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

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081128d.jpg" width="353">
The Chicago Purchasing Manager&#39;s Association indicated that its November business barometer fell to 33.8 after the collapse during October. The latest figure was the lowest since early during the sharp recession of 1982. Consensus expectations had been for a reading of 37.3.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081128e.jpg" width="353">
During the last ten years there has been a 67% correlation between the business barometer and the three-month change in US factory sector industrial production. There has been an 85% correlation between the Chicago figure and the national ISM index (due for release tomorrow) and that is the highest correlation of all the regional series with the national ISM index.
The new orders sub-index fell to 27.2, the lowest since 1980, and the index level is off by roughly one-half during just the last two months. Order backlogs also fell sharply. The production series ticked slightly after having more-than halved during October.
The employment index, at 33.4, was near its lowest level since the last recession. During the last thirty years there has been a 72% correlation between the level of the employment index and the three-month change in nonfarm payrolls. 1
The prices paid index fell further after having declined sharply during October. The current index level of 50.7 is nearly half the July high. During the last ten years there has been a 55% correlation between the price index and the three-month change in the finished goods PPI.
The Mortgage Meltdown, Financial Markets, and the Economy from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2008/el2008-35-36.pdf">here</a>.

<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S2/@S203/@S203.htm">Chicago PMI</a></th>
<th scope="col">&nbsp;November</th>
<th scope="col">&nbsp; October</th>
<th scope="col">September</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>
<td class="firstcol">Chicago PMI Business Barometer Index</td>
<td>33.8</td>
<td>37.8</td>
<td>56.7</td>
<td>53.6</td>
<td>54.4</td>
<td>56.8</td>
<td>60.4</td>
</tr>
</tbody>
</table>
</body>
</html>

The Chicago Purchasing Manager's Association indicated that its November business barometer fell to 33.8 after the collapse during October. The latest figure was the lowest since early during the sharp recession of 1982. Consensus [...]

Chicago Purchasing Managers' Barometer Off Sharply

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081128c.jpg" align="left" border="0" height="265" width="353">
The Euro Area reported a dramatically deflated CPI (HICP,
Harmonized index of consumer prices) for November. The index dropped
its rate of inflation back to 2.1% from 3.2%, a huge deceleration (in
one month!) for yr/yr inflation that owes to the plunge in world oil
and energy prices. With a self-imposed limit for headline consumer
inflation of 2% the ECB can now feel it is no longer in violation of
the spirit of its &#8216;guideline&#8217;. And with inflation falling so sharply a
forward-looking expectation of being inside the target would be prudent
and reasonable. 
 

Core inflation in the EMU is still not available. But the
history shows that that measure has been much better corralled overall.
Through October the three-month pace for core inflation was 2.4%
compared to 2.4% for Yr/Yr core inflation. 
 

Of course the ECB has long since jettisoned any such technical
concerns of being in violation of its ceiling, as it has joined other
central banks in a round of international rate-cutting. The ECB
recognizes the downside risks but still has had this issue with the
inflation rate being so far over its ceiling. The drop in the rate this
month may be all the more important as the Federal Reserve in the US is
pulling out even more stops to lend to banks and issue liquidity as
well as to target mortgage rate reductions with a panoply of moves that
have some Fed critics warning of inflation consequences even as the
economy faces what could be a quarter of -5% real growth (annualized). 
 

In such an environment the ECB at least has the comfort of
getting its inflation rate back close enough to target range that it
can again feel that it is making policy with some degree of comfort,
prudence and discretion. 
 

Still, there should be no sense that all is well. The drop in
headline inflation merely gives the ECB its appearance of propriety
back - not its &#8216;Mo-Jo.&#8217; The Federal Reserve in the US has made the most
moves of any central bank but part of its mix of policies has been to
provide swap facilities for dollars to aid central banks abroad.
Central banks are still &#8216;riding the tiger&#8217;. About a week ago US
Treasury Secretary Paulson dared to commit the &#8216;in-crisis&#8217; error of
saying that banks had been stabilized, only to find that that they had
not as Citigroup saw its stock drop and a new special action by the
Fed/treasury was required. Clearly the financial situation remains
fragile though it appears to be less degenerative than it was. Now
policymakers are turning attention more to the economy. At a time like
this with Europe looking weaker and the German economy set to import a
good deal of weakness from trade as its exports drop, the ECB can use
an extra-measure of flexibility. It is hard to say that this drop in
inflation came &#8216;just in time&#8217; but at least we can say &#8216;better late than
never&#8217;. 


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr><th colspan="8" scope="col">Trends in EMU HICP; Flash Index </th>
</tr>
</thead>
<tbody>
<tr class="grey4">
<td class="firstcol">&nbsp;</td>
<td colspan="3">% mo/mo</td>
<td colspan="4">% saar</td>
</tr>
<tr class="grey3">
<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>Yr Ago</td>
</tr>
<tr class="grey3">
<td class="firstcol">EMU-13</td>
<td>-0.3%</td>
<td>0.0%</td>
<td>0.1%</td>
<td>-0.8%</td>
<td>0.7%</td>
<td>2.1%</td>
<td>3.1%</td>
</tr>
<tr class="grey3">
<td class="firstcol">Core</td>
<td>#N/A</td>
<td>0.2%</td>
<td>0.1%</td>
<td>2.4%</td>
<td>2.2%</td>
<td>2.4%</td>
<td>2.1%</td>
</tr>
<tr class="grey3">
<td class="firstcol">Goods</td>
<td>#N/A</td>
<td>0.0%</td>
<td>0.8%</td>
<td>1.4%</td>
<td>1.4%</td>
<td>3.5%</td>
<td>2.6%</td>
</tr>
<tr class="grey3">
<td class="firstcol">Services</td>
<td>#N/A</td>
<td>0.1%</td>
<td>-0.7%</td>
<td>-1.3%</td>
<td>2.5%</td>
<td>2.6%</td>
<td>2.5%</td>
</tr>
<tr class="grey2">
<td class="firstcol">HICP</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr class="grey3">
<td class="firstcol">Germany</td>
<td>0.0%</td>
<td>-0.3%</td>
<td>0.2%</td>
<td>-0.4%</td>
<td>1.1%</td>
<td>1.5%</td>
<td>3.3%</td>
</tr>
<tr class="grey3">
<td class="firstcol">France</td>
<td>#N/A</td>
<td>0.1%</td>
<td>0.0%</td>
<td>-0.7%</td>
<td>1.8%</td>
<td>3.0%</td>
<td>2.1%</td>
</tr>
<tr class="grey3">
<td class="firstcol">Italy</td>
<td>-0.4%</td>
<td>0.3%</td>
<td>0.0%</td>
<td>-0.4%</td>
<td>1.7%</td>
<td>2.8%</td>
<td>2.6%</td>
</tr>
<tr class="grey3">
<td class="firstcol">UK</td>
<td>#N/A</td>
<td>-0.4%</td>
<td>0.6%</td>
<td>#N/A</td>
<td>#N/A</td>
<td>#N/A</td>
<td>2.1%</td>
</tr>
<tr class="grey3">
<td class="firstcol">Spain</td>
<td>#N/A</td>
<td>-0.3%</td>
<td>0.0%</td>
<td>-1.5%</td>
<td>2.6%</td>
<td>3.6%</td>
<td>3.7%</td>
</tr>
<tr class="grey2">
<td colspan="2">Core:xFE&amp;A</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr class="grey3">
<td class="firstcol">Germany</td>
<td>#N/A</td>
<td>-0.1%</td>
<td>0.0%</td>
<td>0.8%</td>
<td>1.7%</td>
<td>1.5%</td>
<td>2.1%</td>
</tr>
<tr class="grey3">
<td class="firstcol">Italy</td>
<td>#N/A</td>
<td>0.5%</td>
<td>0.0%</td>
<td>4.6%</td>
<td>3.0%</td>
<td>3.0%</td>
<td>2.1%</td>
</tr>
<tr class="grey3">
<td class="firstcol">UK</td>
<td>#N/A</td>
<td>#N/A</td>
<td>0.0%</td>
<td>#N/A</td>
<td>#N/A</td>
<td>#N/A</td>
<td>1.8%</td>
</tr>
<tr class="grey3">
<td class="firstcol">Spain</td>
<td>#N/A</td>
<td>0.1%</td>
<td>0.1%</td>
<td>2.4%</td>
<td>3.1%</td>
<td>2.9%</td>
<td>3.1%</td>
</tr>
<tr class="grey1">
<td colspan="8" class="firstcol">Blue shaded area data trail by one
month.</td>
</tr>
</tbody>
</table>
</body></html>

The Euro Area reported a dramatically deflated CPI (HICP, Harmonized index of consumer prices) for November. The index dropped its rate of inflation back to 2.1% from 3.2%, a huge deceleration (in one month!) for yr/yr inflation that [...]

EMU CPI in Near-Record Drop HICP is Barely Over the ECB Ceiling-Freeing Bank to Slash Rates

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

Previous Trump tariffs fading. A boost from new tariffs ahead?

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

Economic activity is picking up in the US but remains lackluster abroad

Policy uncertainty has surged since the US national elections.

Recent turnaround in US economic surprises leading to increases in rate-cut expectations

The outlook has brightened in the US, while it has dimmed for other major economies

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

Blue Chip forecasters look for further significant monetary easing apart from Japan

Recent rise in global supply chain pressures could augur a pickup in global inflation pressures

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Andrew Cates

**The global business cycle** 
The recent sharp decline in the Future Output Balance in the global composite PMI survey reflects a sudden deterioration in global business expectations. The sweeping tariffs, introduced in April 2025, have generated heightened uncertainty around trade policy and sparked fears of retaliatory actions from key trading partners. As a result, businesses worldwide are scaling back their expectations for future output, wary of rising costs, disrupted demand flows, and a broader shift toward protectionism that could undermine global economic momentum.

250507Z1.jpg

Note: The extreme declines in the Future Output Balance that were recorded in the early months of 2020 (at the height of the COVID pandemic) have been removed from this chart.

**Global supply chain pressures**
Still, despite the marked deterioration in global business expectations, this second chart below provides a reassuring counterpoint: as of now, there is little evidence that global supply chain pressures have materially intensified. Both the New York Fed’s Global Supply Chain Pressure Index and the Baltic Exchange Dry Index remain relatively subdued, especially compared to the pandemic-era spikes of 2020–2022. While there has been heightened concern following the April 2025 US tariff announcements, these trade policy shifts have yet to translate into measurable physical disruption in logistics or freight rates. The stability of these indices suggests that although sentiment has taken a hit, global shipping networks and supply flows are, for now, absorbing the shock. However, this calm may prove fragile if the policy environment hardens further or retaliatory trade actions begin to compound the strain.

250507Z2.jpg

**Expectations for central banks’ policy rates** 
Adding to the picture of mounting economic caution, the latest Blue Chip Financial Forecasts survey reveals that expectations for policy easing over the next 12 months have become even more pronounced than in previous months. While earlier surveys had already pointed to a further extension of the global rate-cutting cycle, the latest results suggest forecasters now anticipate a deeper and more aggressive round of monetary easing—most notably from the US Federal Reserve, which is now expected to deliver nearly a full percentage point in rate cuts over the next 12 months. The sharp deterioration in business sentiment is reshaping the macro narrative: central banks are no longer simply guiding inflation lower, but are instead preparing to confront the risk of a deeper, demand-driven slowdown.

250507Z3.jpg

**Energy prices and inflation** 
Adding further context to the growing expectations for policy easing, oil prices have dropped sharply in recent weeks—driven by mounting concerns over global growth, as reflected in weakening business sentiment and softer demand indicators. The chart below provides a longer-run perspective on why this matters: energy prices have historically played a central role in shaping the global inflation trajectory. The strong positive correlation (r = 0.83) between median world energy price inflation and median core consumer price inflation underscores the powerful pass-through effects energy costs can have on broader price dynamics. While core inflation tends to be stickier, this historical relationship makes clear that sustained declines in energy prices often foreshadow broader disinflationary trends.

250507Z4.jpg

**Intangibles versus tangibles** 
Shifting focus from short-term cyclical risks to longer-term structural dynamics, the next chart below underscores a fundamental transformation in the composition of US investment: the economy has increasingly been built on intangibles. Over the past several decades, investment in intangible assets—such as software, intellectual property, R&D, and brand equity—has steadily climbed and, since the mid-2010s, has overtaken investment in both structures and equipment as a share of GDP. This shift reflects the rise of a knowledge-based, innovation-driven economy, but it also introduces new forms of vulnerability. Unlike physical capital, intangible assets rely heavily on trust, reputation, legal protections, and global openness. In this context, escalating trade frictions and a more confrontational US economic stance—as signalled by the recent tariff wave—risk eroding the goodwill and institutional credibility that underpin much of the value created by intangibles. If geopolitical uncertainty undermines the perceived reliability of US intellectual property protections or weakens global collaboration, it could pose a deeper structural challenge to future growth than any immediate cyclical downturn.

250507Z5.jpg

**Investment in Artificial Intelligence**
The centrality of intangibles to the US growth model is nowhere more evident than in the explosion of private investment in artificial intelligence. As this chart illustrates, global AI investment has surged over the past decade—reaching new highs in 2024—and the United States has consistently accounted for the lion’s share of that spending. This reflects not only America’s previous leadership in frontier technologies but also its dependence on intangible capital, from algorithms and data infrastructure to human expertise and institutional trust. However, this dominance also underscores the strategic stakes of current policy choices. In an environment of rising trade tensions and potential fragmentation, the foundations of US leadership in AI—cross-border collaboration, data openness, and global market access—could be at risk.

250507Z6.jpg

Financial market sentiment has rebounded in recent weeks, buoyed by signs of de-escalation in the US-led trade war and growing confidence that central banks—particularly the Federal Reserve—will step in with more rate cuts to cushion any fallout. Yet beneath the surface, a more sobering picture of the global economy persists. For example, latest PMI surveys reveal that global business expectations have slumped to their lowest levels since the pandemic, reflecting widespread unease about the growth outlook (chart 1). While supply chain pressures have so far remained contained, suggesting no repeat of the logistical chaos seen during the pandemic (chart 2), the latest Blue Chip Financial Forecasts survey reveals that forecasters are now pencilling in deeper and more widespread monetary easing than previously anticipated—an acknowledgment that demand is faltering (chart 3). Falling oil prices further reinforce this view: they are both a symptom of weakening global demand and a potential source of disinflation, reducing the urgency for central banks to maintain tight policy (chart 4). At the structural level, the US economy's increasing reliance on intangible assets—ranging from intellectual property to reputation—has made it more vulnerable to geopolitical frictions and the erosion of global trust (chart 5). This risk is compounded by America's dominant role in AI investment, a sector symbolic of both its economic strengths and its exposure to international perceptions (chart 6). The longer-term challenge, then, is not just navigating the current downturn, but ensuring that the institutional goodwill and cross-border openness that support the modern US economy are not sacrificed in a more fragmented and uncertain global order.

Charts of the Week: Relief Rally Meets Recession Risk

250507J1.jpg

250507K1.jpg

At today’s meeting of the Federal Open Market Committee, the target range for the Fed funds rate was left unchanged at 4.25% to 4.50%. This followed reductions at three consecutive meetings in the fall of 2024. Rates remain below the high of 5.25% to 5.50% in place in mid-September. Today’s target range matched expectations in the Action Economics Forecast Survey.

The statement following the meeting indicated that, “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook has increased further. The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen.”

“The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”

The Fed continued, “The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage backed securities.”

250507L1.jpg

250507M1.jpg

- FOMC holds funds rate target at late-December level.
- Risk assessments include higher unemployment & inflation.

FOMC Targeted Funds Rate Range Is Unchanged; Increased Risks Acknowledged

Kathleen Stephansen, CBE

250507F4.jpg

250507G4.jpg

Consumer credit outstanding rose $10.2 billion (1.9% y/y) during March after declining by $0.6 billion (+1.7% y/y) during February, revised from a decline of $0.8 billion (+1.7% y/y. A $10.0 billion rise had been expected in the Action Economics Forecast Survey. As a percentage of disposable personal income, consumer credit was 22.4% in March, compared to 22.9% one year earlier.

Nonrevolving credit outstanding rose $8.3 billion (1.5% y/y) in March after easing $0.3 billion (1.3% y/y) in February. Nonrevolving credit held by depository institutions declined 7.8% y/y in March after declining 9.0% y/y in February. Finance company debt holdings rose 0.8% y/y, while credit union holdings eased 1.9% y/y in March. Nonrevolving debt held by the federal government rose 3.4% y/y.

In March, revolving credit outstanding, which includes credit cards, rose $1.9 billion (2.9% y/y) following a decline of $0.3 billion (2.9% y/y) in February. Revolving credit outstanding held by depository institutions fell 1.5% y/y. Revolving credit held by finance companies dropped 12.2% y/y, while that held by credit unions rose 3.7% y/y.

The consumer credit figures from the Federal Reserve Board are break-adjusted and calculated by Haver Analytics. The breaks in the series in 2005, 2010 and 2015 are the result of the incorporation of data from the Census and the Survey of Finance Companies, as well as changes in the seasonal adjustment methodology. The consumer credit data are available in Haver’s **USECON** database. The Action Economics forecast figures are contained in the **AS1REPNA** database.

250507H4.jpg

250507I4.jpg

- Consumer credit rises close to expectations.
- Nonrevolving and revolving credit rise.


U.S. Consumer Credit Rebounded in March

250507A20.jpg

250507B20.jpg

Mortgage applications increased 11.0% (26.0% y/y) in the week ended May 2, after declining 4.2% in the week ended April 25, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. Applications to purchase a home rose 11.1% (12.9% y/y) in the week ended May 2 after declining 4.4% in the previous week. Loan applications to refinance a home loan also increased 11.1% (51.0% y/y) in the latest week after falling 3.7% in the prior week.

The effective interest rate on a 30-year fixed rate loan of 7.03% in the week ended May 2 compared to 7.08% in the prior week. The effective rate on a 15-year fixed rate loan of 6.34% in the week ended May 2 followed 6.36% in the prior week. The rate on a 30-year jumbo loan declined to 6.99% in the latest week from 7.06% in the prior week, while the rate on a 5-year ARM eased	to 6.08% in the week ended May 2 from 6.12% in the prior week.

The share of applications to refinance an existing mortgage slipped to 37.1% in the week ended May 2 from 37.3% in the prior week. The share of loans with an adjustable rate rose to 8.3% in the latest week from 7.4% one week earlier.

The average size of a mortgage loan rose 4.2% (3.8% y/y) to $400,200 in the week ended May 2, after slipping 0.7% to $384,100 in the prior week. The average size of a loan to purchase a home increased 1.0% (0.2% y/y) to $444,300 in the latest week from $440,100 in the week prior. The average size of a loan to refinance an outstanding mortgage increased 12.3% (27.6% y/y) last week to $325,400 from $289,800 one week earlier.

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.

- Purchase & refinancing loan applications jump.
- Effective interest rates remain range-bound.
- Average loan size increases.

Mortgage Applications Surge as Interest Rates Ease Last Week

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The U.S. trade deficit in goods and services (BOP basis) in March grew to $140.5 billion after narrowing slightly to $123.2 billion in February, revised from $122.7 billion, after widening to $130.7 billion in January according to the U.S. Census Bureau. A $136.7 billion deficit was expected by the Action Economics Forecast Survey. Exports rose 0.2% (6.7% y/y) in March after increasing 2.8% in February. This was accompanied by a 4.4% rise (27.1% y/y) rise in imports which came after m/m stability in February. In Q1’25, the deficit grew to an average $131.4 billion, after rising to an average $83.3 billion in Q4’24.

The trade deficit in goods (BOP basis) widened to a record $163.2 billion in March from $147.9	 billion in February, revised from $147.0 billion. Goods exports (customs value) rose 1.4% (7.0% y/y) in March, after increasing 3.6% in February. The latest increase reflected an 8.2% (8.4% y/y) surge in auto exports which came after a 12.7% strengthening. A 3.5% (4.0% y/y) gain occurred in industrial supplies & materials exports which followed a 5.1% rise. Foods, feeds & beverage exports rose 6.6% (1.4% y/y) after declining in four of the prior five month. Working lower, capital goods exports fell 2.5% (+13.9% y/y) in March after a 4.	8% increase and nonauto consumer goods exports were off 1.1% (+3.4% y/y) in March after a 2.4% gain.

Imports of goods increased 5.5% (31.4% y/y) in March after a 0.2% February easing. Imports of nonauto consumer goods imports surged 27.9% (56.0% y/y) following a 3.1% February gain. Auto imports rose 6.6% (8.7% y/y) after a 1.2% rise. Capital goods imports rose 4.2% (22.5% y/y) following a 1.1% rise. Foods, feeds & beverage imports eased 0.4% (+11.1% y/y) following a 2.0% weakening. Industrial supplies & materials imports declined 12.4% (+39.5% y/y) after weakening 4.6% in February. Petroleum imports by end-use fell 4.1% (-10.2% y/y) after a 2.9% decline. Nonpetroleum imports increased 6.0% (34.8% y/y) after holding steady in February.

The inflation-adjusted goods trade deficit (customs value) deepened to $150.9 billion in March from $136.9 billion in February. Real exports rose 1.6% (5.3% y/y) after a 3.0% February increase, while real imports rose 5.8% (29.8% y/y) in March following a 0.5% February slip.

The services trade surplus narrowed to $23.0 billion in March after decreasing to $23.8 billion in February. It reached a peak of $25.7 billion in November of last year. Service exports fell 0.9% (+5.7% y/y) after a 0.8% decline in February. Construction services exports rose 1.0% (37.7% y/y) after increasing 2.6% in February. Travel services exports fell 7.1% (-3.7% y/y) and financial exports increased 0.9% (7.3% y/y). Transport exports rose 3.1% (2.4% y/y). Service imports eased 0.1% (+10.8% y/y) in March following a 0.8% gain. Maintenance & repair services declined 1.5% (+32.1% y/y) while imported transport services increased 1.2% (1.7% y/y). Imported travel services fell 2.2% (5.3% y/y) while charges for use of intellectual property rose 1.0% (13.6 y/y).

The U.S. goods trade deficit with China narrowed to a seasonally adjusted $24.8 billion in March from $26.6 billion in February. Exports to China declined 8.2% (-10.5% y/y) while imports weakened 7.2% (-2.7% y/y). The deficit with the European Union deepened to a record $48.3 billion in March from $30.9 billion in February. Exports rose 10.9% (14.5% y/y) while imports soared 34.0% (65.4% y/y). The deficit with Japan deepened to $5.8 billion from $5.2 billion in February. Exports rose 1.8% (8.8% y/y) and imports rose 6.4% (9.9% y/y).

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

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- Goods deficit grows as imports surge ahead of tariff imposition.
- Exports edge higher, led by autos.
- Petroleum product imports fall as crude oil prices decline.

Economy in Brief: 2008

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