Robert Brusca

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The EMU PPI has fallen year-over-year for two months in a row. The year-over-year change in the HICP, the EMU-wide gauge for the CPI, is decelerating for three consecutive months. The core-HICP has been in a general deceleration since September 2011. These observations make it clear that prices do not have much lift in the eurozone. However, the deflation exhibited by the PPI- while disturbing in its own right- does not seem to be the best characterization of the eurozone's inflation situation.

The chart on the components of the PPI makes this clear. In the case of the PPI both consumer goods and capital goods prices are advancing year-over-year albeit at a very slow pace. It is intermediate goods where prices are falling. Capital goods prices are up by 0.6% year-over-year. Consumer goods prices are up by 1.5% year-over-year, but intermediate goods prices are falling by 1.5% year-over year.

Still, the message is that prices are weak. And while countries desire stable prices (a euphemism for low and steady inflation in the real world), the difference between low and desirable inflation and inflation so low that it may be the entree to deflation is really hard to assess. Like beauty, the deflation threat may be in the eye of the beholder.

During a time when growth is still low, when private debt levels are high, when nations are still constricted by budgets that are being redressed for past excesses, when unemployment is high and widespread. low inflation is more likely to be feared as being `too-low.' It is not just the number that represents the inflation rate that matters but the context in which it occurs.

In the current situation of EMU there is a broad basis for concluding that inflation is low and that its pace is still abating. But if we look at the trends for the PPI within the current year we see an opposite development. Producer prices are falling by 0.8% at an annual rate over 12-months, but over six months they falling at a lesser pace of 0.6%, and over three months the pace is a positive 1.7%. Producer prices have their own local dynamic in which they are actually doing somewhat better. However, when we look at the components of the PPI, we see that most of the abatement in the trend to lower prices is from intermediate goods. Capital goods price trends are still eroding, and consumer goods price inflation is oscillating, but stable.

On balance we can expect EMU members to view these trends differently since each has a different context by which to evaluate the trend (different local growth metrics!) in addition to the old line differences in how inflation is viewed and historically has been managed at the country level. With the German economy growing better than the rest of EMU and given the deep seated fear of inflation in Germany, the Germans probably view price developments as just fine. Of the 10 EMU countries in the table, Germany is one of the eight with year-over-year prices falling. In Germany prices are falling by less than in the other seven EMU members where prices are falling (Sweden and the UK are not in the common currency area). Austria and the Netherlands are seeing the largest year-over-year drop in producer prices. 

The biggest increase in PPI inflation trends from 12-months to three-months comes from Greece, the Netherlands, Spain and France. Germany, while having the smallest deflation among EMU members experiencing year-over-year price drops, also has the smallest increase in inflation on this horizon. Only Germany and Italy have inflation accelerations on this horizon of less than one percentage point. 

We can further array the countries in the table to see how their PPI inflation ranks over 3-months versus 12-months. With 12-countries in the table Germany ranks fourth on its 12-month inflation level But its 3-month pace ranks it 10th. In fact only Germany, Ireland and Finland have inflation rate rankings over 12 months that are substantially higher than over 3-months. France and Italy also show some minor relative temperance while Spain's ranking is the same on the two horizons (it is with relatively high inflation, however). Sweden, the Netherlands and Greece show the biggest jump in their respective inflation rankings. These are countries where the negative inflation over 12-months is an anomaly and where inflation is steaming higher already despite what are in some cases relatively large year-over-year declines.

In these metrics we see another element in evaluating inflation. It is not just the pace that matters but its rate of change. In EMU my fear is that temporary and severe austerity pushed inflation down excessively in a few places where it is going to spring back rapidly. Only Germany and Italy do not change their pace of inflation much from 3-months to12-months. On the other hand the UK does not change its pace much either. Its PPI inflation ranks as second over 12-months and first over 3-months. It is also the country in Europe that is experiencing the best pick-up in growth. It is not in the common currency area.

This comparison on inflation levels and rankings and in changes in the pace over 12-months versus 3-months does not provide any results that are carved in stone as to implications for the future. Still, the various rankings tell us things about countries that we already knew and some we did not. Spain's inflation raking is high on both horizons but not as high as in the UK. Greece's inflation turns sharply higher over three-months. On the other hand the encouraging news is that Italy, a high inflation Mediterranean country, does not see its inflation rank jump from 12-months to three-months. But the reason for this may not be such a good one. Italy's inflation over three-months is still negative, the only case of that in this table.

When we look at the intra-year trends country by country, the risk of deflation no longer seems so great. There is no doubt that prices in the eurozone are and have been restrained over the past year. But there also seems to be an uneven rebounding in growth that is creating some uneven inflation performances. Remember that except for Sweden and the UK (the number one and two ranking inflation counties over three months) all these countries are in a zone with the same monetary policy. 

It may be that the price restraint we have been seeing is about to become more lax. I would take this development as one that is pro-growth. were it to continue to develop. But I'm not sure it will continue. What I think we are seeing is that some countries are beginning to bounce back from an episode of severe restraint. But I do not think that Spain and Greece will be able to sustain this sort of turnaround. I worry about Italy still showing PPI deflation. I see Germany as the anchor for EMU-and maybe not in a good way. When you are trying to accelerate it's time to pull the anchor in - not drag it.


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The EMU PPI has fallen year-over-year for two months in a row. The year-over-year change in the HICP, the EMU-wide gauge for the CPI, is decelerating for three consecutive months. The core-HICP has been in a general deceleration since [...]

EMU PPI Falls...But Is Gaining Traction

Tom Moeller

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 The price for a gallon of regular gasoline fell another 2
 cents last week to $3.27 (-6.5% y/y), hitting the lowest level since
 the fourth week of December last year, down from the $3.78 per
 gallon peak reached late in February. Haver Analytics constructs
 seasonal factors to account for seasonal volatility. The adjusted
 price of $3.40 per gallon remained below the February peak of $3.94.
 
 
 Light sweet crude oil prices also have been moving lower.
 The per barrel cost of WTI crude fell to $96.96 (12.9% y/y) last
 week, down from $108.77 two months ago. Yesterday, prices continued
 lower to $94.62. Brent crude oil prices also fell last week to $107.77
 per barrel (-0.7% y/y) and they remained down from the February high
 of $118.09. Yesterday, prices fell further to $105.23 per barrel.
 
 Natural gas prices also recently have been under pressure.
 They fell back last week to $3.56 per mmbtu (+3.3% y/y) and were $3.39
 yesterday, down from the April peak of $4.26.
 
 Inventories of crude oil and petroleum products remain
 plentiful, up 1.6% y/y. The demand for
 all petroleum products rose 1.0% y/y. Gasoline demand gained
 3.2% y/y last week. Residual fuel oil needs, used for
 heating, fell by nearly one half y/y but distillate demand gained 1.8%
 y/y.
 
 The energy price data are reported by the U.S. Department of
 Energy and can be found in Haver's WEEKLY database. The daily
 figures are in DAILY and the gasoline demand and inventory
 figures are in OILWKLY.
 
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	<colgroup><col><col><col><col><col><col><col><col></colgroup>
 
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 <th class="firstcol" scope="col">Weekly Energy Prices</th>
 <th scope="col">11/04/13</th>
 <th scope="col">10/28/13</th>
 <th scope="col">10/21/13</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">Retail Gasoline ($ per Gallon, Regular)</td>
 <td>3.27</td>
 <td>3.29</td>
 <td>3.36</td>
 <td>-6.5</td>
 <td>3.62</td>
 <td>3.52</td>
 <td>2.78</td>
 </tr>
 <tr class="odd">
 <td class="firstcol">Light Sweet Crude Oil, WTI ($ per bbl.)</td>
 <td>96.96</td>
 <td>97.66</td>
 <td>101.51</td>
 <td>12.9</td>
 <td>94.20</td>
 <td>95.14</td>
 <td>79.51</td>
 </tr>
 <tr>
 <td class="firstcol">Natural Gas ($/mmbtu, LA)</td>
 <td>3.56</td>
 <td>3.68</td>
 <td>3.77</td>
 <td>3.3</td>
 <td>2.75</td>
 <td>3.99</td>
 <td>4.00</td>
 </tr>
 </tbody>
 </table>
 
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The price for a gallon of regular gasoline fell another 2 cents last week to $3.27 (-6.5% y/y), hitting the lowest level since the fourth week of December last year, down from the $3.78 per gallon peak reached late in February. Haver [...]

U.S. Energy Prices Continue Downward

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 Orders in the manufacturing sector jumped 1.7% (3.0% y/y) during
 September following two months of decline. Expectations were for a 1.6%
 rise. Durable goods orders increased 3.8% (7.8% y/y), little changed from
 last week's advance report. It was driven by a surge in aircraft orders.
 Shipments of durable goods inched up 0.4% (4.6% y/y). Nondurable goods
 shipments (which equal orders) slipped 0.2% (-1.1% y/y), as strong monthly
 gains in apparel (4.0% y/y) and textile mill (5.6% y/y) shipments were
 offset by a 1.5% decline (-7.4% y/y) in shipments from petroleum
 refineries. Basic chemical shipments inched up 0.2% (0.1% y/y)
 
 Inventories in the manufacturing sector
 increased 0.4% during September. It was the firmest monthly increase since
 January. The y/y rate of inventory accumulation of 1.7% was down, however,
 from the 2.4% increase last year and a 10.2% rise during all of 2011.
 Unfilled orders gained 0.9% (6.5% y/y) and the rate of accumulation has
 picked up versus 3.7% during 2012.
 
 The factory sector figures are available in Haver's USECON database.
 The expectation figure is in Haver's MMSAMER database.
 
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 <thead>
 <tr>
 <th class="firstcol" scope="col" >Factory Sector -
 NAICS Classification (%)</th>
 <th scope="col" >Sep</th>
 <th scope="col" >Aug</th>
 <th scope="col" >Jul</th>
 <th scope="col" >Y/Y</th>
 <th scope="col" >2012</th>
 <th scope="col" >2011</th>
 <th scope="col" >2010</th>
 </tr>
 </thead>
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 <tr>
 <td class="firstcol" >New Orders</td>
 <td >1.7</td>
 <td >-0.1</td>
 <td >-2.8</td>
 <td >3.0</td>
 <td >2.9</td>
 <td >12.9</td>
 <td >16.3</td>
 </tr>
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 <td class="firstcol" >Shipments</td>
 <td >0.1</td>
 <td >0.2</td>
 <td >1.1</td>
 <td >1.5</td>
 <td >4.0</td>
 <td >12.1</td>
 <td >11.0</td>
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 <td class="firstcol" >Inventories</td>
 <td >0.4</td>
 <td >0.2</td>
 <td >0.3</td>
 <td >1.7</td>
 <td >2.4</td>
 <td >10.2</td>
 <td >9.8</td>
 </tr>
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 <td class="firstcol" >Unfilled Orders</td>
 <td >0.9</td>
 <td >0.1</td>
 <td >0.2</td>
 <td >6.5</td>
 <td >3.7</td>
 <td >10.0</td>
 <td >5.4</td>
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Orders in the manufacturing sector jumped 1.7% (3.0% y/y) during September following two months of decline. Expectations were for a 1.6% rise. Durable goods orders increased 3.8% (7.8% y/y), little changed from last week's advance [...]

U.S. Factory Sector Orders and Inventories Improve

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The chart of the manufacturing indices for the four largest EMU members Germany, France, Italy, and Spain shows a clear topping out over the last months. France even seems to be faltering and losing ground. This evidence bristles against conventional wisdom which is that EMU is in a bracing recovery. EMU manufacturing sectors do not seem to strongly embrace that notion over the past two months.

Of course, growth in PMI terms is not about the change in the PMI index but about its level. So when we look at the gradient of the PMI index, we are looking at momentum. EMU momentum has been lacking over the past two months, but the PMI indices are much higher than they were back in April. Momentum is not an absolute. It may be that the broader move up in the EMU PMI indices still is in gear. It is also possible that the last two months represent a morass. After all, the PMI index level is why matters and the PMIs are higher on balance, but they are not yet firmly entrenched in a region signaling growth. 

The PMI levels are higher in a way that is not very reassuring. Their levels have risen from some very weak positions depicting severe declines in manufacturing output by rising to a point where the best of respondents are barley registering growth!

Of the EMU members the highest PMI is at 54.41 in the Netherlands, followed by 52.72 in Austria and 51.54 in Germany. The overall EMU measure itself stands at 52.3. The Netherlands measure is the strongest relative to its history, having been higher only about 30% of the time since 2002. Austria's PMI measure is higher about 40% of the time. Germany's PMI is higher about 45% of the time. The German PMI, the third strongest reading in our group of eight EMU countries, has an index that stands in just the 55th percentile of its historic queue, a very middling value. And it is supposed to the `strongman' of Europe. Good luck with that.

The non EMU members that are chronicled in the table, the UK, Sweden Hungary, and Denmark each slipped in the month, but each of them still holds manufacturing PMI values above 50. But all except the UK have weak PMI standings when evaluated against their respective historic standards.

The table shows in one of its columns the strong gains each country has had from its respective cycle low and, in another column, the much smaller increments that they stand below their respective cycle peaks. There has been clear and substantial progress made in Europe. But the questions of the future and of momentum are questions that still are up in the air and not well addressed by current trends.

Europe's banks continue to shed assets. The European Central Bank like the Federal Reserve has done a lot and, while some press for more action, the Germans remain the keepers of the Treaty; that seems to be a limiting factor for any substantial additional ECB measures.

EMU's momentum is in question. Its level of growth is weak. Its future is still clouded and it is still lacking in public institutions that can provide assistance. That is why I am slow to jump on the optimists' European bandwagon.


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The chart of the manufacturing indices for the four largest EMU members Germany, France, Italy, and Spain shows a clear topping out over the last months. France even seems to be faltering and losing ground. This evidence bristles [...]

Manufacturing PMI Changes Are Negative in October

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 Unit sales of light motor vehicles last month
 edged 0.3% lower (+5.8% y/y) versus September to 15.23 million (SAAR),
 according to the Autodata Corporation. The latest level of sales compares
 to the August peak of 16.09 million.
 
 Light truck sales were firm and inched up
 0.6% (9.0% y/y) in October to 7.61 million. Strongest were sales of
 imported light trucks which increased 2.0% month-to-month (27.6% y/y) to
 1.12 million. Domestic light truck sales gained 0.4% (6.4% y/y) to 6.49
 million.
 
 Offsetting these gains was 1.2% m/m (+2.8% y/y)
 slip in auto sales to 7.63 million. Domestic car sales ticked 0.8%
 higher (4.2% y/y) to 5.40 million but sales of imports fell 5.8% (-0.4%
 y/y) to 2.23 million. 
 
 Imports share of the U.S. light vehicle market fell m/m to 22.0%
 during October. (Imported vehicles are those produced outside the United
 States.) That share remained down from its peak of 29.9% in Q1'09.
 Imports' share of the U.S. car market fell m/m to 29.3% and remained down
 from its 37.6% monthly peak in 2010. Imports' share of the light truck
 market was roughly flat at 14.7%.
 
 U.S. vehicle sales figures can be found in Haver's USECON database.
 
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 <th class="firstcol" scope="col" >Light Vehicle Sales
 (SAAR, Mil. Units)</th>
 <th scope="col" >Oct</th>
 <th scope="col" >Sep</th>
 <th scope="col" >Aug</th>
 <th scope="col" >Y/Y %</th>
 <th scope="col" >2012</th>
 <th scope="col" >2011</th>
 <th scope="col" >2010</th>
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 <td class="firstcol" >Total</td>
 <td >15.23</td>
 <td >15.28</td>
 <td >16.09</td>
 <td >5.8</td>
 <td >14.49</td>
 <td >12.78</td>
 <td >11.59</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;Autos</td>
 <td >7.63</td>
 <td >7.72</td>
 <td >8.03</td>
 <td >2.8</td>
 <td >7.42</td>
 <td >6.23</td>
 <td >5.77</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Domestic</td>
 <td >5.40</td>
 <td >5.35</td>
 <td >5.64</td>
 <td >4.2</td>
 <td >5.10</td>
 <td >4.21</td>
 <td >3.76</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Imported</td>
 <td >2.23</td>
 <td >2.37</td>
 <td >2.39</td>
 <td >-0.4</td>
 <td >2.32</td>
 <td >2.02</td>
 <td >2.01</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;Light Trucks</td>
 <td >7.61</td>
 <td >7.56</td>
 <td >8.06</td>
 <td >9.0</td>
 <td >7.08</td>
 <td >6.55</td>
 <td >5.82</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Domestic</td>
 <td >6.49</td>
 <td >6.46</td>
 <td >6.97</td>
 <td >6.4</td>
 <td >6.10</td>
 <td >5.55</td>
 <td >4.86</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Imported</td>
 <td >1.12</td>
 <td >1.10</td>
 <td >1.09</td>
 <td >27.6</td>
 <td >0.97</td>
 <td >1.00</td>
 <td >0.96</td>
 </tr>
 </tbody>
 </table>
 
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Unit sales of light motor vehicles last month edged 0.3% lower (+5.8% y/y) versus September to 15.23 million (SAAR), according to the Autodata Corporation. The latest level of sales compares to the August peak of 16.09 million. Light [...]

U.S. Vehicle Sales Are Off Highs, But Up Year-to-Year

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Global growth has been and remained weak. The US has had consistent growth, but it has also fallen short of historic markers. Political developments make the future less certain. The US recently has attacked the `German model' of growth, which is to rely on export-led growth and to maintain a current account surplus. Most of the countries in the table above have relied on export-led growth and may be in for the same sorts of pressures from the US in the future. But if the US doesn't do it, someone else should. There is a great deal of reform needed to the underpinnings of our global trading system

The most highly developed countries in the world, roughly the G-10 countries, have relied too much on debt to drive their growth. Now it all has started to unravel. The modern export-led growth model that was developed in Japan to tap this growth, pursued by the Asian `dragons' and then taken to an extreme by China, has run to its logical conclusion. 

That program of export-led growth was never part of a sustained global growth model. Japan moved to the fore using export growth and a low savings rate to build a series of huge trade surpluses while building its foreign exchange reserves as its private financial firms also amassed dollar assets. After some point Japan's penetration of the US market became so great that `orderly marketing agreements' were used to slow the flow of Japanese automobile exports to the US. Japan began to erect factories in the US. A severely rising yen, the impact of the Tsunami and Japan's grappling with a transition away from nuclear power have greatly transformed the Japanese economy from its former export juggernaut days.

Except for China, the rest of the Asian exporters were smaller and did not raise the political backlash that Japan did. But the heavy debt load in the Western countries is beginning to slow demand and their growth rate of imports (exports to them). This, of course, has negative repercussions for nations that use the export-led growth strategy.

China was the game changer, the Baby Huey, who wanted the same thing as `the other kids' but whose size made that impossible. When China launched its own export-led growth drive, it sucked up all the air in the room. Output that had come from other developing economies often migrated to China where costs were even cheaper. China `learned' from Japan's experience and refused to let its currency rise. This allowed China to keep its low-cost advantage longer than it should have. China's international capital flows from its own surplus excesses helped to create the environment for the eventual financial collapse that occurred.

On balance we find the countries that have pursued export-led growth strategies as floundering. Some, like Brazil, blame the US. It blamed the US for the bad effects of QE and for planning to taper and the market effects that the expected taper spawned. This episode is a good example of why world growth needs to be balanced and whey trade needs to occur in a sustainable program. Countries need to take responsibility for their own growth.

Economics does not draw out clear rules on trade and current account balances. Conservatives may hold that a balance international position and domestic fiscal position is best. That is a safe policy but it may not be the best one. 

There is time when some nations should run surpluses and others should run deficits .For obvious reasons Saudi Arabia runs and will continue to run surpluses. Its situation is unusual. China cannot claim Saudi Arabia as a precedent. When countries at a high stage of development without any `clear need' to tap foreign savings are doing so and doing it year after year (as the US has done), there should be some questioning of that. Trade must eventually balance. It need not ever balance bilaterally. And in those two statements you can see room for a world of disagreement. When China was in its heyday it was growing fast and running large trade surpluses. Why was a county, in such need of development, running such large surpluses on its current account, accumulating financial assets instead of spending those resources on development? Why did China's consumption as percentage of GDP fall by so much? What kind of development was that?

It was exploitive. And this is the kind of development that is not only unsustainable but, instead, sure to help to contribute to the next meltdown because it is part of a disequilibrium process.

When we look at the progress of the formerly high growth developing economies, we see angst directed at others, as in the case of Brazil. We see China is trying to shift its focus to develop its own internal demand. China was not prepared for this. It stubbornly refused entreaties to let its currency rise and to go the route of normal development. China's path came to a sudden dead end instead of to a managed change in course because of its intransigence and inability to see how unsustainable its policies were. But economics were telling us that every day. 

As this growth cycle plays out there are many unanswered questions that all nations need to have answered.

First and foremost is this: Can we have free trade organizations -dedicated to free trade- if the rules of free trade are not ever met? Economists extoll the virtues of free trade, of comparative advantage and yet in the real world these concepts remain elusive. The benefits of comparative advantage are fleshed out in the framework of barter. But in the real world trade uses money (monies). To bridge that gap we need financial reforms. Free trade and comparative advantage principles do NOT play out in a world where currencies are misaligned especially not one where they are consistently misaligned. Following free-trade principles in a non-free trade environment leads to trouble

While trade flows are not a perfect judgment of whether trade is truly `free,' looking a trade flows and at reserve accumulation and at accumulated trade balances we can get a good idea of whose currency is breaking the rules.

We have many issues to deal with in the wake of the financial crisis. Developing nations that have long exploited demand by using a weak currency as a tool may feel deprived of an `old friend.' But if there is no exchange rate reform, we will simply be revisiting financial meltdowns again and again.

So as we watch this period of development play out, let's also watch what happens to trade and current account imbalances. If they are not becalmed, then we are simply on another road to our next BIG THING. And it won't be something good.


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Global growth has been and remained weak. The US has had consistent growth, but it has also fallen short of historic markers. Political developments make the future less certain. The US recently has attacked the `German model' of [...]

Peripheral Countries Are Still Lagging: Will That Continue?

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 October was a constructive month for the manufacturing sector. The
 Composite Index of Manufacturing Sector Activity from the Institute for
 Supply Management ticked up to 56.4 from an unrevised 56.2 in September.
 The latest reading was the highest level since April 2011. It beat
 expectations for a decline to 55.1, as measured by the Action Economics
 Survey. Any figure above 50 indicates an increasing level of activity in
 the factory sector. During the last ten years, there has been a 69%
 correlation between the ISM index and the q/q change in real GDP.
 
 The inventories component again provided the greatest lift to the
 Composite Index as it rose to the highest level since August of last year.
 The supplier deliveries series index also rose, indicating the slowest
 delivery speeds since June 2011. New orders ticked up but the export
 orders series rose sharply to the highest level since April of last year.
 The factory sector employment series retreated to its lowest point since
 this past June. During the last ten years there has been an 88%
 correlation between the employment index and the m/m change in factory
 payrolls. The production index also dropped to it lowest level since June.
 
 
 The prices paid index reversed roughly half of its prior month's gain
 but still was up versus the low three months ago. Twenty two percent of
 firms raised prices while 11 percent lowered them. During the last ten
 years there has been a 65% correlation between the index and the m/m
 change in the intermediate producer price index. The order backlog series
 increased to its highest level in six months.
 
 The figures from the Institute For Supply Management (ISM) are
 diffusion indexes and can be found in Haver's USECON database. The
 expectations number is in the AS1REPNA database.
 
 Taking Stock of the Labor Market Recovery from the Federal
 Reserve Bank of Cleveland is available <a href="http://www.clevelandfed.org/research/trends/2013/1113/01labmar.cfm">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" >ISM Mfg</th>
 <th scope="col" >Oct</th>
 <th scope="col" >Sep</th>
 <th scope="col" >Aug</th>
 <th scope="col" >Oct'12</th>
 <th scope="col" >2012</th>
 <th scope="col" >2011</th>
 <th scope="col" >2010</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Composite Index</td>
 <td >56.4</td>
 <td >56.2</td>
 <td >55.7</td>
 <td >51.7</td>
 <td >51.7</td>
 <td >55.2</td>
 <td >57.3</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;New Orders</td>
 <td >60.6</td>
 <td >60.5</td>
 <td >63.2</td>
 <td >52.8</td>
 <td >52.9</td>
 <td >56.4</td>
 <td >59.2</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;Production</td>
 <td >60.8</td>
 <td >62.6</td>
 <td >62.4</td>
 <td >53.3</td>
 <td >53.6</td>
 <td >57.4</td>
 <td >61.0</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;Employment</td>
 <td >53.2</td>
 <td >55.4</td>
 <td >53.3</td>
 <td >52.3</td>
 <td >53.8</td>
 <td >57.4</td>
 <td >57.3</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;Supplier Deliveries</td>
 <td >54.7</td>
 <td >52.6</td>
 <td >52.3</td>
 <td >49.9</td>
 <td >50.0</td>
 <td >54.7</td>
 <td >58.1</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;Inventories</td>
 <td >52.5</td>
 <td >50.0</td>
 <td >47.5</td>
 <td >50.0</td>
 <td >48.2</td>
 <td >50.1</td>
 <td >50.8</td>
 </tr>
 <tr>
 <td class="firstcol" >Prices Paid Index (NSA)</td>
 <td >55.5</td>
 <td >56.5</td>
 <td >54.0</td>
 <td >55.0</td>
 <td >53.2</td>
 <td >65.2</td>
 <td >68.9</td>
 </tr>
 </tbody>
 </table>
 
</body></html>

October was a constructive month for the manufacturing sector. The Composite Index of Manufacturing Sector Activity from the Institute for Supply Management ticked up to 56.4 from an unrevised 56.2 in September. The latest reading was [...]

U.S. ISM Index Nudges Higher While Prices Index Slips

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 Initial claims for unemployment insurance fell
 to 340,000 (-7.4% y/y) during the week ended October 26 from an unrevised
 350,000 during the prior week. The Labor Department indicated that no
 claims were due to a processing difficulties in California. For last week,
 the Action Economics Forecast Survey expected 340,000 claims. The
 four-week moving average of initial claims increased to 356,250, its
 highest level since late-May. During the last ten years there has been a
 74% correlation between the level of claims and the m/m change in payroll
 employment.
 Continuing claims for unemployment insurance in the week ended October
 19 rose to 2.881 million (-11.3% y/y). The figure remained up from the
 early-September low of 2.788 million. The four-week moving average of
 continuing claims slipped to 2.879 million. The insured rate of
 unemployment remained at 2.2%, where it's been since late-August. 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 October 12, the latest figure available, the
 total of all benefit recipients increased slightly to 3.896 million (-22.6%
 y/y). This broader measure is not seasonally adjusted. It compares to a
 cycle peak of 12.060 million in January 2010 and pre-recession figures
 that averaged 2.596 million for 2007. The number of individuals collecting
 emergency and extended payments in the week of October 12 fell to 1.318
 million (-37.2% y/y), a new low for the economic recovery.
 By state, the insured rate of unemployment continued to vary greatly
 with South Dakota (0.36%), Virginia (1.13%), Florida (1.19%), Tennessee
 (1.28%), Indiana (1.37%), Georgia (1.42%) and Texas (1.42%) at the low end
 of the range. At the high end were Massachusetts (1.96%), Wisconsin (2.07%),
 Illinois (2.34%), Pennsylvania (2.55%), California (2.70%), New Jersey (2.92%)
 and Alaska (3.86%).
 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.
 <table class="centered" border="0" cellSpacing="0" width="1231">
 <thead>
 <tr>
 <th class="firstcol" 0801 width="407">Unemployment Insurance (000s)</th>
 <th 0801 width="117">10/26/13</th>
 <th 0801 width="117">10/19/13</th>
 <th 0801 width="117">10/12/13</th>
 <th 0801 width="117">Y/Y %</th>
 <th 0801 width="117">2012</th>
 <th 0801 width="117">2011</th>
 <th 0801 width="118">2010</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" 0801 width="407">Initial Claims</td>
 <td 0801 align="center" width="117">340</td>
 <td 0801 align="center" width="117">350</td>
 <td 0801 align="center" width="117">362</td>
 <td 0801 align="center" width="117">-7.4</td>
 <td 0801 align="center" width="117">375</td>
 <td 0801 align="center" width="117">409</td>
 <td 0801 align="center" width="118">459</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" 0801 width="407">Continuing Claims</td>
 <td 0801 align="center" width="117">--</td>
 <td 0801 align="center" width="117">2,881</td>
 <td 0801 align="center" width="117">2,850</td>
 <td 0801 align="center" width="117">-11.3</td>
 <td 0801 align="center" width="117">3,318</td>
 <td 0801 align="center" width="117">3,744</td>
 <td 0801 align="center" width="118">4,544</td>
 </tr>
 <tr>
 <td class="firstcol" 0801 width="407">Insured Unemployment Rate (%)</td>
 <td 0801 align="center" width="117">--</td>
 <td 0801 align="center" width="117">2.2</td>
 <td 0801 align="center" width="117">2.2</td>
 <td 0801 align="center" width="117">2.5 
 (10/12)</td>
 <td 0801 align="center" width="117">2.6</td>
 <td 0801 align="center" width="117">3.0</td>
 <td 0801 align="center" width="118">3.6</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" 0801 width="407">Total &quot;All Programs&quot;
 (NSA)</td>
 <td 0801 align="center" width="117">--</td>
 <td 0801 align="center" width="117">--</td>
 <td 0801 align="center" width="117">3.896 mil.</td>
 <td 0801 align="center" width="117">-22.6</td>
 <td 0801 align="center" width="117">6.047 mil.</td>
 <td 0801 align="center" width="117">7.750 mil.</td>
 <td 0801 align="center" width="118">9.850 mil.</td>
 </tr>
 </tbody>
 </table>
 
 </div>
 </div>
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 MNI Chicago Index Jumps to Highest Level in Nearly
 Three Years 
 by <a href="http://www.haver.com/comment/Moeller.html">Tom
 Moeller</a>&nbsp;&nbsp;October 31, 2013
 Factory sector activity in the Midwest region heated
 up this month. The MNI Chicago Report
 business barometer jumped to 65.9, its highest level since March of 2011.
 Expectations in the Action Economics Forecast Survey were for 55.0. Haver
 Analytics constructs a seasonally adjusted figure comparable to the MNI
 Barometer and it rose to 60.7, its highest level since November 2011.
 During the last ten years there has been an 66% correlation between the
 adjusted Chicago index the quarterly change in real GDP.
 Improvement in the components during September was broad-based. led by
 production, new orders and a slower pace of vendor deliveries. Working the
 other way, the employment index fell to its lowest level since April.
 During the last ten years there has been an 80% correlation between the
 employment index and the m/m change in factory sector payrolls.
 Pricing power also deteriorated as the prices index reversed its
 increases of the prior two months. During the last ten years there has
 been a 67% correlation between the prices paid index and three-month
 growth in the intermediate goods PPI.
 The survey panel consists of 200 manufacturing purchasing professionals
 in the Chicago area. The MNI figures are copyrighted by the MNI Chicago
 Report in partnership with the Institute for Supply Management-Chicago.
 The figures from the survey can be found in Haver's SURVEYS
 database. The Consensus expectations figure is available in AS1REPNA.&nbsp;
 <table class="centered" border="0" cellSpacing="0" width="1231">
 <thead>
 <tr>
 <th class="firstcol" scope="col" width="690">MNI Chicago Report
 (Diff. Index, 50=No Chg.)</th>
 <th scope="col" width="76">Oct</th>
 <th scope="col" width="76">Sep</th>
 <th scope="col" width="77">Aug</th>
 <th scope="col" width="77">Oct'12</th>
 <th scope="col" width="77">2012</th>
 <th scope="col" width="77">2011</th>
 <th scope="col" width="77">2010</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" width="690">ISM-Adjusted Business Barometer</td>
 <td align="center" width="76">60.7</td>
 <td align="center" width="76">54.0</td>
 <td align="center" width="77">52.2</td>
 <td align="center" width="77">51.2</td>
 <td align="center" width="77">54.8</td>
 <td align="center" width="77">61.3</td>
 <td align="center" width="77">59.0</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="690">Business Barometer</td>
 <td align="center" width="76">65.9</td>
 <td align="center" width="76">55.7</td>
 <td align="center" width="77">53.0</td>
 <td align="center" width="77">50.7</td>
 <td align="center" width="77">54.6</td>
 <td align="center" width="77">62.7</td>
 <td align="center" width="77">61.3</td>
 </tr>
 <tr>
 <td class="firstcol" width="690">&nbsp;&nbsp;New Orders</td>
 <td align="center" width="76">74.3</td>
 <td align="center" width="76">58.9</td>
 <td align="center" width="77">57.2</td>
 <td align="center" width="77">50.6</td>
 <td align="center" width="77">55.1</td>
 <td align="center" width="77">65.3</td>
 <td align="center" width="77">63.4</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="690">&nbsp;&nbsp;Production</td>
 <td align="center" width="76">71.1</td>
 <td align="center" width="76">58.0</td>
 <td align="center" width="77">53.0</td>
 <td align="center" width="77">53.6</td>
 <td align="center" width="77">57.5</td>
 <td align="center" width="77">66.5</td>
 <td align="center" width="77">65.0</td>
 </tr>
 <tr>
 <td class="firstcol" width="690">&nbsp;&nbsp;Order Backlogs</td>
 <td align="center" width="76">61.0</td>
 <td align="center" width="76">46.7</td>
 <td align="center" width="77">46.5</td>
 <td align="center" width="77">45.6</td>
 <td align="center" width="77">48.0</td>
 <td align="center" width="77">55.5</td>
 <td align="center" width="77">54.5</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="690">&nbsp;&nbsp;Deliveries</td>
 <td align="center" width="76">52.3</td>
 <td align="center" width="76">53.7</td>
 <td align="center" width="77">50.8</td>
 <td align="center" width="77">51.0</td>
 <td align="center" width="77">54.8</td>
 <td align="center" width="77">60.0</td>
 <td align="center" width="77">61.0</td>
 </tr>
 <tr>
 <td class="firstcol" width="690">&nbsp;&nbsp;Inventories</td>
 <td align="center" width="76">48.0</td>
 <td align="center" width="76">46.0</td>
 <td align="center" width="77">45.0</td>
 <td align="center" width="77">49.6</td>
 <td align="center" width="77">51.4</td>
 <td align="center" width="77">55.2</td>
 <td align="center" width="77">50.5</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="690">&nbsp;&nbsp;Employment</td>
 <td align="center" width="76">57.7</td>
 <td align="center" width="76">53.2</td>
 <td align="center" width="77">54.9</td>
 <td align="center" width="77">51.1</td>
 <td align="center" width="77">55.3</td>
 <td align="center" width="77">59.4</td>
 <td align="center" width="77">55.2</td>
 </tr>
 <tr>
 <td class="firstcol" width="690">&nbsp;&nbsp;Prices Paid</td>
 <td align="center" width="76">56.7</td>
 <td align="center" width="76">57.1</td>
 <td align="center" width="77">65.2</td>
 <td align="center" width="77">60.8</td>
 <td align="center" width="77">62.2</td>
 <td align="center" width="77">72.4</td>
 <td align="center" width="77">65.3</td>
 </tr>
 </tbody>
 </table>
 
 </div>
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Initial claims for unemployment insurance fell to 340,000 (-7.4% y/y) during the week ended October 26 from an unrevised 350,000 during the prior week. The Labor Department indicated that no claims were due to a processing [...]

U.S. Initial Unemployment Insurance Filings Slip

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

Underperforming German economy generating increased policy uncertainty relative to Europe and the US

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Nonfarm payrolls increased 177,000 (1.2% y/y) during April after rising 185,000 in March, revised from 228,000, and 102,000 in February, revised from 117,000. Expectations had been for a 130,000 rise in the Action Economics Forecast Survey. The latest figure left the three-month average change at 155,000 in April, down from 232,000 in January.

Average hourly earnings rose 0.2% during April after unrevised increases of 0.3% in March and 0.2% in February. Earnings growth of 3.8% y/y was below the 5.9% high in March 2022.

The unemployment rate, measured in the household survey, held m/m at an expected 4.2% in April, and compared to 4.1% in February and 4.0% in January. It reached a low of 3.4% in April 2023. The unemployment rate, including employees working part-time for economic reasons plus all marginally-attached workers, eased to 7.8% in April from 7.9% in March.

In the **establishment survey**, private-sector employment rose 167,000 (1.2% y/y) after a 170,000 March increase. Factory sector jobs edged 1,000 lower (-0.7% y/y) following a 3,000 gain. Construction sector employment increased 11,000 (1.7% y/y), after rising 7,000 in March.

Private service-producing sector employment increased 156,000 (1.4% y/y) in April after improving 161,000 in March. Increases varied greatly amongst service sector categories. Private education & health sector employment rose 70,000 (3.4% y/y) last month following a 74,000 March increase. Leisure & hospitality employment rose 24,000 (1.3% y/y) after a 38,000 gain. Trade, transportation & utilities rose 32,000 (0.9% y/y) in April following a 25,000 March increase. Professional & business services employment rose 17,000 (-0.1% y/y) following a 3,000 rise while temporary help employment rose 3,600 (-3.9% y/y) following a 2,700 decline. Financial activities employment improved 14,000 (1.2% y/y) after a 6,000 gain. The number of information sector jobs held steady (-0.4% y/y) last month after falling 2,000 in March.

Government sector payrolls rose 10,000 (1.3% y/y) last month after increasing 15,000 in March. The number of local government jobs increased 13,000 (1.4% y/y) following a 17,000 gain. State government employment rose 6,000 (1.8% y/y) following a 2,000 March increase but federal government payrolls fell 9,000 (-0.3% y/y), the third consecutive monthly decline.

Private-sector average hourly earnings rose 0.2% (3.8% y/y) in April after increasing 0.3% in March. Earnings in the goods-producing sector eased 0.1% (+4.0% y/y) following a 0.6% gain. Earnings in construction rose 0.3% (3.6% y/y), after a 0.2% rise but factory sector earnings declined 0.3% (+4.3% y/y) after surging 0.8% in March. In the private services-sector, earnings rose 0.2% (3.7% y/y) in April for the third straight month. Information sector pay increased 1.0% (5.2% y/y) last month after easing 0.1%, and financial activities earnings rose 0.5% (4.3% y/y) for the second straight month. Trade, transportation & utilities sector pay increased 0.4% (3.4% y/y) after 0.6%. Professional & business sector earnings increased 0.1% (4.4% y/y) after 0.2% in March. Leisure & hospitality earnings held steady (+3.8% y/y) following a 0.6% March increase.

250502C5.jpg

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The length of the average workweek held steady at 34.3 hours in April. The workweek in the goods-producing sector eased to 39.8 hours from 40.0 hours. The construction sector average workweek eased to 39.0 hours from 39.3 hours while the factory sector workweek moved lower to 40.0 hours from 40.2. The average workweek in the private service sector held at 33.2 hours. Professional & business service hours fell to 36.3 hours from 36.4 while trade, transportation & utilities hours improved to 34.3 from 34.0 hours. Private education hours rose slightly to 32.8, but leisure & hospitality held steady at 25.5 hours.

In the **household survey**, the unemployment rate held at 4.2% in April as employment rose 436,000 and the size of the labor force increased 518,000. The labor force participation rate edged up to 62.6% last month from 62.5% in March. It remained below the high of 63.3% early in 2020. The rate for teenagers declined to 36.9%. For workers aged 20-24, the rate held steady at 72.1%, up from 71.8% six months earlier. For workers aged 25-54 the rate rose to 83.6%, a five-month high. For individuals 55 and over, the rate improved to 38.4% in April.

The employment/population ratio for all workers in April rose to 60.0%. It remained below the peak reading of 61.1% in February, 2020 just prior to the pandemic.

The employment and earnings data are collected from surveys taken each month during the week containing the 12th day of the month. The labor market data are contained in Haver's **USECON** database. Detailed figures are in the **EMPL** and **LABOR** databases. The expectations figures are in the **AS1REPNA** database.

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- Job growth spreads across most sectors.
- Earnings growth trend decelerates.
- Jobless rate holds steady.

U.S. Job Growth Is Firm in April but March Gain Is Lessened

Winnie Tapasanun

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Total factory orders rose a slightly less-than-expected 4.3% m/m in March after rises of 0.5% in February and 1.8% in January, data from the U.S. Census Bureau showed. A 4.5% m/m March increase had been expected in the Action Economics Forecast Survey. The March reading was the third successive monthly rise and the largest since July 2024. The year-on-year rate accelerated to 6.0% in March, the highest since November 2022, from 2.3% in February. Notably, orders for nondefense aircraft & parts soared 139.0% in March following a 7.4% drop in February and a 92.9% surge in January. Factory orders excluding defense rose 4.8% (5.9% y/y), the largest of three straight m/m/ rises, after a 0.4% February increase. Factory orders excluding the transportation sector fell 0.2% (+1.1% y/y), the first m/m fall since August, after rising 0.3% in February, January and December.

Durable goods orders jumped 9.2% (11.9% y/y) in March, the third consecutive m/m gain and the biggest since July 2024, on top of a 0.8% increase in February (matching +9.2% m/m in the advance report on April 24). The March jump reflected m/m orders increases of 27.1% (the largest m/m surge since July 2024; 31.2% y/y) in transportation equipment, 1.1% (4.9% y/y) in primary metals, 0.5% (-0.4% y/y) in furniture & related products, 0.1% (2.5% y/y) in fabricated metal products, and 0.1% (0.9% y/y) in machinery. To the downside, durable goods orders for computers & electronic products (-1.3%; +2.7% y/y) and electrical equipment, appliances & components (-1.0%; +4.2% y/y) declined m/m in March.

Nondurable goods orders, which equal nondurable goods shipments, fell 0.3% (+0.4% y/y) in March, the first m/m fall since September, after a 0.1% uptick in February. The March fall reflected m/m drops of 2.4% (-9.3% y/y) in petroleum & coal products and 0.9% (-1.2% y/y) in apparel. To the upside, the following nondurable goods shipments rose m/m in March: leather & allied products (1.5%; 8.6% y/y), beverage & tobacco products (0.7%; 5.8% y/y), paper products (0.6%; 2.3% y/y), printing (0.3%; 3.8% y/y), textile mills (0.3%; 0.8% y/y), chemical products (0.2%; 5.4% y/y), plastics & rubber products (0.2%; 0.4% y/y), food products (0.1%; 1.8% y/y), and textile products (0.1%; 2.1% y/y).

Total shipments slipped 0.1% (+2.0% y/y) in March, the first m/m easing since October, after a 0.7% increase in February. Excluding transportation, shipments were virtually unchanged m/m (+1.1% y/y) in March following six straight m/m gains. Shipments of durable goods industries inched up 0.1% (3.8% y/y) in March, the smallest of four consecutive m/m increases, after a 1.3% advance in February. This reflected m/m durable goods shipments rises of 1.2% (5.6% y/y) in primary metals, 0.9% (0.1% y/y) in furniture & related products, 0.8% (-0.2% y/y) in nonmetallic mineral products, 0.4% (0.0% y/y) in machinery, 0.3% (1.8% y/y) in fabricated metal products, 0.2% (4.5% y/y) in computers & electronic products, 0.2% (-2.1% y/y) in wood products, and 0.1% (3.0% y/y) in electrical equipment, appliances & components. In contrast, durable goods shipments for transportation equipment (-0.5%; +7.3% y/y) and miscellaneous durable goods (-0.1%; +2.9% y/y) fell m/m in March following three successive m/m increases.

Unfilled orders rose 2.0% (2.3% y/y) in March, up for the eighth month in nine, after a 0.1% uptick in February. Excluding transportation, unfilled orders dipped 0.1% (+0.7% y/y) in March, the first m/m easing since May 2024, after holding steady in February. Backlogs of durable goods rose 2.0% (2.3% y/y) in March, reflecting m/m rises of 3.1% (3.1% y/y) in transportation equipment and 0.2% (2.4% y/y) in electrical equipment, appliances & components.

Inventories edged up 0.1% (0.9% y/y) in March, the fifth straight m/m increase, after rising at the same pace in the prior two months. Excluding transportation, inventories were up 0.1% (0.5% y/y) in March, the fifth consecutive m/m rise. Durable goods inventories ticked up 0.1% (1.0% y/y) in March after holding steady in February and January; nondurable goods inventories edged up 0.1% (0.8% y/y), the fifth successive m/m increase.

The factory sector data are available in Haver’s **USECON** database. The Action Economics Forecast Survey is in the **AS1REPNA** database.

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- March manufacturers’ new orders +4.3% m/m; +6.0% y/y, highest since Nov. ’22.
- Durable goods orders (+9.2%) jump m/m, while nondurable goods orders (-0.3%) and shipments (-0.1%) decline m/m.
- Transportation equipt. orders +27.1% m/m, w/ a 139.0% m/m surge in nondefense aircraft & parts orders.
- Unfilled orders +2.0%, the eighth m/m rise in nine months.
- Inventories +0.1%, the fifth consecutive m/m increase.

U.S. Factory Orders Increase for the Third Straight Month in March

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The global manufacturing data showed broad weakening in April as conditions weakened across more than half of the contributing early reporters in the S&P survey of manufacturing. Of the 18 early reporting countries, more than half of them showed deceleration over six months and 12 months. Over three months, only 8 of 18 showed deterioration and that's about as good as it got in this report. In the current month, month-to-month changes showed more than half of the survey contributors showing weaker results than the month before. In the S&P framework, manufacturing improved month-to-month for the U.S.; however, looking at sequential averages for the U.S., U.K., European monetary union, Canada, and Japan, we see a steady weakening and results over 12 months, over six months versus 12 months, and for three months versus 6 months. The highly developed countries are not doing particularly well.

Asian economies are also showing slight deterioration but doing a little better than the developed countries in general.

Only five of the 18 reporting countries have queue percentile standings in their data back to January 2021 that are above their medians. Readings at or above the 50% mark are at or above the median standing. Canada is showing the weakest manufacturing result on record over this span, in terms of its queue percentile standing which is at 0 in the current month.

I showed the graphic for the Baltic dry goods index in this report rather than statistics on the manufacturing PMI data because the Baltic data, which reflect shipping volume for dry goods - that is excluding things like oil - is weak but it's only in the neighborhood where it's been for some time. There has been a great deal of talk about how tariffs may have impacted trade flows, expected trade flows, shipping, shipping rates, and the like. However, according to the Baltic dry goods index, there isn't much evidence that this is occurring right now and affecting the current data. That may still lie ahead but for now it's not baked in the cake.

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Globally Manufacturing Weakens

Andrew Cates

**China-US shipping activity** 
The economic fallout from escalating US-China trade tensions is becoming increasingly visible in the data. A clear example is the chart below, which highlights a sharp drop in vessel arrivals at the ports of Los Angeles and Long Beach, along with a notable decline in ships waiting offshore. These trends point to a tangible weakening in bilateral trade flows, as the effects of tit-for-tat tariffs imposed by both countries begin to bite. Given the outsized role the US and China play in global commerce, this slowdown is likely to reverberate through global supply chains, weighing on trade volumes, dampening demand, and curbing economic growth worldwide.

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**GDP growth in Q1**
Data this week showed that the US economy contracted, albeit modestly, in Q1 even as the euro area recorded a modest expansion—an unusual divergence. The contraction in US GDP can be largely attributed to a sharp increase in imports, as firms rushed to front-load purchases ahead of anticipated tariff hikes. In addition, domestic demand was subdued, with weaker contributions from both consumer spending and government consumption. This decoupling between the US and euro area economies is particularly striking given the current global focus on the US dollar. While the euro area has shown unexpected signs of resilience, the US downturn raises important questions about its underlying momentum, especially as trade dynamics and policy uncertainty continue to cloud the outlook.

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**The US dollar versus yield differentials**
Chart 3 below illustrates a sharp breakdown in the correlation between the US-Germany 10-year yield differential and the EUR/USD exchange rate. Historically, the dollar has moved closely with interest rate spreads, as yield-seeking capital flowed into US assets. But since early 2025—and more acutely following the April tariff actions—the dollar has weakened markedly even as the yield spread has narrowed only modestly. This decoupling underscores a critical shift: capital markets are reacting not just to monetary policy, but to rising trade and geopolitical uncertainty. In other words, the exchange rate is now being driven as much by risk sentiment as by interest rate arbitrage.

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**The US economy’s structural outperformance and the dollar**
A second dynamic, captured in the next chart, reveals a tight correlation between the US real effective exchange rate and the potential GDP growth differential between the US and euro area over the past 50-60 years. This raises the question: has dollar strength (until recently) merely been a reflection of US growth leadership—or are capital inflows themselves helping to sustain this growth outperformance? In effect, the tail may be wagging the dog. Global investors have long allocated capital to the US, attracted by its macroeconomic resilience, technological leadership, and deep, liquid financial markets. The danger now is that the US trade war may disrupt this equilibrium. A sharp or sustained reduction in capital inflows could undermine growth, weaken the dollar, and trigger broader financial instability. Moreover, reversing this dynamic is not straightforward—barring a credible structural resurgence in European (or Asian) growth, the global investment landscape remains tilted toward the US.

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**US competitiveness versus Europe, China and Japan** 
The next chart below examines relative unit labour costs across major economies since 2011. The US and China have seen a broadly similar trajectory, with steady increases in relative cost structures, while the euro area has remained flat and Japan has seen dramatic improvement. This suggests that, from a cost competitiveness standpoint, the US is not uniquely disadvantaged vis-à-vis China. However, as we discuss further below, this parallel erosion of cost competitiveness is occurring at much higher nominal wage levels in the US, which blunts its ability to regain export share through tariff-related shifts alone. The trade war strategy—absent a corresponding improvement in productivity or structural reforms—risks imposing costs without delivering material competitiveness gains.

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**Average wages in selected developed and developing economies**
This point is reinforced by the final chart, which shows estimates for average monthly wages across countries in 2024. US labour remains much more expensive than in peer or emerging economies. So even if China’s costs rise in tandem with the US, the global supply chain has ample alternatives. 'China plus one' strategies are accelerating, and the US remains structurally misaligned with low-cost production hubs. Tariffs aimed at reshoring supply chains are unlikely to deliver sustained gains unless accompanied by deep supply-side reforms, and risk further disincentivizing foreign direct investment if global firms perceive US trade policy as erratic or punitive.

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Financial markets found a measure of calm this week, buoyed by some subtle shifts in tone from US policymakers. A softening in the administration’s rhetoric around trade tariffs coupled with a less confrontational stance toward Federal Reserve Chair Jerome Powell, helped ease tensions that had roiled markets earlier in the month. Equities rebounded modestly, and volatility indicators edged lower, reflecting cautious optimism that the worst of the policy shocks may be behind us. But beneath the surface, significant downside risks persist. New shipping data point to a pronounced slowdown in US-China trade flows (chart 1), suggesting the damage from recent tariff escalations is already rippling through global supply chains. Meanwhile, incoming data for the US revealed an unexpected contraction in the economy in Q1 and further signs of weakness in the labour market (chart 2). The US dollar, in the meantime, while long supported by superior growth and yield differentials, has begun to decouple from traditional drivers (charts 3 and 4) suggesting growing pressure on capital flows. At the same time, structural imbalances are drawing renewed scrutiny: unit labour cost comparisons show the US steadily losing competitiveness (chart 5), while nominal wage disparities remain stark versus China and other Asian economies, further complicating any effort to restore trade balance without broader reforms (chart 6). In short, while markets may be drawing temporary comfort from a pause in tariff brinkmanship, the deeper economic and financial vulnerabilities exposed this month remain unresolved—and increasingly central to the global macro narrative.

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Charts of the Week: Tariff Truce, Tenuous Trust

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U.S. light vehicle sales dropped 2.9% (+6.5% y/y) to 17.31 million units (SAAR) in April after surging 10.8% to 17.82 million units in March. The retreat in April vehicle sales accompanied a 1.7% y/y rise in real disposable income through March, which compared to 2.0% growth last year.

Sales declines were broad-based last month. Light truck sales fell 1.3% (+9.9% y/y) during April to 14.34 million units (SAAR), after rising 12.4% in March. Purchases of domestically-made light trucks declined 1.2% (+11.9% y/y) to 11.02 million units, after jumping 12.5% in March. Sales of imported light trucks fell 1.8% (+4.4% y/y) to 3.32 million units, following an 11.6% March surge.

Trucks’ record 82.8% share of the light vehicle market last month compared to 81.5% in March and 80.3% in April of last year. The share averaged 80.3% during all of 2024 versus 53.3% ten years earlier.

Auto sales also declined last month, down 9.5% (-7.5%) to 2.97 million units (SAAR) following a 3.5% March rise. The decline reversed all of the increase over the prior two months. Purchases of domestically-produced cars fell 9.8% (-4.3% y/y) last month to 2.22 million units, after rising 3.8% in March. Sales of imported autos declined 9.6% (-15.7% y/y) to 0.75 million units, following a 2.5% March increase.

Imports' 23.5% share of the U.S. light vehicle market was little changed from 23.6% in March and compared to a May 2023 low of 22.9% and a high of 26.3% in November of 2023. Imports' share of the passenger car market held steady at 25.3% last month and compared to 27.7% in April of last year. It reached a high of 38.7% in September 2021. Imports' share of the light truck market eased to 23.2% last month after falling to 23.3% in March.

U.S. vehicle sales figures can be found in Haver's **USECON** database. Additional detail by manufacturer is in the I**NDUSTRY** database.

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- Light truck sales pull back, while auto sales tumble.
- Both domestic and imported sales decline.
- Imports' market share slips further.

Economy in Brief: 2013

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