Robert Brusca

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The flash readings for Markit's manufacturing and service sector PMIs both rose in June, indicating the least amount of contraction since March of 2012 for the service sector (compared to finalized data) and since February of 2012 for the manufacturing sector. 


The downdraft in Europe seems to be slowly dissipating. The chart shows a relatively stronger and longer-lived rise for the manufacturing index compared to the services index. Indeed, the manufacturing PMI stands in the lower 29th percentile of its historic queue compared to a 19% standing for the services sector. Both of these are still extremely low readings. Viewed another way, the manufacturing index is at 95% of its historic average compared to services which is at the 91st percentile of its historic average.


Both indicators are below the mark of '50' indicating ongoing contraction; both of them are below their historic mean indicating weaker than normal activity. And both of them are on an improving trend of some sort.


The manufacturing index has been moving up relatively strongly since about August 2012. During that move, there was a decline in October 2012 and two recent declines in March and in April 2013. The increases in May and June 2013, however, have now brought manufacturing back up to a local cycle high reading, its best since February 2012.


The services index shows a much flatter profile. It has now risen for three months in a row after falling for two months in a row in February and March; it has generally been increasing since October 2012.


Other Euro area data continue to be mixed. The economy in Europe is still not doing well, but the PMI data are speaking to the issue of the degree of decline and that is letting up. Europe has great internal differences in terms of the PMI values for individual country members. We will get more on that when the final figures are released. For now, we will note that France's PMI index for manufacturing jumped in June to 48.3 from 46.4 in May- even so that measures a decline in the French MFG sector. France's services PMI rose by more than two points on the month as well. In Germany the two sector PMI gauges translated into a net gain in its private sector in June for the second month in a row. Even so, the German MFG sector took a step back to 48.7 in June from 49.4 in May. 


Conditions in the Zone remain somewhat unpredictable in spite of the month's overall improvement. The news today from China of a weakening in the MFG PMI there is an offsetting bit of disturbing global news. Early data in the US seem to be better than expected for housing and for a regional MFG report on manufacturing from the Philadelphia Fed region. 


Still, markets are wary about the Fed down-shifting its support. Data have blown hot and cold. While Europe seems to have a trend improvement in train (less weakness) markets and central banks remain wary, The Fed, in its zeal to end QE, still is using language of a very hedged nature. Meanwhile, many inflation-sensitive indicators are very weak with silver looking especially weak in today's trading. The global economy is in flux if not in play. Many Fed watchers are trying to square the Fed's newest policy choice and bond market reactions with the ongoing weak -and weakening- inflation picture globally and in the US itself.


The picture is perplexing. The outlook while possibly better and stronger is also still with a good deal of risk even as the Fed says it sees less risk. The recent drop in inflation has caught some attention but not yet headlines and is the focus of at least one Fed member, St Louis Fed President, James Bullard. There are still a lot of interesting international twists and turns in the data that merit our full attention. We are not yet 'off to the races' despite what some of today's data might suggest. 


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The flash readings for Markit's manufacturing and service sector PMIs both rose in June, indicating the least amount of contraction since March of 2012 for the service sector (compared to finalized data) and since February of 2012 for [...]

EMU Down-Draft Abates

Tom Moeller

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 Economic recovery is
 taking hold. The Philadelphia Federal
 Reserve Bank reported that its General Business Conditions Index for June
 jumped to 12.5. This figure was the highest level since April 2011 and it
 followed an unrevised -5.2 in May. Another negative reading (-2.0) had
 been expected. Haver Analytics constructs a seasonally adjusted figure
 comparable to the ISM index. It also rose but more moderately to 49.6, its
 highest level since December. During the last ten years there has been
 a 71% correlation between the adjusted Philadelphia Fed index and real GDP
 growth.
 Improvement in the Composite Index was driven by a surge in new orders
 to its highest level (16.6) since March 2011. The shipments series also
 recovered handsomely to its highest level this year (4.1). Lesser
 improvement was logged by unfilled orders and employment. During the last
 ten year there has been a 79% correlation between the employment index and
 the m/m change in nonfarm payrolls. To the downside, the delivery times
 and inventories indexes slipped. 
 Pricing power recovered sharply m/m to its highest level since December.
 A sharply higher 28.2% of firms paid higher prices while a reduced 5.7%
 paid less. During the last ten years there has been a 71% correlation
 between the prices paid index and three-month growth in the intermediate
 goods PPI.
 The separate index of expected business conditions in six months
 advanced to 33.7, the highest level in nine months. The employment figure
 surged to its highest reading since April 2011. The readings for new
 orders, shipments, unfilled orders also improved significantly.
 The survey panel consists of 150 manufacturing companies in Federal
 Reserve District III (consisting of southeastern PA, southern NJ and
 Delaware.) The diffusion indexes represent the percentage of respondents
 indicating an increase minus the percentage indicating a decrease in
 activity. The figures from the Philadelphia Federal Reserve can be found
 in Haver's SURVEYS database. The Consensus expectations figure is
 available in AS1REPNA.&nbsp; 
 

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 &nbsp;


<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>
 <thead>
 <tr>
 <th class="firstcol" >Philadelphia Fed (%, SA)</th>
 <th scope="col">Jun</th>
 <th scope="col" >May</th>
 <th scope="col" >Apr</th>
 <th scope="col" >Jun'12</th>
 <th scope="col" >2012</th>
 <th scope="col" >2011</th>
 <th scope="col" >2010</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >ISM-Adjusted General Business
 Conditions</td>
 <td>49.6</td>
 <td >45.8</td>
 <td >46.1</td>
 <td >44.7</td>
 <td >47.7</td>
 <td >51.9</td>
 <td >50.7</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >General Business Conditions</td>
 <td>12.5</td>
 <td >-5.2</td>
 <td >1.3</td>
 <td >-12.8</td>
 <td >-0.2</td>
 <td >7.7</td>
 <td >12.1</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;New Orders</td>
 <td>16.6</td>
 <td >-7.9</td>
 <td >-1.0</td>
 <td >-13.1</td>
 <td >-0.1</td>
 <td >7.2</td>
 <td >5.5</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Shipments</td>
 <td>4.1</td>
 <td >-8.5</td>
 <td >9.1</td>
 <td >-13.8</td>
 <td >-1.4</td>
 <td >9.9</td>
 <td >8.3</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Unfilled Orders</td>
 <td>-7.9</td>
 <td >-9.3</td>
 <td >-8.7</td>
 <td >-11.3</td>
 <td >-6.5</td>
 <td >-0.9</td>
 <td >-3.0</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Delivery Time</td>
 <td>-9.3</td>
 <td >-6.0</td>
 <td >-13.8</td>
 <td >-14.0</td>
 <td >-9.1</td>
 <td >-0.4</td>
 <td >0.9</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Inventories</td>
 <td>-6.6</td>
 <td >4.1</td>
 <td >-22.2</td>
 <td >-7.8</td>
 <td >-6.0</td>
 <td >-0.3</td>
 <td >-4.9</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Number of Employees</td>
 <td>-5.4</td>
 <td >-8.7</td>
 <td >-6.8</td>
 <td >2.3</td>
 <td >0.0</td>
 <td >11.0</td>
 <td >4.7</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Prices Paid</td>
 <td>22.5</td>
 <td >6.9</td>
 <td >3.1</td>
 <td >5.4</td>
 <td >17.6</td>
 <td >39.3</td>
 <td >29.0</td>
 </tr>
 </tbody>
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Economic recovery is taking hold. The Philadelphia Federal Reserve Bank reported that its General Business Conditions Index for June jumped to 12.5. This figure was the highest level since April 2011 and it followed an unrevised -5.2 [...]

Philadelphia Fed Business Conditions Index Recovers to a Two-Year High

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 Initial unemployment insurance claims rose to 354,000 (-8.3%
 y/y) during the week ended June 15 from a revised 336,000 during the week
 prior, initially reported as 334,000. Consensus expectations were for 340,000
 claims. The four week moving average of claims nudged up to 348,250. The
 latest claims figure covers the survey period for June nonfarm payrolls.
 There was a 10,000 increase (2.9%) from May. During the last ten years,
 there has been a 74% correlation between the level of claims and the m/m
 change in nonfarm payrolls.
 Continuing claims for unemployment insurance in the week ended June 8
 fell to 2.951 million (-11.1% y/y) from a revised 2.991 million. The four
 week moving average of continuing claims ticked up to 2.979 million. The
 insured rate of unemployment held at 2.3% where it's been for nine weeks.
 This particular count covers only &quot;regular&quot; programs and does
 not include all extended benefit and other specialized jobless insurance
 programs. In the week of June 1, the latest figure available, the grand
 total of all benefit recipients rose w/w to 4.534 million, (-22.1% y/y).
 That compares to a cycle peak of 12.060 million in January 2010. The
 number of individuals who are collecting emergency and extended payments
 fell to a cycle low of 1.684 million (-33.5% y/y).
 By state, the insured unemployment rate continued to vary
 greatly with South Dakota (0.48%), Virginia (1.24%), Oklahoma (1.39%),
 Texas (1.56%),&nbsp; Indiana (1.57%), Ohio (1.60%), Tennessee (1.67%) and
 Georgia (1.67%) at the low end of the range. At the high end were Michigan
 (1.94%), New York (2.50%), Massachusetts (2.50%), Illinois (2.58%), Nevada
 (2.80%), California (2.89%), Pennsylvania (2.98%) and New Jersey (3.10%).
 Data on weekly unemployment insurance are contained in Haver's WEEKLY
 database and they are summarized monthly in USECON. Data for
 individual states are in REGIONW. The consensus estimates come from
 the Action Economics survey, carried in the AS1REPNA database.
 Estimating the Trend in Employment Growth from the Federal
 Reserve Bank of Chicago is available <a href="http://www.chicagofed.org/digital_assets/publications/chicago_fed_letter/2013/cfljuly2013_312.pdf">here</a>.

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 &nbsp;


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	<colgroup><col><col><col><col><col><col><col><col></colgroup>
	
 <thead>
 <tr>
 <th class="firstcol" scope="col" >Unemployment Insurance
 (000s)</th>
 <th scope="col" >06/15/13</th>
 <th scope="col" >06/08/13</th>
 <th scope="col" >06/01/13</th>
 <th scope="col" >Y/Y %</th>
 <th scope="col" >2012</th>
 <th scope="col" >2011</th>
 <th scope="col" >2010</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Initial Claims</td>
 <td >354</td>
 <td >336</td>
 <td >346</td>
 <td >-8.3</td>
 <td >375</td>
 <td >409</td>
 <td >459</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Continuing Claims</td>
 <td >--</td>
 <td >2,951</td>
 <td >2,991</td>
 <td >-11.1</td>
 <td >3,318</td>
 <td >3,744</td>
 <td >4,544</td>
 </tr>
 <tr>
 <td class="firstcol" >Insured Unemployment Rate (%)</td>
 <td >--</td>
 <td >2.3</td>
 <td >2.3</td>
 <td >2.6 
 (6/12)</td>
 <td >2.6</td>
 <td >3.0</td>
 <td >3.6</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Total &quot;All Programs&quot;
 (NSA)</td>
 <td >--</td>
 <td >--</td>
 <td >4.534</td>
 <td >-22.5</td>
 <td >6.047M</td>
 <td >7.750M</td>
 <td >9.850M</td>
 </tr>
 </tbody>
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Initial unemployment insurance claims rose to 354,000 (-8.3% y/y) during the week ended June 15 from a revised 336,000 during the week prior, initially reported as 334,000. Consensus expectations were for 340,000 claims. The four week [...]

U.S. Initial Jobless Insurance Claims Move Higher

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 As expected, the Federal Open Market Committee today left the Federal
 funds rate in a range from 0 to 1/4 percent. The Fed funds rate has
 remained unchanged since late-2008 at its lowest level ever. The discount
 rate was left at 0.75%. Also unchanged were the Fed's comments on the
 economy. &quot;Economic activity has been expanding at a moderate pace.
 Labor market conditions have shown some improvement in recent months, on
 balance, but the unemployment rate remains elevated. Household spending
 and business fixed investment advanced, and the housing sector has
 strengthened further, but fiscal policy is restraining economic growth. Inflation
 has been running below the Committee's longer-run objective, but
 longer-term inflation expectations have remained stable.&quot;
 New was the statement that &quot;Risks to the economic outlook for the
 economy and labor markets have diminished since the fall.&quot; The
 Committee continues to &quot;anticipate that inflation over the medium
 term likely will run at or below its 2 percent objective.&quot;
 &quot;The Committee decided to continue purchasing additional agency
 mortgage-backed securities at a pace of $40 billion per month and
 longer-term Treasury securities at a pace of $45 billion per month. The
 Committee is maintaining its existing policy of reinvesting principal
 payments from its holdings of agency debt and agency mortgage-backed
 securities in agency mortgage-backed securities and of rolling over
 maturing Treasury securities at auction.&quot;
 The &quot;exceptionally low range for the federal funds rate will be
 appropriate at least as long as the unemployment rate remains above 6-1/2
 percent, inflation between one and two years ahead is projected to be no
 more than a half percentage point above the Committee's 2 percent
 longer-run goal, and longer-term inflation expectations continue to be
 well anchored.&quot;
 The press release for today's FOMC meeting can be found <a href="http://www.federalreserve.gov/newsevents/press/monetary/20130619a.htm">here</a>.
 Haver's SURVEYS database contains the projections from the
 Federal Reserve Board. The economic data can be found in Haver's USECON
 database. 
 Low Inflation in a World of Securitization from the Federal
 Reserve Bank of St. Louis can be found here <a href="http://research.stlouisfed.org/publications/es/article/9801">here</a>.
 
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<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" >&nbsp;</th>
 <th scope="col">Current</th>
 <th scope="col">Last</th>
 <th scope="col">2012</th>
 <th scope="col">2011</th>
 <th scope="col">2010</th>
 <th scope="col">2009</th>
 </tr>
 </thead>
 <tbody>
 <tr class="odd">
 <td class="firstcol" >Federal Funds Rate, % (Target</td>
 <td>0.00-0.25</td>
 <td>0.00-0.25</td>
 <td>0.14</td>
 <td>0.10</td>
 <td>0.17</td>
 <td>0.16</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Discount Rate, %</td>
 <td>0.75</td>
 <td>0.75</td>
 <td>0.75</td>
 <td>0.75</td>
 <td>0.72</td>
 <td>0.50</td>
 </tr>
 </tbody>
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As expected, the Federal Open Market Committee today left the Federal funds rate in a range from 0 to 1/4 percent. The Fed funds rate has remained unchanged since late-2008 at its lowest level ever. The discount rate was left at [...]

FOMC Leaves Fed Funds, Economic Outlook and Securities Purchases Unchanged

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Japan's yen-based current account deficit eroded again in May as exports rose by 3.2% as imports rose faster by 4.7%. Over three months Japanese exports and imports are both growing at a hefty pace over 30% with imports growing slightly faster. These growth rates are also strong over six months. For that period, export growth is nearly flat while imports have accelerated from the 25% pace to their 35% pace over three months. Year-over-year Japanese exports are up by nearly 8% with imports up by about 11%.

One year ago the yen was sitting at a level of 86.2 yen Vs the US dollar. It has since fallen to a level of 100.92 yen. This drop is been one of the main factors driving Japanese exports. The program of QE has been successful in getting the yen lower, helping to stimulate Japanese exports, reviving the domestic economy and helping to increase imports. Despite the rapid decline of the yen, and the recent backtracking in its move, more weakness lies ahead for it. The yen had been vastly overvalued and the QE process is beginning to undo that situation, to restore normalcy to the exchange market.

Still, the Japanese economy is a long way from getting the all-clear signal. Japan has huge debt problems and ongoing issues with the demographic trends that imply a shrinking population. That will make growth harder to attain and will intensify the already heavy burden of the federal debt. Financing its current needs is also an issue for Japan, The older population should begin to whittle down its pile of assets instead of continue to build them.

Japan's ongoing shift away from nuclear power has boosted its imports of fuels and undermines what has been a long history of current account surpluses for Japan. Fortunately Japan's heavy indebtedness is not an issue for international investors as it owes most of its debt to its own citizens. So the crop up of a string of current account deficits is not a problem for Japan's financing.

Japan continues to have problems not just in developing economic demand, but with the ongoing issues from its 'ongoing' nuclear disaster. Just recently the toxic radioactive isotope strontium-90 has been found in the groundwater at Japan's Fukushima nuclear plant. The presence of this toxic radioactive isotope in the local groundwater is a disturbing new development.

Japan's export and import revival is encouraging. Still, exports have not been able to move ahead of imports to reduce Japan's monthly trade deficit. But the revival in the growth rates for both exports and imports are good signs for an improvement in the demand for Japan's products, underscoring the repair that's been made to Japan's competitiveness. Strength in imports underscores the revival of the domestic economy. Year-over-year figures are only just beginning to come into line. The biggest growth rates have been those of the recent handful or so of months, but it's still a set of encouraging developments for a country that still has a long way to go to solidify its outlook for sustainable economic growth.



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Japan's yen-based current account deficit eroded again in May as exports rose by 3.2% as imports rose faster by 4.7%. Over three months Japanese exports and imports are both growing at a hefty pace over 30% with imports growing [...]

Japan's Trade Trends

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 The Mortgage Bankers Association indicated that total applications for
 a home mortgage fell 3.3% w/w from last week, following a 5.0% rise during the prior week.
 The latest level was down by nearly one-third since early-May. Last week's
 decline reflected a 3.4% drop (-40.4% y/y) in applications to refinance
 an existing loan. Home purchase mortgage applications were off 3.0%
 last week (+11.9% y/y).
 The effective interest rate on a 15-year mortgage slipped w/w to 3.30% from 3.32%.
 Nevertheless, the figure was up sharply from its early-May low of 2.81%.
 Earlier numbers were revised slightly. The
 effective rate on a 30-year fixed rate loan ticked up to 4.17% last week
 while the rate on a Jumbo 30-year loan was 4.23%. The 87 basis point
 spread between 15- and 30-year loan rates was the greatest since July 2011.
 The effective interest rate on an adjustable 5-year mortgage increased to
 2.81%, up from its low of 2.53% at the beginning of May.
 Applications for fixed interest rate loans fell by one-third y/y while
 adjustable rate loan applications rose 10.8% y/y. The average mortgage
 loan size was $223,700. The average size loan for home purchases was $268,700
 last week while for refinancings it was $203,300.
 The survey covers over 75 percent of all U.S. retail residential
 mortgage applications, and has been conducted weekly since 1990.&nbsp;
 Respondents include mortgage bankers, commercial banks and thrifts.&nbsp;
 Base period and value for all indexes is March 16, 1990=100. 
 The figures for weekly mortgage applications are available in Haver's SURVEYW
 database.&nbsp;
 Paying Paul and Robbing No One: An Eminent Domain Solution for
 Underwater Mortgage Debt from the Federal Reserve Bank of New York can be found
 <a href="http://www.newyorkfed.org/research/current_issues/ci19-5.html">here</a>.
 &nbsp;
 
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	<colgroup><col><col><col><col><col><col><col><col></colgroup>
	
 <thead>
 <tr>
 <th class="firstcol" scope="col" >MBA Mortgage
 Applications (SA, 3/16/90=100)</th>
 <th scope="col" >06/14/13</th>
 <th scope="col" >06/07/13</th>
 <th scope="col" >05/31/13</th>
 <th scope="col" >Y/Y%</th>
 <th scope="col" >2012</th>
 <th scope="col" >2011</th>
 <th scope="col" >2010</th>
 </tr>
 </thead>
 <tbody>
 <tr class="odd">
 <td class="firstcol" >Total Market Index</td>
 <td >648.9</td>
 <td >670.7</td>
 <td >638.7</td>
 <td >-31.1</td>
 <td >813.8</td>
 <td >572.3</td>
 <td >659.3</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;Purchase</td>
 <td >210.4</td>
 <td >217.0</td>
 <td >207.3</td>
 <td >11.9</td>
 <td >187.8</td>
 <td >182.6</td>
 <td >199.8</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;Refinancing</td>
 <td >3,208.5</td>
 <td >3,322.3</td>
 <td >3,163.5</td>
 <td >-40.4</td>
 <td >4,505.0</td>
 <td >2,858.4</td>
 <td >3,348.1</td>
 </tr>
 <tr>
 <td class="firstcol" >15-Year Mortgage Effective Interest
 Rate (%)</td>
 <td >3.30</td>
 <td >3.32</td>
 <td >3.23</td>
 <td >3.22 
 (6/12)</td>
 <td >3.25</td>
 <td >3.97</td>
 <td >4.39</td>
 </tr>
 </tbody>
 </table>
 
</body>
</html>

The Mortgage Bankers Association indicated that total applications for a home mortgage fell 3.3% w/w from last week, following a 5.0% rise during the prior week. The latest level was down by nearly one-third since early-May. Last [...]

U.S. Mortgage Applications Move Lower Despite Interest Rate Stability

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 The Mortgage Bankers Association indicated that total applications for
 a home mortgage fell 3.3% w/w following a 5.0% rise during the prior week.
 The latest level was down by nearly one-third since early-May. Last week's
 decline reflected a 3.4% drop (-40.4% y/y) in applications to refinance
 an existing loan. Home purchase mortgage applications were off 3.0%
 last week (+11.9% y/y).
 The effective interest rate on a 15-year mortgage slipped w/w to 3.30%.
 Nevertheless, the figure was up sharply from its early-May low of 2.81%.
 Earlier numbers were revised slightly. The
 effective rate on a 30-year fixed rate loan ticked up to 4.17% last week
 while the rate on a Jumbo 30-year loan was 4.23%. The 87 basis point
 spread between 15- and 30-year loan rates was the greatest since July 2011.
 The effective interest rate on an adjustable 5-year mortgage increased to
 2.81%, up from its low of 2.53% at the beginning of May.
 Applications for fixed interest rate loans fell by one-third y/y while
 adjustable rate loan applications rose 10.8% y/y. The average mortgage
 loan size was $223,700. The average size loan for home purchases was $268,700
 last week while for refinancings it was $203,300.
 The survey covers over 75 percent of all U.S. retail residential
 mortgage applications, and has been conducted weekly since 1990.&nbsp;
 Respondents include mortgage bankers, commercial banks and thrifts.&nbsp;
 Base period and value for all indexes is March 16, 1990=100. 
 The figures for weekly mortgage applications are available in Haver's SURVEYW
 database.&nbsp;
 Paying Paul and Robbing No One: An Eminent Domain Solution for
 Underwater Mortgage Debt from the Federal Reserve Bank of New York can
 be found here <a href="http://www.newyorkfed.org/research/current_issues/ci19-5.html">http://www.newyorkfed.org/research/current_issues/ci19-5.html</a>
 &nbsp;
 <table class="centered" border="0" cellSpacing="0" width="1231">
 <thead>
 <tr>
 <th class="firstcol" scope="col" width="561">MBA Mortgage
 Applications (SA, 3/16/90=100)</th>
 <th scope="col" width="95">06/14/13</th>
 <th scope="col" width="95">06/07/13</th>
 <th scope="col" width="95">05/31/13</th>
 <th scope="col" width="95">Y/Y%</th>
 <th scope="col" width="95">2012</th>
 <th scope="col" width="95">2011</th>
 <th scope="col" width="96">2010</th>
 </tr>
 </thead>
 <tbody>
 <tr class="odd">
 <td class="firstcol" width="561">Total Market Index</td>
 <td align="center" width="95">648.9</td>
 <td align="center" width="95">670.7</td>
 <td align="center" width="95">638.7</td>
 <td align="center" width="95">-31.1</td>
 <td align="center" width="95">813.8</td>
 <td align="center" width="95">572.3</td>
 <td align="center" width="96">659.3</td>
 </tr>
 <tr>
 <td class="firstcol" width="561">&nbsp;Purchase</td>
 <td align="center" width="95">210.4</td>
 <td align="center" width="95">217.0</td>
 <td align="center" width="95">207.3</td>
 <td align="center" width="95">11.9</td>
 <td align="center" width="95">187.8</td>
 <td align="center" width="95">182.6</td>
 <td align="center" width="96">199.8</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="561">&nbsp;Refinancing</td>
 <td align="center" width="95">3,208.5</td>
 <td align="center" width="95">3,322.3</td>
 <td align="center" width="95">3,163.5</td>
 <td align="center" width="95">-40.4</td>
 <td align="center" width="95">4,505.0</td>
 <td align="center" width="95">2,858.4</td>
 <td align="center" width="96">3,348.1</td>
 </tr>
 <tr>
 <td class="firstcol" width="561">15-Year Mortgage Effective Interest
 Rate (%)</td>
 <td align="center" width="95">3.30</td>
 <td align="center" width="95">3.32</td>
 <td align="center" width="95">3.23</td>
 <td align="center" width="95">3.22 
 (6/12)</td>
 <td align="center" width="95">3.25</td>
 <td align="center" width="95">3.97</td>
 <td align="center" width="96">4.39</td>
 </tr>
 </tbody>
 </table>
 
 
 


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 FOMC Leaves Fed Funds, Economic Outlook and
 Securities Purchases Unchanged 
 by <a href="http://www.haver.com/comment/Moeller.html">Tom
 Moeller</a>&nbsp;&nbsp;June 19, 2013
 As expected, the Federal Open Market Committee today left the Federal
 funds rate in a range from 0 to 1/4 percent. The Fed funds rate has
 remained unchanged since late-2008 at its lowest level ever. The discount
 rate was left at 0.75%. Also unchanged were the Fed's comments on the
 economy. &quot;Economic activity has been expanding at a moderate pace.
 Labor market conditions have shown some improvement in recent months, on
 balance, but the unemployment rate remains elevated. Household spending
 and business fixed investment advanced, and the housing sector has
 strengthened further, but fiscal policy is restraining economic growth. Inflation
 has been running below the Committee's longer-run objective, but
 longer-term inflation expectations have remained stable.&quot;
 New was the statement that &quot;Risks to the economic outlook for the
 economy and labor markets have diminished since the fall.&quot; The
 Committee continues to &quot;anticipate that inflation over the medium
 term likely will run at or below its 2 percent objective.&quot;
 &quot;The Committee decided to continue purchasing additional agency
 mortgage-backed securities at a pace of $40 billion per month and
 longer-term Treasury securities at a pace of $45 billion per month. The
 Committee is maintaining its existing policy of reinvesting principal
 payments from its holdings of agency debt and agency mortgage-backed
 securities in agency mortgage-backed securities and of rolling over
 maturing Treasury securities at auction.&quot;
 The &quot;exceptionally low range for the federal funds rate will be
 appropriate at least as long as the unemployment rate remains above 6-1/2
 percent, inflation between one and two years ahead is projected to be no
 more than a half percentage point above the Committee's 2 percent
 longer-run goal, and longer-term inflation expectations continue to be
 well anchored.&quot;
 The press release for today's FOMC meeting can be found <a href="http://www.federalreserve.gov/newsevents/press/monetary/20130619a.htm">http://www.federalreserve.gov/newsevents/press/monetary/20130619a.htm</a>.
 Haver's SURVEYS database contains the projections from the
 Federal Reserve Board. The economic data can be found in Haver's USECON
 database. 
 Low Inflation in a World of Securitization from the Federal
 Reserve Bank of St. Louis can be found here <a href="http://research.stlouisfed.org/publications/es/article/9801">http://research.stlouisfed.org/publications/es/article/9801</a>
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 <th class="firstcol" scope="col" width="517">&nbsp;</th>
 <th scope="col" width="118">Current</th>
 <th scope="col" width="118">Last</th>
 <th scope="col" width="118">2012</th>
 <th scope="col" width="118">2011</th>
 <th scope="col" width="119">2010</th>
 <th scope="col" width="119">2009</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" width="517">Federal Funds Rate, % (Target</td>
 <td align="center" width="118">0.00-0.25</td>
 <td align="center" width="118">0.00-0.25</td>
 <td align="center" width="118">0.14</td>
 <td align="center" width="118">0.10</td>
 <td align="center" width="119">0.17</td>
 <td align="center" width="119">0.16</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="517">Discount Rate, %</td>
 <td align="center" width="118">0.75</td>
 <td align="center" width="118">0.75</td>
 <td align="center" width="118">0.75</td>
 <td align="center" width="118">0.75</td>
 <td align="center" width="119">0.72</td>
 <td align="center" width="119">0.50</td>
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The Mortgage Bankers Association indicated that total applications for a home mortgage fell 3.3% w/w following a 5.0% rise during the prior week. The latest level was down by nearly one-third since early-May. Last week's decline [...]

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<a href="/comment/130618o_big.png" name="modal"><img class="large" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/130618o.png" align="left"></a>
 
The Zew economic index for Germany saw its expectations component rise slightly to 38.5 from 36.4 in June. This is the second rise in a row for the expectations component, however, it is still substantially below the levels of 48.5 reached in March 2013 and 48.2 reached in February 2013. It is, however, still above the level of 31.5 reached in January 2013. Current conditions continue to slip and they have slipped for the third month in a row. At a level of 8.6 current conditions were last lower in February 2013.

The current conditions reading, while at a low-seeming 8.6, is still are only stronger than this about 33% of the time. Expectations, at a reading of 38.5, are stronger than this about 45% of the time. So despite their respective numeric values the current reading is actually stronger relative to its history than is the expectations reading relative to its own history.

Investment professionals who contribute to this index rated stocks just slightly stronger in June compared to May. Bonds continue to receive a negative reading and one that's weaker in June compared to May. Expectations for profits in insurance stocks had one of the largest drops in June but this may be related to expected property and casualty claims with the extensive flooding that we've seen in central Europe in the past month. The outlook for profits in the vehicles sector and for consumption and trade industries has improved as has the outlook for profits in the construction sector. The outlook for profits in the services industry declined as it has been doing for the last several months. Still, if you look at expectations overall, profit expectations by industry in the business cycle are in an oscillating uptrend although there in a minor down-phase of that uptrend this month.
<img border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/1306182.png" width="540" height="200">
Although the outlook for profit in the vehicle sector is slightly improved in June the data to May show us that German car registrations continue to be quite weak as they fell 11.6% in May alone. 

If we take the sector as an indication of confidence for the EU as a whole, conditions continue to be very weak but there is an improvement in vehicle registrations for the European Union as a whole as registrations are up 13.1% at an annual rate over three months. Italy shows a strong gain; that is mostly due to an incentive program that has been in place and is now expiring.

On balance the conditions in Germany as depicted by the Zew survey are more or less stable. The positioning of the two key indices is roughly consistent with the kind of ongoing recovery that we've seen in Germany. There's little reason from this survey to be more optimistic or more pessimistic about its speed. However, the results for automobile registrations for the economic union as a whole continue to paint a picture of the consumer that is still struggling to regain some confidence. The European auto industry is beleaguered just about everywhere except in the UK, where auto sales have held up remarkably well during the entire period of economic sluggishness.



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The Zew economic index for Germany saw its expectations component rise slightly to 38.5 from 36.4 in June. This is the second rise in a row for the expectations component, however, it is still substantially below the levels of 48.5 [...]

German Zew Expectations Make Slight Rise as European Auto Sales Struggle

Resilient US economy pushing up Blue Chip 2026 outlook

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

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Michael J. Moran

260213L.jpg

260213M.jpg

The consumer price index rose 0.2% in January, slower than the expected increase of 0.3% (and it rounded up to reach the published advance – 0.17% when calculated with more precision; annual rate of 2.04%). The latest monthly increase left the year-over-year at 2.4%, down from a recent high of 3.0% in September and bested by only one other recent reading: 2.3% in April of last year.

A drop of 1.5% in energy prices helped to contain the headline index. The drop was led by sharp retreats in the prices of both fuel oil and gasoline (off 5.7% and 3.2%, respectively). Energy prices have jumped around from month-to-month, but they have stayed within a narrow range in the past two years. Food prices rose 0.2% in January after a surge of 0.7% in the prior month. The food category experienced severe pressure during the inflation burst in 2022 (peak of 11.4%). Pressure settled in 2024, with annual food inflation easing to a low of 2.0% in August of that year. However, prices picked up again in 2025, with the year-over-year increase moving to 3.2% in August and staying close to that pace in subsequent months. The year-over-year increase in January totaled 2.9%.

The core component (ex food and energy) rose 0.3% in January, one of the sharpest advances of the past year or so. However, the increase was not especially troubling, as it was influenced by a jump of 6.5% in airfares, which added nearly a full tenth percentage point to the core component (0.08%). Airfares often move erratically, and the ups and downs in the past few years have left little net change. Discounting, most likely, will unfold in coming months. Even with the jump in airfares, the year-over-year increase in core prices moved to a new low for the current period of deceleration (2.5%). Core inflation appeared to be picking up in the spring and summer of last year (a recent peak of 3.1% in August), but pressure has eased since then.

The source of the waxing and waning in core prices lies primarily in the goods component of the CPI. Goods prices were declining noticeably in the first half of 2024 (deflation!), but, they began to shift direction in the second half of 2024 and moved to price increases in 2025. The upward trend seems to have peaked at 1.5% in September and October, with the year-over-year change easing to 1.1 percent in January. Service prices have been decelerating over the past few years, but the rate of decline began to slow last year, and the latest months have shown no further improvement, stuck at 3.0% in the past three months.

Within the core component, the movement of housing costs is notable. Rental rates rose 0.2% in January, a marked shift from the experience in 2022 and 2023, when increases in excess of 0.6% were common.  This component jumps around from month-to-month, but the downtrend is unmistakable. After peaking at 8.2% in 2022, the latest year-over-increase totaled 3.0% in January.

The cost of electricity is now gathering the attention of the public and politicians because of the pressure being exerted by the infrastructure requirements of artificial-intelligence. Costs were tame in January (down 0.1%), but increases have largely been the norm in the past year or so. The year-over-year increase totaled 6.3% in January, down from 7.0% in November but still a challenge for many households. Many observers are expecting more upward pressure down the road. Some observers perhaps recall (and fear) the experience in 2022, when electricity inflation touched 15.8%.

The Consumer Price figures can be found in Haver's **USECON** database. The expectations figure is contained in the **AS1REPNA** database.

260213N.jpg

260213O.jpg

- The year-over-year change in the headline index moved to the bottom of its recent range.
- The annual change in the core index moved to a new low for the current cycle.

Consumer Price Index: Slow, but Steady, Deceleration

Andrew Cates

**The Blue Chip Growth Consensus**
The first chart this week highlights a striking feature of recent forecast revisions: the outperformance of Asia, and Taiwan in particular. Over the past six months, Blue Chip panelists have upgraded their 2026 GDP growth forecasts most aggressively for Taiwan, far outpacing revisions elsewhere. This reflects the central role Taiwan plays in the global AI supply chain, especially in advanced semiconductors, where demand linked to data centres, AI accelerators and high-performance computing continues to strengthen. More broadly, positive revisions across parts of Asia suggest that the current AI-driven investment cycle is not just a US story, but one that is increasingly feeding through global tech supply chains, boosting exports, industrial production and capital spending across the region. In contrast, forecast changes elsewhere remain far more muted, underscoring how tightly the near-term growth impulse from AI is concentrated in economies most directly exposed to the semiconductor and hardware build-out.

260212Z1.jpg

**The Blue Chip Inflation Consensus**
The second chart highlights a growing theme of cross-country divergence, this time through the lens of inflation and monetary policy. Recent changes to Blue Chip CPI forecasts for 2026 show upward revisions in economies such as Japan, Australia and Canada, where inflation pressures are proving more persistent and policy tightening is either already under way or increasingly expected. In contrast, inflation forecasts in the US have been revised lower, consistent with softer recent data and reinforcing expectations of further monetary easing. The result is an increasingly asymmetric global policy backdrop: some central banks are still leaning against residual inflation risks, while others are preparing to shift toward rate cuts. This divergence, moreover, could matter more for global capital flows, exchange rates and financial conditions in the period ahead.

260212Z2.jpg

**South Korea’s Semiconductor Trade**
The third chart provides a concrete, high-frequency illustration of the forces underpinning the forecast upgrades seen earlier for Asia. South Korea’s semiconductor exports have surged sharply on a year-on-year basis, marking one of the strongest upswings of the past decade and underscoring the revival of the global tech cycle. This acceleration is closely linked to AI-related demand, particularly for advanced memory chips used in data centres and high-performance computing. Alongside Taiwan, South Korea sits at the core of the AI hardware supply chain, and the strength of semiconductor exports helps explain why growth expectations in parts of Asia have been revised higher so decisively. In this sense, the chart offers a real-economy counterpart to the consensus forecast revisions: the AI boom is not just a financial or expectations story, but one that is already showing up clearly in trade and industrial data across the region.

260212Z3.jpg

**Global Supply Chain Pressures**
The fourth chart places recent inflation dynamics in a broader supply-chain context and offers little evidence that current US tariff policies are materially exacerbating global bottlenecks. The Global Supply Chain Pressure Index has remained close to historical norms in recent months, a sharp contrast with the extreme dislocations seen during the pandemic period. Consistent with this, producer price inflation across advanced economies has remained muted, reinforcing the tight relationship between supply-chain stress and upstream price pressures. While tariffs may still influence relative prices at the margin and contribute to sector-specific adjustments, the data do not point to a broad-based resurgence in supply-chain pressures of the kind that would generate renewed, systemic inflationary pressure.

260212Z4.jpg

**Uncertainty in the US versus Europe** 
The fifth chart highlights a striking shift in the global policy uncertainty landscape. The US news-based economic policy uncertainty index has risen sharply and is now approaching levels more typically associated with Europe — a vivid contrast with the post-GFC and post-pandemic period, when US policy uncertainty was consistently well below European norms. This convergence likely reflects a combination of factors: renewed uncertainty around US trade policy and tariffs, questions over fiscal sustainability and debt dynamics, and growing debate around institutional independence, including the role of the Federal Reserve. At the same time, political polarisation and an increasingly unpredictable policy environment have become more prominent features of the US backdrop. The implications are potentially important for markets. A sustained rise in policy uncertainty would argue for a higher risk premium on US assets, particularly if it begins to influence corporate investment decisions, capital flows or the perceived safe-haven status of US markets.

260212Z5.jpg

**The Global Business Cycle** 
The final chart brings the story together by highlighting a further strengthening in global economic sentiment in February. The Sentix global expectations index moved higher alongside a renewed run of positive economic surprises across a number of major economies, as captured by the Citi Global Economic Surprise Index. This combination points to an environment in which incoming data have consistently exceeded expectations, helping to reinforce investor confidence and support risk appetite. Taken together, the improvement in sentiment and the upside surprise in activity data underscore the constructive macroeconomic backdrop that markets have been responding to in recent months — one characterised by resilient growth, easing inflation pressures and still-supportive financial conditions, even as policy paths and regional dynamics continue to diverge.

260212Z6.jpg

While markets have been unsettled at times by shifting policy expectations, geopolitical noise and questions around valuation, underlying global macroeconomic signals remain broadly supportive. Upgrades to Blue Chip consensus growth forecasts for parts of Asia — led by Taiwan — point to the tangible impact of the AI-driven tech cycle, a theme reinforced by the sharp rebound in semiconductor exports from South Korea (charts 1 and 3). At the same time, revisions to inflation forecasts underline a growing divergence in monetary policy paths, with easing still expected in the US and UK, while tighter stances persist elsewhere (chart 2). Importantly, there is little evidence so far that global supply-chain pressures are re-emerging in a way that would reignite inflation, notwithstanding lingering trade policy tensions (chart 4). Against this backdrop, rising policy uncertainty — particularly in the US — stands out as a potential source of risk, with implications for asset pricing and risk premia (chart 5). Yet the improvement in global sentiment surveys and a continued run of positive economic surprises suggest that markets are responding not just to policy noise, but to a genuinely resilient and improving macroeconomic environment (chart 6).

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Charts of the Week: AI-Led Growth Meets Monetary Divergence

Winnie Tapasanun

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Existing home sales fell 8.4% m/m (-4.4% y/y) to a lower-than-expected 3.91 million units (SAAR) in January following a downwardly revised 4.4% gain to 4.27 million in December (previously +5.1%; 4.35 mil.), according to the National Association of Realtors (NAR). January sales registered the lowest level since September 2024 and the deepest m/m drop since February 2022, well below the Action Economics Forecast Survey expectation of 4.20 million. Sales were 39.2% below a high of 6.43 million in January 2022 and 40.8% below a peak of 6.60 million in January 2021. The sales fall accompanied a drop in the average 30-year fixed mortgage rate to 6.11% in January, the lowest since September 2022, after declining to 6.20% in December, according to Freddie Mac. The sales figures are based on closings of sales contracts signed over the past couple of months.

Existing single-family home sales slid 9.0% (-4.3% y/y) to 3.53 million units in January, the lowest level since September 2024, after a 4.3% gain to 3.88 million in December. Sales of condos and co-ops fell 2.6% (-5.0% y/y) to 380,000 following a 5.4% December rebound to 390,000.

By region, January existing home sales decreased m/m across all major regions. Sales in the West slumped 10.3% (-7.9% y/y) to 700,000 in January after a 4.0% increase in December, marking the third m/m decline in four months and the lowest level since December 2023. Sales in the South dropped 9.0% (-1.6% y/y) to 1.81 million, the lowest reading since October 2024, reversing a 6.4% December gain. Sales in the Midwest fell 7.1% (-7.1% y/y) to 920,000, the lowest level since September 2024, after a 2.1% December increase. Sales in the Northeast declined 5.9% (-4.0% y/y) to 480,000, the lowest level since June 2025, after rising 2.0% in December and November. The South remained the dominant region, accounting for 46.3% of total U.S. existing home sales.

The median price of all existing homes (NSA) fell 2.0% (+0.9% y/y) to $396,800 in January after a 1.2% decline to $405,100 in December ($405,400 initially), representing the sixth m/m fall in seven months and the lowest level since February 2025. Prices were 8.3% below a high of $432,700 in June 2025. The median price of an existing single-family home, also down for the sixth time in seven months, slid 2.2% (+0.6% y/y) to a one-year-low $400,300 in January after a 1.3% decline to $409,500 in December. The median price of condos and co-ops, up for the third time in four months, rose 0.9% (3.8% y/y) to $364,600, the highest level since August, after a 0.4% December increase to $361,200. Regionally, overall prices fell m/m in the Midwest (-3.6%; +2.3% y/y) and South (-2.3%; +0.1% y/y) in January, but increased m/m in the Northeast (+1.1%; +5.8% y/y) and West (+0.4%; -1.4% y/y).

Inventories of homes for sale weakened further in January. The number of existing homes for sale (NSA) fell 0.8% (+3.4% y/y) to 1.22 million units on top of a 14.6% December plunge to 1.23 million, posting the fourth consecutive m/m fall and the lowest level since January 2025. The supply of homes on the market at the current selling rate (NSA) rose to 3.7 months in January after falling to 3.5 months in December (the lowest since January 2025). The most recent high of 4.6 months was in August 2025, while a record low in supply of 1.6 months was in January 2022.

The data on existing home sales, prices and affordability are compiled by the National Association of Realtors. The data on single-family home sales extend back to February 1968. Total sales and price data and regional sales can be found in Haver's **USECON** database. Regional price and affordability data and national inventory data are available in the **REALTOR** database. Mortgage interest rates can be found in the **WEEKLY** database. The expectations figure is from the Action Economics Forecast Survey, reported in the **AS1REPNA** database.

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- January sales -8.4% (-4.4% y/y) to 3.91 mil., below expectations; steepest m/m fall since Feb. ’22.
- Widespread regional m/m declines: West (-10.3%), South (-9.0%), Midwest (-7.1%), Northeast (-5.9%); all regions down y/y.
- Median sales price -2.0% (+0.9% y/y) to $396,800, lowest since Feb. ’25.
- Unsold inventory -0.8% (+3.4% y/y) to 1.22 mil. units, a one-year low; 3.7 months' supply.

U.S. Existing Home Sales Drop in January; Lowest Level Since Sept. ’24

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance dropped 5,000 to 227,000 in the week of February 7, from 232,000, revised from 231,000, in the week ended January 31. The four-week average rose 7,000 to 219,500 from 212,500. The Action Economics Forecast Survey looked for 225,000 claims to have been filed.

The total number of unemployment insurance beneficiaries—also known as “continuing claims”—increased by 21,000 to 1.862 million in the week ending January 31, from 1.841 million, revised from 1.844 million, in the week ending January 24. The four-week moving average stood at 1.847 million in the January 31 week, the lowest level for this average since October 5, 2024, when it was 1.846 million. The prior week was 1.850 million. The insured unemployment rate remained at 1.2% in the week of January 24, unchanged from the previous nine weeks.

The insured unemployment rate varied greatly across individual states and territories. In the week ending January 24, the highest unemployment rates were in Rhode Island (2.95%), New Jersey (2.78%), Massachusetts (2.68%), Minnesota and Washington (both 2.58%), California (2.30%), and Montana (2.21%). The lowest rates were in Florida (0.31%), Arkansas (0.39%), North Carolina (0.43%), Louisiana (0.41%), and Alabama (0.45%). Rates in other notable states include Illinois (2.23%), New York (2.11%), Pennsylvania (1.91%), and Texas (1.16%). 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.

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- New claims dropped 5,000 to 227,000.
- Continuing claims rose to 1.862 million.
- The insured unemployment rate remained at 1.2% for the tenth consecutive week.

U.S. Initial Unemployment Claims Declined in Latest Week

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U.K. GDP slowed to a crawl at the end of the year, with growth at a 0.2% (annualized) rate logged in both the third and fourth quarters as 2025 drew to a close. The year had started with a strong 2.7% growth rate in Q1, which slipped to a 0.8% pace in the second quarter and decelerated to negligible growth at the end of the year.

These quarterly growth rates correspond to higher but obviously declining year over year growth rates. Because the quarterly growth rates diminished as the year progressed, year over year growth to start 2025 was at 1.8%; growth slipped to 1.4% in the second quarter and then to 1.2% in the third quarter. By the end of the year, growth had slipped to 1%.

The quarterly growth rates in the fourth quarter show public spending picked up to a 1.7% annual rate following 1% in the third quarter and erratic behavior in the first two quarters. Capital formation has remained relatively strong but has also oscillated, with first quarter growth at a blowout annual rate of 14.3%, falling to a contraction of 3.1% in Q2, rising back to 4.4% in Q3, and then declining at a 0.5% annual rate in Q4. So the year-over-year growth rates for capital formation during the course of the year only slipped from 4% in the first quarter to 3.6% in the fourth quarter, holding up fairly solidly and indicating strong rates of expansion for capital spending.

Housing, which was firm and strong in Q1 and Q2, slipped to a 0.8% annual rate of growth in the third quarter, and then housing investment fell at a 9.1% annualized rate in the fourth quarter. Year over year trends for housing show mostly low to moderate spending growth for residential investment.

U.K. exports have been floundering quarter-to-quarter, alternating between expanding and contracting; this corresponds to year over year growth rates that steadily diminish. In the first quarter of 2025, exports grew 3.5% year-over-year; that slipped to a 2% growth rate in Q2, then to a 1.5% growth rate in the third quarter. In the fourth quarter, U.K. exports are falling at a 0.5% annual rate of growth.
 
The export pattern contrasts with U.K. imports. They have mostly continued to grow, posting positive growth rates in three of the four quarters, starting the year with 5% quarterly growth and ending the fourth quarter with a 3.3% annual growth rate. Import growth rates have slipped, but not as much as other growth rates in GDP. For example, first quarter import growth was extremely strong at 7.6%; that year over year growth rate slips to 2.1% in Q2, then rises back to 5.3% in Q3, and finishes the year at 2.3%. There is slippage, but still significant growth, and the year began on a really high note.

Domestic demand has been fluctuating. In both quarterly and annual terms, there is unevenness. Quarterly growth rates range from 3.1% at an annual rate in Q1, to a 0.6% and 0.7% annual rate in the middle two quarters of the year; domestic demand ends the fourth quarter with a quarterly growth rate of 2.1% annualized. This causes year-over-year growth to be 2.9% in the first quarter; that falls to 1.2% in the second quarter, rebounds to 2.1% in the third quarter, and ends the year at 1.6% year-over-year.

Domestic demand has consistently been stronger than private consumption and it has been supported by both public consumption and by capital formation. Private consumption in 2025 has been erratic, logging 1.2% quarterly growth, annualized, in the first quarter; growth dropped to 0.2% in Q2, rising back to 1.7% in Q3, and then ending the year at a 0.6% rate of expansion quarter-over-quarter. The year-over-year data showed private consumption slipping but not dramatically, at a pace of 1.1% in the first quarter, up to 1.2% in the second quarter and then logging 0.9% in both the third and fourth quarters of 2025 as domestic demand ended the year stronger.

All of the U.K. growth rates are consistently and substantially below their five year growth rates. The economy continues to have a problem with inflation. Some recent inflation signals, however, suggest that there may be deceleration and progress, but the Bank of England hasn’t been convinced yet, even though Monetary Policy Committee members continue to speak favorably about the prospects for rate reductions ahead. The U.K. also has a corseted fiscal situation as there’s not much flexibility to spend more given its relatively bloated budget. The economy is waffling. The current administration has had its share of political issues, having recently had to eject several members from leadership positions in government. The outlook for growth is still touch and go. The outlook for inflation holds slightly more promise for deescalation. But overall, there is a lot of uncertainty over events and the growth path for the U.K. economy.

Economy in Brief

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EMU Down-Draft Abates

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