Louise Curley

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081201j.jpg" border="0" height="265" width="312"><img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081201i.jpg" border="0" height="265" width="312">

J.P. Morgan's broad effective exchange rate for the U. S.
hasstaged a dramatic reversal in its long decline since 2001 by
appreciating 17% from July 15 to last Friday. The first chart shows the
daily values of this index over that past ten years.
It is hard to find a country whose exchange rate has not
depreciated against the U. S. dollar in the period from July 15 to
November 28, 2008.The one significant exception is Japan where the
currency has appreciated by almost 10% against the dollar. Both the
Euro and the British pound have experienced depreciations of 20% and
23% respectively. These currencies are shown in the second chart.
The Canadian dollar has seen a 22% decline in its currency
relative to the dollar, New Zealand a 29% decline and Australia, a 33%
decline since July 15 of the year, as shown in the third chart.

<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081201h.jpg" border="0" height="265" width="312"><img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081201k.jpg" border="0" height="265" width="312">
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol">EXCHANGE
RATES&nbsp;</th>
<th scope="col">July 15, 08</th>
<th scope="col">Nov 28,&nbsp; 08&nbsp;</th>
<th scope="col">Depreciation&nbsp;</th>
<th scope="col">Appreciation&nbsp;</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">J.P. Morgan Broad
Effective Exchange Rate (2000=100)</td>
<td>80.7</td>
<td>94.3</td>
<td>--</td>
<td>16.7%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;</td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Australian Dollar
(US$/AUS$)&nbsp;&nbsp;</td>
<td>.9797</td>
<td>.6546</td>
<td>-33.2%</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">New Zealand Dollar
(US$/NZ$)</td>
<td>.7721</td>
<td>.5500</td>
<td>-28.8%</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">Canadian
Dollar&nbsp;&nbsp;&nbsp; (C$/US$)</td>
<td>1.0015</td>
<td>1.286</td>
<td>-22.1%</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">United Kingdom Pound
(US$/UKP)&nbsp;</td>
<td>2.0036</td>
<td>1.5348</td>
<td>-23.4%</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">Euro (US$/Euro)</td>
<td>1.5914</td>
<td>1.2694</td>
<td>-20.2%</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">Japanese Yen
(Yen/US$)&nbsp;</td>
<td>104.64</td>
<td>95.46</td>
<td>--</td>
<td>9.62%</td>
</tr>
<tr class="odd">
<td class="firstcol">Mexico (Peso/ US$)</td>
<td>10.32</td>
<td>13.39</td>
<td>-22.9%</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">South Korea (Won/US$)</td>
<td>1006.3</td>
<td>1468.0</td>
<td>-31.4%</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">South Africa (Rand/US$)</td>
<td>7.64</td>
<td>10.1</td>
<td>-24.4%</td>
<td>--</td>
</tr>
</tbody>
</table>
</body></html>

J.P. Morgan's broad effective exchange rate for the U. S. hasstaged a dramatic reversal in its long decline since 2001 by appreciating 17% from July 15 to last Friday. The first chart shows the daily values of this index over that [...]

The Recent Rise of the U.S. Dollar

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081201f.jpg" width="353">
The October value of construction put in place fell 1.2% during October. The decline followed a slight September downtick which was revised to be shallower than the initial report. Consensus expectations had been for a 0.9%. Construction activity continued to decline 4.6% y/y.
Residential building activity again led the latest monthly decline with a 3.5% drop and activity remained off by a quarter from last year. Single-family construction activity fell 4.6%, off by two-thirds from its peak in early-2006. Building activity on multi-family units slipped 0.3% (-1.4 y/y), off roughly 20% from the early 2007 peak. Spending on improvements fell 3.2% m/m but still was up slightly versus last year.
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.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081201g.jpg" width="353">
The value of nonresidential building activity slipped 0.7% after a little-revised 1.1% September increase. Spending on office construction did rise 1.1% but the y/y gain of 4.4% is much reduced from the near 20% growth of the prior two years. Building in the multi-retail sector rose 7.5% but the y/y decline of 7.2% compares to a 17% gain last year. Spending on health care facilities reversed a September increase and fell 1.1% (+3.9% y/y).
Public construction reversed a September decline and rose 0.7%. The value of spending on educational facilities rose a firm 1.2% (10.1% y/y) but the value of construction spending on highways &amp; streets fell for the second month by 0.9% (+6.3% y/y). The value of construction on highways &amp; streets is roughly one-third of the value of total public construction spending.
The more detailed categories of construction 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/@E907.HTM">Construction</a> (%)</th>
<th scope="col">October</th>
<th scope="col">September</th>
<th scope="col">Y/Y</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>-1.2</td>
<td>-0.0</td>
<td>-4.6</td>
<td>-2.7</td>
<td>6.3</td>
<td>11.2</td>
</tr>
<tr>
<td class="firstcol">Private</td>
<td>-2.0</td>
<td>0.4</td>
<td>-8.8</td>
<td>-6.9</td>
<td>5.5</td>
<td>12.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Residential</td>
<td>-3.5</td>
<td>-0.5</td>
<td>-24.2</td>
<td>-19.8</td>
<td>1.0</td>
<td>14.9</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Nonresidential</td>
<td>-0.7</td>
<td>1.1</td>
<td>9.1</td>
<td>19.6</td>
<td>16.2</td>
<td>7.8</td>
</tr>
<tr>
<td class="firstcol">Public</td>
<td>0.7</td>
<td>-0.9</td>
<td>7.4</td>
<td>12.3</td>
<td>9.3</td>
<td>6.2</td>
</tr>
</tbody>
</table>
</body>
</html>

The October value of construction put in place fell 1.2% during October. The decline followed a slight September downtick which was revised to be shallower than the initial report. Consensus expectations had been for a 0.9%. [...]

U.S. Construction Spending Off Sharply Again

Robert Brusca

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081201e.jpg" align="left" border="0" height="265" width="353">
The NTC final indices are now out and are weaker than their
FLASH counterparts were. The percentile column on the far right seems
due for an &#8216;out of order&#8217; sign except that it is not out of order. The
overall index as well as the country components and the UK index are
all at lifetime lows- even for Germany an index that goes back to 1996
and for the UK that goes back to 1992. The drop off in MFG in Europe
has been very sharp and the authorities have been caught off guard.
They watched the troubles in the US unfold largely thinking that the
problems would not migrate over the ocean to such a great degree but of
course they have. 
 

Germany&#8217;s MFG index stood at 49.68 barely indicating any
contraction as recently as August, just three short months ago. At that
time the EMU index had slipped to 47.55. Over three months the EMU MFG
index has dropped by 11.97 points compared to a drop of 14.02 points
for Germany. Over six months the EMU index is lower by 15.02 points
compared to a drop of 17.91 for Germany. But over 12-months the EMU
drop at 17.22 is very similar to Germany&#8217;s drop of 18.08 points.
Spain&#8217;s index has dropped by 21.31 points over 12-months and the UK, an
EU member nation, has seen its MFG index drop by 20.23 points over that
period. 
 

In short, Europe is sliding very fast. The US PMI dropped by
11.5 points in 12 months though October compared to a drop of 10.42
points for EMU. So the US unravel has been a bit faster than Europe&#8217;s
&#8211;at least through October. The US MFG report for November will be out
later today. It would have to fall to 28.32 in order for the US MFG PMI
(ISM) to have the same point drop as the EMU index over the last
12-months (though November). To do that it would have to drop to a
level of 21.7. For now it appears that Europe has caught up to or
surpassed the US in the race to show which region&#8217;s MFG sector is
declining the most rapidly. 
 
A dubious distinction&#8230; 
 


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr><th colspan="8" scope="col"> NTC/Markit MFG Indices</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Nov-08</td>
<td>Oct-08</td>
<td>Sep-08</td>
<td>3-Mo</td>
<td>6-Mo</td>
<td>12-Mo</td>
<td>Percentile</td>
</tr>
<tr>
<td class="firstcol">Euro Area 13</td>
<td>35.58</td>
<td>41.10</td>
<td>44.97</td>
<td>40.55</td>
<td>44.29</td>
<td>48.07</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">Germany</td>
<td>35.66</td>
<td>42.88</td>
<td>47.36</td>
<td>41.97</td>
<td>46.51</td>
<td>50.31</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">France</td>
<td>37.28</td>
<td>40.59</td>
<td>42.97</td>
<td>40.28</td>
<td>43.82</td>
<td>48.25</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">Italy</td>
<td>34.95</td>
<td>39.67</td>
<td>44.42</td>
<td>39.68</td>
<td>43.06</td>
<td>46.35</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">Spain</td>
<td>29.42</td>
<td>34.60</td>
<td>38.32</td>
<td>34.11</td>
<td>37.43</td>
<td>42.16</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">Austria</td>
<td>38.26</td>
<td>43.44</td>
<td>46.01</td>
<td>42.57</td>
<td>45.28</td>
<td>48.69</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">Greece</td>
<td>42.25</td>
<td>48.14</td>
<td>50.81</td>
<td>47.07</td>
<td>49.85</td>
<td>51.37</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">Ireland</td>
<td>37.10</td>
<td>39.69</td>
<td>43.70</td>
<td>40.16</td>
<td>42.25</td>
<td>44.59</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">Netherlands</td>
<td>38.71</td>
<td>45.28</td>
<td>48.30</td>
<td>44.10</td>
<td>46.86</td>
<td>49.72</td>
<td>0.0%</td>
</tr>
<tr class="odd">
<td colspan="8" class="firstcol">EU</td>
</tr>
<tr>
<td class="firstcol">UK</td>
<td>34.36</td>
<td>40.70</td>
<td>40.80</td>
<td>38.62</td>
<td>41.78</td>
<td>46.23</td>
<td>0.0%</td>
</tr>
<tr>
<td colspan="8" class="firstcol">percentile is over range since March
2000</td>
</tr>
</tbody>
</table>
</body></html>

The NTC final indices are now out and are weaker than their FLASH counterparts were. The percentile column on the far right seems due for an ‘out of order’ sign except that it is not out of order. The overall index as well as the [...]

Graceful but Painful Swan Dive in MFG PMI’s… Into an Empty Pool

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081201d.jpg" align="left" border="0" height="265" width="353">
No hunt for this red October&#8230; 
 

German retail sales were unexpectedly weak in October. The
&#8216;unexpectedly&#8217; part is just as important as the &#8217;weak&#8217; part since
Germans have been deluding themselves with a view of how this crisis is
going to pass them by. Chancellor Merkel is disdainful of what she
regards as competition over who can launch the largest stimulus plan
and has in contrast to much of the rest of the world continued to sit
on the sidelines and watch as Germany&#8217;s economy unravels. Retail sales
in Germany are steadily and progressively deteriorating. Real ex auto
sales are down at a 3.9% annual pace over three months compared to a
-2.2% pace over six months and -1.4% over 12-months. What is the
surprise there? Why should that sequence of growth rates, that is so
very well-behaved, be called &#8216;unexpected?&#8217; Sales had risen by a strong
2.1% in August and after a rise of 0.3% in July. But September and
October sales now tell a different story and one that is consistent
with the world surrounding the German economy as well. The progression
of growth rates shows the August &#8216;burst of strength&#8217; to have been a
false signal. Real and nominal series tell pretty clear stories if
anyone is watching. Now Germany&#8217;s auto sector is getting hit harder as
short hours are being planned. 
 



<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr><th colspan="9" scope="col">German Real and Nominal Retail Sales&nbsp; </th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Nominal</td>
<td>Oct-08</td>
<td>Sep-08</td>
<td>Aug-08</td>
<td>3-mo</td>
<td>6-mo</td>
<td>12-mo</td>
<td>Yr Ago</td>
<td>QTR Saar</td>
</tr>
<tr>
<td class="firstcol">Retaill excl Auto</td>
<td>-1.7%</td>
<td>-1.1%</td>
<td>2.1%</td>
<td>-3.0%</td>
<td>-0.2%</td>
<td>1.1%</td>
<td>-1.0%</td>
<td>-10.1%</td>
</tr>
<tr>
<td class="firstcol">Food Beverage &amp; Tobacco</td>
<td>-0.4%</td>
<td>-1.7%</td>
<td>3.4%</td>
<td>5.0%</td>
<td>0.4%</td>
<td>0.0%</td>
<td>2.6%</td>
<td>-2.6%</td>
</tr>
<tr>
<td class="firstcol">Clothing &amp; Footwear</td>
<td>-4.4%</td>
<td>4.1%</td>
<td>-0.1%</td>
<td>-2.5%</td>
<td>9.3%</td>
<td>1.6%</td>
<td>0.5%</td>
<td>-10.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Real</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Retail excl Auto</td>
<td>-1.6%</td>
<td>-1.0%</td>
<td>1.6%</td>
<td>-3.9%</td>
<td>-2.2%</td>
<td>-1.4%</td>
<td>-2.4%</td>
<td>-9.9%</td>
</tr>
</tbody>
</table>
</body></html>

No hunt for this red October… German retail sales were unexpectedly weak in October. The ‘unexpectedly’ part is just as important as the ’weak’ part since Germans have been deluding themselves with a view of how this crisis is going [...]

German Retail Sales Hit the Skids Again in October

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081201a.jpg" width="353">
The Institute for Supply Management (ISM) reported that its November Composite Index of Activity in the manufacturing sector came in at 36.2. The index fell 2.7 points from October and it was the fifth decline in as many months. The figure was again the lowest level since the 1981-82 recession and was lower than expectations for a reading of 37.5. The break-even level for this diffusion index of factory sector activity is 50.
During the last twenty years there has been a 64% correlation between the level of the Composite Index and the three-month growth in factory sector industrial production.
It is appropriate to correlate the ISM index level with factory sector growth because the ISM index is a diffusion index. It measures growth by using all of the positive changes in activity added to one half of the zero change in activity measures.
Lower oil prices plunged the separate index of prices paid by another 11.5 points. It fell to 25.5 after the 16.5 point October drop. The latest was the lowest level since 1949. During the last twenty years there has been a 79% correlation between the price index and the three-month change in the PPI for intermediate goods.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081201c.jpg" width="353">
During the last three months the ISM index composite index fell by nearly fourteen points. A decline of that magnitude was exceeded only by the drop during the short &quot;credit crunch&quot; recession of 1980. Following that decline, the index bounced back smartly only then to fall again during the sharp recession of 1981-82. How severe was that economic downturn? During all of 1982 the average level of the ISM (then called the Nat&#39;l Association of Purchasing Management) index was 38.5 versus an average 52.5 during 1979. The index level signaled a 5.4% decline in factory sector industrial production during 1982 as reported by the Federal Reserve Board.
The new orders index during November again fell sharply to 27.9. The index is down over twenty points during the last three months, again the sharpest decline since 1980. Only 12% of survey participants reported higher orders while 59% reported lower orders. The export order index continued to reflect economic weakness outside of the U.S., though it was unchanged at 41.0, the lowest level in this index&#39;s short twenty year history. During the last ten years there has been a 53% correlation between the index and the q/q change in real exports of goods in the GDP accounts.
The production sub-series reflected the weakness in new orders and it fell 2.6 points to 31.5, off 20.6 points during the last three months. Following was the employment index which logged a slight m/m decline to 34.2, the lowest reading since early 1991. During the last twenty years there has been a 67% correlation between the level of the ISM employment index and the three-month growth in factory sector employment.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081201b.jpg" width="353">
The shedding of inventories continues. The index level of 39.1 was down from 44.3 in October and was at its lowest since the recession of 2001. The index gauging the speed of supplier deliveries fell further (indicating faster delivery) and order backlogs fell to the lowest level in the series&#39; history.
Too big to fail: the way forward from the Federal Reserve Bank of Minneapolis can be found <a href="http://www.minneapolisfed.org/news_events/pres/stern11-13-08.cfm">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/SURVEYS/@S2/@S201/@S201.HTM">ISM Mfg</a></th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">November &#39;07</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Composite Index</td>
<td>36.2</td>
<td>38.9</td>
<td>50.0</td>
<td>51.1</td>
<td>53.1</td>
<td>54.4</td>
</tr>
<tr>
<td class="firstcol">&nbsp; New Orders Index</td>
<td>27.9</td>
<td>32.2</td>
<td>52.5</td>
<td>54.3</td>
<td>55.4</td>
<td>57.4</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Employment Index</td>
<td>34.2</td>
<td>34.6</td>
<td>48.4</td>
<td>50.5</td>
<td>51.7</td>
<td>53.6</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index (NSA)</td>
<td>25.5</td>
<td>37.0</td>
<td>67.5</td>
<td>64.6</td>
<td>65.0</td>
<td>66.4</td>
</tr>
</tbody>
</table>
</body>
</html>

The Institute for Supply Management (ISM) reported that its November Composite Index of Activity in the manufacturing sector came in at 36.2. The index fell 2.7 points from October and it was the fifth decline in as many months. The [...]

ISM Index the Lowest Since 1982 Recession; Pricing Power Evaporated

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

US production rebounded in Q2, but demand continued to slow

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

Negative US inflation surprises leading G10 down

Deflation continues in China

Incoming data surprising on downside in US; positive surprises elsewhere

FOMC expects more inflation and less growth than in March

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

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

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

Apart from the US, productivity is moribund

Financial market concerns ebb even though policy uncertainty continues to soar

US tariff revenues nearly doubled in April

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

USD/EUR exchange rate uncoupling from interest rate differential

Widespread downgrading of 2025 GDP outlook

Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

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

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

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

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

US economy expected to outperform other major economies in 2025

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

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Andrew Cates

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

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

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

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

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

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

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

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Charts of the Week: Downside Risks

Sandy Batten

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Nonfarm business labor productivity (output per hour) rebounded in Q2, increasing 2.4% q/q (SAAR) after having fallen 1.8% in Q1 (revised down from -1.5%). A 2.0% quarterly increase in Q2 was expected by the Action Economics Forecast Survey. Compared to a year ago, productivity growth edged up to 1.3% in Q2 from 1.2% in Q1.

Real value added (output) advanced 3.7% q/q in Q2 after declining 0.6% in Q1. Hours worked increased 1.3% q/q, up only marginally from a 1.2% gain in Q1. Compensation growth slowed to 4.0% q/q in Q2 from 5.0% in Q1 and 5.5% in last year’s Q4. As a result, unit labor costs advanced only 1.6% q/q in Q2, down markedly from a 6.9% quarterly gain in Q1. However, on a y/y basis, unit labor costs increased 2.6% y/y in Q2 versus 2.0% in Q1. Annual unit labor costs have been on an uptrend since the middle of last year.

Factory sector productivity slowed to 2.1% q/q (SAAR) in Q2 from a downwardly revised 3.3% in Q1 (previously 4.4%). Compared with a year ago, manufacturing productivity increased 1.5% in Q2, its fastest annual advance since Q2 2021. Manufacturing compensation growth slowed to 3.8% q/q in Q2 from 6.3% in Q1. Accordingly, unit labor cost growth slowed to 1.7% q/q in Q1, its slowest pace in four quarters, from 2.9% in Q1.

The productivity and labor cost data are available in Haver’s **USECON** database. The Action Economics expectations figures are in the **AS1REPNA** database.

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- Nonfarm business productivity increased 2.4% q/q annualized in Q2, more than reversing the 1.8% quarterly decline in Q1.
- Compensation growth slowed to 4.0% from 5.0% in Q1.
- Consequently, unit labor cost growth slowed markedly to 1.6% from 6.9% in Q1.

U.S. Productivity Rebounded in Q2; Unit Labor Costs Slowed

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Initial claims for unemployment insurance rose to 226,000 (-3.4% y/y) during the week ended August 2 after increasing to 219,000 in the prior week, revised from 218,000. The Action Economics Forecast Survey expected 222,000 initial claims for last week. The four-week moving average of initial claims edged lower to 220,750 from 221,250. It was the lowest level since the third week of April.

In the week ended July 26, the total number of unemployment insurance beneficiaries – also known as “continuing claims” – was 1.974 million (+5.2% y/y), up from 1.936 million in the prior week, revised from 1.946 million. The four-week moving average rose to 1.952 million, and was increased from 1.862 million in the second week of April.

In the week ending July 26, the insured rate of unemployment (the number of beneficiaries as a percent of covered employment) was 1.3% for the ninth straight week. It had increased from 1.2% since the beginning of 2023 and 1.0% in November 2022.

The insured unemployment rate varied greatly across individual states and territories. In the week ended July 19, the highest unemployment rates were in New Jersey (2.76%), Puerto Rico (2.67%), Rhode Island (2.55%), California (2.20%), Minnesota (2.18%), Massachusetts (2.12%), and District of Colombia and Washington (both 2.08%). The lowest were in South Dakota (0.30%), Florida (0.41%), North Carolina (0.48%) Georgia (0.61%) and Louisiana (0.64%). Rates in other notable states include Pennsylvania (1.90%), Illinois (1.77%), New York (1.74%), Texas (1.31%) and Michigan (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 **AS1REPN**A database.

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- Initial claims increase to highest in four weeks.
- Continuing claims continue upward trend.
- Insured unemployment rate holds steady.

U.S. Initial Claims for Unemployment Insurance Rise in Latest Week

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Economy in Brief: December 2008

Jump to:

The Recent Rise of the U.S. Dollar

U.S. Construction Spending Off Sharply Again

Graceful but Painful Swan Dive in MFG PMI’s… Into an Empty Pool

German Retail Sales Hit the Skids Again in October

ISM Index the Lowest Since 1982 Recession; Pricing Power Evaporated

ISM Index the Lowest Since 1982 Recession; Pricing Power Evaporated