingly interpreted the current rebound elsewhere as structural rather than purely cyclical—underpinned by the belief that AI represents a transformative and durable source of demand growth.

260205Z4.jpg

**Large-Scale AI Models**
The next chart illustrates the rapid proliferation of large-scale AI models globally, with newly updated data for 2025 pointing to a further sharp acceleration in development activity. The United States continues to lead by a wide margin, while China has also seen a steep rise in model deployment in recent years, underscoring the intensifying technological competition between the two economies. Growth in the UK and other regions has been more modest by comparison, highlighting the increasingly concentrated nature of AI innovation. Taken together with the surge in semiconductor sales, these trends help explain the market’s strong preoccupation with AI as a potential driver of future productivity and investment cycles—although the geographic concentration of activity also raises questions about the uneven distribution of any resulting economic gains.

260205Z5.jpg

**An AI Bubble?** 
The final chart draws on the latest Blue Chip Financial Forecasts special questions, highlighting market participants’ perceptions of the economic gains likely to be delivered by artificial intelligence. While a sizeable share of respondents still believe that financial markets may be overestimating AI’s potential benefits, an increasing proportion now judge current expectations to be broadly accurate, with only a small minority viewing the gains as underestimated. Notably, this represents a softening in scepticism compared with the survey results from last month, when concerns about excessive market optimism were more pronounced. The shift suggests a growing acceptance that AI-related investment and innovation could translate into meaningful economic impacts—though uncertainty remains high around the scale, timing and distribution of these gains.

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Financial markets have experienced renewed gyrations in recent weeks, as shifting geopolitical risks, questions around Federal Reserve independence, renewed talk of US dollar “debasement,” and ongoing enthusiasm surrounding artificial intelligence have combined to drive volatility across asset classes. These cross-currents have also contributed to a degree of rotation away from high-flying technology stocks, as investors reassess valuations and the timing of anticipated AI-driven gains. Against this backdrop, the charts in this week’s COTW highlight several important themes. Policy rate expectations now appear more balanced globally, marking a clear shift away from the one-sided easing bias of the past two years (chart 1), even as resilient US data—underscored by the unexpected jump in the January ISM index and a run of positive economic surprises—continues to complicate the outlook for monetary easing (chart 2). At the same time, US financial conditions remain relatively benign, with limited evidence of widespread credit stress or aggressive tightening in lending standards (chart 3). Meanwhile, the sharp rebound in semiconductor sales and the accelerating rollout of large-scale AI models underscore why investors remain so focused on the AI narrative, even as Europe lags behind due to weaker industrial momentum and a smaller footprint in advanced chip production (charts 4 and 5). Finally, while some scepticism about AI’s ultimate economic impact persists, the latest survey results suggest a moderation in concerns that markets are materially overestimating its gains (chart 6). Taken together, these developments paint a picture of a US economy that remains more resilient than many had anticipated, set against a financial landscape increasingly shaped by powerful—if sometimes competing—narratives around geopolitics, policy, and technological transformation.

Charts of the Week: Balanced Policy, Resilient Data and AI Narratives

Winnie Tapasanun

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**Total job openings** fell 5.6% m/m (-12.9% y/y) to 6.542 million in December after a downwardly revised 7.0% decline to 6.928 million in November (previously -4.1% m/m; 7.146 million), according to the Job Openings and Labor Turnover Survey. December marked the third consecutive m/m fall and the lowest level since September 2020. The job openings rate declined to 3.9% in December, the lowest since April 2020, from 4.2% in November, remaining below a record-high 7.4% in March 2022. This rate is calculated as the ratio of job openings to total nonfarm employment plus openings. Significantly, the drop in job openings also lowered the **ratio of job openings to unemployed individuals** to 0.872 in December—the lowest since March 2021—from 0.890 in November, down from 1.085 in December 2024 and a pre-pandemic 1.211 in February 2020. A reading of 0.872 implies there were about 0.87 open jobs per unemployed person—indicating fewer openings than unemployed workers. December was the fifth time in six months that this ratio remained below 1.0.

**Private sector job openings** fell 6.8% (-12.5% y/y) to 5.804 million in December after a 6.6% fall to 6.227 million in November, registering the third successive m/m decline and the lowest level since September 2020. The private sector job openings rate fell to 4.1% in December, the lowest since April 2020, from 4.4% in November. The December m/m decline in private sector openings reflected drops of 27.7% (-36.9% y/y) in financial activities, 20.2% (-25.5% y/y) in professional & business services, 14.4% (-5.1% y/y) in trade, transportation & utilities, and 5.2% (-12.4% y/y) in private educational & health services. To the upside, private sector openings in the following categories rose m/m in December: other services (21.1%; 11.0% y/y), mining & lodging (17.6%; 0.0% y/y), information (13.5%; -4.7% y/y), manufacturing (8.5%; 0.5% y/y), leisure & hospitality (7.5%; -17.2% y/y), and construction (2.8%; 42.4% y/y). Meanwhile, government job openings rose 5.3% (-15.6% y/y) in December, the first m/m rise in three months, after a 10.6% drop in November.

**Total hiring** rebounded 3.4% (-1.5% y/y) to 5.293 million in December, the first m/m increase since September, following a 4.6% decrease to 5.121 million in November. The hiring rate edged up to 3.3% in December from 3.2% in November, though it remained below pre-pandemic levels. **Private sector hiring** rose 3.1% (-0.4% y/y) to 4.978 million in December, the third m/m rise in four months, after a 4.0% decline to 4.826 million in November. The private sector hiring rate rose to 3.7% in December from 3.5% in November, the same as in October and September. The December m/m increase in private sector hiring was led by a 32.1% jump (42.3% y/y) in information, followed by gains of 24.0% (-4.6% y/y) in financial activities, 23.5% (0.0% y/y) in mining & lodging, 6.5% (-4.8% y/y) in private educational & health services, 4.2% (-4.9% y/y) in trade, transportation & utilities, 3.6% (6.1% y/y) in construction, 3.4% (7.9% y/y) in leisure & hospitality, and 1.8% (-4.3% y/y) in manufacturing. To the downside, private sector hiring in professional & business services (-5.2%; +0.5% y/y) and other services (-4.3%; -16.5% y/y) declined m/m in December. Meanwhile, government hiring rebounded 6.4% (-16.3% y/y) in December, the first m/m rise since September, following a 13.5% drop in November.

**Total separations** rose 2.1% (3.3% y/y) to 5.251 million in December after a 1.5% rise to 5.144 million in November, marking the third m/m increase in four months and the highest level since September. The total separations rate edged up to 3.3% after holding at 3.2% in November and October. Private sector separations rose 1.6% (4.2% y/y) to 4.932 million in December, the highest level since June, while government sector separations jumped 10.4% (-9.1% y/y) to 319,000 following two consecutive m/m declines. **Total quits** (voluntary separations initiated by the employee) increased 0.3% (3.5% y/y) to 3.204 million in December, the third m/m rise in four months and the highest level since June, after a 7.4% rebound in November. The quits rate (a measure of workers’ willingness or ability to leave jobs) held at 2.0% in December and November, slightly below 2.3% in February 2020. Private sector quits eased 0.2% (+4.5% y/y) following an 8.4% November rebound. **Layoffs and discharges** (involuntary separations initiated by the employer) increased 3.6% (5.6% y/y) to 1.762 million in December, up for the third time in four months, after an 8.1% drop in November. The layoffs & discharges rate remained at 1.1% in December and November, marginally below 1.3% in February 2020. Private sector layoffs grew 4.3% (7.8% y/y) following a 7.3% November decrease.

The Job Openings and Labor Turnover Survey (JOLTS) data are available in Haver’s **USECON** database.

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- Job openings down 5.6% (-12.9% y/y) to 6.542 mil., third straight m/m decline.
- Hiring up 3.4% (-1.5% y/y) to 5.293 mil., first m/m increase since September.
- Separations rise to a three-month high; quits reach a six-month high; layoffs rebound.

Economy in Brief: 2007

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OECD Leaders Rose

Broad Industrial Production Advance in India

U.S. Inventory Accumulation Up A Bit

U.S. Import Prices Jumped

U.S. Retail Sales Firm At Yearend Led By Electronics

U.S. Retail Sales Firm At Yearend Led By Electronics

Big Gain in Australia Employment; Unemployment Remains at All-Time Low

MAPI Business Outlook Survey Fell Again