Carol Stone, CBE

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060703e.jpg" width="353">
We&#39;ve haven&#39;t commented on the Bank of Japan&#39;s TANKAN report since December, so even though we just talked about Japan&#39;s employment data on Friday, this information bears examination promptly as well. Large manufacturing firms, the widely followed &quot;headline&quot; segment, saw business conditions in June at +21%, up 1 point from March&#39;s 20% reading (a %-balance measure: % favorable less % unfavorable). This result was just below the group&#39;s forecast of 22%. They anticipate another 21% in September.
All size firms in all industries also firmed by 1 point from March, from +5% to +6% in June. This performance met their expectations and they look to repeat the +6% in September. All large firms have been holding at 20% with a prospect for 21% in September. Medium-sized companies moved up from +7% in March to +8% in June and hope for +9% in the next period. Small firms continue to struggle, however, with a -2% reading in this survey, a little better than March&#39;s -3%, although they look to some deterioration over the summer to -4%.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060703f.jpg" width="353">
The large manufacturing companies report that their sales growth this fiscal year continues to come mainly from export customers, with a projection of a 5.2% gain; fiscal 2005 ended with a substantial 11.7% rise, 3.1% more than their last estimate. This year&#39;s estimate represents a 6.0 point upward revision of the previous export sales forecast. Domestic sales are not doing as well. The FY2005 outcome was 5.1% growth, even with the previous estimate, but the expectation for this year is just 1.7%, a downward revision of 0.9-point from the last forecast. A breakout by customer is not shown for other firm sizes or industries, but they all expect further gains in total sales this fiscal year and have raised their forecasts after 2005 came in better than forecast.
News reports highlighted forecasts for capital investment this year. Last year&#39;s actual spending amounts were in fact somewhat lower than forecast, albeit at still good rates; for example, large manufacturing firms expanded capital spending by 13.9%, but this was 2.6% lower than expected. However, rather than revising down this year&#39;s forecasts after that modest shortfall, these firms raised their 2006 plans by 8.2 points to 16.4%. This high number prompted a number of analysts to assert that it would add to the evidence favoring an increase in the BoJ&#39;s target overnight call rate at its meeting next week (July 13 &amp; 14). The employment data we reported on Friday and another positive CPI for May (+0.6% year/year) also add to that argument. The call rate, which has been virtually 0% since September 2001, edged upward to 0.02% (2 basis points) last Friday, end-June.
Finally, as we call to your attention frequently, the TANKAN survey was dramatically reorganized two years ago, most significantly changing the very definition of &quot;size&quot; from employee-based to capital-based. Thus, for example, firms counted as &quot;small&quot; before because they employed fewer than 300 people might now be &quot;large&quot; because they have substantial capital; this is particularly true for high-tech companies. Thus, we continue to separate data for the two periods in the survey in our JAPAN database. However, in the Haver database &quot;G10&quot;, where we include some customized series that we calculate, we show a long history for &quot;all firms&quot;, which would not have been affected by the modified size criterion. That series, seen in the second graph, was +6 this quarter, the highest reading since December 1991, 14-1/2 years ago.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Business Conditions:&nbsp; % Favorable minus % Unfavorable</th>
June 2006
March 2006
December 2005
<th scope="col">Sept 2005</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Forecast for Sept</td>
<td>Actual</td>
<td>Forecast for June</td>
<td>Actual</td>
<td>Forecast for Mar</td>
<td>Actual</td>
<td>Forecast for Dec</td>
</tr>
<tr>
<td class="firstcol">All Firms</td>
<td>6</td>
<td>6</td>
<td>6</td>
<td>5</td>
<td>4</td>
<td>5</td>
<td>2</td>
</tr>
<tr class="odd">
<td class="firstcol">Large Firms*</td>
<td>21</td>
<td>20</td>
<td>20</td>
<td>20</td>
<td>18</td>
<td>19</td>
<td>17</td>
</tr>
<tr>
<td class="firstcol">Manufacturing (&quot;Headline Series&quot;)</td>
<td>22</td>
<td>21</td>
<td>22</td>
<td>20</td>
<td>19</td>
<td>21</td>
<td>18</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Nonmanufacturing</td>
<td>21</td>
<td>20</td>
<td>19</td>
<td>18</td>
<td>17</td>
<td>17</td>
<td>16</td>
</tr>
<tr>
<td class="firstcol">Medium-Sized Firms**</td>
<td>9</td>
<td>8</td>
<td>8</td>
<td>7</td>
<td>5</td>
<td>5</td>
<td>3</td>
</tr>
<tr class="odd">
<td class="firstcol">Small Firms***</td>
<td>-4</td>
<td>-2</td>
<td>-2</td>
<td>-3</td>
<td>-4</td>
<td>-2</td>
<td>-5</td>
</tr>
</tbody>
</table>
</body>
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We've haven't commented on the Bank of Japan's TANKAN report since December, so even though we just talked about Japan's employment data on Friday, this information bears examination promptly as well. Large manufacturing firms, the [...]

Japan's "TANKAN" Steady at Higher Readings; High Investment Forecast Adds to Expectations of Hike in BoJ Interest Rate

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060703c.jpg" width="353">
The value of construction put in place fell another 0.4% in May following a little revised 0.2% slip during April. Consensus expectations had been for a 0.2% gain and revisions to the data extended back to January 2003.
Lower residential building activity led the decline during May with a 0.8% drop. New single family building fell a notable 1.7% (+3.7% y/y) after a similar drop the month prior. Spending on multi-family projects slipped a more moderate 0.5% (+23.1% y/y) while the value of spending on improvements jumped 1.8% (-6.8% y/y).
During the last twenty years there has been an 84% correlation between the q/q change in the value of residential building and its contribution to growth in real GDP. During April and May the value of residential building activity was down 1.3% from the 1Q average.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060703d.jpg" width="353">
Nonresidential building slipped 0.3% following downwardly revised during prior months but the 2Q level so far is up 3.1% from the prior quarter. Office construction added 0.2% to the 2.5% surge during April (8.8% y/y) and commercial building slipped 0.8% (+5.4% y/y). Multi-retail building jumped another 5.1% (36.9% y/y) as building activity at shopping malls (39.3% y/y) and shopping centers (57.7% y/y) was firm.
Public construction spending increased 0.7% though construction activity on highways &amp; streets, nearly one third of the value of public construction spending, rose just 0.1% (16.3% y/y) after several months of strong gain.
These more detailed categories represent the Census Bureau&#146;s reclassification of construction activity into end-use groups. Finer detail is available for many of the categories; for instance, commercial construction is shown for Automotive sales and parking facilities, drugstores, building supply stores, and both commercial warehouses and mini-storage facilities. Note that start dates vary for some seasonally adjusted line items in 2000 and 2002 and that constant-dollar data are no longer computed.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E9/@E907/@E90701/@E90701.HTM">Construction Put-in-place</a></th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>-0.4%</td>
<td>-0.2%</td>
<td>6.0%</td>
<td>10.7%</td>
<td>11.5%</td>
<td>5.6%</td>
</tr>
<tr>
<td class="firstcol">Private</td>
<td>-0.6%</td>
<td>-0.3%</td>
<td>5.3%</td>
<td>12.0%</td>
<td>14.3%</td>
<td>6.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Residential</td>
<td>-0.8%</td>
<td>-1.2%</td>
<td>2.4%</td>
<td>13.9%</td>
<td>18.6%</td>
<td>12.8%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Nonresidential</td>
<td>-0.3%</td>
<td>1.6%</td>
<td>12.7%</td>
<td>7.4%</td>
<td>5.3%</td>
<td>-4.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">Public</td>
<td>0.7%</td>
<td>0.5%</td>
<td>8.7%</td>
<td>6.2%</td>
<td>2.8%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>
</body>
</html>

The value of construction put in place fell another 0.4% in May following a little revised 0.2% slip during April. Consensus expectations had been for a 0.2% gain and revisions to the data extended back to January 2003. Lower [...]

U.S. Construction Spending Off Again

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060703a.jpg" width="353">
The June Composite Index of factory sector activity reported by the Institute of Supply Management (ISM) slipped to 53.8 from 54.4 the month prior. Consensus expectations had been for a slight increase to 55.0.
During the last twenty years there has been a 68% correlation between the level of the Composite Index and the three month growth in factory sector industrial production.
A 4.2 point drop in the employment index to 48.7 dropped the reading below the break even level of 50 for the first time in over a year. During the last twenty years there has been a 66% correlation between the level of the ISM employment Index and the three month growth in factory sector employment.
The production index also fell for the second consecutive month to its lowest (55.1) since early 2003 and the inventory index (46.9) fell for the fourth month this year.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060703b.jpg" width="353">
New orders (57.9) improved for the first month in the last four and recovered most of the prior two months&#39; decline. New export orders slipped modestly m/m and at 55.4 were down from the highs of the prior nine months. During the last nineteen years there has been a 68% correlation between the level of the ISM export index and the y/y change in real exports of goods.
An index of order backlogs rose moderately to 54.0 following two months of sharp decline while the import index was unchanged at a still strong 56.5.
The price index slipped modestly following several m/m jumps earlier this year. During the last twenty years there has been a 91% correlation between the price index and the three month change in the PPI for intermediate goods less food &amp; energy.
The Puzzling Convergence in Foreign Exchange Volatility from the Federal Reserve Bank of St. Louis is available <a href="http://research.stlouisfed.org/publications/aiet/20060701/cover.pdf">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF02/@EF02.HTM">ISM Manufacturing Survey</a></th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">June &#39;05</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Composite Index</td>
<td>53.8</td>
<td>54.4</td>
<td>54.0</td>
<td>55.5</td>
<td>60.5</td>
<td>53.3</td>
</tr>
<tr>
<td class="firstcol">&nbsp; New Orders Index</td>
<td>57.9</td>
<td>53.7</td>
<td>57.2</td>
<td>57.4</td>
<td>63.5</td>
<td>57.9</td>
</tr>
<tr class="odd">
<td class="firstcol">Prices Paid Index (NSA)</td>
<td>76.5</td>
<td>77.0</td>
<td>50.5</td>
<td>66.4</td>
<td>79.8</td>
<td>59.6</td>
</tr>
</tbody>
</table>
</body>
</html>

The June Composite Index of factory sector activity reported by the Institute of Supply Management (ISM) slipped to 53.8 from 54.4 the month prior. Consensus expectations had been for a slight increase to 55.0. During the last twenty [...]

ISM Index Disappointing Again in June, but Orders Up

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060703a.jpg" width="353">
The June Composite Index of factory sector activity reported by the Institute of Supply Management (ISM) slipped to 53.8 from 54.4 the month prior. Consensus expectations had been for a slight increase to 55.0.
During the last twenty years there has been a 68% correlation between the level of the Composite Index and the three month growth in factory sector industrial production.
A 4.2 point drop in the employment index to 48.7 dropped the reading below the break even level of 50 for the first time in over a year. During the last twenty years there has been a 66% correlation between the level of the ISM employment Index and the three month growth in factory sector employment.
The production index also fell for the second consecutive month to its lowest (55.1) since early 2003 and the inventory index (46.9) fell for the fourth month this year.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060703b.jpg" width="353">
New orders (57.9) improved for the first month in the last four and recovered most of the prior two months&#39; decline. New export orders slipped modestly m/m and at 55.4 were down from the highs of the prior nine months. During the last nineteen years there has been a 68% correlation between the level of the ISM export index and the y/y change in real exports of goods.
An index of order backlogs rose moderately to 54.0 following two months of sharp decline while the import index was unchanged at a still strong 56.5.
The price index slipped modestly following several m/m jumps earlier this year. During the last twenty years there has been a 91% correlation between the price index and the three month change in the PPI for intermediate goods less food &amp; energy.
The Puzzling Convergence in Foreign Exchange Volatility from the Federal Reserve Bank of St. Louis is available <a href="http://research.stlouisfed.org/publications/aiet/20060701/cover.pdf">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF02/@EF02.HTM">ISM Manufacturing Survey</a></th>
<th scope="col">June</th>
<th scope="col">May</th>
<th scope="col">June &#39;05</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Composite Index</td>
<td>53.8</td>
<td>54.4</td>
<td>54.0</td>
<td>55.5</td>
<td>60.5</td>
<td>53.3</td>
</tr>
<tr>
<td class="firstcol">&nbsp; New Orders Index</td>
<td>57.9</td>
<td>53.7</td>
<td>57.2</td>
<td>57.4</td>
<td>63.5</td>
<td>57.9</td>
</tr>
<tr class="odd">
<td class="firstcol">Prices Paid Index (NSA)</td>
<td>76.5</td>
<td>77.0</td>
<td>50.5</td>
<td>66.4</td>
<td>79.8</td>
<td>59.6</td>
</tr>
</tbody>
</table>
U.S. Construction Spending Off Again 
by <a href="/comment/Moeller.html">Tom Moeller</a> July 3, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060703c.jpg" width="353">
The value of construction put in place fell another 0.4% in May following a little revised 0.2% slip during April. Consensus expectations had been for a 0.2% gain and revisions to the data extended back to January 2003.
Lower residential building activity led the decline during May with a 0.8% drop. New single family building fell a notable 1.7% (+3.7% y/y) after a similar drop the month prior. Spending on multi-family projects slipped a more moderate 0.5% (+23.1% y/y) while the value of spending on improvements jumped 1.8% (-6.8% y/y).
During the last twenty years there has been an 84% correlation between the q/q change in the value of residential building and its contribution to growth in real GDP. During April and May the value of residential building activity was down 1.3% from the 1Q average.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060703d.jpg" width="353">
Nonresidential building slipped 0.3% following downwardly revised during prior months but the 2Q level so far is up 3.1% from the prior quarter. Office construction added 0.2% to the 2.5% surge during April (8.8% y/y) and commercial building slipped 0.8% (+5.4% y/y). Multi-retail building jumped another 5.1% (36.9% y/y) as building activity at shopping malls (39.3% y/y) and shopping centers (57.7% y/y) was firm.
Public construction spending increased 0.7% though construction activity on highways &amp; streets, nearly one third of the value of public construction spending, rose just 0.1% (16.3% y/y) after several months of strong gain.
These more detailed categories represent the Census Bureau&#146;s reclassification of construction activity into end-use groups. Finer detail is available for many of the categories; for instance, commercial construction is shown for Automotive sales and parking facilities, drugstores, building supply stores, and both commercial warehouses and mini-storage facilities. Note that start dates vary for some seasonally adjusted line items in 2000 and 2002 and that constant-dollar data are no longer computed.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E9/@E907/@E90701/@E90701.HTM">Construction Put-in-place</a></th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>-0.4%</td>
<td>-0.2%</td>
<td>6.0%</td>
<td>10.7%</td>
<td>11.5%</td>
<td>5.6%</td>
</tr>
<tr>
<td class="firstcol">Private</td>
<td>-0.6%</td>
<td>-0.3%</td>
<td>5.3%</td>
<td>12.0%</td>
<td>14.3%</td>
<td>6.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Residential</td>
<td>-0.8%</td>
<td>-1.2%</td>
<td>2.4%</td>
<td>13.9%</td>
<td>18.6%</td>
<td>12.8%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Nonresidential</td>
<td>-0.3%</td>
<td>1.6%</td>
<td>12.7%</td>
<td>7.4%</td>
<td>5.3%</td>
<td>-4.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">Public</td>
<td>0.7%</td>
<td>0.5%</td>
<td>8.7%</td>
<td>6.2%</td>
<td>2.8%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>
Japan's "TANKAN" Steady at Higher Readings; High Investment Forecast Adds to Expectations of Hike in BoJ Interest Rate 
by <a href="/comment/Stone.html">Carol Stone</a> July 3, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060703e.jpg" width="353">
We&#39;ve haven&#39;t commented on the Bank of Japan&#39;s TANKAN report since December, so even though we just talked about Japan&#39;s employment data on Friday, this information bears examination promptly as well. Large manufacturing firms, the widely followed &quot;headline&quot; segment, saw business conditions in June at +21%, up 1 point from March&#39;s 20% reading (a %-balance measure: % favorable less % unfavorable). This result was just below the group&#39;s forecast of 22%. They anticipate another 21% in September.
All size firms in all industries also firmed by 1 point from March, from +5% to +6% in June. This performance met their expectations and they look to repeat the +6% in September. All large firms have been holding at 20% with a prospect for 21% in September. Medium-sized companies moved up from +7% in March to +8% in June and hope for +9% in the next period. Small firms continue to struggle, however, with a -2% reading in this survey, a little better than March&#39;s -3%, although they look to some deterioration over the summer to -4%.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060703f.jpg" width="353">
The large manufacturing companies report that their sales growth this fiscal year continues to come mainly from export customers, with a projection of a 5.2% gain; fiscal 2005 ended with a substantial 11.7% rise, 3.1% more than their last estimate. This year&#39;s estimate represents a 6.0 point upward revision of the previous export sales forecast. Domestic sales are not doing as well. The FY2005 outcome was 5.1% growth, even with the previous estimate, but the expectation for this year is just 1.7%, a downward revision of 0.9-point from the last forecast. A breakout by customer is not shown for other firm sizes or industries, but they all expect further gains in total sales this fiscal year and have raised their forecasts after 2005 came in better than forecast.
News reports highlighted forecasts for capital investment this year. Last year&#39;s actual spending amounts were in fact somewhat lower than forecast, albeit at still good rates; for example, large manufacturing firms expanded capital spending by 13.9%, but this was 2.6% lower than expected. However, rather than revising down this year&#39;s forecasts after that modest shortfall, these firms raised their 2006 plans by 8.2 points to 16.4%. This high number prompted a number of analysts to assert that it would add to the evidence favoring an increase in the BoJ&#39;s target overnight call rate at its meeting next week (July 13 &amp; 14). The employment data we reported on Friday and another positive CPI for May (+0.6% year/year) also add to that argument. The call rate, which has been virtually 0% since September 2001, edged upward to 0.02% (2 basis points) last Friday, end-June.
Finally, as we call to your attention frequently, the TANKAN survey was dramatically reorganized two years ago, most significantly changing the very definition of &quot;size&quot; from employee-based to capital-based. Thus, for example, firms counted as &quot;small&quot; before because they employed fewer than 300 people might now be &quot;large&quot; because they have substantial capital; this is particularly true for high-tech companies. Thus, we continue to separate data for the two periods in the survey in our JAPAN database. However, in the Haver database &quot;G10&quot;, where we include some customized series that we calculate, we show a long history for &quot;all firms&quot;, which would not have been affected by the modified size criterion. That series, seen in the second graph, was +6 this quarter, the highest reading since December 1991, 14-1/2 years ago.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Business Conditions:&nbsp; % Favorable minus % Unfavorable</th>
June 2006
March 2006
December 2005
<th scope="col">Sept 2005</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Forecast for Sept</td>
<td>Actual</td>
<td>Forecast for June</td>
<td>Actual</td>
<td>Forecast for Mar</td>
<td>Actual</td>
<td>Forecast for Dec</td>
</tr>
<tr>
<td class="firstcol">All Firms</td>
<td>6</td>
<td>6</td>
<td>6</td>
<td>5</td>
<td>4</td>
<td>5</td>
<td>2</td>
</tr>
<tr class="odd">
<td class="firstcol">Large Firms*</td>
<td>21</td>
<td>20</td>
<td>20</td>
<td>20</td>
<td>18</td>
<td>19</td>
<td>17</td>
</tr>
<tr>
<td class="firstcol">Manufacturing (&quot;Headline Series&quot;)</td>
<td>22</td>
<td>21</td>
<td>22</td>
<td>20</td>
<td>19</td>
<td>21</td>
<td>18</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Nonmanufacturing</td>
<td>21</td>
<td>20</td>
<td>19</td>
<td>18</td>
<td>17</td>
<td>17</td>
<td>16</td>
</tr>
<tr>
<td class="firstcol">Medium-Sized Firms**</td>
<td>9</td>
<td>8</td>
<td>8</td>
<td>7</td>
<td>5</td>
<td>5</td>
<td>3</td>
</tr>
<tr class="odd">
<td class="firstcol">Small Firms***</td>
<td>-4</td>
<td>-2</td>
<td>-2</td>
<td>-3</td>
<td>-4</td>
<td>-2</td>
<td>-5</td>
</tr>
</tbody>
</table>
</body>
</html>

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

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

Equity market exuberance outpacing macroeconomic data

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

US production rebounded in Q2, but demand continued to slow

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

Negative US inflation surprises leading G10 down

Deflation continues in China

Incoming data surprising on downside in US; positive surprises elsewhere

FOMC expects more inflation and less growth than in March

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

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Winnie Tapasanun

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The advance estimate of the U.S. international trade deficit in goods widened to a larger-than-expected $103.57 billion in July after narrowing to $84.85 billion in June, data from the U.S. Census Bureau showed. The July reading, the second widening in the goods trade deficit in three months, was slightly smaller than a $103.92 billion shortfall in July 2024. A deficit of $90.2 billion for July had been expected by the Action Economics Forecast Survey. The deficit reached a record $161.95 billion in March. In Q2'25, the goods trade deficit narrowed to $266.96 billion, the smallest since Q4'23, after ballooning to a record $465.035 billion in Q1'25; the monthly deficit averaged $88.99 billion in Q2'25, down from a record $155.01 billion in Q1'25.

Total goods exports dipped 0.1% m/m (+3.0% y/y), the third consecutive monthly decline, to $177.97 billion in July, the lowest level since January, after a 0.7% decrease to $178.08 billion in June. April registered a record high of $190.08 billion. Exports were up 9.6% from a June 2023 low but down 2.1% from a July 2022 high. The m/m decline in exports in July reflected exports m/m drops of 2.4% (+16.3% y/y) in other goods, 0.9% (+5.1% y/y) in nonfood consumer goods excluding autos, and 0.8% (-1.2% y/y) in industrial supplies & materials. To the upside, exports for the following end-use categories rose m/m in July: automotive vehicles & parts (2.2%; -4.0% y/y), capital goods excluding autos (0.7%; 7.0% y/y), and foods, feeds & beverages (0.5%; 1.4% y/y).

Total goods imports rebounded 7.1% m/m (1.7% y/y), the first monthly increase since March, to a four-month-high $281.54 billion in July following a 4.6% drop to $262.94 billion in June. March registered a record high of $344.59 billion. Imports were up 11.9% from a June 2023 low but down 2.6% from a March 2022 high. The m/m rebound in imports in July reflected m/m rises in most imports end-use categories. These included a 25.4% surge (the first m/m increase and the largest since January; 4.9% y/y) in industrial supplies & materials as well as rises of 11.5% (23.5% y/y) in other goods, 4.8% (14.7% y/y) in capital goods excluding autos, 2.4% (4.9% y/y) in foods, feeds & beverages, and 2.1% (-12.2% y/y) in nonfood consumer goods excluding autos. In contrast, imports of automotive vehicles & parts, the only end-use category with a monthly decline in July, fell 3.2% (-14.1% y/y), the third m/m fall in four months, on top of a 3.6% June decrease.

The advance international trade data can be found in Haver's **USECON** database. The expectation figure is from the Action Economics Forecast Survey, which is in **AS1REPNA**.

- Deficit: $103.57 bil. in July, jumping 22.1% from June’s $84.85 bil.
- Exports -0.1%, down for the third straight month, led by a 2.4% decline in exports of other goods.
- Imports +7.1%, up for the first time since March, led by a 25.4% surge in imports of industrial supplies & materials.

U.S. Goods Trade Deficit Balloons in July; Largest Since March’s Record High

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Real GDP grew 3.3% (SAAR) during the second quarter of 2025, revised from a 3.0% gain reported initially. The increase followed an unrevised 0.5% decline in Q1. A 3.1% rise had been expected in the Action Economics Forecast Survey. Growth during the last four quarters of 2.1% compared to 2.0% y/y in Q1, and remained below its most recent high of 3.2% in Q4 2023.

After-tax corporate profits without IVA & CCA adjustment increased 1.4% (7.0% y/y) last quarter after easing 0.8% in Q1. Before-tax earnings with IVA & CCA rose 1.7% (4.3% y/y) after falling 2.3% in Q1. Financial sector earnings rose 1.4% (15.3% y/y) after rising 2.3% in Q1. Nonfinancial corporate profits rose 2.2% (2.5% y/y) after falling 2.5% in Q1. Earnings from abroad eased 0.7% (-0.4% y/y) following a 7.3% Q1 decline.

Foreign trade balance improvement added 4.95 percentage points to growth last quarter after subtracting 4.61 percentage points in Q1. Imports fell 29.8% (+1.3% y/y) after surging 38.0% in Q1. Exports declined 1.3% (+2.0% y/y) after improving 0.4% in Q1. Inventories subtracted 3.29 percentage points from growth after adding 2.59 percentage point to Q1 growth.

Real final sales to domestic purchasers grew 1.6% (2.4% y/y), revised from 1.1%, in Q2 after rising 1.5% in Q1. Personal consumption expenditures rose 1.6% (2.4% y/y), revised from 1.4%, following a 0.5% gain. Durable goods spending rose 2.6% (4.6% y/y) after falling 3.7% in Q1. Motor vehicle purchases strengthened 11.7% (6.7% y/y) after declining 11.2% in Q1. Spending on home furnishings & appliances weakened 2.1% (+3.5% y/y) following a 1.5% rise. Recreational goods & vehicle outlays fell 3.5% (+4.3% y/y) last quarter after a 0.4% Q1 gain.

Nondurable goods outlays in constant dollars rose 2.3% (3.0% y/y) following 2.1% growth in Q1. Apparel spending increased 5.4% (4.8% y/y) following a 7.0% rise. Food & beverage buying gained 0.3% (1.5% y/y) after a 1.0% increase. Gasoline & fuel oil purchases weakened 1.4% (+0.9% y/y) after gaining 3.6% in Q1.

Real spending on services increased 1.2% (1.9% y/y) after a 0.6% gain. Outlays on housing & utilities eased 0.4% (+1.1% y/y) after rising 2.9% in Q1. Health care expenditures rose 4.2% (4.8% y/y) after a 3.1% increase. Transportation outlays declined 2.9% (-0.6% y/y) after a 1.4% rise, while recreation spending rose 3.6% (0.7% y/y) following a 5.1% decline. Restaurant & hotel expenditures increased 5.1% (1.9% y/y) after falling 1.8%. Financial services expenditures rose 1.9% (2.3% y/y) following a 0.1% Q1 increase.

Business fixed investment in constant dollars increased 5.7% last quarter (4.2% y/y), revised from 1.9%, following a 10.3% surge in Q1. Expenditures on structures declined 8.9% (-3.4% y/y), after falling 2.4% in Q1. Expenditures on producers’ durable equipment increased 7.4% (7.7% y/y), revised from 4.8%, after surging 23.7% in Q1. Outlays on information processing equipment rose 10.1% (20.1% y/y), revised from 5.5%, after soaring 72.8% during Q1. Industrial equipment investment rose 6.7% (4.0% y/y) after a 4.7% rise. Transportation equipment investment surged 20.4% (6.8% y/y) after a 6.9% gain. Intellectual property product spending rose 12.8% last quarter (5.2% y/y) following a 6.0% rise.

Residential structures investment in real terms declined a little-revised 4.7% (-1.3% y/y), the fourth decline in the last five quarters.

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Government spending eased 0.2%, revised from up 0.5% in Q2 (+1.8% y/y) after a 0.6% decline. Federal government expenditures declined 4.7% (+0.7% y/y) after falling 4.6% in Q1. National defense expenditures increased 1.4% (3.0% y/y) after declining 7.1% in Q1. State & local government spending rose 2.6% (2.5% y/y) following a 2.0% rise.

The GDP chain price index rose an unrevised and expected 2.0% last quarter (2.5% y/y) after increasing 3.8% in Q1. The PCE chain price index increased 2.0% (2.4% y/y) following a 3.7% rise. The PCE price index excluding food and energy rose 2.5% (2.7% y/y) after increasing 3.5% in Q1. The business fixed investment price index edged 0.5% lower (+1.1% y/y) after a 0.4% rise. The residential price index rose 1.1% (2.6% y/y) after a 4.1% rise while the government price index increased 3.3% (3.1% y/y) following a 4.6% rise.

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**.

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- Business investment strengthens & consumer spending firms.
- U.S. business earnings reverse Q1 decline.
- Increase in price index is unrevised, remaining roughly half of Q1’s gain.

U.S. GDP Q2’25 Growth Revised Up; Profits Improve

Sandy Batten

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The Kansas City Fed manufacturing composite index was unchanged at 1 in August from July. This was the second consecutive month that the index has been positive, indicating the manufacturing in the KC Fed district continue to inch up in August. Prior to the positive reading in July, the index had been negative for 22 consecutive months. The index’s most recent high was 31 reached in both April 2021 and October 2021. The durable manufacturing sector was mostly flat in August, while nondurable manufacturing activity declined slightly driven by printing activities and paper and chemical manufacturing. 

The August survey was open for a six-day period from August 20-25, 2025 and included 103 responses from plants in Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico, and western Missouri.

The ISM-adjusted index calculated by Haver Analytics rose to 51.1 (NSA) in August from 50.2 in July. This was the fifth reading above the critical 50 level that separates expansion from contraction in the past six months, a further indication of expanding manufacturing activity.

For the major component indexes, the production index was 0 in August, but this was up from -3 in July. The new orders index rose to 5 in August, its highest reading since May 2022, from 2 in July. The shipments index increased to 6 in August from 3 in July. The employment index was 0 in August, but this was up from -11 in July. Also, the average workweek index rebounded to 3 in August after having been in negative territory for the previous four months. Supplier delivery times were unchanged at 7 in August. The elevation of this index since April may indicate some incipient supply-chain disruptions from higher tariffs. In contrast, raw materials inventories fell to -7 in August from 8 in July.

On the inflation front, the prices paid for raw materials index remained elevated but fell to 43 in August from 47 in July and a local high of 51 in June. Forty-four percent of respondents reported an increase in raw materials prices in August, down from 48% in July and 53% in June, while only 4% reported a decrease, down from 5% in July and 6% in June. The prices received for finished products index increased to 21 in August from 18 in July. This index has fluctuated in a range between 17 and 21 for the past four months.

Expectations for future activity remained positive, with the composite index rising to 11 from 8, as firms anticipate an improvement in production and new orders. While expectations have been trending up over the past several months, they remain depressed relative to the recent high reading of 17 last December. Capital expenditures expectations remained in negative territory in August for the second consecutive month but edged up to -3 from -4 in July.

The series dates back to July 2001. The diffusion indexes are calculated as the percentage of total respondents reporting increases minus the percentage reporting declines. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. Data for the Kansas City Fed Survey can be found in Haver’s **SURVEYS** database.

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- Index remained (though barely) in positive territory for the second consecutive month, indicating that manufacturing activity was inching up.
- Prior to last month, the index had been negative for 22 consecutive months.
- Positive readings across most key components.

FRB Kansas City Manufacturing Index Unchanged in August

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The Pending Home Sales Index weakened 0.4% in July (+0.7% y/y) to 71.7 after falling an unrevised 0.8% in June and rising an unrevised 1.8% in May, according to the National Association of Realtors (NAR). The Index remained 42.7% below its most recent peak of 125.1 in October 2021. The index is a forward-looking measure of home sales based on contract signings.

The fall in pending home sales occurred as the average rate on a 30-year mortgage rose to 6.72% in July after holding steady m/m at 6.82% in June. These rates remained well above a low of 5.22% in August 2022 and more than double a record-low 2.68% in December 2020.

Pending home sales were mixed last month in the four major regions of the country. Sales in the Midwest declined 4.0% (+1.3% y/y) in July after easing 0.8% in June. Sales in the Northeast fell 0.6% both m/m and y/y, after holding steady in June. In the South, sales eased 0.1% (+1.8% y/y) following a 0.6% June decline, but sales in the West increased 3.7% (-1.9% y/y), reversing a 3.9% June drop.

The pending home sales index measures sales at the time the contract for the purchase of an existing home is signed, similar to the Census Bureau's new home sales data. In contrast, the National Association of Realtors' existing home sales data are recorded when the sale is closed, which is usually a couple of months after the sales contract has been signed. In developing the pending home sales index, the NAR found that the level of monthly sales contract activity leads the level of closed existing home sales by about two months.

The series dates back to 2001 and are available in Haver's **PREALTOR** database. Weekly mortgage interest rates from the Mortgage Bankers Association can be found in the **WEEKLY** database.

- Decline adds to June weakness.
- Regional changes are mixed.


U.S. Pending Home Sales Decline in July

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance declined to 229,000 during the week of August 23, after rising to 234,000 in the week of August 16, revised from 235,000. The Action Economics Forecast Survey expected 230,000 initial claims for last week. The four-week moving average of initial claims increased to 228,500 from 226,000, revised from 226,250. It was the highest level since the second week of July.

In the week ended August 16, the total number of unemployment insurance beneficiaries – also known as “continuing claims” – decreased by 7,000 to 1.954 million from 1.961 million in the prior week, revised down by 11,000 from 1.972 million. The four-week moving average rose to 1.956 million in the week ending August 16, the highest level in six weeks, and up from 1.952 million in the prior week, revised from 1.955 million.

In the week ending August 16, the insured rate of unemployment (the number of beneficiaries as a percent of covered employment) was 1.3% for the twelfth consecutive week.

The insured unemployment rate varied greatly across individual states and territories. In the week ended August 9, the highest unemployment rates were in New Jersey (2.75%), Rhode Island (2.58%), Massachusetts (2.18%), Minnesota (2.17%), California (2.11%), Washington (2.08%), District of Columbia (2.04%), and Puerto Rico (2.02%). The lowest were in South Dakota (0.28%), Florida (0.42%), and Alabama and North Carolina (both 0.47%). Rates in other notable states include Pennsylvania (1.92%), New York (1.73%), Illinois (1.72%), and Texas (1.24%). 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. The expectations figure is from the Action Economics Forecast Survey in the **AS1REPNA** database.

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- Initial claims declined in latest week after a surge in the prior week.
- Continuing claims declined.
- Insured unemployment rate holds steady.

U.S. Initial Unemployment Insurance Claims Declined in Latest Week

Economy in Brief: July 2006

Jump to:

Japan's "TANKAN" Steady at Higher Readings; High Investment Forecast Adds to Expectations of Hike in BoJ Interest Rate

U.S. Construction Spending Off Again

ISM Index Disappointing Again in June, but Orders Up

ISM Index Disappointing Again in June, but Orders Up