Tom Moeller

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<div align="left"><img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090202a.jpg" align="left" border="0" height="265" width="353">

The personal income &amp; outlays report for the end of
2008 contained news of difficult times for the "front-end" of the U.S.
economy. To start, personal income fell for the third straight month.
The 0.2% December decline was a bit less-than-expected and it lowered
the gain for the full year to 3.7% which was the weakest since 2003.
The year ended with December-to-December growth in income of just 1.4%
and a three-month drop of 2.6% (AR).
A 0.3% decline in wages &amp; salaries was in the
forefront of that income weakness as employment levels declined. Wages
over the last three months were down at a 2.1%rate and up just 2.8% for
the full year, half that during 2007. Factory sector wages suffered the
worst of the shortfall with an 8.2% three-month rate of decline. In
addition, service sector wages fell at a 1.5% rate during those three
months which was their weakest performance since the recession of 2001.
Lower interest rates caused the seventh straight monthly
decline in interest income. The -7.2% y/y growth rate was eclipsed,
however, by the 22.1% rate of decline during the last three months.
Dividend income also fell at a 5.9% rate during that three month period
as corporate profits fell.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090202b.jpg" align="right" border="0" height="265" width="353">
Disposable personal income dropped last
month for the sixth month in the last seven to lower the three-month
change to -2.3%. Thanks to falling energy prices and weaker pricing
power generally, real disposable income growth actually increased by a
strong 6.7% (1.3% y/y).
Personal consumption suffered heavily from across-the-board
weakness. The December decline was the sixth in a row. While the
three-month rate of growth was an abysmal -11.2% (AR), the change in
real terms was little better. Real personal consumption
expenditures fell 0.5% last month and at a 3.1% during the
last three.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090202c.jpg" align="left" border="0" height="265" width="353">
Real spending on discretionary items was notably weak. Motor
vehicle &amp; parts purchases fell 0.4% in December and the
three-month annual growth rate amounted to -33.1%. Real spending on
household furniture &amp; appliances fell at a lesser 4.7% rate
while real spending on apparel dropped at a 2.7% rate since September.
These and other detailed spending figures are available in Haver's
USNA database.
The silver lining of this weakness in spending is while it
reflects weakened income growth, it also produced a rise in the level
of savings. The personal savings rate rose last month to 3.6 versus an
average of 1.7% for the year, which was the highest since 2004.
Declines in spending caused pricing power to evaporate. The PCE
chain price index fell 0.5% last month with lower petroleum
prices. Core pricing power, however, was additionally under pressure.
The 0.0% December downtick in the core PCE price index
about matched expectations and it was the third such consecutive
decline. It lowered the three-month change in core pricing to -0.1%
which was its weakest since the recession of 2001.
The Federal Reserve Board published a policy that was
adopted to help avoid preventable foreclosures on certain residential
mortgage assets. The Fed's release can be found <a href="http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090130a1.pdf">
here</a>.
</div>


<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">December</th>
<th scope="col">November</th>
<th scope="col">Y/Y</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Personal Income</td>
<td>-0.2</td>
<td>-0.4</td>
<td>1.4</td>
<td>3.7</td>
<td>6.1</td>
<td>7.1</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Disposable
Personal Income</td>
<td>-0.2</td>
<td>-0.3</td>
<td>1.9</td>
<td>4.6</td>
<td>5.5</td>
<td>6.4</td>
</tr>
<tr class="odd">
<td class="firstcol">Personal Consumption</td>
<td>-1.0</td>
<td>-0.8</td>
<td>-1.1</td>
<td>3.6</td>
<td>5.5</td>
<td>5.9</td>
</tr>
<tr>
<td class="firstcol">Saving Rate</td>
<td>3.6</td>
<td>2.8</td>
<td>0.4 (Dec. 08)</td>
<td>1.7</td>
<td>0.5</td>
<td>0.7</td>
</tr>
<tr class="odd">
<td class="firstcol">PCE Chain Price Index</td>
<td>-0.5</td>
<td>-1.1</td>
<td>0.6</td>
<td>3.3</td>
<td>2.6</td>
<td>2.8</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Less food
&amp; energy</td>
<td>-0.0</td>
<td>-0.0</td>
<td>1.7</td>
<td>2.2</td>
<td>2.2</td>
<td>2.3</td>
</tr>
</tbody>
</table>
</body></html>

The personal income & outlays report for the end of 2008 contained news of difficult times for the "front-end" of the U.S. economy. To start, personal income fell for the third straight month. The 0.2% December decline was a bit less- [...]

U.S. December Income, Consumption & Prices Fell While Savings Rose

U.S. December Income, Consumption& Prices Fell While Savings Rose

Robert Brusca

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090130h.jpg" align="left" border="0" height="265" width="353">
The drop off in Japan&#8217;s industrial production index is now
extraordinary as it has posted a month-to-month drop of nearly double
digits. Over three months Japan&#8217;s IP is plunging at a 58% annual rate.
It is also down by 22.5% Yr/Yr. Transportation output dropped by 14% in
November and its three-month annualized growth rate is -79%.
Intermediate goods are taking the most sever beating in December. But
consumer goods output is off by 7.9% in December. Investment goods
output is dropping by 4.8% in December. There is no safe haven. 
 

Japan has been sliding for some time. But the figures from
overnight are shocking with household spending off and housing stars
off and construction orders plunging. Unemployment has jumped and
Japan&#8217;s manufacturing PMI has dropped for eleven straight months and to
a record low. 
 

Germany, another export dependent country, heard its deputy
finance minister today warn that the hammer blow to exports was
continuing and the domestic economy was getting hit even harder as a
result. The lesson is to be wary of export oriented economies since the
export market is drying up fast, however you define it. 


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="9" scope="col"> Japan
Industrial Production Trends</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3"> m/m %</td>
<td colspan="3"> Saar %</td>
<td> Yr/Yr</td>
<td> Qtr-2-Date</td>
</tr>
<tr class="odd">
<td class="firstcol"> seas adjusted</td>
<td> Dec-08</td>
<td> Nov-08</td>
<td> Oct-08</td>
<td> 3-mo</td>
<td> 6-mo</td>
<td> 12-mo</td>
<td> Yr-Ago</td>
<td>% AR</td>
</tr>
<tr class="odd">
<td class="firstcol"> mining&amp;MFG</td>
<td> -9.6%</td>
<td> -8.5%</td>
<td> -3.1%</td>
<td> -58.8%</td>
<td> -37.4%</td>
<td> -22.5%</td>
<td>2.3%</td>
<td>-39.8%</td>
</tr>
<tr class="odd">
<td class="firstcol"> Total Industry</td>
<td> -9.2%</td>
<td> -7.9%</td>
<td> -3.4%</td>
<td> -57.4%</td>
<td> -36.2%</td>
<td> -21.7%</td>
<td>2.3%</td>
<td>-39.2%</td>
</tr>
<tr class="odd">
<td class="firstcol"> MFG</td>
<td> -9.6%</td>
<td> -8.5%</td>
<td> -3.2%</td>
<td> -59.0%</td>
<td> -37.5%</td>
<td> -22.5%</td>
<td>2.4%</td>
<td>-39.8%</td>
</tr>
<tr class="odd">
<td class="firstcol"> &nbsp; Textiles</td>
<td> -4.4%</td>
<td> -1.5%</td>
<td> -0.2%</td>
<td> -22.3%</td>
<td> -18.7%</td>
<td> -15.7%</td>
<td> -4.3%</td>
<td>-12.7%</td>
</tr>
<tr class="odd">
<td class="firstcol"> &nbsp; T-port</td>
<td> -14.3%</td>
<td> -14.3%</td>
<td> -7.4%</td>
<td> -78.6%</td>
<td> -55.3%</td>
<td> -33.9%</td>
<td>5.2%</td>
<td>-59.7%</td>
</tr>
<tr>
<td colspan="9" class="firstcol"> Product Group</td>
</tr>
<tr class="odd">
<td class="firstcol"> &nbsp; Consumer
Gds</td>
<td> -7.9%</td>
<td> -6.2%</td>
<td> -2.2%</td>
<td> -49.1%</td>
<td> -28.6%</td>
<td> -16.8%</td>
<td>2.4%</td>
<td>-33.9%</td>
</tr>
<tr class="odd">
<td class="firstcol"> &nbsp;
Intermediate Gds</td>
<td> -12.5%</td>
<td> -8.6%</td>
<td> -4.7%</td>
<td> -66.4%</td>
<td> -44.0%</td>
<td> -26.7%</td>
<td>4.8%</td>
<td>-45.5%</td>
</tr>
<tr class="odd">
<td class="firstcol"> &nbsp; Investment
Gds</td>
<td> -4.8%</td>
<td> -9.3%</td>
<td> -2.6%</td>
<td> -50.2%</td>
<td> -31.4%</td>
<td> -19.4%</td>
<td> -2.5%</td>
<td>-31.6%</td>
</tr>
<tr class="odd">
<td class="firstcol"> Miining</td>
<td> -1.4%</td>
<td>7.6%</td>
<td> -7.5%</td>
<td> -7.5%</td>
<td> -1.5%</td>
<td> -3.9%</td>
<td>4.3%</td>
<td>-20.9%</td>
</tr>
<tr class="odd">
<td class="firstcol"> Electric&amp;Gas</td>
<td> -3.8%</td>
<td>0.4%</td>
<td>1.4%</td>
<td> -8.3%</td>
<td> -3.5%</td>
<td> -4.5%</td>
<td>2.4%</td>
<td>-3.4%</td>
</tr>
</tbody>
</table>
</body></html>

The drop off in Japan’s industrial production index is now extraordinary as it has posted a month-to-month drop of nearly double digits. Over three months Japan’s IP is plunging at a 58% annual rate. It is also down by 22.5% Yr/Yr. [...]

Japan Hits The Skids Hard In December

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090130g.jpg" align="left" border="0" height="265" width="353">
The EU sentiment index has fallen to a record low. Most of its
sector readings are on lows as well. Construction, in the lower 13% of
its range, is the strongest sector in relative terms. The sentiment
indices for the major EMU nations and for the UK are on lows as well &#8211;
at the very bottom of their ranges. France is the relative strongest in
only the bottom 5% of its range. Europe is obviously getting clobbered
and the weakness runs across sectors and countries. The EMU overall
sentiment reading fell to 64.9 in Jan from 68.2 in December &#8211; a very
sharp fall at a reading level that is already so low. That is not a
good sign. The pace of the drop in sentiment is not slowing down.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="11" class="firstcol">EU
Sectors and Country level Overall Sentiment</th>
<th class="firstcol">R-SQ</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">EU</td>
<td>Jan 
09</td>
<td>Dec 
08</td>
<td>Nov 
08</td>
<td>Oct 
08</td>
<td>%tile</td>
<td>Rank</td>
<td>Max</td>
<td>Min</td>
<td>Range</td>
<td>Mean</td>
<td>w/ 
Overall</td>
</tr>
<tr class="odd">
<td class="firstcol">Overall</td>
<td>64.9</td>
<td>68.2</td>
<td>75.1</td>
<td>81.1</td>
<td>0.0</td>
<td>220</td>
<td>116</td>
<td>65</td>
<td>51</td>
<td>100</td>
<td>1.00</td>
</tr>
<tr class="odd">
<td class="firstcol">Industrial</td>
<td>-34</td>
<td>-32</td>
<td>-25</td>
<td>-19</td>
<td>0.0</td>
<td>220</td>
<td>7</td>
<td>-34</td>
<td>41</td>
<td>-8</td>
<td>0.85&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">Consumer Confid</td>
<td>-31</td>
<td>-28</td>
<td>-24</td>
<td>-23</td>
<td>0.0</td>
<td>220</td>
<td>2</td>
<td>-31</td>
<td>33</td>
<td>-11</td>
<td>0.87</td>
</tr>
<tr class="odd">
<td class="firstcol">Retail</td>
<td>-25</td>
<td>-25</td>
<td>-18</td>
<td>-16</td>
<td>0.0</td>
<td>219</td>
<td>6</td>
<td>-25</td>
<td>31</td>
<td>-6</td>
<td>0.61</td>
</tr>
<tr class="odd">
<td class="firstcol">Construction</td>
<td>-36</td>
<td>-32</td>
<td>-28</td>
<td>-25</td>
<td>13.3</td>
<td>203</td>
<td>3</td>
<td>-42</td>
<td>45</td>
<td>-17</td>
<td>0.48</td>
</tr>
<tr class="odd">
<td class="firstcol">Services</td>
<td>-28</td>
<td>-23</td>
<td>-18</td>
<td>-10</td>
<td>0.0</td>
<td>145</td>
<td>33</td>
<td>-28</td>
<td>61</td>
<td>15</td>
<td>0.82</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">%m/m</td>
<td>Jan 
09</td>
<td colspan="2">Based on Level</td>
<td colspan="4">Level</td>
<td>&nbsp;</td>
</tr>
<tr class="even">
<td class="firstcol">EMU</td>
<td>-2.1%</td>
<td>-10.2%</td>
<td>-5.7%</td>
<td>68.9</td>
<td>0.0</td>
<td>220</td>
<td>118</td>
<td>69</td>
<td>49</td>
<td>99</td>
<td>0.96</td>
</tr>
<tr class="odd">
<td class="firstcol">Germany</td>
<td>-4.0%</td>
<td>-6.4%</td>
<td>-7.0%</td>
<td>74.4</td>
<td>0.0</td>
<td>220</td>
<td>121</td>
<td>74</td>
<td>46</td>
<td>99</td>
<td>0.61</td>
</tr>
<tr class="odd">
<td class="firstcol">France</td>
<td>-1.2%</td>
<td>-10.6%</td>
<td>-1.8%</td>
<td>74.4</td>
<td>5.2</td>
<td>219</td>
<td>119</td>
<td>72</td>
<td>47</td>
<td>100</td>
<td>0.81</td>
</tr>
<tr class="odd">
<td class="firstcol">Italy</td>
<td>-1.4%</td>
<td>-11.7%</td>
<td>-1.4%</td>
<td>71.9</td>
<td>0.0</td>
<td>220</td>
<td>121</td>
<td>72</td>
<td>50</td>
<td>100</td>
<td>0.79</td>
</tr>
<tr class="odd">
<td class="firstcol">Spain</td>
<td>3.7%</td>
<td>-7.2%</td>
<td>-3.4%</td>
<td>69.2</td>
<td>5.0</td>
<td>219</td>
<td>117</td>
<td>67</td>
<td>50</td>
<td>100</td>
<td>0.69</td>
</tr>
<tr class="odd">
<td class="firstcol">Memo:UK</td>
<td>-10.9%</td>
<td>-0.6%</td>
<td>-9.9%</td>
<td>60.2</td>
<td>0.0</td>
<td>220</td>
<td>117</td>
<td>60</td>
<td>57</td>
<td>100</td>
<td>0.50</td>
</tr>
<tr class="even">
<td colspan="5" class="firstcol">Since
1990
except Services (Oct
1996)247</td>
<td>-Count</td>
<td>Services:</td>
<td>145</td>
<td>-Count</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td colspan="12" class="firstcol">Sentiment
is an index, sector
readings are net balance diffusion measures</td>
</tr>
</tbody>
</table>
</body></html>

The EU sentiment index has fallen to a record low. Most of its sector readings are on lows as well. Construction, in the lower 13% of its range, is the strongest sector in relative terms. The sentiment indices for the major EMU [...]

EU Index At Record Low

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090130e.jpg" width="353">
The January consumer sentiment index from the University of Michigan rose slightly for the second month. The 1.8% rise was slightly less than indicated in the mid-month report but it followed an 8.7% increase off the cycle&#39;s low in December. Nevertheless, at 61.2, the latest level was close to the lows for the series which occurred in the severe recessions of 1973-75 and 1980. Moreover, the figure remained down nearly one-quarter from last year. The latest reading about matched Consensus expectations for a reading of 61.9.
During the last ten years there has been a 58% correlation between the level of sentiment and the three-month change in real consumer spending.
The expectations component of consumer sentiment rose moderately. Still, the series was near its lowest since 1990 and close to the low of 1980. Expectations for business conditions during the next year rose somewhat and expectations for conditions during the next five years also ticked up. The expected change in personal finances rose to the highest level since September.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090130f.jpg" width="353">
The current economic conditions index fell after an initial reading that was unchanged from December. The buying conditions index for large household goods fell sharply but the view of current personal finances rose (surprisingly) to the highest level since September. The figure did, however, remain off sharply from the 2007 average.
The opinion of government policy, which apparently influences economic expectations, was about unchanged but off a sharp 28.2% during the last twelve months. Only seven percent of respondents thought that a good job was being done by government and a near-record fifty-one percent thought that a poor job was being done.
Inflation expectations ticked slightly higher to 2.5% during the next year but that remained near the series&#39; low. It was as high as 7.0% in May. The expected inflation rate during the next five years rose off the series&#39; low to 3.7%.
The University of Michigan survey is not seasonally adjusted.The reading is based on telephone interviews with about 500 households at month-end; the mid-month results are based on about 300 interviews. The summary indexes are in Haver&#39;s USECON database, with details in the proprietary UMSCA database.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF14/@EF1402/@EF1402.HTM">University of Michigan</a></th>
<th scope="col">January</th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">January y/y</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Consumer Sentiment</td>
<td>61.2</td>
<td>60.1</td>
<td>55.3</td>
<td>-21.9%</td>
<td>63.8</td>
<td>85.6</td>
<td>87.3</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Current Conditions</td>
<td>66.5</td>
<td>69.5</td>
<td>57.5</td>
<td>-29.6</td>
<td>73.7</td>
<td>101.2</td>
<td>105.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Expectations</td>
<td>57.8</td>
<td>54.0</td>
<td>53.9</td>
<td>-15.1</td>
<td>57.3</td>
<td>75.6</td>
<td>75.9</td>
</tr>
</tbody>
</table>
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The January consumer sentiment index from the University of Michigan rose slightly for the second month. The 1.8% rise was slightly less than indicated in the mid-month report but it followed an 8.7% increase off the cycle's low in [...]

Michigan Consumer Sentiment Up Slightly In January, Yet Still Near Series' Low

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090130c.jpg" width="353">
Weak job markets have held down compensation. For private industry workers, the employment cost index increased by 0.5% during 4Q. The rise eased slightly from the 0.6% 3Q increase and it left costs up 2.9% for the full year. That was down slightly from the 3.1% rise during 2007 and the quarterly gain fell short of Consensus expectations for a 0.7% rise. A notion of weakness in compensation growth was emphasized by the 4Q-to-4Q rate of increase of 2.4%. That was the weakest in the series&#39; history which extends back to 1980.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090130d.jpg" width="353">
The rise in benefit costs was the main cause of the slowdown in overall compensation costs. The quarterly increase slowed to 0.2%, the weakest since early last year. The 2.0% year-to-year rise was near the slowest since 1999. In the goods producing sector benefits ticked up 0.1% (1.5% y/y) and in services they nudged up just 0.2% (2.2% y/y) after a 0.6% 3Q gain.
Health benefit costs rose 3.5% y/y and that was the slowest rate of growth since 1998.
Wage and salary growth of 0.3% was half the rate of increase during 3Q. Wages account for roughly 70% of the compensation index. The 4Q-to-4Q gain of 2.6% clearly was restrained by the weak job market and it was the weakest increase since 2006. Wages in the services industries grew a modest 0.3% and the y/y gain of 2.6% also was the weakest since 2006. Wages in the goods producing industries rose 0.4% (2.8% y/y) and that y/y growth compares to a recent peak of 4.0% in 2000.

<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;08</th>
<th scope="col">3Q &#39;08</th>
<th scope="col">4Q Y/Y</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Compensation</td>
<td>0.5</td>
<td>0.6</td>
<td>2.4</td>
<td>2.9</td>
<td>3.1</td>
<td>2.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wages &amp; Salaries</td>
<td>0.3</td>
<td>0.6</td>
<td>2.6</td>
<td>3.0</td>
<td>3.4</td>
<td>2.9</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Benefit Costs</td>
<td>0.2</td>
<td>0.5</td>
<td>2.0</td>
<td>2.5</td>
<td>2.4</td>
<td>2.9</td>
</tr>
</tbody>
</table>


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Weak job markets have held down compensation. For private industry workers, the employment cost index increased by 0.5% during 4Q. The rise eased slightly from the 0.6% 3Q increase and it left costs up 2.9% for the full year. That was [...]

U.S. Employment Cost Index Increase Eased Slightly During 4Q; 2008 Gain A Record Low

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090130a.jpg" width="353">
The current recession in economic activity intensified last quarter. Real GDP contracted at a 3.8% annual rate. Although, the rate of decline was less than the generally expected 5.4%, it was the deepest quarterly drop since the last, sharp recession of 1982. Moreover, a run-up in inventories accounted for the upside surprise to growth and that will have limited staying power if demand remains under pressure.
Real U.S. final sales to domestic purchasers contracted at a 4.9% annual rate after the 2.2% 3Q drop. That was the worst decline since the notably sharp, &quot;credit crunch&quot; recession of 1980 when consumers pocketed their credit cards. Personal consumption expenditures fell a sharp 3.5% (AR) after a like decline during 3Q. Business fixed investment fell off a cliff at a 19.1% annual rate. Residential investment fell at a 23.6% rate. Combined, business plus residential investment declined for the tenth quarter out of the last eleven.
The sharpness of that decline in demand suggests that the strong rate of 4Q inventory accumulation was involuntary. Inventory accumulation added 1.3 percentage points to GDP growth which was the most for one quarter since 2005. The increase then was followed by three consecutive quarters of decumulation or modest accumulation as tight control methods kept inventories under wraps.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090130b.jpg" width="353">
An improved foreign trade deficit added just 0.1 percentage points to 4Q GDP growth, held down by an outsized 19.8% decline in exports. Imports fell at a 15.7% rate with the developing domestic recession.
The estimate of the GDP chain price index fell by 0.1% (AR), the first quarterly decline since 1954. It was a give-back from the a strong 3.9% gain during 3Q. The 4Q drop was led by lower oil prices which pulled down the PCE deflator at a 5.5% annual rate, reversing all of the 3Q increase. The residential investment chain price index fell at an 8.2% annual rate but the business fixed investment price index rose 5.0%, about as it did during 3Q.

<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/@E701/@E701.HTM">Chained 2000$, % AR</a></th>
<th scope="col">4Q &#39;08 (Advance)</th>
<th scope="col">3Q &#39;08</th>
<th scope="col">4Q Y/Y</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">GDP</td>
<td>-3.8</td>
<td>-0.5</td>
<td>-0.2</td>
<td>1.3</td>
<td>2.0</td>
<td>2.8</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Inventory Effect</td>
<td>1.3</td>
<td>0.8</td>
<td>0.1</td>
<td>0.1</td>
<td>-0.4</td>
<td>0.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Final Sales</td>
<td>-5.1</td>
<td>-1.3</td>
<td>-0.3</td>
<td>1.4</td>
<td>2.4</td>
<td>2.8</td>
</tr>
<tr>
<td class="firstcol">Foreign Trade Effect</td>
<td>0.1</td>
<td>1.1</td>
<td>1.4</td>
<td>1.4</td>
<td>0.6</td>
<td>0.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Domestic Final Demand</td>
<td>-4.9</td>
<td>-2.2</td>
<td>-1.5</td>
<td>0.0</td>
<td>1.8</td>
<td>2.6</td>
</tr>
<tr>
<td class="firstcol">Chained GDP Price Index</td>
<td>-0.1</td>
<td>3.9</td>
<td>1.9</td>
<td>2.2</td>
<td>2.7</td>
<td>3.2</td>
</tr>
</tbody>
</table>


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The current recession in economic activity intensified last quarter. Real GDP contracted at a 3.8% annual rate. Although, the rate of decline was less than the generally expected 5.4%, it was the deepest quarterly drop since the last, [...]

U.S. Recession Intensifies; 3.8% Drop in Real GDP Is Sharpest Since 1982

U.S. Recession Intensifies; 3.8%Drop in Real GDP Is Sharpest Since 1982

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

US production rebounded in Q2, but demand continued to slow

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

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Andrew Cates

**US trade with Europe** 
Geopolitical tensions surrounding Greenland have abruptly sharpened investor sensitivity to US trade and foreign-policy risk. What might once have been dismissed as rhetorical brinkmanship has taken on greater macro-financial relevance as Donald Trump has coupled renewed interest in Greenland’s strategic importance with explicit threats of higher tariffs on European imports. The first chart below highlights that the US is materially more exposed to EU goods than the EU is to US trade, making any escalation asymmetrically more costly for the US economy. Beyond the direct inflationary impact of higher tariffs, the more immediate risk lies in confidence effects and capital flows: early signs of capital reallocation away from US assets over the past 24 hours suggest that markets could be beginning to price a broader erosion of policy predictability. In this environment, tariffs risk functioning less as a targeted trade tool and more as a systemic confidence shock—tightening financial conditions, unsettling the dollar’s safe-haven status and increasing downside risks to US growth via weaker investment and higher risk premia.

260122Z1.jpg

**Japan’s JGB yields**
That said, recent capital outflows from US assets may owe as much to developments in Japan as to geopolitical and trade-related shocks. While tariff threats and policy unpredictability have clearly unsettled sentiment, an underappreciated driver of the sell-off in US Treasuries has been the sharp repricing in the Japanese government bond market. Renewed domestic political uncertainty and intensifying concerns over Japan’s debt dynamics have triggered a rapid rise in JGB yields, prompting portfolio rebalancing by Japanese investors and reducing the relative appeal of US duration. Given Japan’s role as one of the largest foreign holders of US Treasuries, yield gyrations at home can translate quickly into capital repatriation, hedging adjustments and reduced demand for US bonds. In this sense, recent moves in US yields may reflect less a direct reaction to geopolitical risk and more a globally transmitted capital-flow shock—originating in Japan but felt most acutely in US financial markets.

260122Z2.jpg

**Inflation expectations and oil prices**
Capital-flow dynamics may have also begun to spill over into how markets are pricing US inflation risk and monetary credibility. Historically, medium-term US inflation expectations have remained closely anchored to global energy prices, as illustrated by the strong co-movement between the 5-year forward inflation rate and Brent crude prices. More recently, however, that relationship has begun to fray: inflation expectations have proven notably resilient even as oil prices have softened, suggesting that markets are increasingly pricing political and policy risk rather than cost-push fundamentals alone. Renewed tariff threats under President Trump, combined with heightened geopolitical tensions involving Greenland and transatlantic relations, risk reinforcing concerns that future inflation outcomes could be shaped as much by political intervention as by macroeconomic conditions. Any perception that the Federal Reserve may face constraints on its operational independence would compound this shift—loosening inflation anchors, raising term premia and increasing the sensitivity of capital flows to US policy credibility.

260122Z3.jpg

**UK inflation** 
UK inflation data released this week show a small upside surprise in headline CPI at year-end. Headline CPI inflation specifically rose from 3.2% y/y in November to 3.4% in December, a little more than expected. The chart below shows that the pickup was driven by persistent underlying pressures—most notably in services. While a negative drag from energy prices has largely faded, services inflation continues to account for a disproportionate share of overall price growth, probably reflecting ongoing wage pressures and limited slack in parts of the domestic economy.

260122Z4.jpg

**Wage growth in the US and Europe** 
Labour-market data from the Indeed Hiring Lab reinforce the picture of persistent services-side pressure in the UK inflation mix. As the chart shows, UK posted wage growth remains elevated relative to both the euro area and the US, even though momentum has eased from its 2023 peak. At around the mid-5% range on a three-month moving average basis, UK wage growth is still running at a pace that is difficult to reconcile with a rapid return of services inflation to target. By contrast, posted wage growth in the euro area has slowed more decisively, while the US has seen a sharper deceleration from earlier extremes.

260122Z5.jpg

**China’s property market**
Finally, the Q4 GDP figures released in China this week sit uneasily alongside continued weakness in its domestic property sector, which remains a key drag on both investment and consumption. While Q4 growth of 4.5% y/y brought full-year GDP broadly in line with the authorities’ 5% target, the chart highlights how property-market adjustment is still running deep beneath the surface. Prices of existing homes across China’s 70 cities remain in year-on-year decline, while real estate investment continues to contract sharply, underscoring the scale and persistence of the sector’s retrenchment. This helps explain why fixed asset investment has softened further and why household demand remains subdued, despite more resilient industrial output.

260122Z6.jpg

This week’s data and market moves have been framed by an abrupt escalation in geopolitical tensions surrounding Greenland, which has served as a catalyst for broader financial unease rather than a standalone shock. The episode has sharpened investor focus on US policy predictability, amplifying concerns already evident in the charts on EU–US trade exposure, where tariff threats risk feeding directly into confidence effects and capital flows. At the same time, recent turbulence in Japanese government bonds appears to have been an underappreciated driver of the sell-off in US Treasuries, highlighting how global capital reallocation—rather than geopolitics alone—has contributed to higher US yields. These forces intersect with growing questions around the durability of US monetary credibility, as inflation expectations have shown signs of decoupling from traditional oil-price anchors, raising the sensitivity of markets to any perceived constraints on the Federal Reserve. Beyond the US, UK data delivered a modest upside surprise in headline inflation, with persistent services and wage pressures reinforcing a cautious policy backdrop for the Bank of England. In China, meanwhile, Q4 GDP growth of 4.5% y/y kept full-year expansion aligned with the government’s target, but continued weakness in the property sector remains a significant drag on investment and household confidence. Taken together, the week’s developments point to a global outlook increasingly shaped by geopolitical risk, capital-flow dynamics and domestic  structural constraints, rather than by straightforward cyclical momentum alone.

Charts of the Week: Seeing Green

260123E.jpg

The S&P PMIs for January show flash readings that indicate broadly stronger conditions across the early reporters in this table. Exceptions are the European Monetary Union as a whole with its composite reading weaker and France with its composite reading weaker, but Germany, the United Kingdom, Japan, Australia, India, and the United States all have composite readings that are stronger month-to-month in January. With these eight countries, there are 24 readings in each period, three for each country: a composite, one for manufacturing, and one for services. Among these 24 readings, only five of them were weaker month-to-month in January. Of course, this follows a December when only 6 of the readings were stronger month-to-month.

The sequential readings, that we calculate only off hard data (which means that calculations are done from December backward) are still mixed. Substantially weaker conditions period-to-period are reported comparing three-months to six-months. Over three months, only nine of the 24 readings are stronger whereas over six months only one of the 24 readings is weaker when compared to the 12-month average. Over 12 months, the average is stronger than it was one-year ago in 15 of the 24 readings. 

Only the United States and France have service sectors that are below their medians over this period back to 2022. Only France and India have composite readings that are below their respective medians over this period. But by comparison, there are very strong composite readings as well. There is a 91-percentile standing on the composite in Australia, an 87-percentile standing in Japan and the United Kingdom. The German composite has a 79-percentile standing.

The recent data have been running sporadically hot and cold, making it difficult to make sense out of what's happening. But broadly, it's clear that the PMIs in the European Monetary Union have been working their way higher and this is the general theme.

For the 8 reporters in the table back to January 2022, all of them except India show weaker manufacturing readings in January 2026 than what they showed in January 2022. But January 2022 was, of course, part of the COVID recovery move. Manufacturing in the European Monetary Union slipped from its high point over this period to its low point around mid-2023.

260123.jpg

Looking at point-to-point changes over the last three months, we find 3-sector cumulative drops in the United States, the European Monetary Union, and Germany. India has two sectors weakening with a decline in its composite as well as its manufacturing reading. Meanwhile, all the rest of the readings in the table over these three months show improved results. On a broad basis, we have to conclude there's more strength than weakness. However, since the weakness is concentrated and widespread and the largest economic units: the United States, the European Monetary Union, and the German economy, it's better to refer to the last three months as generating mixed economic statistics.

Looking forward, conditions are still hard to sort out. There's this obvious recovery in January after an equally obvious weak spot in December. The two of them cancel one another out in some sense. The average composite reading for all countries in the table shows some improvement in the manufacturing sector but waffling on the services sector. We get the same sort of readings looking at sequential averages; they do more of waffling than any kind of clear trend. On balance, the S&P readings don't give us a lot to go on this month. The survey is a bounce-back after a weak December and that's good news. But that doesn't give us a good handle on the trend yet.

S&P Flash PMIs Rebound But Emit No Clear Signal

Sandy Batten

260122N8.jpg

260122C8.jpg

Real GDP increased 4.4% q/q saar in the third quarter of 2025 in the final estimate, up marginally from 4.3% in the first release. The Action Economics Forecast Survey expected no revision. Growth from a year ago was unrevised at 2.3% y/y. Growth of corporate profits was revised up to 4.5% q/q not annualized from 4.2% in the previous report.

The revision to GDP mostly reflected slightly stronger nonresidential fixed investment, a larger increase in exports and a smaller decrease in inventory investment. Nonresidential fixed investment increased a revised 3.2% q/q saar versus a 2.8% gain in the previous release. This reflected a smaller decline in structures, a smaller increase in equipment and a larger increase in intellectual property products than previously estimated. Residential investment was revised weaker with a 7.1% quarterly decline versus -5.1% in the previous estimate.

Upon revision, exports rose 9.6% q/q in Q3 versus 8.8% in the first estimate. Consequently, the trade deficit narrowed a little more than in the first estimate, resulting in net exports adding 1.62%-points to overall growth, 0.03%-point more previously estimated. The decline in inventory investment in Q3 was smaller than previously estimated, reducing the drag from inventories by 0.1%-point versus the previous estimate. The decline in inventories subtracted 0.12%-point in Q3 on top of a 3.44%-point subtraction in Q2.

Domestic demand growth remained solid in Q3 but was revised down 0.1%-point. Final sales to domestic purchasers grew a revised 2.8% q/q saar in Q3 versus 2.9% in the first estimate. Final sales to private domestic purchasers increased 2.9% q/q, down slightly from 3.0% previously.

260122O8.jpg

260122P8.jpg

The primary driver of overall growth continued to be personal consumption expenditures. They increased an unrevised 3.5% q/q saar in Q3, adding 2.34%-points to total GDP growth. This reflected a 3.0% increase in spending on goods versus 3.1% previously and a 3.6% gain in spending on services versus 3.7% previously. The rise in government spending was unrevised at 2.2% q/q. However, spending by the federal government was revised slightly slower to 2.7% from 2.9% while spending by state and local governments was revised up slightly to 2.0% from 1.8%.

Key measures of inflation were unrevised. Inflation as measured by the GDP price index remained at 3.8% q/q saar in Q3, but this was up markedly from 2.1% in Q2. Similarly, PCE inflation in Q3 was unrevised at 2.8% versus 2.1% in Q2. Core PCE inflation was also unrevised at 2.9% in Q3.

The GDP data can be found in Haver’s **USECON** and **USNA** databases. **USNA** contains virtually all of the Bureau of Economic Analysis detail in the national accounts. The Action Economics consensus estimates can be found in **AS1REPNA**.

260122Q8.jpg

260122S8.jpg

- Real GDP grew 4.4% q/q saar in Q3 2025, up slightly from 4.3% previously reported.
- The modest upward revision was due mostly to slightly stronger nonresidential fixed investment, a larger increase in exports and a smaller decrease in inventories.
- Growth of domestic demand remained solid in Q3 but was revised down 0.1%-point.
- GDP and PCE inflation were unrevised at 3.8% and 2.8%, respectively. Both are meaningful accelerations from Q2.

U.S. Q3 GDP Growth Revised Slightly Faster

Kathleen Stephansen, CBE

260122A2.jpg

260122B2.jpg

Initial claims for unemployment insurance edged up 1,000 to 200,000 in the week ending January 17, from 199,000 in the week ending January 10, revised from 198,000. The four-week moving average of initial claims was 201,500 in the January 17 week, down 3,750 from 205,250 in the January 10 week, revised from 205,000, and reaching the lowest level for this average since January 13, 2024, when it was 200,000.

Federal government employees initially filed 1010 (NSA) jobless insurance claims in the week ended January 10, after filing 646 (NSA) claims in the week ended January 3.

The total number of unemployment insurance beneficiaries – also known as “continuing claims” –decreased by 26,000 to 1.849 million in the week ended January 10 from 1.875 million in the week ending January 3, revised from 1.884 million. The four-week moving average was 1.871 million in the latest week, down from 1.887 million in the January 3 week, revised from 1.889 million. The insured unemployment rate remained at 1.2% in the week of January 10, unchanged from previous 6 weeks.

Federal government employees’ continuing benefits claims were 12,977 (NSA) in the week ending January 3, from 12,803 (NSA) in the week of December 27.

The insured unemployment rate varied greatly across individual states and territories. In the week ending January 3, the highest unemployment rates were in Rhode Island (3.27%), New Jersey (3.17%), Washington (2.85%), Minnesota (2.75%), Massachusetts (2.74%), Oregon (2.37%), Connecticut (2.31%), Montana (2.26%), California (2.21%), and Alaska (2.06%). The lowest rates were in Florida (0.29%), North Carolina (0.40%), and Louisiana (0.43%). Rates in other notable states include New York (2.28%), Pennsylvania (2.23%), Illinois (2.21%), and Texas (1.14%). 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.

260122C2.jpg

260122D2.jpg

U.S. Initial Claims for Unemployment Insurance Edged Up in Latest Week

260122E.jpg

The National Bank of Belgium index for January 2026 rose to +4 from -1 in December, stronger than its November 2025 reading of +2. The survey value is exceptionally strong, lying in the top 6% of all observations back to 1991, even as the survey contains significant variations that range from strong to quite weak across its various components. What is most notable is that the index itself is extremely high-ranking; the current situation appraisal is also quite high-ranking; and, that the forecast for unemployment embedded in this survey is at a 35-year low. Considering current circumstances, against the events of the last 35 years, that's a rather remarkable finding especially considering the world situation.

**The times, they are a changin’ was Dylan 50 years early?** 
These have been remarkable times in a number of different ways with a clear transition from the circumstances of the post-war period under way. The solidarity of the NATO alliance is clearly in a situation in flux, revealed since Russia invaded Ukraine. Prior to that, the Europeans had resisted putting more money into the NATO pot as the United States had been frantically asking them while it funded most of the security umbrella. Now, in the wake of these new events, and with the changes to the global stage wrought by climate shifting, the U.S. finds Greenland to be a more important piece on the geopolitical chess board and wants to have more say there in order to protect its own flank as Arctic ice packs recede. This is after a period when NATO basically failed to engage in the front-line protections of its own doorstep that the U.S. had thought were necessary. Not surprisingly, the U.S. found that whole episode unsatisfactory and is now reluctant to give up control to NATO of what it regards as the protection of its own back door for the area around Greenland. But at last, Europe and the U.S. appear to have a deal or the makings of one, so, stay tuned. Maybe all civility is not lost.

**Geopolitical shifts meld with economic issues to change the landscape**
Geopolitical shifts are part of the problem because geopolitics and economics help shape one another. And there has been a great deal of economic turmoil as well. The U.S., after reassessing the Post War order, is bringing back to life tariffs, in order to try to get economic leverage after running 33 consecutive years of current account deficits under what people want to call a free trade system. The U.S. finds itself with a still very overvalued dollar and in a situation where its current account deficits are poised to continue to run high and perhaps get higher. Economists say tariffs are not the solution, but maybe they ARE the wake-up call that will lead to a solution? Europeans have also shifted to embracing a larger and larger government sector and ever larger fiscal deficits and more fiscal debt while absorbing migrants. This is constraining its ability to have any kind of a flexible macroeconomic policy and is a severe problem already for the U.K. and France. And these changes are wreaking havoc with what has been a very solid post-war Atlantic alliance.

**Views change**
But the changes that the U.S. has pushed on to the system from its geopolitical adventurism to its use of tariffs and other strong rhetorical comments have led economists to focus on the elevation of uncertainty in the economic system. Elevating uncertainty has an adverse impact on the economy and on growth. I mentioned this with the obvious caveat that this warning by economists seems to have been completely wrong. U.S. growth has turned out to be quite resilient and even strong. It is not the only adamant position that has proved to be wrong and malleable. Despite the reality of climate change, the view that once took carbon as the main and unequivocal climate change agent, itself is shifting. Opposition to carbon has dwindled, more as the U.S. is embracing nuclear power. Artificial intelligence is becoming a strong bet for stronger growth in the future, and this explains why there have been so many shifting views on energy since artificial intelligence requires massive amounts of energy and would make it impossible to make progress on carbon and to push ahead with the AI agenda at the same time. So, instead of delaying AI, the view on carbon had to go. So much for ‘science.’

**Why are Belgians so satisfied?**
The finding that in Belgium consumer confidence has risen sharply in this environment and fears of unemployment are the lowest they've been in 35 years is another shocking development in this pantheon of incredible and shocking changes. As the above discussion points out, a lot is changing and NATO is at odds with the U.S., its lynchpin. Yet, there is no clear increase in uncertainty in Belgium, while they maybe more in Brussels.

**The Belgian Survey: strong despite waffles**
Belgians do not read the economic situation over the next 12 months as that strong at a reading of -29 on the survey; it has weakened over the last few months, and the economic situation assessment is only at its 8.3 percentile, an extremely weak standing. Price trends are the opposite; they have eased somewhat in the recent months, but over the next 12 months the assessment still has a top 14-percentile evaluation. It is in this context that the unemployment forecast, which is the lowest in 35 years, emerges as surprising. The environment to make major household purchases over the next 12 months is only a mid-range at a 45.7 percentile standing. And people rate their financial situation over the next 12 months slightly better than at the end of last year but at only a 34.2 percentile standing. However, the appraisal of the current situation moved up sharply in January and has a 97.7 percentile standing, which is extremely strong.

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**Low unemployment fear spurs confidence**
The reason for consumer confidence to be strong is clear when you see how low concerns are about unemployment. But it's hard to understand why concerns about unemployment are so low with the rest of the economic metrics so varied in the survey. This is especially true with Belgium nestled in the heart of Europe and all of these concerns between the U.S. and NATO swirling around as well as a still very hot war occurring on Europe's border between Ukraine and Russia. Meanwhile, the U.S. position about this war continues to seem to back Ukraine a lot less than it should.

**Belgium is a good bellwether**
The Belgian survey is not the most important bit of economic activity. Belgium is not an extremely important country in Europe, although it's in the heart of the European Union, a member of the European Monetary Union, linked closely to Germany, and to other key European economies through trade, so that its performance likely is a good reflection of what's going on in Europe. It is not a European border country. It is in the heartland of Europe. That may explain a little bit why Belgians are not perhaps as nervous as Poles, are or Finns or the small Baltic countries, and others, with potentially more border proximity and vulnerability to the Russia-Ukraine conflict.

**Belgian optimism flies in out of the blue**
This is an observation. I think it's the kind of observation in this world economy that we find striking and unusual and will bear some further watching and some watching of other similar readings in Europe to see if there's evidence that there's some kind of new resilience that we might have missed. Economists seem hung-up broken-record style on uncertainty. Certainly, there's something here that economists have missed who have only seen these new actions by the U.S. as creating more uncertainty since we do not know what the new Greenland deal is. And uncertainty should create more adversity for growth except that it hasn't worked out that way. And it's a reminder that separating economics from geopolitics may take more than a crowbar. And also that uncertainty comes in many shapes and sizes while some may argue that there still is not a Greenland deal, what we see is a lowering of the temperature, a calming of the rhetoric and a sense that the parties have a horse trade they think they can do to resolve their differences. And while there is still uncertainty, there is also clear progress and a clear reduction in risk. Still, the times are changing.

Economy in Brief: 2009

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