Robert Brusca

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080604i.jpg" align="left" border="0" height="265" width="353">
Euro Area retail sales are weak in April just as they were in
March and in February. It&#8217;s no surprise then that one month into the
new quarter Retail sales volumes are falling at a 7.6% annual rate, led
by an 8.3% volume drop in nonfood items. 
 

The sequential growth rates for the main aggregates (total,
food and nonfood) show clearly accelerating weakness in retail sales.
It is not hard to see why the OECD cut its forecasts in its new
projections released on Wednesday. 
 

The consumer, his sentiment and his spending habits, are under
clear pressure. Europe&#8217;s industrial measures have been held aloft by
strength in capital spending, but it&#8217;s time to wonder what is keeping
that aloft. In Japan, a country as well plugged into the overseas
growth markets as any, cap-ex spending turned weak again in the recent
government survey. 
 

Europe seems to have even harder times ahead, made harder
still by and an inflexible ECB over what are actually moderate
inflation pressures during very unusual times with steeply spiking oil
prices. The Fed has not exactly been a fountain of ease but it has done
a lot more for the US economy than that one-trick pony known as the ECB
has done for Europe. Spare the rate, spoil their fate. 


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="7" scope="col"> Euro
Area (13) Retail Sales Volume</th>
</tr>
</thead>
<tbody>
<tr class="grey4">
<td class="firstcol">&nbsp;</td>
<td>Apr-08</td>
<td>Mar-08</td>
<td>Feb-08</td>
<td>3-Mo</td>
<td>6-MO</td>
<td>12-Mo</td>
</tr>
<tr class="grey2">
<td class="firstcol">Euro 13 Total</td>
<td>-0.6%</td>
<td>-0.9%</td>
<td>-0.2%</td>
<td>-6.8%</td>
<td>-3.5%</td>
<td>-2.6%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Food</td>
<td>-1.0%</td>
<td>-0.3%</td>
<td>0.1%</td>
<td>-4.7%</td>
<td>-4.3%</td>
<td>-3.4%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Non food</td>
<td>-0.5%</td>
<td>-1.2%</td>
<td>-0.4%</td>
<td>-8.2%</td>
<td>-3.0%</td>
<td>-2.0%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Textiles</td>
<td>#N/A</td>
<td>-5.0%</td>
<td>1.1%</td>
<td>-8.5%</td>
<td>-11.4%</td>
<td>-5.0%</td>
</tr>
<tr class="grey2">
<td class="firstcol">HH Goods</td>
<td>#N/A</td>
<td>-1.2%</td>
<td>-0.2%</td>
<td>-4.3%</td>
<td>-3.6%</td>
<td>-2.9%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Books news, etc</td>
<td>#N/A</td>
<td>-1.5%</td>
<td>-0.2%</td>
<td>1.8%</td>
<td>0.2%</td>
<td>-0.3%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Pharmaceuticals</td>
<td>#N/A</td>
<td>-0.3%</td>
<td>0.4%</td>
<td>2.0%</td>
<td>1.9%</td>
<td>2.8%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Other NonSpec</td>
<td>#N/A</td>
<td>-1.2%</td>
<td>0.2%</td>
<td>-1.1%</td>
<td>-1.9%</td>
<td>-2.0%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Mail Order</td>
<td>#N/A</td>
<td>-1.3%</td>
<td>-1.1%</td>
<td>-8.2%</td>
<td>-0.8%</td>
<td>0.1%</td>
</tr>
<tr class="grey4">
<td colspan="7">Non-Food Country Detail
Volume</td>
</tr>
<tr class="grey2">
<td class="firstcol">Germany</td>
<td>-4.2%</td>
<td>-1.4%</td>
<td>1.1%</td>
<td>-16.7%</td>
<td>-4.9%</td>
<td>-4.2%</td>
</tr>
<tr class="grey2">
<td class="firstcol">France</td>
<td>#N/A</td>
<td>-1.1%</td>
<td>0.0%</td>
<td>#N/A</td>
<td>#N/A</td>
<td>#N/A</td>
</tr>
<tr class="grey2">
<td class="firstcol">Italy (Total; Value)</td>
<td>#N/A</td>
<td>-0.5%</td>
<td>0.2%</td>
<td>-0.7%</td>
<td>-0.2%</td>
<td>-0.5%</td>
</tr>
<tr class="grey2">
<td class="firstcol">UK(EU)</td>
<td>-1.6%</td>
<td>-0.1%</td>
<td>1.8%</td>
<td>0.4%</td>
<td>4.3%</td>
<td>4.8%</td>
</tr>
<tr class="grey1">
<td colspan="7" class="firstcol">Shaded areas
calculated on a
one-month lag due to lagging data</td>
</tr>
<tr class="grey1">
<td colspan="7" class="firstcol">The EA 13
countries are Austria,
Belgium, Finland, France, Germany,</td>
</tr>
<tr class="grey1">
<td colspan="7" class="firstcol">Greece,
Ireland, Italy, Luxembourg,
the Netherlands, Portugal, Slovenia</td>
</tr>
</tbody>
</table>
</body></html>

Euro Area retail sales are weak in April just as they were in March and in February. It’s no surprise then that one month into the new quarter Retail sales volumes are falling at a 7.6% annual rate, led by an 8.3% volume drop in [...]

EMU Retail Spending and Plans Continue to Roll Over

Tom Moeller

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080604h.jpg" align="left" border="0" height="265" width="353">
The ADP National Employment Report, from the payroll
processor, reported that private nonfarm payrolls rose 40,000 last
month after a slightly revised increase 13,000 during April.
&gt;The U.S. Bureau of Labor Statistics May employment figure
will be published this Friday.For
April, a 13,000 worker rise in ADP's measure of private nonfarm
payrolls was accompanied by a 29,000 worker decline in private sector
payrolls as reported by BLS.

According to ADP and Macro Advisers, the correlation between
the monthly percentage change in the ADP estimate and that in the BLS
data is 0.90.
The ADP sub-index for large payrolls fell 18,000 (-1.0% y/y)
after a 15,000 worker decline during April.
A 61,000 worker increase (1.3% y/y) in small sized payrolls
during May followed a 43,000 April rise.
Medium sized payrolls fell 3,000 (-0.0% y/y).

Employment in the goods producing industries fell another
37,000 (-2.1% y/y) and the rate of decline has intensified as this year
has progressed. Services payrolls rose 77,000 (1.3% y/y).
ADP compiled the estimate from its database of individual
companies' payroll information. Macroeconomic Advisers, LLC, the St.
Louis economic consulting firm, developed the methodology for
transforming the raw data into an economic indicator.
The ADP National Employment Report data is maintained in
Haver's pUSECONp database;
historical data go back to December 2000. The figures in this report
cover only private sector jobs and exclude employment in the public
sector, which rose an average 11,083 during the last twelve months.The full ADP National Employment Report can be found <a href="http://www.adpemploymentreport.com/PDF/FINAL_Report_May_08.pdf">here</a>,
and the ADP methodology is explained <a href="http://www.adpemploymentreport.com/PDF/ADPNERMethodology.pdf">here</a>.
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EB/@EB25/@EB25.HTM">LAXEPA@USECON</a></th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">Y/Y</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Nonfarm Private Payroll
Employment (m/m Chg.)</td>
<td>40,000</td>
<td>13,000</td>
<td>0.7%</td>
<td>1.1%</td>
<td>1.7%</td>
<td>1.8%</td>
</tr>
</tbody>
</table>
</body></html>

The ADP National Employment Report, from the payroll processor, reported that private nonfarm payrolls rose 40,000 last month after a slightly revised increase 13,000 during April. >The U.S. Bureau of Labor Statistics May employment [...]

ADP Report: May Private Sector Payrolls Rose

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080604g.jpg" width="353">
The May Composite Index for the non-manufacturing sector, from the Institute for Supply Management, held about steady with April at 51.7; an improvement from 49.6 in March and well up from the recent low of 44.6 in January. Consensus expectations had been for a lower May reading of 51.0.
Beginning with the January 2008 Non-Manufacturing <cite>Report On Business</cite>&reg;, a composite index is now calculated as an indicator of the overall economic condition for the non-manufacturing sector. It is a composite index based on the diffusion indexes for four of the indicators (business activity, new orders, employment and supplier deliveries) with equal weights. The latest report from the ISM can be found <a href="http://www.ism.ws/ISMReport/NonMfgROB.cfm">here</a>.
The non-manufacturing business activity sub-index also improved to 53.6 from 50.9 in April. So far in 2008 the index has averaged a beak-even 49.9, down from 56.0 during all of last year. Since the series&#39; inception in 1997 there has been a 48% correlation between the level of the business activity index for the non-manufacturing sector and the Q/Q change in real GDP for the services and the construction sectors.
The new orders sub-index improved to 53.6 from 50.1 in April but the employment index gave back half of its April improvement and fell to 48.7. The series remained below last year&#39;s level of 52.0. Since the series&#39; inception in 1997 there has been a 56% correlation between the level of the ISM non-manufacturing employment index and the m/m change in payroll employment in the service producing plus the construction industries.
Pricing power rose further as the prices paid index rose to 77.0. The latest was the highest level since last November and it was well up from the 2007 average of 63.8. Since inception ten years ago, there has been a 60% correlation between the price index and the q/q change in the GDP services chain price index.
ISM surveys more than 370 purchasing managers in more than 62 industries including construction, law firms, hospitals, government and retailers. The non-manufacturing survey dates back to July 1997.

<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/@EF03/@EF03.HTM">ISM Nonmanufacturing Survey</a></th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">May &#39;07</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Composite Index</td>
<td>51.7</td>
<td>52.0</td>
<td>54.5</td>
<td>53.5</td>
<td>55.7</td>
<td>58.0</td>
</tr>
<tr>
<td class="firstcol">Prices Index</td>
<td>77.0</td>
<td>72.1</td>
<td>64.3</td>
<td>63.8</td>
<td>65.3</td>
<td>68.0</td>
</tr>
</tbody>
</table>


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The May Composite Index for the non-manufacturing sector, from the Institute for Supply Management, held about steady with April at 51.7; an improvement from 49.6 in March and well up from the recent low of 44.6 in January. Consensus [...]

U.S. ISM Non-Manufacturing Index Fell in May; Prices Rose

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080604e.jpg" width="353">
During May, job cut announcements continued to rise according to the Challenger, Grey &amp; Christmas survey. A 15% increase from April to 103,522 pulled the level to its highest since December 2005. Since December announcements have more than doubled and the three-month average of announcements were at the highest level since 2006.
A rise in the three-month average of job cut announcements in services, financial and automotive sectors led the recent rise.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080604f.jpg" width="353">
During the last ten years there has been a 76% (inverse) correlation between the three month moving average of announced job cuts and the three month change payroll employment.
Job cut announcements differ from layoffs. Many are achieved through attrition, early retirement or just never occur.
Challenger also reported that announced hiring plans fell by more than one-third and reversed an April gain.

<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/SURVEYS/@S3/@S301/@S301.HTM">Challenger, Gray &amp; Christmas</a></th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">Y/Y</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Announced Job Cuts</td>
<td>103,522</td>
<td>90,015</td>
<td>45.6%</td>
<td>768,264</td>
<td>839,822</td>
<td>1,072,054</td>
</tr>
</tbody>
</table>
</body>
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During May, job cut announcements continued to rise according to the Challenger, Grey & Christmas survey. A 15% increase from April to 103,522 pulled the level to its highest since December 2005. Since December announcements have more [...]

Challenger Layoffs Highest Since 2005

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080604d.jpg" align="left" border="0" height="265" width="353">
Labor productivity in the nonfarm business sector rose a
revised 2.6% last quarter, as expected. That increase was stronger than
the 2.2% growth estimated last month and was up from 1.8% growth during
4Q07.
The upward revision was due to an upward revision to output
growth to a still low 0.7% from 0.4%. That was accompanied by an
unrevised 1.8% decline in total hours worked.
Growth in compensation per hour rose was revised up to 4.9%
from 4.4%. The increase, nevertheless, lowered the year-to-year rise to
4.0%, down from 5.8% as of 3Q '07.
Unit labor cost growth was left unrevised at 2.2% after a
revised 4.7% surge during 4Q '07. Year-to- year, the growth in costs
fell to a modest 0.7%, the slowest rate of growth since a slight
decline early in 2004.
In the nonfinancial corporate sector, productivity rose a firm
4.6% (3.0% y/y). That annual increase was the quickest since the end of
2004 while quarterly strength reflected a 3.2% rise in output but a
1.4% decline in hours worked.
Compensation in the corporate sector again was firm and
increased 5.9%, a rise which left unit labor costs to increase 1.2%
(1.1% y/y).
In the factory sector, productivity rose a somewhat lessened
3.6% (4.0% y/y). Unit labor cost growth was revised up to 4.2% on a
quarterly basis but earlier quarterly declines reduced the year-to-year
change to -0.2%.
Productivity, Energy Prices, and the Great
Moderation: a New Link is from the Federal Reserve Bank of
Atlanta and it can be found <a href="http://www.frbatlanta.org/filelegacydocs/wp0811.pdf">here</a>
. 


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<colgroup><col><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EC/@EC02/@EC02.HTM">Nonfarm
Business Sector</a> (SAAR, %)</th>
<th scope="col">Q1 '08
(Revised)</th>
<th scope="col">Q1 '08</th>
<th scope="col">Q4 '07</th>
<th scope="col">Y/Y</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Output per
Hour</td>
<td>2.6</td>
<td>2.2</td>
<td>1.8</td>
<td>3.3</td>
<td>1.8</td>
<td>1.0</td>
<td>1.9</td>
</tr>
<tr>
<td class="firstcol">Compensation
per Hour</td>
<td>4.9</td>
<td>4.4</td>
<td>6.6</td>
<td>4.0</td>
<td>5.1</td>
<td>3.9</td>
<td>4.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Unit Labor
Costs</td>
<td>2.2</td>
<td>2.2</td>
<td>4.7</td>
<td>0.7</td>
<td>3.2</td>
<td>2.9</td>
<td>2.0</td>
</tr>
</tbody>
</table>
</body></html>

Labor productivity in the nonfarm business sector rose a revised 2.6% last quarter, as expected. That increase was stronger than the 2.2% growth estimated last month and was up from 1.8% growth during 4Q07. The upward revision was due [...]

U.S. Productivity Growth Revised Up; Unit Labor Costs Rose Moderately

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080604a.jpg" align="left" border="0" height="265" width="353">
U.S. sales of light vehicles in May fell another 1.1% m/m to a
14.30M unit annual selling rate, according to the Autodata Corporation.
It was the fourth m/m decline this year and so far in 2008 vehicle
sales have fallen 11.7%. The level of vehicle sales also was lower than
Consensus expectations for sales of 14.6M.
Overall, sales of domestically made light vehicles
fell 1.3% last month and were off 14.5% YTD, at the lowest level since
early 1992.
Higher gasoline prices continued to hit sales of relatively
fuel inefficient domestically made light trucks.
Sales fell 9.8% m/m during May and that brought the decline
this year to 25.6%. Sales of U.S. made cars have held up relatively
well and posted an 8.8% increase last month and are roughly unchanged
since yearend. 
Sales of imported light vehicles slipped
just 0.7% m/m to 3.97M units after a 2.1% April decline. Sales of
imported autos rose 3.8% after a 0.4% April slip and so far this year
sales of imported cars are up 5.8%. Sales of imported light trucks,
however, felt some of the effect from higher gas prices and fell 9.7%;
off 19.6% so far this year.
Import's share of the U.S. light vehicle
market rose slightly to another record level of 27.9%. (Imported
vehicles are those produced outside the U.S. and does not include
vehicles with the nameplate of a foreign manufacturer produced within
the U.S.) Imports' share of the U.S. car market rose to 34.6% and the
share of the light truck market was 19.2%; both records and more than
double the shares ten years ago.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080604b.jpg" border="0" height="265" width="312">
<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080604c.jpg" border="0" height="265" width="312">

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED09/@ED0901/@ED0901.HTM">Light
Vehicle Sales (SAAR, Mil. Units)</a></th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">Y/Y</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>14.30</td>
<td>&nbsp;14.46</td>
<td>-12.5%</td>
<td>16.17</td>
<td>16.54</td>
<td>16.96</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Autos</td>
<td>7.98</td>
<td>7.46</td>
<td>-0.3%</td>
<td>7.58</td>
<td>7.77</td>
<td>7.65</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp;
Domestic</td>
<td>5.22</td>
<td>4.80</td>
<td>-2.9%</td>
<td>5.07</td>
<td>5.31</td>
<td>5.40</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp;
Imported</td>
<td>2.76</td>
<td>2.66</td>
<td>5.0%</td>
<td>2.51</td>
<td>2.45</td>
<td>2.25</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Light Trucks</td>
<td>6.32</td>
<td>7.00</td>
<td>-24.1%</td>
<td>8.60</td>
<td>8.78</td>
<td>9.32</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp;
Domestic</td>
<td>5.11</td>
<td>5.66</td>
<td>-26.4%</td>
<td>7.12</td>
<td>7.42</td>
<td>8.12</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp;
Imported</td>
<td>1.21</td>
<td>1.34</td>
<td>-13.2%</td>
<td>1.48</td>
<td>1.37</td>
<td>1.20</td>
</tr>
</tbody>
</table>
</body></html>

U.S. sales of light vehicles in May fell another 1.1% m/m to a 14.30M unit annual selling rate, according to the Autodata Corporation. It was the fourth m/m decline this year and so far in 2008 vehicle sales have fallen 11.7%. The [...]

U.S. Light Vehicle Sales Down in May; Truck Sales Lowest Since 1996

U.S. Light Vehicle Sales Down inMay; Truck Sales Lowest Since 1996

Louise Curley

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080603g.jpg" align="left" border="0" height="265" width="353">
Revised figures for growth in Gross Domestic Product in the
Euro Area in the first quarter of this year, published today, were
better than the flash estimates reported earlier--an increase of 0.8%
instead of 0.7%. Growth in Germany was 1.5%, in part the result of
unusually high activity in the construction field due to mild winter
weather. The quarterly rates of growth in Germany, France, Italy and
the entire Euro Area are shown in the first chart. Germany's
performance is a clear stand out.
The performance of the area and of Germany in particular was
in stark contrast to that of the United States, where real GDP
increased at an annual rate of 0.22% in the first quarter of 2008. At
annual rates, the Euro Area grew 3.2% and Germany grew 6.3%.
Most forecasters expect growth in the Euro Area and in Germany
to slow in the remaining quarters of 2008, but some have begun to raise
their forecasts for the whole year as a result of the strong first
quarter. The IMF has recently raised its 2008 forecast for the Euro
Area from 1.4 % to 1.75%

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol">REAL
GDP (Billions of Chained 2000Euros)&nbsp;</th>
<th scope="col">Q1 08</th>
<th scope="col">Q4&nbsp; 07&nbsp;</th>
<th scope="col">Q1 07&nbsp;</th>
<th scope="col">Q/Q %&nbsp;&nbsp;</th>
<th scope="col">Y/Y % &nbsp;</th>
<th scope="col">2007%</th>
<th scope="col">2006%</th>
<th scope="col">2005%</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Euro Area</td>
<td>1946.9</td>
<td>1931.5</td>
<td>1905.8</td>
<td>0.80</td>
<td>2.16</td>
<td>2.65</td>
<td>2.92</td>
<td>1.75</td>
</tr>
<tr>
<td class="firstcol">Germany</td>
<td>572.1</td>
<td>563.5</td>
<td>557.4</td>
<td>1.53</td>
<td>2.64</td>
<td>2.62</td>
<td>3.08</td>
<td>0.97</td>
</tr>
<tr class="odd">
<td class="firstcol">France</td>
<td>414.1</td>
<td>411.5</td>
<td>405.0</td>
<td>0.64</td>
<td>2.25</td>
<td>2.11</td>
<td>2.36</td>
<td>1.92</td>
</tr>
<tr>
<td class="firstcol">Italy</td>
<td>321.8</td>
<td>320.5</td>
<td>321.2</td>
<td>0.41</td>
<td>0.18</td>
<td>1.36</td>
<td>1.90</td>
<td>0.68</td>
</tr>
</tbody>
</table>
</body></html>

Revised figures for growth in Gross Domestic Product in the Euro Area in the first quarter of this year, published today, were better than the flash estimates reported earlier--an increase of 0.8% instead of 0.7%. Growth in Germany [...]

Strong First Quarter Growth In The Euro Area, Particularly In Germany

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

US production rebounded in Q2, but demand continued to slow

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

Negative US inflation surprises leading G10 down

Deflation continues in China

Incoming data surprising on downside in US; positive surprises elsewhere

FOMC expects more inflation and less growth than in March

With escalation of Israel/Iran conflict, geopolitical risk has recently surged while US trade policy uncertainty has ebbed

Renewed supply chain pressures point to a rebound in global inflation ahead

Apart from Japan, Blue Chip forecasters look for further significant monetary policy easing

Apart from the US, productivity is moribund

Financial market concerns ebb even though policy uncertainty continues to soar

US tariff revenues nearly doubled in April

Even with expected tariff-induced increases in inflation, BCFF forecasters look for a more aggressive round of monetary easing

USD/EUR exchange rate uncoupling from interest rate differential

Widespread downgrading of 2025 GDP outlook

Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

Wage growth slowing in the US and Euro area; elevated and sticky in the UK

Stagflation-lite: Blue Chip forecasts below-trend growth and elevated inflation

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

US and Japan ended 2024 on solid ground in contrast to Europe

US economy expected to outperform other major economies in 2025

Only modest evidence of AI-related surge in US productivity growth

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Andrew Cates

**Capacity pressures in the US and Europe**
Output gaps in advanced economies (the US and euro area) are estimated to have narrowed sharply in recent months and could be on the verge of turning negative. This reflects a prior period of weaker growth and a growing degree of slack in the economy—conditions that typically translate into softer inflation and heightened pressure on central banks to ease policy. Labour markets are certainly showing greater signs of weakness in the US. A big caveat to this is that estimating output gaps is inherently difficult, especially after recent supply shocks and structural shifts in labour markets. Still, most real-time indicators now suggest aggregate demand is slipping below potential. And that, alongside weakening job data, is strengthening the case for further policy easing and hints at continued disinflation in the months ahead.

250807Z1.jpg

**The US housing market**
US housing has long been a bellwether for broader economic conditions, largely because of its deep ties to credit creation, household balance sheets, and interest rates. That’s why the latest data showing a renewed slump in builder sentiment and a more sustained drop in house price momentum has been of note. With mortgage rates still elevated and lending standards – as we discuss below – still tight, the housing sector looks increasingly fragile—raising fresh concerns about the durability of US growth.

250807Z2.jpg

**US bank lending standards**
This week’s latest Fed Senior Loan Officer Survey confirms that US credit conditions remain restrictive. Banks are still tightening lending standards for companies and consumers while loan demand continues to weaken—a pattern historically associated with periods of economic downturn. Although the net percentage of banks tightening standards has eased somewhat from 2023 peaks (see chart below), it remains elevated, and credit demand is now falling across most categories, from small business to commercial real estate. This tightening in credit supply and fall in demand suggests that monetary policy is still transmitting forcefully through the banking sector.

250807Z3.jpg

**Global growth momentum** 
Until recently, global economic surprises and sentiment surveys were broadly supportive, suggesting the global cycle still had momentum. But this week’s Sentix survey revealed a renewed drop in expectations for August. That decline, coupled with a fading Citi Economic Surprise Index, hints that global momentum may be weakening again. As forward-looking indicators start to roll over, investors and policymakers alike should be alert to a potential shift toward a more pronounced downturn.

250807Z4.jpg

**Global shipping costs and supply chain pressures** 
One additional area of heightened investor concern of late has been the potential inflationary fallout from recent US tariff measures. But so far, there is little evidence – at the global level - to suggest that global supply chains or freight costs have been meaningfully disrupted. The Baltic Exchange Dry Index and the NY Fed’s Global Supply Chain Pressure Index both remain relatively subdued, indicating that logistics bottlenecks have not re-emerged.

250807Z5.jpg

**China’s excess capacity**
China’s economic influence remains pivotal in shaping global goods inflation. The latest data show that producer prices in China continue to contract, extending a prolonged period of deflation that reflects both domestic weakness and excess industrial capacity. This ongoing slack not only suppresses China’s export prices but also exerts downward pressure on global manufacturing input costs. At a time when central banks (most notably in the US) are weighing the risk of reacceleration in inflation, China’s persistent deflation in upstream prices acts as a powerful counterforce—reinforcing the view that goods inflation risks could remain subdued for now.

250807Z6.jpg

Last week’s weaker-than-expected US labour market report—marked by sluggish payroll growth, rising unemployment, and downward revisions to prior months—sparked a notable shift in financial markets. Bond yields fell sharply as investors repriced the outlook for Fed easing, with rate cut expectations brought forward. This recalibration arguably reflects growing awareness of mounting downside risks across the US and broader global economy. Several indicators reinforce this view. Output gaps in many major economies are narrowing or turning negative, signalling that demand is falling short of potential (chart 1). The US housing market looks fragile, amidst weak builder sentiment and falling prices (chart 2). US bank lending standards are still restrictive, with implications for credit availability, household and business investment, and overall economic momentum (chart 3). Some (though not all) global sentiment surveys have softened, and positive growth surprises are now fading. Meanwhile, and despite earlier fears, US tariffs have not triggered renewed supply chain stress or inflationary pressures (chart 5). Add to that the ongoing deflation in China’s producer prices, and the macro narrative could be tilting more decisively toward slower growth and diminishing inflation risks—leaving policymakers with more space to continue easing monetary policy (chart 6).

Charts of the Week: Downside Risks

250806A1.jpg

250806B1.jpg

Mortgage applications increased 3.1% (17.8% y/y) in the week ending August 1, after declining 3.8% in the prior week, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. Applications for loan refinancing jumped 5.2% (17.5% y/y) last week, following three straight weeks of decline. Applications for loans to purchase a home rose 1.5% (18.0% y/y) last week, following a 5.8% decline in the week of July 25.

The effective interest rate on a 30-year fixed-rate loan slipped to 6.94% in the week ending August 1, from 7.00% in the prior week. It was the lowest rate since the first week of April. The rate on 15-year fixed-rate mortgages declined to 6.19% in the latest week from 6.28% in the week of July 25. The rate on 30-year Jumbo loans dropped to 6.82% last week from 6.89% one week earlier. The rate on a 5-year ARM dropped to 6.25% in the week of August 1 after rising to 6.40% in the prior week. It was above a low of 5.84% in the week of September 13, 2024.

The share of applications for refinancing an existing loan rose to 41.5% of total applications in the week ending August 1, from 40.7% in the prior week. The adjustable-rate mortgage (ARM) share of activity rose to 8.50% in the latest week from 8.30% in the week of July 25.

The average size of a mortgage loan rose 1.9% (0.6% y/y) to $381,400 in the week of August 1, following a 0.7% rise in the prior week. The average size of a purchase loan rose 0.7% (1.3% y/y) to $432,300 in the latest week after gaining 0.6% in the week ending July 27. The average size of a loan to refinance a mortgage rose 5.2% (-0.8% y/y) to $309,800 last week, after rising 2.3% in the prior week.

The Mortgage Bankers Association Survey covers 75% of all U.S. retail residential mortgage applications and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts. The base period and value for all indexes is March 16, 1990=100. The figures for weekly mortgage applications and interest rates are available in Haver’s **SURVEYS** database.

- Loan refinancing jumps as purchase applications edge higher.
- Effective fixed-interest rate eases on 30-year loans. 
- Average loan size increases again.

U.S. Mortgage Applications Rise Last Week as Interest Rates Slip

250806E.jpg

German orders expressed in real terms fell by 1% in June after falling by 0.8% in May. Foreign orders fell by 3% month-to-month after rising 3.8% in May. Domestic orders came back to life rising by 2.2% in June but only after a sharp 7.5% drop in May; that drop had been preceded by a 2.8% increase in April. The gyration and trend performance of orders is still choppy and, for the most part, weak.

**Order trends**
Sequential growth rates show that overall orders for Germany (still expressed in real terms) rose by 0.6% over 12 months; however, they fall at 4.7% annual rate over six months and fall at a 0.5% annual rate over three months. Foreign orders rise by 7.4% over 12 months; over six months the gain is at a 13.7% annual rate, and over three months that pace is reduced to a 7.3% annual rate. German domestic orders fall by 8.6% over 12 months, then decline at an extremely rapid 26.1% annual rate over six months, and continue to decline at 11.1% annual rate over three months. For the time being, orders have been propped up by strength in the international market while domestic orders continue to languish and to contract.

**Real sales**
Sector sales, expressed in real terms, rose by 1% and those across all the components after seeing widespread contractions in May that had followed an uneven performance in April. Real sales for manufacturing fall by 1.5% over 12 months, fall at a 1.9% annual rate over six months, and fall at an annual rate of 9.2% over three months. Real sales trends are not reassuring.

**European Surveys on Industry**
Survey results for the largest economies in the European Monetary Union show slippages in June compared to May as three of the four large economies weaken (with Italy being the exception). Over three months France logged a weaker reading compared to six-months, Germany improved, Italy's performance is unchanged; Spain reports a result that's better by a single tick on the survey index comparing 3-months to 6-months. Comparing the 12-month to averages to 3-month averages for the four large European economies, shows deterioration that's across the board with the slight exception of Italy.

**Quarter-to-date (completed Q2)**
The quarter-to-date (QTD) performance in Germany for orders are strong, rising at a 13.1% annual rate. Sector sales show deteriorated real sector sales across most sectors on QTD basis; manufacturing sales fall at a 2.9% annual rate.

**Longer term evaluations** 
The two right hand columns evaluate the growth and level performance of these various metrics on real sector sales and on a level basis and well as on annual growth rates. Total orders and foreign orders ranked on levels are well above their 50% mark, which puts them above their median on data back to 1994. Domestic sales levels have only a 21.8 percentile standing, extremely weak. Rankings on growth rates show total orders at a 45.9 percentile ranking, below the median growth rate (which occurs at a ranking of 50%). However, foreign orders’ growth ranks in the 70th percentile, quite firm, while the domestic growth rate queue ranking resides in the lower 10.7 percentile of its range. Growth rates for real sector sales are mostly below their 50-percentile mark except for consumer nondurables and consumer goods sales overall (which, of course, are boosted by the sales of consumer nondurables). The industrial confidence indicators for European economies that are from diffusion surveys are evaluated relative to historic levels only. All of them score weak results. The best queue standing is Spain with a 37.5 percentile standing, followed by Italy at a 24.8 percentile standing. France has a 14.6 percentile standing, while Germany has a 7.4 percentile standing. These range from weak, and below median, to very weak.

250806.jpg

**Summing up**
On balance, German performance in June is poor. The trends are poor, and far from reassuring. Sector sales performance is poor. Performance across Europe continues to be poor as captured by survey results- that performance continues, for the most part, to deteriorate. However, German quarter-to-date growth rates for orders are strong in Q2 compared to Q1, but that is only on the back of strength in foreign orders. German domestic orders are still behaving badly. All-in-all, it's a disappointing report on the manufacturing sector for Germany and for what we survey of Europe.

Germany

German Orders Fall Again, Unexpectedly

250806N4.jpg

250806O4.jpg

The U.S. ISM Services PMI declined to 50.1 during July, after rising to 50.8 in June from 49.9 in May, according to the Institute for Supply Management. The index hit a recent high of 55.8 in October of last year, and remains below the all-time high of 67.5 in November 2021. The Action Economics Forecast Survey expected a reading of 51.5 for July.

The composite index combines the services index and the manufacturing index released last Friday. This index fell to 49.8 in July from 50.6 in June. The latest figure is the lowest since June 2024, down from the November 2024 high of 54.7.

Amongst the services component series, the business activity index fell to 52.6 last month from 54.2 in June. Twenty-four percent (NSA) of respondents reported improved activity while 14.4% reported a decline. The new orders index fell to 50.3 in July from 51.3 in June. Twenty percent (NSA) of respondents reported improved orders while a higher 18.7% reported a decline. The employment series weakened to 46.4, its lowest level in four months, from 47.2 in June. An increased 12.3% (NSA) of respondents reported increased employment while a higher 18.1% reported a decline. Working higher, the supplier delivery series edged up to 51.0 in July after falling to 50.3 in June, but remained below a high of 56.4 in October of last year. A reduced 4.3% of respondents (NSA) reported faster delivery speeds while a higher 6.3% reported a slowing.

On the inflation front, the prices index surged to 69.9 in July after easing to 67.5 in June. It was the highest level since October 2022. An increased 42.1% (NSA) of respondents reported higher prices while an increased 4.0% reported lower prices. The index was increased from its March 2024 low 53.5 and stood at its highest level since October 2022.

Additionally, the new export orders index fell sharply to 47.9 (NSA) in October following a rise to 51.1 in June. Just 10.4% of survey respondents reported higher exports while an increased 14.7% reported a decline. The imports index fell sharply to 45.9 last month from 51.7 in June. A greatly lessened 4.1% of respondents reported higher imports while a higher 12.4% reported a decline. The inventory change index weakened to 51.8. The order backlog index rose to 44.3 in July after falling to 42.4 in June. A higher 8.3% of respondents reported higher backlogs while a fewer 19.7% reported a decline. These series are not seasonally adjusted and not included in the ISM Services PMI total.

The ISM Services PMI is a composite index consisting of four equally weighted diffusion indexes: Business Activity, New Orders, Employment, and Supplier Deliveries. A reading above 50 indicates expansion in the services sector, while below 50 suggests contraction. Supplier Deliveries is the only ISM index that is inversed; a reading above 50 indicates slower deliveries.

The ISM figures are available in Haver's **USECON** database, with additional detail in the **SURVEYS** database. The expectations figure from Action Economics is in the **AS1REPNA** database.

250806P4.jpg

250806Q4.jpg

- Total index trending lower for nine months.
- Business activity, new orders & employment weaken.
- Prices Index strengthens to highest level since 2022.

U.S. ISM Services PMI Declines in July; Price Index Increases

Winnie Tapasanun

250805J23.jpg

250805K23.jpg

The U.S. trade deficit in goods and services (BOP basis) narrowed to $60.18 billion in June after widening to $71.66 billion in May ($71.52 billion originally), according to the U.S. Census Bureau. This was the second month in three in which the deficit had narrowed. The June deficit was the smallest since September 2023 and much smaller than the $73.89 billion in June 2024. A deficit of $61.6 billion had been expected in the Action Economics Forecast Survey. Exports declined 0.5% m/m (+3.3% y/y) in June following a 4.1% drop in May (-4.0% previously) and four successive m/m increases. Imports fell 3.7% (-1.4% y/y) after an unrevised 0.1% downtick in May, registering the third consecutive m/m fall and the fourth in five months.

The real (inflation-adjusted) goods trade deficit (customs value; chained 2017 dollars) narrowed to $84.61 billion in June after widening to $93.32 billion in May; it was smaller than the $92.82 billion in June 2024. The $87.43 billion average monthly real trade deficit in Q2'25 was the smallest since Q4'23 and significantly smaller than the record $143.28 billion in Q1'25. A trade balance (net exports) added 4.99%-points to Q2'25 real GDP growth after subtracting 4.61%-points in Q1'25.

The deficit in goods trade (BOP basis) narrowed to $85.88 billion in June, the smallest since September 2023, after widening to $97.30 billion in May; it was much smaller than the $99.56 billion in June 2024. Goods exports fell 0.7% (+3.3% y/y) in June following a 5.9% drop in May and four straight m/m rises. Imports of goods decreased 4.5% (-2.9% y/y), down for the fourth month in five, after a 0.1% May easing.

The customs value goods trade deficit fell to $84.85 billion in June, the smallest since September 2023, after widening to $96.21 billion in May; it was much smaller than the $98.81 billion in June 2024. The latest figure was slightly smaller than an $85.99 billion deficit in the advance report released on July 29. Custom value exports fell 0.7% (+3.5% y/y) in June following a 5.6% drop in May and four consecutive m/m gains. This reflected m/m falls of 7.4% (+0.7% y/y) in industrial supplies & materials and 2.6% (+22.8% y/y) in other goods. To the upside, exports for the following end-use categories rose m/m in June: nonfood consumer goods excluding autos (4.6%; 4.3% y/y), foods, feeds & beverages (4.4%; 1.2% y/y), capital goods excluding autos (3.4%; 9.7% y/y), and automotive vehicles, parts & engines (1.6%; -15.8% y/y).

Customs value imports slid 4.6% (-2.9% y/y) in June, the third straight m/m slide and the fourth in five months, after a 0.1% downtick in May. This reflected m/m drops of 12.7% (-13.3% y/y) in nonfood consumer goods excluding autos, 5.2% (-12.4% y/y) in industrial supplies & materials, 4.9% (+7.8% y/y) in other goods, 3.6% (-12.2% y/y) in automotive vehicles, parts & engines, and 1.5% (+3.8% y/y) in foods, feeds & beverages. In contrast, imports of capital goods excluding autos, the only end-use category with a monthly increase in June, rose 0.7% (14.0% y/y), the seventh m/m rise in eight months, on top of a 0.3% May rebound. Meanwhile, petroleum imports fell 3.8% (-24.7% y/y) in June, the fourth m/m fall in five months, reversing a 1.5% rise in May. Nonpetroleum imports slid 4.6% (-1.1% y/y), the third straight m/m slide, after a 0.2% May decline.

The services trade surplus rose to $25.70 billion in June after narrowing to $25.64 billion in May; it was in line with $25.67 billion in June 2024. Services exports fell 0.2% (+3.3% y/y) in June, the fifth m/m fall in six months, on top of a 0.6% decline in May. This reflected m/m drops of 4.8% (-11.3% y/y) in government goods & services, 2.1% (+30.8% y/y) in maintenance & repair services, and 1.1% (-0.02% y/y) in travel services, while exports for construction services (0.9%; -5.7% y/y), insurance services (0.7%; 18.9% y/y) and charges for the use of intellectual property (0.5%; 7.0% y/y) increased m/m in June. Services imports fell 0.3% (+4.5% y/y) after a 0.3% May fall and two successive m/m increases. This reflected m/m drops of 1.9% (+48.0% y/y) in maintenance & repair services, 1.5% (+2.9% y/y) in travel services, and 1.3% (-1.3% y/y) in transport services, while imports for construction services (2.0%; 82.3% y/y), charges for the use of intellectual property (0.8%; 1.3% y/y) and financial services (0.5%; 4.9% y/y) rose m/m in June.

The U.S. goods trade deficit with China narrowed to a seasonally adjusted $9.38 billion in June, the smallest on record, after falling to $13.97 billion in May. Exports surged 45.4% (-16.6% y/y) following a 19.9% May slump, while imports fell 6.9% (-45.6% y/y) on top of a 26.3% May plunge. The goods trade deficit with the European Union narrowed markedly to $9.52 billion in June, the smallest since June 2013, after widening to $22.54 billion in May, with exports up 6.8% (16.6% y/y) and imports down 19.2% (-8.2% y/y). The trade shortfall with Japan narrowed marginally to $5.72 billion in June, the smallest since February, from $5.77 billion in the previous month, reflecting declines of 3.4% (-7.5% y/y) in exports and 2.3% (-0.4% y/y) in imports.

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

250805L23.jpg

250805M23.jpg

- $60.2 bil. trade deficit, reflecting $85.9 bil. goods deficit & $25.7 bil. services surplus.
- Exports -0.5% m/m, down for the second consecutive month.
- Imports -3.7% m/m, down for the third straight month.
- Real goods trade deficit narrows to $84.6 bil. after May’s widening.
- Goods trade deficits w/ China at a record low, w/ EU at a June ’13 low, and w/ Japan at a 4-month low.

Economy in Brief: June 2008

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