Robert Brusca

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The services sector in the European Monetary Union improved in February, registering a diffusion value of 52.57, up from 51.57 in January. The 12-month average for the diffusion metric is 49.94. The euro area has progressed to a point where the services sector is advancing. However, when we take a look at this value and place it in its queue of historic values, it resides in the 49.7th percentile, which is just below the median. Although the euro area has shown an expansion, it has not yet reached the point of normalcy.let alone `recovery.'
</p><p>
Germany also saw its services PMI improve in February, along with Italy. France, Spain, and Ireland saw slippage in their service sector readings in February. Ireland saw a sharp decline to 57.47 from 61.54. However, despite that drop, Ireland's reading still sits at about the 70th percentile of its historic queue. Spain, at 53.70, sits in the 73rd percentile of its historic queue. But France, having slipped to 47.17 from 48.90, now sits in the bottom 13th percentile of its historic queue, at an exceptionally weak reading. There continues to be a good deal of dispersion in the performance metrics for the EMU services sector.
</p><p>
The UK is not a member of the single currency union. It saw a very slight drop in its services PMI to 58.2 from 58.3. That's still represents a slight pick up from 58.0, its 12-months average. The UK measure sits in the 83rd percentile of its historic queue and is among one of the strongest services sectors in Europe.
</p><p>
Along with the services sectors, we show surveys of consumer confidence in a number of countries and continue to find that there is a great divide between Germany and other EMU members when it comes to the assessment of consumer sentiment. Germany's metric is near the top 20th percentile of its historic queue of data while France is in the bottom 30% and Italy and Spain are just above the 52nd percentile of their respective historic queues. In the UK, we find a strong showing for consumer confidence as its consumer sentiment gauge resides in the 98th percentile of its historic queue. 
</p><p>
The services sector is showing improvement in Europe. Although the metric itself points to service sector growth, we have to remember that the services sector usually does grow and that its current value is actually below its median performance. For those looking for economic recovery, `recovery per se' is usually a period when growth exceeds its long-term average -and its long-run potential - for a spell. Europe is not there yet. There also are, as we saw, substantial differences among member countries in the performance of their respective services sectors. In addition, German consumer confidence is leagues ahead of confidence levels in fellow monetary union member countries although its level of confidence is exceeded by consumer confidence in the UK.
</p><p>
By comparison, the US nonmanufacturing sector (services plus construction) registered a small decline in February. Although its diffusion value is only slightly below the value for Europe, the queue standing for the US PMI is in the bottom 25th percentile of its historic queue. Services sectors around the world continue to lag which is a problem because services sectors tend to be the job creating sectors. Jobs simply are not being created with enough vigor in the US and Europe. Domestic demand continues to lag in most countries, while those same countries continue to put their hopes on export-led growth, which depends on domestic demand in other countries. There is an obvious inconsistency here.
</p><p>
There has been no sense of trying to manage and coordinate international growth. There has been no sense of trying to reduce the international imbalances where they seem to be the most entrenched. Europe has gone the route of addressing internal budget imbalances alone. That effort has produced some results, but also has had enormous side-effects on growth. There is a great deal of excitement about Europe finally turning the corner to growth, but perhaps we put too many eggs in that basket as Europe's growth continues to be measured and is rife with internal inconsistencies. Europe may have achieved growth, but it has not achieved recovery yet. Some think that, with the PMI indicators for Europe improving, some of the heat will be taken off of the European Central Bank. However, Europe is not exactly knocking them dead with its strength and the growth irregularities within the Community are still severe and threaten continuity. It is always it's the laggard countries within the Community that need the help - and some of them continue to lag badly.
</p><p>
For its part, the Federal Reserve has already taken several steps down the road of tapering, to reduce its accommodative stance. However, economic statistics, since the Fed began taking those steps, have become mixed and weaker. The question surrounding the US economy revolves around the weather which has been unseasonably cold, blustery and filled with storms. Is the recent US weakening, due to weather or due to a change in the economic climate? For the most part, there are unclear signs. The weather seems to have disrupted the economy to some extent. Yet, it's not uncommon for economists overestimate the impact of storms on the economy since when one part of economic activity is affected often another part of economic activity is stimulated. As a result of that, the deadweight loss from storms tends to be overestimated. I dwell on the US to some extent because Europe depends on US domestic demand to fire its export machine and it's unclear that the US is going to provide that kind of growth. China has publicly and purposely declared that it is trying to stimulate its domestic growth through the revival of domestic demand. Perhaps Europe should try to do the same thing; especially having Germany, the country with the largest current account surplus in the world, in it's very midst?
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The services sector in the European Monetary Union improved in February, registering a diffusion value of 52.57, up from 51.57 in January. The 12-month average for the diffusion metric is 49.94. The euro area has progressed to a point [...]

Services Mostly Turn Higher in EMU

Tom Moeller

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      <p>The <b>Composite Index for the service and construction sectors</b>
      from the Institute for Supply Management (ISM) plunged last month to 51.6,
      the lowest reading since February 2010. The latest figure fell short of
      expectations for 53.2 in the Action Economics Forecast Survey. During the last ten years, there has been a 75% correlation between the
      level of the nonmanufacturing composite index and the q/q change in real
      GDP for the service and the construction sectors.</p>
      
      <p><b>Haver Analytics calculates an index</b> using the ISM
      nonmanufacturing series and the ISM manufacturing sector index released
      Monday. The February figure fell to 51.8, also the lowest reading since
      February 2010. During the last ten years, there has been a 76%
      correlation between the composite index and the quarterly change in real
      GDP.</p>
      
      <p>Dragging the total index lower last month was an 8.9 point drop in the
      employment component to 47.5. This indication of m/m contraction in
      non-manufacturing payrolls was the weakest reading since March 2010.
      During the last ten years, there has been an 89% correlation between the
      employment index and the m/m change in private service sector plus
      construction payrolls. The business activity index showed a lesser 1.7
      point decline to 54.6, the weakest reading since December. The supplier
      delivery index nudged up to 53.0, indicating the slowest delivery speeds
      since March of last year. The new orders series also inched up to 51.3 but
      remained near the four year low.</p>
      
      <p>The prices paid index fell to 53.7 and reversed most of the gains in
      the prior two months. Twenty three percent of respondents indicated higher prices 
      last month while six percent reported lower. During the last ten years, there has
      been a 78% correlation between the price index and the q/q change in the
      GDP services chain price index.</p>
      
      <p>Beginning with the January 2008 Nonmanufacturing <cite>Report On
      Business, </cite>the composite index is calculated as an indication of
      overall economic conditions for the non-manufacturing sector. It is a
      composite index based on the diffusion indices of four of the indicators
      (business activity, new orders, employment and supplier deliveries) with
      equal weights. Readings above 50 indicate expansion in activity.</p>
      
      <p>The ISM data are available in Haver's <b>USECON</b> database. The
      expectations figure from ACTION ECONOMICS is in the <b>AS1REPNA </b>database.</p>
      
      <p><a href="/comment/140305k_big.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/140305k.png"></a>
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	<colgroup><col><col><col><col><col><col><col><col></colgroup>

        <thead>
          <tr>
            <th class="firstcol" scope="col" ><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF03/@EF03.HTM">ISM
              Nonmanufacturing Survey (SA)</a></th>
            <th scope="col" >Feb</th>
            <th scope="col" >Jan</th>
            <th scope="col" >Dec</th>
            <th scope="col" >Feb'13</th>
            <th scope="col" >2013</th>
            <th scope="col" >2012</th>
            <th scope="col" >2011</th>
          </tr>
        </thead>
        <tbody>
          <tr>
            <td class="firstcol" >Composite Diffusion Index</td>
            <td  >51.6</td>
            <td  >54.0</td>
            <td  >53.0</td>
            <td  >54.8</td>
            <td  >54.7</td>
            <td  >54.6</td>
            <td  >54.4</td>
          </tr>
          <tr class="odd">
            <td class="firstcol" >&nbsp;&nbsp; Business Activity</td>
            <td  >54.6</td>
            <td  >56.3</td>
            <td  >54.3</td>
            <td  >56.3</td>
            <td  >56.7</td>
            <td  >57.7</td>
            <td  >57.2</td>
          </tr>
          <tr>
            <td class="firstcol" >&nbsp;&nbsp; New Orders</td>
            <td  >51.3</td>
            <td  >50.9</td>
            <td  >50.4</td>
            <td  >56.0</td>
            <td  >55.9</td>
            <td  >56.6</td>
            <td  >56.3</td>
          </tr>
          <tr class="odd">
            <td class="firstcol" >&nbsp;&nbsp; Employment</td>
            <td  >47.5</td>
            <td  >56.4</td>
            <td  >55.6</td>
            <td  >55.5</td>
            <td  >54.4</td>
            <td  >53.5</td>
            <td  >52.4</td>
          </tr>
          <tr>
            <td class="firstcol" >&nbsp;&nbsp; Supplier Deliveries
              (NSA)</td>
            <td  >53.0</td>
            <td  >52.5</td>
            <td  >51.5</td>
            <td  >51.5</td>
            <td  >51.7</td>
            <td  >50.6</td>
            <td  >51.9</td>
          </tr>
          <tr class="odd">
            <td class="firstcol" >Prices Index</td>
            <td  >53.7</td>
            <td  >57.1</td>
            <td  >54.7</td>
            <td  >57.4</td>
            <td  >55.6</td>
            <td  >59.3</td>
            <td  >65.1</td>
           </tr>
              </tbody>
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The Composite Index for the service and construction sectors from the Institute for Supply Management (ISM) plunged last month to 51.6, the lowest reading since February 2010. The latest figure fell short of expectations for 53.2 in [...]

U.S. ISM Nonmanufacturing Index Drops to Four Year Low

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      <p>The Mortgage Bankers Association indicated that their total mortgage market
      index increased 9.4% last week (-55.9% y/y) following three successive
      weeks of sharp decline. Applications to <i>purchase</i> a home rebounded
      9.4% (-19.1% y/y) after four weeks of decline. Applications to <i>refinance</i>
      a loan improved 9.6% (-66.1% y/y) and made up most of the prior week's
      drop.</p>
      
      <p>The effective interest rate on a 15-year mortgage slipped last week to
      3.57% but remained up from the 2.89%
      low early in May of 2013. The effective rate on a 30-year fixed rate loan
      edged lower to 4.56% last week while the rate on a Jumbo 30-year loan
      slipped to 4.43%. The effective interest rate on an adjustable
      5-year mortgage at 3.23% remained up from its low of 2.59% at the
      beginning of May last year.</p>
      
      <p>Applications for fixed interest rate loans fell 57.5% y/y while
      adjustable rate loan applications fell 17.5% y/y. The average mortgage
      loan size rose to $231,600, up sharply from $209,000 averaged in February
      of last year. The average loan size for home purchases held at $269,400 last week and for refinancings it
      was $204,000.</p>
      
      <p>The survey covers over 75 percent 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 <b>SURVEYW</b> database.</p>

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        <thead>
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            <th class="firstcol" scope="col" 0918 0925 >MBA Mortgage
              Applications (SA, 3/16/90=100)</th>
            <th scope="col" 0918 0925 >02/28/14</th>
            <th scope="col" 0918 0925 >02/21/14</th>
            <th scope="col" 0918 0925 >02/14/14</th>
            <th scope="col" 0918 0925 >Y/Y%</th>
            <th scope="col" 0918 0925 >2013</th>
            <th scope="col" 0918 0925 >2012</th>
            <th scope="col" 0918 0925 >2011</th>
          </tr>
        </thead>
        <tbody>
          <tr class="odd">
            <td class="firstcol" 0918 0925 >Total Market Index</td>
            <td 0918 0925  >381.4</td>
            <td 0918 0925  >348.5</td>
            <td 0918 0925  >380.9</td>
            <td 0918 0925  >-55.9</td>
            <td 0918 0925  >616.6</td>
            <td 0918 0925  >813.8</td>
            <td 0918 0925  >572.3</td>
          </tr>
          <tr>
            <td class="firstcol" 0918 0925 >&nbsp;Purchase</td>
            <td 0918 0925  >169.6</td>
            <td 0918 0925  >155.0</td>
            <td 0918 0925  >160.7</td>
            <td 0918 0925  >-19.1</td>
            <td 0918 0925  >197.5</td>
            <td 0918 0925  >187.8</td>
            <td 0918 0925  >182.6</td>
          </tr>
          <tr class="odd">
            <td class="firstcol" 0918 0925 >&nbsp;Refinancing</td>
            <td 0918 0925  >1,597.6</td>
            <td 0918 0925  >1,457.2</td>
            <td 0918 0925  >1,644.5</td>
            <td 0918 0925  >-66.1</td>
            <td 0918 0925  >3,070.0</td>
            <td 0918 0925  >4,505.0</td>
            <td 0918 0925  >2,858.4</td>
          </tr>
          <tr>
            <td class="firstcol" 0918 0925 >15-Year Mortgage
              Effective Interest Rate (%)</td>
            <td 0918 0925  >3.57</td>
            <td 0918 0925  >3.63</td>
            <td 0918 0925  >3.63</td>
            <td 0918 0925  >3.10<br>
              (2/13)</td>
            <td 0918 0925  >3.42</td>
            <td 0918 0925  >3.25</td>
            <td 0918 0925  >3.97</td>
     </tr>
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The Mortgage Bankers Association indicated that their total mortgage market index increased 9.4% last week (-55.9% y/y) following three successive weeks of sharp decline. Applications to purchase a home rebounded 9.4% (-19.1% y/y) [...]

U.S. Mortgage Loan Applications Stabilize

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      <p>The <b>ADP/Moody's National Employment Report indicated a 139,000</b> rise (1.9% y/y) in nonfarm
      private sector jobs during February. Expectations were for a 157,000 gain in the Action Economics Forecast
      Survey. Last month's rise followed increases of 127,000 and 191,000 during January and
      December, revised down from 175,000 and 227,000. During the last
      three months, job increases averaged 152,000, below the peak of 259,000 in
      February of 2012.</p>
      
      <p>The ADP survey is based on ADP's business payroll transaction system
      covering 406,000 companies and roughly 23 million employees. The data are
      processed by Moody's Analytics Inc., then calibrated and aligned with the
      BLS data. Extensive information on the methodology is available <a href="http://www.adpemploymentreport.com/common/docs/ADP-NER-Methodology-Exec-Summary.pdf">here</a>.</p>
      
      <p>A moderate 120,000 rise (2.0% y/y) in service-producing payrolls led job growth last month.
      The gain was, however, half the increase in November 2012. Jobs in professional and business
      services increased 33,000 (2.8% y/y), transportation and utilities
      employment grew 32,000 (1.9% y/y) while financial activities headcount
      slipped 1,000 (+0.5% y/y). Goods-producing payrolls rose 19,000 (1.5%
      y/y). Factory sector employment edged up 1,000 (0.4% y/y) while construction payrolls
      increased 14,000 (3.5% y/y), the weakest monthly rise since August.</p>
      
      <p>Hiring amongst small businesses totaled 59,000 (2.1% y/y). Medium-sized
      firms' payrolls advanced 35,000 (1.4% y/y) while jobs at large-size
      companies rose 44,000 (2.4% y/y).</p>
      
      <p>The ADP National Employment Report data are maintained in Haver's <b>USECON</b>
      database; historical figures date back to March 2001. The figures in this
      report cover jobs only in the private sector. The expectation figure is
      available in Haver's <b>AS1REPNA</b> database.</p>
      
      <p>The Fed's latest <b>Beige Book</b> covering regional economic
      conditions can be found <a href="http://www.federalreserve.gov/monetarypolicy/beigebook/beigebook201403.htm">here</a>.</p>
      
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            <th class="firstcol" scope="col" >ADP/Moody's National
              Employment Report</th>
            <th scope="col" >Feb</th>
            <th scope="col" >Jan</th>
            <th scope="col" >Dec</th>
            <th scope="col" >Y/Y</th>
            <th scope="col" >2013</th>
            <th scope="col" >2012</th>
            <th scope="col" >2011</th>
          </tr>
        </thead>
        <tbody>
          <tr>
            <td class="firstcol" >Nonfarm Private Payroll Employment
              (m/m chg, 000s)</td>
            <td  >139</td>
            <td  >127</td>
            <td  >191</td>
            <td  >1.9%</td>
            <td  >2.0%</td>
            <td  >2.3%</td>
            <td  >1.8%</td>
          </tr>
          <tr class="odd">
            <td class="firstcol" >&nbsp;Small Payroll (1-49)</td>
            <td  >59</td>
            <td  >52</td>
            <td  >91</td>
            <td  >2.1</td>
            <td  >2.1</td>
            <td  >2.5</td>
            <td  >1.1</td>
          </tr>
          <tr>
            <td class="firstcol" >&nbsp;Medium Payroll (1-49)</td>
            <td  >35</td>
            <td  >49</td>
            <td  >46</td>
            <td  >1.4</td>
            <td  >1.6</td>
            <td  >2.0</td>
            <td  >2.0</td>
          </tr>
          <tr class="odd">
            <td class="firstcol" >&nbsp;Large Payroll (&gt;500)</td>
            <td  >44</td>
            <td  >27</td>
            <td  >55</td>
            <td  >2.4</td>
            <td  >2.3</td>
            <td  >2.4</td>
            <td  >2.7</td>
          </tr>
          <tr>
            <td class="firstcol" >Goods-Producing</td>
            <td  >19</td>
            <td  >12</td>
            <td  >36</td>
            <td  >1.5</td>
            <td  >1.6</td>
            <td  >2.2</td>
            <td  >1.7</td>
          </tr>
          <tr>
            <td class="firstcol" >&nbsp;Manufacturing</td>
            <td  >1</td>
            <td  >-6</td>
            <td  >16</td>
            <td  >0.4</td>
            <td  >0.6</td>
            <td  >1.6</td>
            <td  >1.9</td>
          </tr>
          <tr class="odd">
            <td class="firstcol" >Service-Producing</td>
            <td  >120</td>
            <td  >116</td>
            <td  >154</td>
            <td  >2.0</td>
            <td  >2.0</td>
            <td  >2.3</td>
            <td  >1.8</td>
           </tr>
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The ADP/Moody's National Employment Report indicated a 139,000 rise (1.9% y/y) in nonfarm private sector jobs during February. Expectations were for a 157,000 gain in the Action Economics Forecast Survey. Last month's rise followed [...]

U.S. ADP Job Growth is Constrained By Bad Weather

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      <p><b>Personal income gained 0.3% during January (4.1% y/y) after </b>little
      change in December. The gain beat expectations for a 0.2% rise in the
      Action Economics Forecast Survey. Disposable personal income increased
      0.4% (4.0% y/y). Wages &amp; salaries advanced 0.2% and the 3.6%
      year-to-year increase was improved. To the upside, transfer receipts
      jumped 1.2% (3.2% y/y), rental earnings rose 0.9% (7.9% y/y) and
      proprietors income gained 0.3% (4.7% y/y). Working lower were dividend
      income by 0.4% (+17.2% y/y) and interest income by 0.3% (+1.1 y/y).
      Adjusted for price inflation disposable income recovered 0.3% (-2.8% y/y).</p>
      </span>
      <p><span id="articletext"><b>Personal consumption expenditures matched
      expectations and edged 0.1% higher (3.5% y/y) </b>after a 0.1% December
      uptick. Late-2013 outlay levels were revised sharply lower. Motor vehicle
      purchases slipped 0.1% (-0.3% y/y) after a hefty 4.7% December drop while
      spending on furnishings &amp; household equipment slipped 0.2% (+1.4%
      y/y). Clothing purchases were off 1.2% (+0.1% y/y). Gasoline expenditures
      plunged 3.3% (+2.9% y/y) due to lower prices &amp; volumes. Services
      outlays jumped 0.9% (4.1% y/y) led by a 1.6% rise (4.7% y/y) in health
      care spending. Adjusted for inflation, PCE gained 0.3% (2.2% y/y).
      <p>The <b>personal savings rate</b> held steady at 4.3% but earlier
      figures were raised with the revised spending levels. Nevertheless, the
      savings rate remained close to its lowest since January 2008. The total
      amount of personal saving has been trending lower since 2009.</p>
      <p><b>The PCE chain price index ticked up 0.1% (1.2% y/y) in January</b>.
      The price index excluding food &amp; energy also rose a steady 0.1% and 1.1%
      y/y, the slowest annual increase since early-2011.<b> </b>Durable goods
      prices slipped 0.1% (-2.2% y/y) while nondurable goods prices were
      unchanged (0.7% y/y). Prices for services gained 0.2% (1.9% y/y).</p>
      <p>The personal income &amp; consumption figures are available in Haver's <b>USECON</b>
      and <b>USNA</b> databases. The consensus expectation figure is in the <b>AS1REPNA</b>
      database. </p>
      <table class="centered" border="0" cellSpacing="0" width="1321">
        <thead>
          <tr>
            <th class="firstcol" scope="col" width="652">Personal Income &amp;
              Outlays (%)</th>
            <th scope="col" width="95">Jan</th>
            <th scope="col" width="95">Dec</th>
            <th scope="col" width="95">Nov</th>
            <th scope="col" width="95">Y/Y</th>
            <th scope="col" width="95">2013</th>
            <th scope="col" width="95">2012</th>
            <th scope="col" width="95">2011</th>
          </tr>
        </thead>
        <tbody>
          <tr>
            <td class="firstcol" width="652">Personal Income</td>
            <td align="center" width="95">0.3</td>
            <td align="center" width="95">-0.0</td>
            <td align="center" width="95">0.3</td>
            <td align="center" width="95">4.1</td>
            <td align="center" width="95">2.8</td>
            <td align="center" width="95">4.2</td>
            <td align="center" width="95">6.1</td>
          </tr>
          <tr class="odd">
            <td class="firstcol" width="652">&nbsp;&nbsp;Wages &amp; Salaries</td>
            <td align="center" width="95">0.2</td>
            <td align="center" width="95">-0.1</td>
            <td align="center" width="95">0.6</td>
            <td align="center" width="95">3.6</td>
            <td align="center" width="95">3.1</td>
            <td align="center" width="95">4.3</td>
            <td align="center" width="95">4.1</td>
          </tr>
          <tr>
            <td class="firstcol" width="652">Disposable Personal Income</td>
            <td align="center" width="95">0.4</td>
            <td align="center" width="95">-0.1</td>
            <td align="center" width="95">0.2</td>
            <td align="center" width="95">4.0</td>
            <td align="center" width="95">1.9</td>
            <td align="center" width="95">3.9</td>
            <td align="center" width="95">4.8</td>
          </tr>
          <tr class="odd">
            <td class="firstcol" width="652">Personal Consumption Expenditures</td>
            <td align="center" width="95">0.4</td>
            <td align="center" width="95">0.1</td>
            <td align="center" width="95">0.5</td>
            <td align="center" width="95">3.5</td>
            <td align="center" width="95">3.1</td>
            <td align="center" width="95">4.1</td>
            <td align="center" width="95">5.0</td>
          </tr>
          <tr>
            <td class="firstcol" width="652">Personal Saving Rate</td>
            <td align="center" width="95">4.3</td>
            <td align="center" width="95">4.3</td>
            <td align="center" width="95">4.4</td>
            <td align="center" width="95">3.6<br>
              (Jan '13)</td>
            <td align="center" width="95">4.5</td>
            <td align="center" width="95">5.6</td>
            <td align="center" width="95">5.7</td>
          </tr>
          <tr class="odd">
            <td class="firstcol" width="652">PCE Chain Price Index</td>
            <td align="center" width="95">0.1</td>
            <td align="center" width="95">0.2</td>
            <td align="center" width="95">0.1</td>
            <td align="center" width="95">1.2</td>
            <td align="center" width="95">1.1</td>
            <td align="center" width="95">1.8</td>
            <td align="center" width="95">2.4</td>
          </tr>
          <tr>
            <td class="firstcol" width="652">&nbsp;&nbsp;Less Food &amp; Energy</td>
            <td align="center" width="95">0.1</td>
            <td align="center" width="95">0.1</td>
            <td align="center" width="95">0.1</td>
            <td align="center" width="95">1.1</td>
            <td align="center" width="95">1.2</td>
            <td align="center" width="95">1.8</td>
            <td align="center" width="95">1.4</td>
          </tr>
          <tr class="odd">
            <td class="firstcol" width="652">Real Disposable Income</td>
            <td align="center" width="95">0.3</td>
            <td align="center" width="95">-0.2</td>
            <td align="center" width="95">0.1</td>
            <td align="center" width="95">2.8</td>
            <td align="center" width="95">0.7</td>
            <td align="center" width="95">2.0</td>
            <td align="center" width="95">2.4</td>
          </tr>
          <tr>
            <td class="firstcol" width="652">Real Personal Consumption
              Expenditures</td>
            <td align="center" width="95">0.3</td>
            <td align="center" width="95">-0.1</td>
            <td align="center" width="95">0.4</td>
            <td align="center" width="95">2.2</td>
            <td align="center" width="95">2.0</td>
            <td align="center" width="95">2.2</td>
            <td align="center" width="95">2.5</td>
          </tr>
        </tbody>
      </table>
      </span>
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      <span id="articletitle">U.S. ISM Index Begins to Recover</span><br>
      <span id="byline">by <a href="http://www.haver.com/comment/Moeller.html">Tom
      Moeller</a>&nbsp;&nbsp;March 4, 2014</span>
      <p>The factory sector began to bounce back last month following heavy
      winter snowfalls. <span id="articletext">The Composite Index of
      Manufacturing Sector Activity from the Institute for Supply Management
      improved to 53.2 during February from 51.3 in January. The latest reading
      beat expectations for little change at 51.5 as measured by the Action
      Economics Survey. Any figure above 50 indicates an increasing level of
      activity in the factory sector. During the last ten years, there has been
      a 76% correlation between the ISM index and the q/q change in real GDP.
      <p>A bounce-back in new orders (54.5), inventories (52.5) and supplier
      deliveries (slower) prompted the recovery in last month's factory sector
      activity. Offsetting these gains was a lower reading for production (48.2)
      and an unchanged employment figure (52.3). During the last ten years there
      has been an 88% correlation between the employment index and the m/m
      change in factory payrolls. The new export orders index fell to 53.5, the
      lowest reading since September, while the order backlog reading made up
      its January shortfall. The imports index was unchanged at 53.5.</p>
      <p>The prices paid index series indicated further improvement in pricing
      power with a rise to 60.5, the highest level since February of last year.
      Twenty eight percent of firms raised prices while seven percent lowered
      them. During the last ten years there has been a 67% correlation between
      the index and the m/m change in the intermediate producer price index.</p>
      <p>The figures from the Institute For Supply Management (ISM) are
      diffusion indexes and can be found in Haver's <b>USECON</b> database. The
      expectations number is in the <b>AS1REPNA</b> database.</p>
      <table class="centered" border="0" cellSpacing="0" width="1321">
        <thead>
          <tr>
            <th class="firstcol" scope="col" width="504">ISM Mfg</th>
            <th scope="col" width="116">Feb</th>
            <th scope="col" width="116">Jan</th>
            <th scope="col" width="116">Dec</th>
            <th scope="col" width="116">Feb'13</th>
            <th scope="col" width="116">2013</th>
            <th scope="col" width="116">2012</th>
            <th scope="col" width="117">2011</th>
          </tr>
        </thead>
        <tbody>
          <tr>
            <td class="firstcol" width="504">Composite Index</td>
            <td width="116" align="center">53.2</td>
            <td width="116" align="center">51.3</td>
            <td width="116" align="center">56.5</td>
            <td width="116" align="center">53.1</td>
            <td width="116" align="center">53.9</td>
            <td width="116" align="center">51.8</td>
            <td width="117" align="center">55.2</td>
          </tr>
          <tr class="odd">
            <td class="firstcol" width="504">&nbsp;New Orders</td>
            <td width="116" align="center">54.5</td>
            <td width="116" align="center">51.2</td>
            <td width="116" align="center">64.4</td>
            <td width="116" align="center">55.7</td>
            <td width="116" align="center">57.2</td>
            <td width="116" align="center">53.1</td>
            <td width="117" align="center">56.4</td>
          </tr>
          <tr>
            <td class="firstcol" width="504">&nbsp;Production</td>
            <td width="116" align="center">48.2</td>
            <td width="116" align="center">54.8</td>
            <td width="116" align="center">61.7</td>
            <td width="116" align="center">54.5</td>
            <td width="116" align="center">57.7</td>
            <td width="116" align="center">53.8</td>
            <td width="117" align="center">57.4</td>
          </tr>
          <tr class="odd">
            <td class="firstcol" width="504">&nbsp;Employment</td>
            <td width="116" align="center">52.3</td>
            <td width="116" align="center">52.3</td>
            <td width="116" align="center">55.8</td>
            <td width="116" align="center">52.2</td>
            <td width="116" align="center">53.2</td>
            <td width="116" align="center">53.8</td>
            <td width="117" align="center">57.4</td>
          </tr>
          <tr>
            <td class="firstcol" width="504">&nbsp;Supplier Deliveries</td>
            <td width="116" align="center">58.5</td>
            <td width="116" align="center">54.3</td>
            <td width="116" align="center">53.7</td>
            <td width="116" align="center">51.5</td>
            <td width="116" align="center">51.9</td>
            <td width="116" align="center">50.0</td>
            <td width="117" align="center">54.7</td>
          </tr>
          <tr class="odd">
            <td class="firstcol" width="504">&nbsp;Inventories</td>
            <td width="116" align="center">52.5</td>
            <td width="116" align="center">44.0</td>
            <td width="116" align="center">47.0</td>
            <td width="116" align="center">51.5</td>
            <td width="116" align="center">49.4</td>
            <td width="116" align="center">48.2</td>
            <td width="117" align="center">50.1</td>
          </tr>
          <tr>
            <td class="firstcol" width="504">Prices Paid Index (NSA)</td>
            <td width="116" align="center">60.0</td>
            <td width="116" align="center">60.5</td>
            <td width="116" align="center">53.5</td>
            <td width="116" align="center">61.5</td>
            <td width="116" align="center">53.8</td>
            <td width="116" align="center">53.2</td>
            <td width="117" align="center">65.2</td>
          </tr>
        </tbody>
      </table>
      </span>
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Personal consumption expenditures matched expectations and edged 0.1% higher (3.5% y/y) after a 0.1% December uptick. Late-2013 outlay levels were revised sharply lower. Motor vehicle purchases slipped 0.1% (-0.3% y/y) after a hefty [...]

U.S. Personal Income, Outlays & Savings Firm

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      <span id="articletext">
      <p></p>
      
      <p><a href="/comment/140304h_big.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/140304h.png"></a>
      <a href="/comment/140304i_big.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/140304i.png"></a></p>
      
      <p>The Institute for Supply Management reported that expectations for
      business conditions in New York State improved last month to the highest
      level since October 2010. The diffusion index level rose to 76.3 from 70.0
      in January. (A level above 50 indicates growth in activity. The reading of
      current economic conditions declined to 57.0, its weakest level in five
      months as heavy snow fell. During the last ten years there has been a 61%
      correlation between the N.Y. index and the Q/Q change in real GDP.</p>
      
      <p>The prices paid index surged to 66.7, the highest level since May 2011.
      That caused the index of current revenues to jump to 72.5, up sharply
      versus 68.0 during February of last year.</p>
      
      <p>The ISM figures can be found in Haver's<b> SURVEYS </b>database.</p>
      
      <table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

        <thead>
          <tr>
            <th class="firstcol" scope="col" >ISM New York
              (Diffusion Index)</th>
            <th scope="col" ><b>Feb</b></th>
            <th scope="col" ><b>Jan</b></th>
            <th scope="col" ><b>Dec</b></th>
            <th scope="col" ><b>Feb'13</b></th>
            <th scope="col" ><b>2013</b></th>
            <th scope="col" ><b>2012</b></th>
            <th scope="col" ><b>2011</b></th>
          </tr>
        </thead>
        <tbody>
          <tr>
            <td class="firstcol" >Economic Conditions Six Months
              Hence (SA)</td>
            <td  >76.3</td>
            <td  >70.0</td>
            <td  >73.2</td>
            <td  >64.1</td>
            <td  >65.0</td>
            <td  >64.9</td>
            <td  >66.2</td>
          </tr>
          <tr class="odd">
            <td class="firstcol" >Current Economic Conditions (SA)</td>
            <td  >57.0</td>
            <td  >64.4</td>
            <td  >63.8</td>
            <td  >58.8</td>
            <td  >58.4</td>
            <td  >55.2</td>
            <td  >56.9</td>
          </tr>
          <tr>
            <td class="firstcol" >Prices Paid (NSA)</td>
            <td  >66.7</td>
            <td  >63.0</td>
            <td  >60.0</td>
            <td  >59.7</td>
            <td  >55.3</td>
            <td  >56.4</td>
            <td  >58.8</td>
  </tr>
              </tbody>
            </table>
            </span>
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The Institute for Supply Management reported that expectations for business conditions in New York State improved last month to the highest level since October 2010. The diffusion index level rose to 76.3 from 70.0 in January. (A [...]

New York State Expected Business Conditions Improve Sharply

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      <p></p>
      
      <p><a href="/comment/140304e_big.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/140304e.png"></a>
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<p>The International Council of Shopping Centers and Goldman Sachs reported that
chain store sales inched up 0.3% (1.6% y/y) last week and made up half of the
prior week's decline. The rise left sales up 1.5% versus last year, roughly half
the rate of increase of two years ago. During the last ten years there has been
a 70% correlation between the y/y change in chain store sales and the change in
retail sales at general merchandise stores.</p>

<p>The ICSC-Goldman Sachs retail chain-store sales index is constructed using
the same-store sales (stores open for one year) reported by 78 stores of seven
retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and
Wal-Mart. General merchandise store sales account for 15% of total retail sales.
The data can be found in Haver's <b>SURVEYW</b> database.</p>

<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

  <thead>
    <tr>
      <th class="firstcol" >ICSC-Goldman Sachs (SA, 1977=100)</th>
      <th>03/01/14</th>
      <th>02/22/14</th>
      <th>02/15/14</th>
      <th>Y/Y</th>
      <th>2013</th>
      <th>2012</th>
      <th>2011</th>
    </tr>
  </thead>
  <tbody>
    <tr class="odd">
      <td class="firstcol" >Total Weekly Chain Store Sales</td>
      <td  >540.9</td>
      <td  >538.9</td>
      <td  >542.0</td>
      <td  >1.5%</td>
      <td  >2.3%</td>
      <td  >3.0%</td>
      <td  >3.2%</td>
    </tr>
    <tr>
      <td class="firstcol" >&nbsp;&nbsp; W/W %</td>
      <td  >0.3</td>
      <td  >-0.6</td>
      <td  >2.5</td>
      <td  >--</td>
      <td  >--</td>
      <td  >--</td>
      <td  >--</td>
  </tr>
              </tbody>
            </table>
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The International Council of Shopping Centers and Goldman Sachs reported that chain store sales inched up 0.3% (1.6% y/y) last week and made up half of the prior week's decline. The rise left sales up 1.5% versus last year, roughly [...]

U.S. Chain Store Sales Continue To Lose Momentum

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EMU producer prices continue to crash and burn. While the European Central Bank has its focus on consumer prices using the Harmonized Index of Consumer Prices (HICP), the ongoing drop in PPI prices will give the ECB plenty of confidence that inflation is well under control in the euro area. But is it that confidence that the ECB needs or does it need some different reassurance? 
</p><p>
While the ECB is often portrayed as a single-mandate central bank, it has been very clear that under the direction of Mario Draghi it has had a much broader focus to the delight/consternation of its various members (e.g. do what's necessary). At times, the Germans have been quite livid over the ECB's policy tacks and its justification under the treaty mandate.  But in retrospect it is hard to fault the various policy maneuvers of the bank under Draghi as the euro area continues to flounder and struggle even as it shifts to a regime of growth. We are reminded that growth is not simply a binary state and that it has many gradations. An oft-used analogy is that while Europe may have achieved lift off, it has not yet fully achieved escape velocity. Can it escape the pull of the gravity of its past lethargic momentum? What about the new headwinds of geopolitical change?
</p><p>
Growth in the euro area is a weighted average affair. While it `only makes sense' to give Germany, the largest economy in the EMU, the largest weight in the euro area, Europe still has what the United States would see as a Senate/House-of-Representatives problem. The euro area is in one sense a single zone, but its politics has not been thoroughly shaken and stirred together. The problem is that euro zone data still are reported on a national jurisdictional basis, but policy is made solely on a weighted-borderless-economic basis. For example, the ECB shoots at an inflation target made up of the weighted HICP without regard to the dispersion of inflation within the euro area. This is a policy admixture sure to create strife - and it has.
</p><p>
Basically, there is no formal vehicle for the smaller European member countries to have their say except through their vote on the ECB board (and of course through the EU Commission on non-monetary matters). Since there is no formal weight attached to policy dispersion, there is little ground to stand on in ECB discussions for smaller nations with problems that differ from the weighted average for the EMU as a whole. EMU policy is aggregate-data focused. Because small-country economic weighting is so low, the ECB can (and has!) hit its (inflation-only) targets even with quite a number of smaller economies in severe and persistent violation of the ECB standards. were those standards to be applied on a country by country basis (which they are not). Had the ECB/Europe paid attention to such divergence in the past the crisis may not have occurred.   
</p><p>
With Mario Draghi as ECB head, there has been much more attention to the needs of the peripheral nations than there was with a German banker as the ECB's head. While a German was in line to head the ECB this round, the main candidate stepped aside because he could see the pressure mounting and he wanted no part of being head of the ECB as the strict standards that would have been applied at the Bundesbank were set to be eroded or pressured in the conduct of policy by the ECB. 
</p><p>
The Bundesbank has continued to express its opposition to some of the policies of Mario Draghi which seem to have stretched the ECB mandate. But in the end weakness not inflation has remained the main EMU problem. And no German can point to any bad repercussion from the innovative Draghi policies save the ever-lurking concern that `moral hazard' might emerge as an issue in the future. Still, it would have been hard for the ECB to ignore the real world problems of the euro area and one can only wonder how different the world might have been had Draghi not swerved. Would there still be a euro area?
</p><p>
That musing brings us back to the circumstance of the current PPI which continues to be so weak. Obviously, the ECB has little mandate to swerve its policy even with the PPI falling on a broad-based front across the euro area and most horizons. The PPI is more volatile and will undergo more extreme movement than the CPI (HICP); that is one reason why the ECB really is focused upon the HICP. Still, pronounced weakness on any of these key measures is also a proxy for economic strength albeit that the PPI will be tossed around more than the CPI by commodity price movements. We know we can have stagflation (weak growth with high inflation) and there have been periods of robust growth with low inflation (nirvana/true equilibrium), but more generally low inflation and low growth as a pairing reinforce the signal of weakness in the economy. 
</p><p>
I do not propose that the ECB become more proactive- that is not its place. But I do propose that market observers and investors absorb the sense of helplessness that the ECB will have under these circumstances unless a crisis develops and Draghi thinks, once again, he can twist the rules.
</p><p>
Simple stagnation will not do it. While growth is turning the corner to positive numbers in Europe, this corner has a severe angle and the road surface has a slippery surface with no guard-rail and a steep drop off the shoulder. The risks are still in full tilt for the EMU. Low inflation, a usual comfort for the bank, no longer is so comforting. Ongoing weakness in prices will add to the atmosphere of instability as political unrest is now encroaching on Europe's very borders - a Europe that is very dependent on energy shipments from Russia through the currently unstable Ukraine. If anyone thinks that Europe's recovery will continue being affected by these developments, I wish them well, but bid him/her to buy some insurance for that view against the potential for the future to be quite different.
</p>


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EMU producer prices continue to crash and burn. While the European Central Bank has its focus on consumer prices using the Harmonized Index of Consumer Prices (HICP), the ongoing drop in PPI prices will give the ECB plenty of [...]

EMU PPI Is Softer Faster-Is That Good or Bad News in This Troubled Time?

US and China big leaders in adoption of AI models

Robust US demand for advanced technology products

China's export growth rotating away from the US

More pronounced upward revisions in countries more exposed to AI investment

Stable job openings and hiring rates point to cautious hiring

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

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

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

Tighter US immigration enforcement adversely impacting labor force

Economic policy uncertainty, while still elevated, is declining

Gradual disinflation and easier monetary policies across advanced economies

Largest October layoffs since 2003, led by technology

Subdued global shipping costs not yet pointing to supply chain problems

PMIs show still-elevated but slowing US inflation

AI boosting US investment in data centers

US productivity growth has been significantly faster than in other major economies

Consumers' short-term US inflation expectations still elevated while longer-term expectations of financial markets are steady

US financial markets have gotten used to elevated policy uncertainty

FOMC now expects more rate cuts going forward than in June

China gaining ASEAN exports while US exports slump

Job openings less than the number unemployed in July for first time since 2021

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

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

Equity market exuberance outpacing macroeconomic data

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

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Tian Yong Woon

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

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

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

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

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

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

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

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

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

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Asia

Economic Letter from Asia: Of Ballots and Bots

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

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

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

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

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

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

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Japan

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

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

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

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

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

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

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

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

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

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

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

Germany

German IP Reveals Chaotic Trends

Andrew Cates

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

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

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

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

260205Z4.jpg

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

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

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

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

Winnie Tapasanun

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

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

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

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

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

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