Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060131b.jpg" width="353">
For private industry workers, the employment cost index rose a steady 0.8% last quarter. The increases during the last two quarters were up from 0.6% gains during 1Q &amp; 2Q but they were off the 1.0% average of the prior two years. Consensus expectations had been for a 0.9% 4Q increase.
The 2.8% increase in the ECI during 2005 was the lowest in ten years.
The increase in benefit costs eased last quarter to 0.9% from the quick 1.3% during 3Q. For the full year, the rise in benefit costs moderated substantially to 4.1% from the peak 7.1% increase during 2004. Benefit costs in manufacturing rose 1.3% (4.9% y/y). The yearly increase compared to a 10.1% rise during 2004.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060131c.jpg" width="353">
The cost of health benefits rose 6.4% y/y and for the year was the slowest rate on increase since 1999.
Wage and salary growth continued at 0.6% for the fourth straight quarter. The annual gain of 2.5% about equaled 2004 but was down sharply from the 4.0% increase during 1997. Wages account for roughly 70% of the compensation index.
Gauging the Size of Today&#39;s Price Shocks from the Federal Reserve Bank of St. Louis is available <a href="http://research.stlouisfed.org/publications/net/20060101/cover.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/@EB/@EB08/@EB08.HTM">ECI- Private Industry Workers</a></th>
<th scope="col">4Q &#39;05</th>
<th scope="col">3Q &#39;05</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Compensation</td>
<td>0.8%</td>
<td>0.8%</td>
<td>2.8%</td>
<td>2.8%</td>
<td>3.9%</td>
<td>4.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wages &amp; Salaries</td>
<td>0.6%</td>
<td>0.6%</td>
<td>2.5%</td>
<td>2.5%</td>
<td>2.4%</td>
<td>3.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Benefit Costs</td>
<td>0.9%</td>
<td>1.3%</td>
<td>4.1%</td>
<td>4.1%</td>
<td>7.1%</td>
<td>6.6%</td>
</tr>
</tbody>
</table>
</body>
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For private industry workers, the employment cost index rose a steady 0.8% last quarter. The increases during the last two quarters were up from 0.6% gains during 1Q & 2Q but they were off the 1.0% average of the prior two years. [...]

Employment Cost Index Steady Last Quarter, Down During '05

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060131f.jpg" width="353">
At today&#39;s meeting of the Federal Open Market Committee, the target interest rate for Federal funds was raised 25 basis points to 4.50%, the fourteenth increase since June of 2004. The unanimous decision was widely expected by analysts. The discount rate also was raised 25 basis points to 5.50%.
The economy&#39;s slowdown in 4Q05 was noted in the Fed&#39;s statement. &quot;Although recent economic data have been uneven, the expansion in economic activity appears solid.&quot;
This latest action, therefore, had a preemptive sense to it. The FOMC&#39;s press release stated &quot;Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.&quot;
The latest statement&#39;s verbiage regarding the likelihood of future rate action was toned down slightly from &quot;is likely to be needed&quot; in the prior statement to &quot;may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance.&quot;
Today&#39;s meeting was Chairman Alan Greenspan&#39;s last since taking over the Chairmanship in 1988.
For the complete text of the Fed&#39;s latest press release please click<a href="http://www.federalreserve.gov/boarddocs/press/monetary/2006/20060131/default.htm">here</a>.
The Fed&#39;s Monetary Policy Rule from William Poole, President of the Federal Reserve Bank of St. Louis, can be found <a href="http://research.stlouisfed.org/publications/review/06/01/Poole.pdf"> here</a>.

Employment Cost Index Steady Last Quarter, Down During '05 
by <a href="/comment/Moeller.html">Tom Moeller</a> January 31, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060131b.jpg" width="353">
For private industry workers, the employment cost index rose a steady 0.8% last quarter. The increases during the last two quarters were up from 0.6% gains during 1Q &amp; 2Q but they were off the 1.0% average of the prior two years. Consensus expectations had been for a 0.9% 4Q increase.
The 2.8% increase in the ECI during 2005 was the lowest in ten years.
The increase in benefit costs eased last quarter to 0.9% from the quick 1.3% during 3Q. For the full year, the rise in benefit costs moderated substantially to 4.1% from the peak 7.1% increase during 2004. Benefit costs in manufacturing rose 1.3% (4.9% y/y). The yearly increase compared to a 10.1% rise during 2004.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060131c.jpg" width="353">
The cost of health benefits rose 6.4% y/y and for the year was the slowest rate on increase since 1999.
Wage and salary growth continued at 0.6% for the fourth straight quarter. The annual gain of 2.5% about equaled 2004 but was down sharply from the 4.0% increase during 1997. Wages account for roughly 70% of the compensation index.
Gauging the Size of Today&#39;s Price Shocks from the Federal Reserve Bank of St. Louis is available <a href="http://research.stlouisfed.org/publications/net/20060101/cover.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
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<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EB/@EB08/@EB08.HTM">ECI- Private Industry Workers</a></th>
<th scope="col">4Q &#39;05</th>
<th scope="col">3Q &#39;05</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Compensation</td>
<td>0.8%</td>
<td>0.8%</td>
<td>2.8%</td>
<td>2.8%</td>
<td>3.9%</td>
<td>4.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wages &amp; Salaries</td>
<td>0.6%</td>
<td>0.6%</td>
<td>2.5%</td>
<td>2.5%</td>
<td>2.4%</td>
<td>3.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Benefit Costs</td>
<td>0.9%</td>
<td>1.3%</td>
<td>4.1%</td>
<td>4.1%</td>
<td>7.1%</td>
<td>6.6%</td>
</tr>
</tbody>
</table>
Consumer Confidence Up: Jobs Plentiful, Inflation Stable 
by <a href="/comment/Moeller.html">Tom Moeller</a> January 31, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060131e.jpg" width="353">
The Index of Consumer Confidence, as measured by the Conference Board, rose 2.4% to 106.3 during January. This third consecutive monthly increase exceeded Consensus expectations for a lesser gain to 105.0. The increase was in line with the 2.1% m/m (-2.2% y/y) rise in Consumer Sentiment reported last week by the University of Michigan.
During the last twenty years there has been a 52% correlation between the level of consumer confidence and the y/y change in real consumer spending. The correlation rose to 66% during the last ten years.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060131d.jpg" width="353">
Consumers&#39; assessment of the present situation added 6.4% (14.5% y/y) to a revised 6.6% December increase. Jobs were viewed as plentiful by 26.9% of respondents, a sharp increase from December and the highest since September, 2001. Fewer (20.3%) thought jobs were hard to get, also the lowest since 2001.
The index of consumers&#39; expectations dipped slightly month to month (-8.9% y/y). Fewer expected better business conditions in six months and fewer expected that there would be more jobs.
Inflation in twelve months was expected at a 5.1% rate, down slightly from the 5.2% expected in December and down sharply from the 6.8% expected last September.
The Conference Board&#146;s survey isconducted by a mailed questionnaire to 5,000 households and about 3,500 typically respond.

<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/@EF/@EF14/@EF1401/@EF1401.HTM">Conference Board</a></th>
<th scope="col">Jan</th>
<th scope="col">Dec</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Consumer Confidence</td>
<td>106.3</td>
<td>103.8</td>
<td>1.1%</td>
<td>100.3</td>
<td>96.1</td>
<td>79.8</td>
</tr>
</tbody>
</table>
Chain Store Sales Lower, Gasoline Prices Up 
by <a href="/comment/Moeller.html">Tom Moeller</a> January 31, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060131a.jpg" width="353">
Chain store sales fell a hard 1.1% last week after the modest 0.3% rise during the prior period, according to the International Council of Shopping Centers (ICSC)-UBS survey.
The drop lowered the gain in sales during January to 1.0% versus December.
Last week, gasoline prices at the pump rose two cents to $2.36 per gallon of regular unleaded. The January average rose to $2.32 but yesterday, in spot market trading, gasoline rose to $1.74 and that has been the spot market average during January, up 27 cents from November.
The leading indicator of chain store sales rose 0.5% and pulled the January average 1.3% ahead of December which rose 0.8%.
The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/surveyw/@S2/@S2.HTM">ICSC-UBS (SA, 1977=100)</a></th>
<th scope="col">01/28/06</th>
<th scope="col">01/21/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Total Weekly Chain Store Sales</td>
<td>454.0</td>
<td>459.0</td>
<td>4.1%</td>
<td>3.6%</td>
<td>4.7%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>
Economic Sentiment and Consumer Confidence in Europe Improve 
by <a href="/comment/Curley.html">Louise Curley</a> January 31, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060131g.jpg" width="353">
Economic sentiment in the European Union, and particularly the Euro Zone is improving. The Business Climate Indicator (long-term average = 100) for the individual countries of the European Union, together with the aggregates for the EU (25) and for the Euro Zone (12) were released today by the Directorate General for Economic and Financial Affairs of the European Commission. In addition, the results of surveys of the manufacturing, retail, service and construction industries and of consumer confidence were released.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060131h.jpg" width="353">
The Business Climate Indicator for the EU(25) as a whole has generally been better than in the smaller subset, the Euro Zone, as shown in the first chart. The better sentiment in the EU as a whole may be due, in part to the inclusion of the emerging central and eastern countries where recent growth prospects have been stronger than those in the west. But there are faint signs that sentiment in the Euro Zone may be improving faster. The sentiment indicator for the EU was 102.6 in January, an increase of 1.28 % from December, but 0.48% below January of 2005. The indicator for the Euro Zone was 101.8 up, 1.19% from December but, significantly, 1.29% above January 2005. The Index for the Euro Zone is now at its highest level since June 2001.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060131i.jpg" width="353">
Among the countries showing an improved business climate were Germany, Italy and Poland. We&#39;ve charted the business climate indicators for a Euro Zone and a Non Euro Zone country--Germany and Poland--in the second chart. Germany&#39;s muted rise contrasts with the dynamic rise that has taken place in Poland over the past three years. Another Euro Zone and Non Euro Zone comparison is shown in chart 3 where the business climate indicators for Spain and the United Kingdom are compared.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060131j.jpg" width="353"> After rising sharply in late 2003 the indicator for the UK plunged in early 2005 and has yet to show significant improvement. The course of the business climate indicator for Spain has been less dramatic, but shows a definite waning of business sentiment.
Similar to the comparison between the business climate indicator for the EU and the Euro Zone, the comparison of the consumer confidence indicators shown in the fourth chart suggests some slight improvement in consumer confidence in the Euro Zone relative to the EU as a whole.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Economic Sentiment Indicator &nbsp; (Long term average = 100)</th>
<th scope="col">Jan 06&nbsp;&nbsp;</th>
<th scope="col">Dec 05&nbsp; </th>
<th scope="col">Jan 05&nbsp;</th>
<th scope="col">M/M %</th>
<th scope="col">Y/Y&nbsp; %</th>
<th scope="col">2005&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </th>
<th scope="col">2004 &nbsp;&nbsp;</th>
<th scope="col">2003&nbsp; &nbsp;</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">European Union (25)</td>
<td>102.6</td>
<td>101.2</td>
<td>103.1</td>
<td>1.28</td>
<td>-0.48</td>
<td>99.8</td>
<td>102.4</td>
<td>94.1</td>
</tr>
<tr>
<td class="firstcol">Euro Zone (12)</td>
<td>101.8</td>
<td>100.6</td>
<td>100.5</td>
<td>1.19</td>
<td>1.29</td>
<td>98.2</td>
<td>99.5</td>
<td>93.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Germany</td>
<td>100.9</td>
<td>98.1</td>
<td>98.0</td>
<td>2.85</td>
<td>2.96</td>
<td>95.2</td>
<td>95.8</td>
<td>90.2</td>
</tr>
<tr>
<td class="firstcol">Poland</td>
<td>150.1</td>
<td>145.8</td>
<td>131.9</td>
<td>2.95</td>
<td>13.80</td>
<td>133.1</td>
<td>113.6</td>
<td>102.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Spain</td>
<td>95.4</td>
<td>101.1</td>
<td>98.4</td>
<td>-5.64</td>
<td>-3.05</td>
<td>98.5</td>
<td>99.0</td>
<td>100.1</td>
</tr>
<tr>
<td class="firstcol">United Kingdom</td>
<td>95.0</td>
<td>95.5</td>
<td>108.0</td>
<td>-0.52</td>
<td>-12.04</td>
<td>101.0</td>
<td>110.2</td>
<td>93.8</td>
</tr>
<tr class="odd">
<td class="firstcol"></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Percent Balance</td>
<td>Jan 06&nbsp;&nbsp;</td>
<td>Dec 05&nbsp; </td>
<td>Jan 05&nbsp;</td>
<td>M/M dif</td>
<td>Y/Y&nbsp; dif</td>
<td>2005&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </td>
<td>2004 &nbsp;&nbsp;</td>
<td>2003&nbsp; &nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">Consumer Confidence (25)</td>
<td>-9</td>
<td>-9&nbsp;</td>
<td>-10&nbsp;</td>
<td>0&nbsp;</td>
<td>1&nbsp;</td>
<td>-11&nbsp;</td>
<td>-12&nbsp;</td>
<td>-16&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Consumer Confidence (12)</td>
<td>&nbsp;-11</td>
<td>-11&nbsp;</td>
<td>&nbsp;-13</td>
<td>0&nbsp;</td>
<td>2&nbsp;</td>
<td>&nbsp;-14</td>
<td>-14</td>
<td>-18&nbsp;</td>
</tr>
</tbody>
</table>


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At today's meeting of the Federal Open Market Committee, the target interest rate for Federal funds was raised 25 basis points to 4.50%, the fourteenth increase since June of 2004. The unanimous decision was widely expected by [...]

Fed Funds Rate Increased to 4.50%

Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060130d.jpg" width="353">
Industrial production in Japan rose for the fifth successive month in December giving further credence to Carol Stone&#39;s comment of last week: &quot;So perhaps there is in fact room for encouragement about the state of the Japanese economy.&quot; The headline index of manufacturing and mining at 105.0 (2000=100) rose 1.4% in December and exceeded the previous peaks reached in 1997 and early 2001 as shown in the first chart.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060130e.jpg" width="353">
One of the fastest growing areas of Japanese manufacturing has been the Electronic Parts and Devices, followed closely by Transport Equipment (ex ships and rolling stock). These industries have shown strong growth trends throughout Japan&#39;s period of overall sluggish growth as shown in the second chart. In December, the Electronic Parts and Devices index was 32.8% above the 2000 average and 21.5% above December 2004. The Transport Equipment (ex ships and rolling stock) index was 26% above the 2000 average and 15.5% above December,2004<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060130f.jpg" width="353">
The rise of the Electronic and Transport Industries illustrates the changing structure of the Japanese economy. While these industries have grown, there has been a steady decline in the once traditional Japanese industries such as Textiles and Ceramics, Clay &amp; Stone Products as shown in the third chart.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Japan: Industrial Production (2000=100)</th>
<th scope="col">Dec 05</th>
<th scope="col">Nov 05&nbsp; </th>
<th scope="col">Dec 04&nbsp;</th>
<th scope="col">M/M %</th>
<th scope="col">Y/Y&nbsp; %&nbsp;</th>
<th scope="col">2005&nbsp;&nbsp;&nbsp; </th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Manufacturing and Mining</td>
<td>105.0</td>
<td>103.6</td>
<td>100.0</td>
<td>1.35</td>
<td>5.00</td>
<td>101.8</td>
<td>100.0</td>
<td>95.1</td>
</tr>
<tr>
<td class="firstcol">Electronic parts and devices</td>
<td>132.8</td>
<td>128.9</td>
<td>109.3</td>
<td>3.03</td>
<td>21.50</td>
<td>117.6</td>
<td>116.8</td>
<td>103.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Transport eqpt (ex ships and rolling stock)</td>
<td>126.0</td>
<td>121.5</td>
<td>109.1</td>
<td>3.70</td>
<td>15.49</td>
<td>119.0</td>
<td>113.2</td>
<td>108.6</td>
</tr>
<tr>
<td class="firstcol">Ceramics, clay and stone products</td>
<td>78.5</td>
<td>81.0</td>
<td>82.5</td>
<td>-3.09</td>
<td>-4.85</td>
<td>82.2</td>
<td>83.6</td>
<td>86.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Textiles</td>
<td>64.1</td>
<td>64.5</td>
<td>68.8</td>
<td>-0.62</td>
<td>-6.83</td>
<td>66.2</td>
<td>70.6</td>
<td>74.9</td>
</tr>
</tbody>
</table>
</body>
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Industrial production in Japan rose for the fifth successive month in December giving further credence to Carol Stone's comment of last week: "So perhaps there is in fact room for encouragement about the state of the Japanese [...]

Industrial Production in Japan Rises for Fifth Successive Month

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060130b.jpg" width="353">
Personal income rose an expected 0.4% last month following an upwardly revised like increase in November. For the full year personal income rose 5.4% which together with the 5.9% increase in 2004 was the strongest two year rise since 2001. The twelve month comparison of 2.1% suffered due to Microsoft&#39;s payment last year of a $32B stock dividend.
Wage &amp; salary disbursements rose the same 0.3% (3.7% y/y) as during November and the full year gain of 6.0% was the strongest since 2000. Factory sector wages reversed the prior month&#39;s decline and rose 0.1% (2.4% y/y) while service sector wages rose a moderate 0.3% (3.7% y/y) following an upwardly revised 0.4% November increase.
Disposable personal income rose 0.4% (0.9% y/y) for the second month. Adjusted for the negligible change in prices during December, take home pay jumped 0.4%, half the November increase which was boosted by a decline in prices and the year to year comparison was negative due to the dividend payout.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060130c.jpg" width="353">
Personal taxes rose 0.4% (11.8% y/y) in December and for the full year rose 15.0% following a 4.9% gain during 2004.
Personal consumption expenditures rose a firm 0.9% versus expectations for a 0.7% gain. Spending on motor vehicles &amp; parts jumped 11.4% (-5.6% y/y) and spending on furniture &amp; household equipment added 0.3% (6.4% y/y) to a 1.6% November spike. Spending on clothing &amp; shoes dipped slightly (+5.8% y/y) following two months of huge increase while services spending rose 0.5% (6.3% y/y) after a 0.8% November jump.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060130a.jpg" width="353">
The PCE chain price index fell for the second consecutive month due to the third consecutive decline in gasoline &amp; oil prices (+16.1% y/y). Less food &amp; energy, prices rose 0.1% following an upwardly revised 0.2% November increase. Durables prices continued the most recent decline which began in May as furniture &amp; household appliance prices fell (-4.0% y/y). Clothing &amp; shoes prices also fell by 0.3% (-1.1% y/y) and services prices rose a modest 0.1% (3.3% y/y).
The personal savings rate was negative for the eighth month in the last nine. In comparison, the personal savings rate from the Federal Reserve&#39;s Flow of Funds accounts, through 3Q05, was similarly depressed but still a positive 0.9%. The Flow of Funds measure amortizes durable goods purchases over an expected lifetime instead of treating them as an expense.
The Income Implications of Rising U.S. International Liabilities from the Federal Reserve Bank of New York can be found <a href="http://www.newyorkfed.org/newsevents/news/research/2006/rp060111.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/USECON/@E7/@E711/@E71102/@E71102.HTM">Disposition of Personal Income</a></th>
<th scope="col">Dec</th>
<th scope="col">Nov</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">Personal Income</td>
<td>0.4%</td>
<td>0.4%</td>
<td>2.1%</td>
<td>5.4%</td>
<td>5.9%</td>
<td>3.2%</td>
</tr>
<tr>
<td class="firstcol">Personal Consumption</td>
<td>0.9%</td>
<td>0.5%</td>
<td>6.2%</td>
<td>6.5%</td>
<td>6.5%</td>
<td>4.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Savings Rate</td>
<td>-0.7%</td>
<td>-0.2%</td>
<td>4.4% (Dec &#39;04)</td>
<td>-0.5%</td>
<td>1.7%</td>
<td>2.1%</td>
</tr>
<tr>
<td class="firstcol">PCE Chain Price Index</td>
<td>-0.0%</td>
<td>-0.4%</td>
<td>2.8%</td>
<td>2.8%</td>
<td>2.6%</td>
<td>1.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Less food &amp; energy</td>
<td>0.1%</td>
<td>0.2%</td>
<td>1.9%</td>
<td>2.0%</td>
<td>2.0%</td>
<td>1.3%</td>
</tr>
</tbody>
</table>


</html>

Personal income rose an expected 0.4% last month following an upwardly revised like increase in November. For the full year personal income rose 5.4% which together with the 5.9% increase in 2004 was the strongest two year rise since [...]

U.S. Personal Income & Spending Firm

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060130b.jpg" width="353">
Personal income rose an expected 0.4% last month following an upwardly revised like increase in November. For the full year personal income rose 5.4% which together with the 5.9% increase in 2004 was the strongest two year rise since 2001. The twelve month comparison of 2.1% suffered due to Microsoft&#39;s payment last year of a $32B stock dividend.
Wage &amp; salary disbursements rose the same 0.3% (3.7% y/y) as during November and the full year gain of 6.0% was the strongest since 2000. Factory sector wages reversed the prior month&#39;s decline and rose 0.1% (2.4% y/y) while service sector wages rose a moderate 0.3% (3.7% y/y) following an upwardly revised 0.4% November increase.
Disposable personal income rose 0.4% (0.9% y/y) for the second month. Adjusted for the negligible change in prices during December, take home pay jumped 0.4%, half the November increase which was boosted by a decline in prices and the year to year comparison was negative due to the dividend payout.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060130c.jpg" width="353">
Personal taxes rose 0.4% (11.8% y/y) in December and for the full year rose 15.0% following a 4.9% gain during 2004.
Personal consumption expenditures rose a firm 0.9% versus expectations for a 0.7% gain. Spending on motor vehicles &amp; parts jumped 11.4% (-5.6% y/y) and spending on furniture &amp; household equipment added 0.3% (6.4% y/y) to a 1.6% November spike. Spending on clothing &amp; shoes dipped slightly (+5.8% y/y) following two months of huge increase while services spending rose 0.5% (6.3% y/y) after a 0.8% November jump.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060130a.jpg" width="353">
The PCE chain price index fell for the second consecutive month due to the third consecutive decline in gasoline &amp; oil prices (+16.1% y/y). Less food &amp; energy, prices rose 0.1% following an upwardly revised 0.2% November increase. Durables prices continued the most recent decline which began in May as furniture &amp; household appliance prices fell (-4.0% y/y). Clothing &amp; shoes prices also fell by 0.3% (-1.1% y/y) and services prices rose a modest 0.1% (3.3% y/y).
The personal savings rate was negative for the eighth month in the last nine. In comparison, the personal savings rate from the Federal Reserve&#39;s Flow of Funds accounts, through 3Q05, was similarly depressed but still a positive 0.9%. The Flow of Funds measure amortizes durable goods purchases over an expected lifetime instead of treating them as an expense.
The Income Implications of Rising U.S. International Liabilities from the Federal Reserve Bank of New York can be found <a href="http://www.newyorkfed.org/newsevents/news/research/2006/rp060111.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/USECON/@E7/@E711/@E71102/@E71102.HTM">Disposition of Personal Income</a></th>
<th scope="col">Dec</th>
<th scope="col">Nov</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">Personal Income</td>
<td>0.4%</td>
<td>0.4%</td>
<td>2.1%</td>
<td>5.4%</td>
<td>5.9%</td>
<td>3.2%</td>
</tr>
<tr>
<td class="firstcol">Personal Consumption</td>
<td>0.9%</td>
<td>0.5%</td>
<td>6.2%</td>
<td>6.5%</td>
<td>6.5%</td>
<td>4.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Savings Rate</td>
<td>-0.7%</td>
<td>-0.2%</td>
<td>4.4% (Dec &#39;04)</td>
<td>-0.5%</td>
<td>1.7%</td>
<td>2.1%</td>
</tr>
<tr>
<td class="firstcol">PCE Chain Price Index</td>
<td>-0.0%</td>
<td>-0.4%</td>
<td>2.8%</td>
<td>2.8%</td>
<td>2.6%</td>
<td>1.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Less food &amp; energy</td>
<td>0.1%</td>
<td>0.2%</td>
<td>1.9%</td>
<td>2.0%</td>
<td>2.0%</td>
<td>1.3%</td>
</tr>
</tbody>
</table>
Industrial Production in Japan Rises for Fifth Successive Month 
by <a href="/comment/Curley.html">Louise Curley</a> January 30, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060130d.jpg" width="353">
Industrial production in Japan rose for the fifth successive month in December giving further credence to Carol Stone&#39;s comment of last week: &quot;So perhaps there is in fact room for encouragement about the state of the Japanese economy.&quot; The headline index of manufacturing and mining at 105.0 (2000=100) rose 1.4% in December and exceeded the previous peaks reached in 1997 and early 2001 as shown in the first chart.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060130e.jpg" width="353">
One of the fastest growing areas of Japanese manufacturing has been the Electronic Parts and Devices, followed closely by Transport Equipment (ex ships and rolling stock). These industries have shown strong growth trends throughout Japan&#39;s period of overall sluggish growth as shown in the second chart. In December, the Electronic Parts and Devices index was 32.8% above the 2000 average and 21.5% above December 2004. The Transport Equipment (ex ships and rolling stock) index was 26% above the 2000 average and 15.5% above December,2004<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060130f.jpg" width="353">
The rise of the Electronic and Transport Industries illustrates the changing structure of the Japanese economy. While these industries have grown, there has been a steady decline in the once traditional Japanese industries such as Textiles and Ceramics, Clay &amp; Stone Products as shown in the third chart.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Japan: Industrial Production (2000=100)</th>
<th scope="col">Dec 05</th>
<th scope="col">Nov 05&nbsp; </th>
<th scope="col">Dec 04&nbsp;</th>
<th scope="col">M/M %</th>
<th scope="col">Y/Y&nbsp; %&nbsp;</th>
<th scope="col">2005&nbsp;&nbsp;&nbsp; </th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Manufacturing and Mining</td>
<td>105.0</td>
<td>103.6</td>
<td>100.0</td>
<td>1.35</td>
<td>5.00</td>
<td>101.8</td>
<td>100.0</td>
<td>95.1</td>
</tr>
<tr>
<td class="firstcol">Electronic parts and devices</td>
<td>132.8</td>
<td>128.9</td>
<td>109.3</td>
<td>3.03</td>
<td>21.50</td>
<td>117.6</td>
<td>116.8</td>
<td>103.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Transport equip (ex ships and rolling stock)</td>
<td>126.0</td>
<td>121.5</td>
<td>109.1</td>
<td>3.70</td>
<td>15.49</td>
<td>119.0</td>
<td>113.2</td>
<td>108.6</td>
</tr>
<tr>
<td class="firstcol">Ceramics, clay and stone products</td>
<td>78.5</td>
<td>81.0</td>
<td>82.5</td>
<td>-3.09</td>
<td>-4.85</td>
<td>82.2</td>
<td>83.6</td>
<td>86.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Textiles</td>
<td>64.1</td>
<td>64.5</td>
<td>68.8</td>
<td>-0.62</td>
<td>-6.83</td>
<td>66.2</td>
<td>70.6</td>
<td>74.9</td>
</tr>
</tbody>
</table>


</html>

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/060127c.jpg" width="353">
Japan business and government leaders today were excited to report a second straight month of positive consumer price performance. The most widely followed CPI series is the total excluding fresh food, and it rose 0.1% year-on-year in December, following an equal move in November. The index was flat in October. So, by this gauge, the nation has not experienced deflation since early autumn. This development is already sparking talk of monetary policy changes as it perhaps signals that the long era of deflation has finally concluded. There was further encouragement from the local Tokyo area index, which moved into positive territory for January.
The upward price movements in the national index came in several sectors: housing costs, clothing, transportation and fuel. There was also less deflation in communications charges and in furniture and appliance prices. A separate &quot;core&quot; rate which, similar those in other countries, excludes energy as well as food, rose to +0.1% in December, its first positive reading. There is only slightly more than a year&#39;s history for this measure in Japan, however, so this move is less meaningful.
While the &quot;increases&quot; in the aggregate CPI series are minimal, they are the first since mid-1998, that is, more than seven years ago. The trend at that time was headed clearly downward, in the wake of the Asian currency crisis and in the face of general weakness of the Japanese economy. Now, finally, prices are firming, and this on the back of better demand. Retail sales in December, also reported today, rose 0.8% month-to-month in December, making 2005 the first year of positive growth in these sales since 1996. So perhaps there is in fact room for encouragement about the state of the Japanese economy.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/JAPAN/@J5/@J504/@J504.HTM">Japan CPI: Yr/Yr % Changes, NSA</a></th>
<th scope="col">Jan 2006</th>
<th scope="col">Dec 2005</th>
<th scope="col">Nov 2005</th>
<th scope="col">Oct 2005</th>
December/December
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2004</td>
<td>2003</td>
<td>2002</td>
</tr>
<tr>
<td class="firstcol">CPI Headline*</td>
<td>--</td>
<td>+0.1</td>
<td>+0.1</td>
<td>0.0</td>
<td>-0.2</td>
<td>0.0</td>
<td>-0.7</td>
</tr>
<tr class="odd">
<td class="firstcol">Total CPI</td>
<td>--</td>
<td>-0.1</td>
<td>-0.8</td>
<td>-0.7</td>
<td>+0.2</td>
<td>-0.4</td>
<td>-0.3</td>
</tr>
<tr>
<td class="firstcol">Commodities ex Fresh Food</td>
<td>--</td>
<td>+0.2</td>
<td>0.0</td>
<td>+0.1</td>
<td>-0.1</td>
<td>-0.3</td>
<td>-1.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Fresh Food</td>
<td>--</td>
<td>-7.5</td>
<td>-16.8</td>
<td>-14.2</td>
<td>+9.3</td>
<td>-6.6</td>
<td>+9.6</td>
</tr>
<tr>
<td class="firstcol">Services ex Imputed Rent</td>
<td>--</td>
<td>0.0</td>
<td>0.0</td>
<td>-0.4</td>
<td>-0.5</td>
<td>+0.3</td>
<td>+0.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Total CPI, Ku-area of Tokyo</td>
<td>+0.1</td>
<td>-0.2</td>
<td>-0.3</td>
<td>-0.3</td>
<td>-0.4</td>
<td>-0.1</td>
<td>-0.7</td>
</tr>
</tbody>
</table>
</body>
</html>

Japan business and government leaders today were excited to report a second straight month of positive consumer price performance. The most widely followed CPI series is the total excluding fresh food, and it rose 0.1% year-on-year in [...]

Japan CPI Rises in December, a Second Consecutive Year/Year Increase

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060127b.jpg" width="353">
December new single-family home sales increased 2.9% to 1.269M after a 9.2% November decline that was less than initially estimated. Consensus expectations had been for a decline to 1.225M. For the year, new home sales set a new record of 1.280M, up 6.7% from 2004.
Sales gains out West, up 11.1% (12.9% y/y), and in the Midwest, up 22.7% (-8.0% y/y), offset declines in the Northeast (0.0% y/y) and in the South (4.0% y/y).
The median price of a new single family home fell 2.2% (-3.4% y/y) to $221,800. For the year, prices rose to an average $231,350 (6.2% Y/Y).
The figures from the Census Department reflect home sales counted at the time of sales contract or deposit.

<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/@E9/@E904/@E90401/@E90401.HTM">Homes Sales (000s, AR)</a></th>
<th scope="col">Dec</th>
<th scope="col">Nov</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">New Single-Family</td>
<td>1,269</td>
<td>1,233</td>
<td>1.8%</td>
<td>1,280</td>
<td>1,200</td>
<td>1,091</td>
</tr>
</tbody>
</table>
</body>
</html>

December new single-family home sales increased 2.9% to 1.269M after a 9.2% November decline that was less than initially estimated. Consensus expectations had been for a decline to 1.225M. For the year, new home sales set a new [...]

New Home Sales Finished a Record 2005 Firm, Prices Soft

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

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

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

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More pronounced upward revisions in countries more exposed to AI investment

Stable job openings and hiring rates point to cautious hiring

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

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

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

Tighter US immigration enforcement adversely impacting labor force

Economic policy uncertainty, while still elevated, is declining

Gradual disinflation and easier monetary policies across advanced economies

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Sandy Batten

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

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

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

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

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

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

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

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



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


U.S. Industrial Production Jumped in April

Robert Brusca

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

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

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

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

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

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

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



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Canada

Canadian Industry Perks Up

Andrew Cates

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

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

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

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

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

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

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

Charts of the Week: The Tug of War

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

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

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

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

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


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


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

Kathleen Stephansen, CBE

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

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

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

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


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

Economy in Brief: 2006

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Employment Cost Index Steady Last Quarter, Down During '05

Fed Funds Rate Increased to 4.50%

Industrial Production in Japan Rises for Fifth Successive Month

U.S. Personal Income & Spending Firm

U.S. Personal Income & Spending Firm

U.S. Personal Income & Spending Firm

Japan CPI Rises in December, a Second Consecutive Year/Year Increase

New Home Sales Finished a Record 2005 Firm, Prices Soft