Robert Brusca

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090406a.jpg" align="left" border="0" height="265" width="353">
EMU inflation drops at record pace in February. EMU
inflation dropped in February after a very sharp drop in January. Over
three-months the annual pace of decline is at -12% compared to -11%
over six-months. This is a strong pace to stay in force over these two
periods. Over 12-months, inflation is off by 1.8% compared to being up
by 5.3% Yr/Yr one year ago. Thus average inflation over the past two
years is quite tame, under two percent. 
 

A job well done&#8230;but. Central banks can be
content that despite all the angst, they handled the energy price spurt
well and did manage to keep inflation at bay. Still, inflation is well
under control and last week ahead of the G-20 meeting, the ECB gave the
markets a smaller rate cut than they had anticipated. Now with the
inflation numbers still showing declines the ECB is expected to be
cutting rates again. 
 

Widespread drops, too. Inflation is falling
in Germany and in Italy at about the same pace as in EMU over the last
3 and 6 months. The UK has inflation falling fast over six months but
the pace of decline has let up over the past three-months. 
 


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="7" scope="col">Euro Area
and UK PPI Trends </th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td colspan="2">M/M</td>
<td colspan="4">Saar</td>
</tr>
<tr>
<td class="firstcol">Euro Area</td>
<td>Feb-09</td>
<td>Jan-09</td>
<td>3-Mo</td>
<td>6-MO</td>
<td>Yr/Yr</td>
<td>Y/Y Yr Ago</td>
</tr>
<tr>
<td class="firstcol">Total ex Construction</td>
<td>-0.6%</td>
<td>-1.5%</td>
<td>-12.0%</td>
<td>-11.2%</td>
<td>-1.8%</td>
<td>5.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Capital Goods</td>
<td>0.0%</td>
<td>-0.2%</td>
<td>-0.6%</td>
<td>0.6%</td>
<td>1.7%</td>
<td>1.6%</td>
</tr>
<tr>
<td class="firstcol">Consumer Goods</td>
<td>-0.2%</td>
<td>-0.8%</td>
<td>-5.0%</td>
<td>-3.6%</td>
<td>-0.5%</td>
<td>4.7%</td>
</tr>
<tr>
<td class="firstcol">Intermediate &amp; Capital
Goods</td>
<td>-1.1%</td>
<td>-1.9%</td>
<td>-15.4%</td>
<td>-11.9%</td>
<td>-3.1%</td>
<td>4.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">MFG</td>
<td>-0.5%</td>
<td>-1.0%</td>
<td>-11.7%</td>
<td>-12.9%</td>
<td>-3.9%</td>
<td>5.5%</td>
</tr>
<tr>
<td class="firstcol">Germany</td>
<td>-0.7%</td>
<td>-1.4%</td>
<td>-12.5%</td>
<td>-5.9%</td>
<td>2.1%</td>
<td>2.7%</td>
</tr>
<tr>
<td class="firstcol">Gy Ex Energy</td>
<td>-0.6%</td>
<td>-0.6%</td>
<td>-6.6%</td>
<td>-5.1%</td>
<td>-0.7%</td>
<td>2.2%</td>
</tr>
<tr>
<td class="firstcol">Italy</td>
<td>-0.8%</td>
<td>-0.9%</td>
<td>-12.0%</td>
<td>-13.1%</td>
<td>-3.3%</td>
<td>6.3%</td>
</tr>
<tr>
<td class="firstcol">UK</td>
<td>0.4%</td>
<td>0.7%</td>
<td>-5.2%</td>
<td>-14.7%</td>
<td>2.1%</td>
<td>13.1%</td>
</tr>
</tbody>
</table>
</body></html>

EMU inflation drops at record pace in February. EMU inflation dropped in February after a very sharp drop in January. Over three-months the annual pace of decline is at -12% compared to -11% over six-months. This is a strong pace to [...]

Euro Area Inflation Is Still Dropping Fast

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090406a.jpg" align="left" border="0" height="265" width="353">
EMU inflation drops at record pace in February. EMU
inflation dropped in February after a very sharp drop in January. Over
three-months the annual pace of decline is at -12% compared to -11%
over six-months. This is a strong pace to stay in force over these two
periods. Over 12-months, inflation is off by 1.8% compared to being up
by 5.3% Yr/Yr one year ago. Thus average inflation over the past two
years is quite tame, under two percent. 
 

A job well done&#8230;but. Central banks can be
content that despite all the angst, they handled the energy price spurt
well and did manage to keep inflation at bay. Still, inflation is well
under control and last week ahead of the G-20 meeting, the ECB gave the
markets a smaller rate cut than they had anticipated. Now with the
inflation numbers still showing declines the ECB is expected to be
cutting rates again. 
 

Widespread drops, too. Inflation is falling
in Germany and in Italy at about the same pace as in EMU over the last
3 and 6 months. The UK has inflation falling fast over six months but
the pace of decline has let up over the past three-months. 
 


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="7" scope="col">Euro Area
and UK PPI Trends </th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td colspan="2">M/M</td>
<td colspan="4">Saar</td>
</tr>
<tr>
<td class="firstcol">Euro Area</td>
<td>Feb-09</td>
<td>Jan-09</td>
<td>3-Mo</td>
<td>6-MO</td>
<td>Yr/Yr</td>
<td>Y/Y Yr Ago</td>
</tr>
<tr>
<td class="firstcol">Total ex Construction</td>
<td>-0.6%</td>
<td>-1.5%</td>
<td>-12.0%</td>
<td>-11.2%</td>
<td>-1.8%</td>
<td>5.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Capital Goods</td>
<td>0.0%</td>
<td>-0.2%</td>
<td>-0.6%</td>
<td>0.6%</td>
<td>1.7%</td>
<td>1.6%</td>
</tr>
<tr>
<td class="firstcol">Consumer Goods</td>
<td>-0.2%</td>
<td>-0.8%</td>
<td>-5.0%</td>
<td>-3.6%</td>
<td>-0.5%</td>
<td>4.7%</td>
</tr>
<tr>
<td class="firstcol">Intermediate &amp; Capital
Goods</td>
<td>-1.1%</td>
<td>-1.9%</td>
<td>-15.4%</td>
<td>-11.9%</td>
<td>-3.1%</td>
<td>4.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">MFG</td>
<td>-0.5%</td>
<td>-1.0%</td>
<td>-11.7%</td>
<td>-12.9%</td>
<td>-3.9%</td>
<td>5.5%</td>
</tr>
<tr>
<td class="firstcol">Germany</td>
<td>-0.7%</td>
<td>-1.4%</td>
<td>-12.5%</td>
<td>-5.9%</td>
<td>2.1%</td>
<td>2.7%</td>
</tr>
<tr>
<td class="firstcol">Gy Ex Energy</td>
<td>-0.6%</td>
<td>-0.6%</td>
<td>-6.6%</td>
<td>-5.1%</td>
<td>-0.7%</td>
<td>2.2%</td>
</tr>
<tr>
<td class="firstcol">Italy</td>
<td>-0.8%</td>
<td>-0.9%</td>
<td>-12.0%</td>
<td>-13.1%</td>
<td>-3.3%</td>
<td>6.3%</td>
</tr>
<tr>
<td class="firstcol">UK</td>
<td>0.4%</td>
<td>0.7%</td>
<td>-5.2%</td>
<td>-14.7%</td>
<td>2.1%</td>
<td>13.1%</td>
</tr>
</tbody>
</table>
Retail Sales Continue To Fall In
The Euro Area 
by <a href="/comment/Curley.html">Louise
Curley</a> April 6, 2009



<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090406b.jpg" align="left" border="0" height="265" width="353">
The value of retail sales excluding motor vehicles and
motorcycles in the Euro Area had risen each month since the series
began in 1995 until September of last year. (In the Euro Area, retail
sales, excluding motor vehicles and motorcycles, are reported in index
form with a base of 2005=100.) Since then, they have declined in four
of the five subsequent months. By February 2009, they were 2.7% below
February 2008<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090406c.jpg" align="right" border="0" height="265" width="353">
In general, retail sales tend to show increases in year to
year growth reflecting the growing demands of an increasing population.
Even in mild recessions, retail sales tend to increase. The growth in
retail sales in the Euro Area has tended to be lower than that in
either the UK or the US, as can be seen in the first chart. In the last
four months retail sales in the Euro Area show much smaller declines in
sales relative to the US but slightly larger declines than the UK. (The
chart shows recession shading for the US.)
Good data for retail sales, like data on employment,
production and such, take time to compile and by the time they are
published, then current conditions may well have changed. Measures of
consumer and business confidence help in judging current sentiment and
they have recently shown some slight improvement. The stock markets
also reflect economic sentiment and markets around the world have
improved in the very recent past.. The second chart plots the daily
price of stocks in the Euro Area, the UK and the US on a log scale.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol">Retail
sales ex motor vehicles and motor cycles (2005=100)</th>
<th scope="col">Feb 09</th>
<th scope="col">Jan 09&nbsp;</th>
<th scope="col">Dec&nbsp; 08&nbsp;</th>
<th scope="col">Nov 08&nbsp;</th>
<th scope="col">Oct 08</th>
<th scope="col">Sep 08</th>
<th scope="col">Feb 09/Feb 08</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">EURO AREA&nbsp;</td>
<td>105.97</td>
<td>106.38</td>
<td>106.10</td>
<td>106.59</td>
<td>107.36</td>
<td>108.70</td>
<td>-2.66</td>
</tr>
<tr>
<td class="firstcol">United Kingdom</td>
<td>109.57</td>
<td>110.64</td>
<td>106.91</td>
<td>109.98</td>
<td>110.71</td>
<td>116.41</td>
<td>-2.14</td>
</tr>
<tr class="odd">
<td class="firstcol">United States</td>
<td>107.72</td>
<td>106.76</td>
<td>105.12</td>
<td>108.94</td>
<td>112.42</td>
<td>116.16</td>
<td>-6.04</td>
</tr>
</tbody>
</table>
</body></html>

Euro Area Inflation Is StillDropping Fast

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090403f.jpg" align="left" border="0">
In the Market PMI framework Europe is stabilizing as the rates
of decline in MFG and Services bottom and begin to show some
improvement. But the EU framework of surveys shows declines are still
in train. The table above shows the EMU and EU EC-Commission readings
along with the Market PMI readings. They are in conflict. The EC
readings for services are mostly on their lows while the Market figures
have risen from their respective lows. 
 

Germany, France, Italy Spain and Ireland each showed Service
sector improvement in March in the Market framework. The UK also showed
some nice improvement. All the indices are still below 50, indicating
ongoing contraction for the sector. The three-month averages are still
falling and MEU Ireland France and UK each do show current market
reading that surpass their respective three-month averages a good sign
for stability and recovery. 


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="8" scope="col"> NTC
Services Indices for EU/EMU</th>
</tr>
</thead>
<tbody>
<tr class="grey4">
<td class="firstcol">&nbsp;</td>
<td>Mar-09</td>
<td>Feb-09</td>
<td>Jan-09</td>
<td>3Mo</td>
<td>6Mo</td>
<td>12Mo</td>
<td>Percentile</td>
</tr>
<tr class="grey4">
<td class="firstcol">Euro-13</td>
<td>40.95</td>
<td>39.24</td>
<td>42.16</td>
<td>40.78</td>
<td>42.11</td>
<td>45.80</td>
<td>8.0%</td>
</tr>
<tr class="grey4">
<td class="firstcol">Germany</td>
<td>42.30</td>
<td>41.32</td>
<td>45.20</td>
<td>42.94</td>
<td>44.81</td>
<td>48.70</td>
<td>5.0%</td>
</tr>
<tr class="grey4">
<td class="firstcol">France</td>
<td>43.64</td>
<td>40.18</td>
<td>42.56</td>
<td>42.13</td>
<td>43.44</td>
<td>46.64</td>
<td>14.1%</td>
</tr>
<tr class="grey4">
<td class="firstcol">Italy</td>
<td>39.10</td>
<td>37.85</td>
<td>41.10</td>
<td>39.35</td>
<td>40.58</td>
<td>44.45</td>
<td>5.2%</td>
</tr>
<tr class="grey4">
<td class="firstcol">Spain</td>
<td>34.11</td>
<td>31.73</td>
<td>31.84</td>
<td>32.56</td>
<td>31.71</td>
<td>35.40</td>
<td>18.3%</td>
</tr>
<tr class="grey4">
<td class="firstcol">Ireland</td>
<td>35.69</td>
<td>31.78</td>
<td>33.94</td>
<td>33.80</td>
<td>34.03</td>
<td>38.10</td>
<td>10.8%</td>
</tr>
<tr class="grey4">
<td class="firstcol" colspan="8">EU
only</td>
</tr>
<tr class="grey4">
<td class="firstcol">UK (CIPs)</td>
<td>45.47</td>
<td>43.24</td>
<td>42.48</td>
<td>43.73</td>
<td>42.31</td>
<td>45.31</td>
<td>26.4%</td>
</tr>
<tr class="grey4">
<td class="firstcol">US NONFMG ISM</td>
<td>#N/A</td>
<td>41.60</td>
<td>42.90</td>
<td>#N/A</td>
<td>#N/A</td>
<td>#N/A</td>
<td>#N/A</td>
</tr>
<tr class="grey3">
<td colspan="8" class="firstcol">EU Commission Indices for
EU and EMU</td>
</tr>
<tr class="grey2">
<td class="firstcol">EU Index</td>
<td>Mar-09</td>
<td>Feb-09</td>
<td>Jan-09</td>
<td>3Mo</td>
<td>6Mo</td>
<td>12Mo</td>
<td>Percentile</td>
</tr>
<tr class="grey2">
<td class="firstcol">EU Services</td>
<td>-31</td>
<td>-29</td>
<td>-28</td>
<td>-32.67</td>
<td>-29.50</td>
<td>-23.25</td>
<td>0.0%</td>
</tr>
<tr class="grey2">
<td class="firstcol">EMU</td>
<td>Mar-09</td>
<td>Feb-09</td>
<td>Jan-09</td>
<td>3Mo</td>
<td>6Mo</td>
<td>12Mo</td>
<td>Percentile</td>
</tr>
<tr class="grey2">
<td class="firstcol">Services</td>
<td>-25</td>
<td>-24</td>
<td>-22</td>
<td>-23.67</td>
<td>-17.83</td>
<td>-8.63</td>
<td>0.0%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Cons Confidence</td>
<td>-34</td>
<td>-33</td>
<td>-31</td>
<td>-32.67</td>
<td>-29.50</td>
<td>-13.50</td>
<td>0.0%</td>
</tr>
<tr class="grey3">
<td colspan="8" class="firstcol">Consumer confidence by
country</td>
</tr>
<tr class="grey1">
<td class="firstcol">Germany-Ccon</td>
<td>-31</td>
<td>-29</td>
<td>-27</td>
<td>-29.00</td>
<td>-22.67</td>
<td>-14.08</td>
<td>0.0%</td>
</tr>
<tr class="grey1">
<td class="firstcol">France-Ccon</td>
<td>-36</td>
<td>-36</td>
<td>-35</td>
<td>-35.67</td>
<td>-33.67</td>
<td>-27.33</td>
<td>0.0%</td>
</tr>
<tr class="grey1">
<td class="firstcol">Ital-Ccon</td>
<td>-31</td>
<td>-28</td>
<td>-26</td>
<td>-28.33</td>
<td>-27.33</td>
<td>-25.08</td>
<td>0.0%</td>
</tr>
<tr class="grey1">
<td class="firstcol">Spain-Ccon</td>
<td>-43</td>
<td>-48</td>
<td>-44</td>
<td>-45.00</td>
<td>-44.83</td>
<td>-39.83</td>
<td>10.4%</td>
</tr>
<tr class="grey1">
<td class="firstcol">UK-Ccon</td>
<td>-28</td>
<td>-32</td>
<td>-35</td>
<td>-31.67</td>
<td>-29.67</td>
<td>-24.92</td>
<td>18.4%</td>
</tr>
<tr class="grey3">
<td colspan="8" class="firstcol">percentile
is over range since May
2000</td>
</tr>
</tbody>
</table>
</body></html>

In the Market PMI framework Europe is stabilizing as the rates of decline in MFG and Services bottom and begin to show some improvement. But the EU framework of surveys shows declines are still in train. The table above shows the EMU [...]

Market Services PMIs Turn Higher In March

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090403d.jpg" width="353">
The service sector remains under pressure. The March Composite Index for the nonmanufacturing sector from the Institute for Supply Management (ISM) slipped further to 40.8 from an unrevised February reading of 41.6. Consensus expectations were for a reading of 42.0. For the quarter as a whole, the index edged up to 41.8 from the low of 40.7 during 4Q &#39;08. A level of the ISM index below 50 indicates declining activity. Since the series&#39; inception in 1997 there has been a 48% correlation between the level of the business activity index in the nonmanufacturing sector and the Q/Q change in real GDP for the services and the construction sectors.
Despite the decline in the overall index, the business activity index improved last month. The employment index, however, offset that rise with a decline to near the cycle low. Since the series&#39; inception in 1997 there has been a 56% correlation between the level of the ISM nonmanufacturing employment index and the m/m change in payroll employment in the service-producing plus the construction industries.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090403e.jpg" width="353">
Pricing power fell back again after February improvement. Since its inception ten years ago, there has been a 60% correlation between the price index and the q/q change in the GDP services chain price index.
Beginning with the January 2008 Nonmanufacturing <cite>Report On Business</cite>&reg;, the composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector. It is a composite index based on the diffusion indices for four of the indicators (business activity, new orders, employment and supplier deliveries) with equal weights. The latest report from the ISM can be found <a href="http://www.ism.ws/ISMReport/NonMfgROB.cfm.">here</a>.
ISM surveys more than 370 purchasing managers in more than 62 industries including law firms, hospitals, government and retailers. The nonmanufacturing survey dates back to July 1997.
Credit Market Competition and the Nature of Firms from the Federal Reserve Bank of New York is available <a href="http://www.newyorkfed.org/research/staff_reports/sr366.pdf">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF03/@EF03.HTM">ISM Nonmanufacturing Survey</a></th>
<th scope="col">March</th>
<th scope="col">February</th>
<th scope="col">March &#39;08</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Composite Index</td>
<td>40.8</td>
<td>41.6</td>
<td>49.9</td>
<td>47.4</td>
<td>53.5</td>
<td>55.7</td>
</tr>
<tr>
<td class="firstcol">Prices Index</td>
<td>41.5</td>
<td>46.5</td>
<td>75.5</td>
<td>66.0</td>
<td>63.8</td>
<td>65.3</td>
</tr>
</tbody>
</table>


</html>

The service sector remains under pressure. The March Composite Index for the nonmanufacturing sector from the Institute for Supply Management (ISM) slipped further to 40.8 from an unrevised February reading of 41.6. Consensus [...]

U.S. ISM Nonmanufacturing Index Falls Again

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090403a.jpg" align="right" border="0" height="265" width="353">The March
employment figures showed that there was little, if any, diminution in
the pace of job loss. Nonfarm payrolls fell an
expected 663,000 following their unrevised 651,000 worker drop during
February. The loss of employment spread across industries. The Bureau
of Labor Statistics indicated, furthermore, that the number of payroll
jobs lost during this recession so far totals 5.1 million, the record
for a 15-month period. Even after accounting for the labor force's
larger size, that's a huge number. In percentage terms, jobs are down
3.7% since the 2007 peak, close to a record. 
The weakness in payrolls
also was associated with a jump in the unemployment rate to
an expected 8.5%, the highest level since November of 1983. The
unemployment rate reached its recent low of 4.4% in October of 2006.
Last months' increase was fueled by an 861,000 drop in household
employment (-3.5% y/y) and a 166,000 drop (+0.1% y/y) drop in the labor
force.
 Long-term unemployment has risen substantially.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090403b.jpg" align="right" border="0" height="265" width="353">
The
average duration of unemployment rose even further in March to 20.1
weeks, up from 16.9 weeks during 2007. The number of those unemployed
for longer than 15 weeks more than doubled during the last year and
they accounted for nearly half of all those who are unemployed.
Long-term unemployment has discouraged workers. The ranks of those who
have dropped out of the labor force has grown by nearly one-quarter
during the last year to 5.8 million.
The payroll employment figures
indicate that the breadth of job loss continues to grow. Only 22.0% of
industries were hiring last month, half that of last March and down
from the 2006 peak of 24.9%. Over a six-month period, just 15.7% of
firms were hiring. The breadth of the downturn includes 126,000
construction industry jobs lost last month, bringing the total to 1.3
million since early 2007.&nbsp; Factory jobs were down another
161,000 in March, adding to the 10-year downtrend during which over 5
million jobs (29.1%) have been shed. The job market has turned so sour
that the somewhat immune service sector has suffered. It lost 353,000
jobs last month and 2.8 million (3.0%) since the peak in late 2007.
Even government sector hiring has slowed. The 81,000 rise in payrolls
last month left them up just 0.4% y/y. Hiring by local governments has
been unchanged since last year.
Fewer workers worked fewer hours last
month and the length of the average workweek fell to 33.2 hours, a
record low. <img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090403c.jpg" align="right" border="0" height="265" width="353">
For the first quarter, the combination of lower employment
and fewer hours-worked brought aggregate hours down by 8.7% (AR) from
4Q' 08. That rate of decline was even faster than during 4Q and
suggests negative growth in real GDP in excess of 7% in 1Q '09.· The
weak labor market has taken a toll on average hourly earnings in
private industries. The 0.2% gains in each of the last three months
lowered the annualized rate of growth by half since last year to 2.2%.
In the construction and the goods producing sectors, growth in average
hourly earnings was negative.
 The figures referenced above
are available in Haver's USECON database.
Additional detail can be found in the LABOR and in
the EMPL databases.
Policies to Bring Us
Out of the Financial Crisis and Recession is this morning's
speech by Fed Vice Chairman Donald L. Kohn and it is available <a href="http://www.federalreserve.gov/newsevents/speech/kohn20090403a.htm">
here</a>.&nbsp;
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol">Employment:
000s</th>
<th scope="col">March</th>
<th scope="col">February</th>
<th scope="col">January</th>
<th scope="col">Y/Y</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Payroll Employment</td>
<td>-663</td>
<td>-651</td>
<td>-741</td>
<td>-3.5%</td>
<td>-0.4%</td>
<td>1.1%</td>
<td>1.8%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Previous</td>
<td>--</td>
<td>-651</td>
<td>-655</td>
<td>--</td>
<td>-0.3%</td>
<td>1.1%</td>
<td>1.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Manufacturing</td>
<td>-161</td>
<td>-169</td>
<td>-262</td>
<td>-9.8%</td>
<td>-3.3%</td>
<td>-2.0%</td>
<td>-0.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Construction</td>
<td>-126</td>
<td>-107</td>
<td>-135</td>
<td>-12.5%</td>
<td>-5.5%</td>
<td>-0.8%</td>
<td>4.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Service Producing</td>
<td>-358</td>
<td>-366</td>
<td>-336</td>
<td>-2.2%</td>
<td>0.2%</td>
<td>1.6%</td>
<td>1.8%</td>
</tr>
<tr>
<td class="firstcol">Average Weekly Hours</td>
<td>33.2</td>
<td>33.3</td>
<td>33.3</td>
<td>33.8 (March '08)</td>
<td>33.6</td>
<td>33.8</td>
<td>33.9</td>
</tr>
<tr class="odd">
<td class="firstcol">Average Hourly Earnings</td>
<td>0.2%</td>
<td>0.2%</td>
<td>0.2%</td>
<td>3.4%</td>
<td>3.8%</td>
<td>4.0%</td>
<td>3.9%</td>
</tr>
<tr>
<td class="firstcol">Unemployment Rate</td>
<td>8.5%</td>
<td>8.1%</td>
<td>7.6%</td>
<td>4.8% March '08)</td>
<td>5.8%</td>
<td>4.6%</td>
<td>4.6%</td>
</tr>
</tbody>
</table>

</body></html>

The March employment figures showed that there was little, if any, diminution in the pace of job loss. Nonfarm payrolls fell an expected 663,000 following their unrevised 651,000 worker drop during February. The loss of employment [...]

U.S. Jobless Rate Reaches 8.5%; 5.1 Million Payroll Jobs Are Lost Since Cycle Peak

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090403a.jpg" align="right" border="0" height="265" width="353">The March
employment figures showed that there was little, if any, diminution in
the pace of job loss. Nonfarm payrolls fell an
expected 663,000 following their unrevised 651,000 worker drop during
February. The loss of employment spread across industries. The Bureau
of Labor Statistics indicated, furthermore, that the number of payroll
jobs lost during this recession so far totals 5.1 million, the record
for a 15-month period. Even after accounting for the labor force's
larger size, that's a huge number. In percentage terms, jobs are down
3.7% since the 2007 peak, close to a record. 
The weakness in payrolls
also was associated with a jump in the unemployment rate to
an expected 8.5%, the highest level since November of 1983. The
unemployment rate reached its recent low of 4.4% in October of 2006.
Last months' increase was fueled by an 861,000 drop in household
employment (-3.5% y/y) and a 166,000 drop (+0.1% y/y) drop in the labor
force.
 Long-term unemployment has risen substantially.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090403b.jpg" align="right" border="0" height="265" width="353">
The
average duration of unemployment rose even further in March to 20.1
weeks, up from 16.9 weeks during 2007. The number of those unemployed
for longer than 15 weeks more than doubled during the last year and
they accounted for nearly half of all those who are unemployed.
Long-term unemployment has discouraged workers. The ranks of those who
have dropped out of the labor force has grown by nearly one-quarter
during the last year to 5.8 million.
The payroll employment figures
indicate that the breadth of job loss continues to grow. Only 22.0% of
industries were hiring last month, half that of last March and down
from the 2006 peak of 24.9%. Over a six-month period, just 15.7% of
firms were hiring. The breadth of the downturn includes 126,000
construction industry jobs lost last month, bringing the total to 1.3
million since early 2007.&nbsp; Factory jobs were down another
161,000 in March, adding to the 10-year downtrend during which over 5
million jobs (29.1%) have been shed. The job market has turned so sour
that the somewhat immune service sector has suffered. It lost 353,000
jobs last month and 2.8 million (3.0%) since the peak in late 2007.
Even government sector hiring has slowed. The 81,000 rise in payrolls
last month left them up just 0.4% y/y. Hiring by local governments has
been unchanged since last year.
Fewer workers worked fewer hours last
month and the length of the average workweek fell to 33.2 hours, a
record low. <img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090403c.jpg" align="right" border="0" height="265" width="353">
For the first quarter, the combination of lower employment
and fewer hours-worked brought aggregate hours down by 8.7% (AR) from
4Q' 08. That rate of decline was even faster than during 4Q and
suggests negative growth in real GDP in excess of 7% in 1Q '09.· The
weak labor market has taken a toll on average hourly earnings in
private industries. The 0.2% gains in each of the last three months
lowered the annualized rate of growth by half since last year to 2.2%.
In the construction and the goods producing sectors, growth in average
hourly earnings was negative.
 The figures referenced above
are available in Haver's USECON database.
Additional detail can be found in the LABOR and in
the EMPL databases.
Policies to Bring Us
Out of the Financial Crisis and Recession is this morning's
speech by Fed Vice Chairman Donald L. Kohn and it is available <a href="http://www.federalreserve.gov/newsevents/speech/kohn20090403a.htm">
here</a>.&nbsp;
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol">Employment:
000s</th>
<th scope="col">March</th>
<th scope="col">February</th>
<th scope="col">January</th>
<th scope="col">Y/Y</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Payroll Employment</td>
<td>-663</td>
<td>-651</td>
<td>-741</td>
<td>-3.5%</td>
<td>-0.4%</td>
<td>1.1%</td>
<td>1.8%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Previous</td>
<td>--</td>
<td>-651</td>
<td>-655</td>
<td>--</td>
<td>-0.3%</td>
<td>1.1%</td>
<td>1.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Manufacturing</td>
<td>-161</td>
<td>-169</td>
<td>-262</td>
<td>-9.8%</td>
<td>-3.3%</td>
<td>-2.0%</td>
<td>-0.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Construction</td>
<td>-126</td>
<td>-107</td>
<td>-135</td>
<td>-12.5%</td>
<td>-5.5%</td>
<td>-0.8%</td>
<td>4.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Service Producing</td>
<td>-358</td>
<td>-366</td>
<td>-336</td>
<td>-2.2%</td>
<td>0.2%</td>
<td>1.6%</td>
<td>1.8%</td>
</tr>
<tr>
<td class="firstcol">Average Weekly Hours</td>
<td>33.2</td>
<td>33.3</td>
<td>33.3</td>
<td>33.8 (March '08)</td>
<td>33.6</td>
<td>33.8</td>
<td>33.9</td>
</tr>
<tr class="odd">
<td class="firstcol">Average Hourly Earnings</td>
<td>0.2%</td>
<td>0.2%</td>
<td>0.2%</td>
<td>3.4%</td>
<td>3.8%</td>
<td>4.0%</td>
<td>3.9%</td>
</tr>
<tr>
<td class="firstcol">Unemployment Rate</td>
<td>8.5%</td>
<td>8.1%</td>
<td>7.6%</td>
<td>4.8% March '08)</td>
<td>5.8%</td>
<td>4.6%</td>
<td>4.6%</td>
</tr>
</tbody>
</table>

U.S. ISM Nonmanufacturing Index
Falls Again 
by <a href="/comment/Moeller.html">Tom
Moeller</a> April 3, 2009


<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090403d.jpg" align="left" border="0" height="265" width="353">
The service sector remains under pressure. The March Composite
Index for the nonmanufacturing sector from the Institute for Supply
Management (ISM) slipped further to 40.8 from an unrevised February
reading of 41.6. Consensus expectations were for a reading of 42.0. For
the quarter as a whole, the index edged up to 41.8 from the low of 40.7
during 4Q '08. A level of the ISM index below 50 indicates declining
activity. Since the series' inception in 1997 there has been a 48%
correlation between the level of the business activity index in the
nonmanufacturing sector and the Q/Q change in real GDP for the services
and the construction sectors.
Despite the decline in the overall index, the business
activity index improved last month. The employment index, however,
offset that rise with a decline to near the cycle low. Since the
series' inception in 1997 there has been a 56% correlation between the
level of the ISM nonmanufacturing employment index and the m/m change
in payroll employment in the service-producing plus the construction
industries.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090403e.jpg" align="right" border="0" height="265" width="353">
Pricing power fell back again after February improvement.
Since its inception ten years ago, there has been a 60% correlation
between the price index and the q/q change in the GDP services chain
price index.
Beginning with the January 2008 Nonmanufacturing <cite>Report
On Business</cite>®, the composite index is calculated as an
indicator of the overall economic condition for the non-manufacturing
sector. It is a composite index based on the diffusion indices for four
of the indicators (business activity, new orders, employment and
supplier deliveries) with equal weights. The latest report from the ISM
can be found <a href="http://www.ism.ws/ISMReport/NonMfgROB.cfm.">here</a>.
ISM surveys more than 370 purchasing managers in more than 62
industries including law firms, hospitals, government and retailers.
The nonmanufacturing survey dates back to July 1997.
Credit Market Competition and the Nature of Firms
from the Federal Reserve Bank of New York is available <a href="http://www.newyorkfed.org/research/staff_reports/sr366.pdf">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF03/@EF03.HTM">ISM
Nonmanufacturing Survey</a></th>
<th scope="col">March</th>
<th scope="col">February</th>
<th scope="col">March '08</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Composite Index</td>
<td>40.8</td>
<td>41.6</td>
<td>49.9</td>
<td>47.4</td>
<td>53.5</td>
<td>55.7</td>
</tr>
<tr>
<td class="firstcol">Prices Index</td>
<td>41.5</td>
<td>46.5</td>
<td>75.5</td>
<td>66.0</td>
<td>63.8</td>
<td>65.3</td>
</tr>
</tbody>
</table>
Market Services PMIs Turn Higher
In March 
by <a href="/comment/Brusca.html">Robert
Brusca&nbsp;</a> April 3, 2009


<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090403f.jpg" align="left" border="0">
In the Market PMI framework Europe is stabilizing as the rates
of decline in MFG and Services bottom and begin to show some
improvement. But the EU framework of surveys shows declines are still
in train. The table above shows the EMU and EU EC-Commission readings
along with the Market PMI readings. They are in conflict. The EC
readings for services are mostly on their lows while the Market figures
have risen from their respective lows. 
 

Germany, France, Italy Spain and Ireland each showed Service
sector improvement in March in the Market framework. The UK also showed
some nice improvement. All the indices are still below 50, indicating
ongoing contraction for the sector. The three-month averages are still
falling and MEU Ireland France and UK each do show current market
reading that surpass their respective three-month averages a good sign
for stability and recovery. 


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="8" scope="col"> NTC
Services Indices for EU/EMU</th>
</tr>
</thead>
<tbody>
<tr class="grey4">
<td class="firstcol">&nbsp;</td>
<td>Mar-09</td>
<td>Feb-09</td>
<td>Jan-09</td>
<td>3Mo</td>
<td>6Mo</td>
<td>12Mo</td>
<td>Percentile</td>
</tr>
<tr class="grey4">
<td class="firstcol">Euro-13</td>
<td>40.95</td>
<td>39.24</td>
<td>42.16</td>
<td>40.78</td>
<td>42.11</td>
<td>45.80</td>
<td>8.0%</td>
</tr>
<tr class="grey4">
<td class="firstcol">Germany</td>
<td>42.30</td>
<td>41.32</td>
<td>45.20</td>
<td>42.94</td>
<td>44.81</td>
<td>48.70</td>
<td>5.0%</td>
</tr>
<tr class="grey4">
<td class="firstcol">France</td>
<td>43.64</td>
<td>40.18</td>
<td>42.56</td>
<td>42.13</td>
<td>43.44</td>
<td>46.64</td>
<td>14.1%</td>
</tr>
<tr class="grey4">
<td class="firstcol">Italy</td>
<td>39.10</td>
<td>37.85</td>
<td>41.10</td>
<td>39.35</td>
<td>40.58</td>
<td>44.45</td>
<td>5.2%</td>
</tr>
<tr class="grey4">
<td class="firstcol">Spain</td>
<td>34.11</td>
<td>31.73</td>
<td>31.84</td>
<td>32.56</td>
<td>31.71</td>
<td>35.40</td>
<td>18.3%</td>
</tr>
<tr class="grey4">
<td class="firstcol">Ireland</td>
<td>35.69</td>
<td>31.78</td>
<td>33.94</td>
<td>33.80</td>
<td>34.03</td>
<td>38.10</td>
<td>10.8%</td>
</tr>
<tr class="grey4">
<td class="firstcol" colspan="8">EU
only</td>
</tr>
<tr class="grey4">
<td class="firstcol">UK (CIPs)</td>
<td>45.47</td>
<td>43.24</td>
<td>42.48</td>
<td>43.73</td>
<td>42.31</td>
<td>45.31</td>
<td>26.4%</td>
</tr>
<tr class="grey4">
<td class="firstcol">US NONFMG ISM</td>
<td>#N/A</td>
<td>41.60</td>
<td>42.90</td>
<td>#N/A</td>
<td>#N/A</td>
<td>#N/A</td>
<td>#N/A</td>
</tr>
<tr class="grey3">
<td colspan="8" class="firstcol">EU
Commission Indices for
EU and EMU</td>
</tr>
<tr class="grey2">
<td class="firstcol">EU Index</td>
<td>Mar-09</td>
<td>Feb-09</td>
<td>Jan-09</td>
<td>3Mo</td>
<td>6Mo</td>
<td>12Mo</td>
<td>Percentile</td>
</tr>
<tr class="grey2">
<td class="firstcol">EU Services</td>
<td>-31</td>
<td>-29</td>
<td>-28</td>
<td>-32.67</td>
<td>-29.50</td>
<td>-23.25</td>
<td>0.0%</td>
</tr>
<tr class="grey2">
<td class="firstcol">EMU</td>
<td>Mar-09</td>
<td>Feb-09</td>
<td>Jan-09</td>
<td>3Mo</td>
<td>6Mo</td>
<td>12Mo</td>
<td>Percentile</td>
</tr>
<tr class="grey2">
<td class="firstcol">Services</td>
<td>-25</td>
<td>-24</td>
<td>-22</td>
<td>-23.67</td>
<td>-17.83</td>
<td>-8.63</td>
<td>0.0%</td>
</tr>
<tr class="grey2">
<td class="firstcol">Cons Confidence</td>
<td>-34</td>
<td>-33</td>
<td>-31</td>
<td>-32.67</td>
<td>-29.50</td>
<td>-13.50</td>
<td>0.0%</td>
</tr>
<tr class="grey3">
<td colspan="8" class="firstcol">Consumer
confidence by
country</td>
</tr>
<tr class="grey1">
<td class="firstcol">Germany-Ccon</td>
<td>-31</td>
<td>-29</td>
<td>-27</td>
<td>-29.00</td>
<td>-22.67</td>
<td>-14.08</td>
<td>0.0%</td>
</tr>
<tr class="grey1">
<td class="firstcol">France-Ccon</td>
<td>-36</td>
<td>-36</td>
<td>-35</td>
<td>-35.67</td>
<td>-33.67</td>
<td>-27.33</td>
<td>0.0%</td>
</tr>
<tr class="grey1">
<td class="firstcol">Ital-Ccon</td>
<td>-31</td>
<td>-28</td>
<td>-26</td>
<td>-28.33</td>
<td>-27.33</td>
<td>-25.08</td>
<td>0.0%</td>
</tr>
<tr class="grey1">
<td class="firstcol">Spain-Ccon</td>
<td>-43</td>
<td>-48</td>
<td>-44</td>
<td>-45.00</td>
<td>-44.83</td>
<td>-39.83</td>
<td>10.4%</td>
</tr>
<tr class="grey1">
<td class="firstcol">UK-Ccon</td>
<td>-28</td>
<td>-32</td>
<td>-35</td>
<td>-31.67</td>
<td>-29.67</td>
<td>-24.92</td>
<td>18.4%</td>
</tr>
<tr class="grey3">
<td colspan="8" class="firstcol">percentile
is over range since May
2000</td>
</tr>
</tbody>
</table>
</body></html>

U.S. Jobless Rate Reaches 8.5%;5.1 Million Payroll Jobs Are Lost Since Cycle Peak

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090402g.jpg" align="left" border="0" height="265" width="353">
Headline and sector inflation rates for France are showing
consistent declines. The core is also on a decelerating trend.
Excluding construction the PPI is falling over rapidly. Anyway you cut
the inflation signals at the PPI level France is showing weakness in
prices. 
 

Still, at the Summit in London, French and German leaders are
focused on patching up the global regulatory system. The persisting
downward pressure on prices suggests that weak growth is still public
enemy number one. The ECB got on board today with a rate cut, but once
again it was about half the magnitude of the cut that the market
expected. Markets retreated after early day strong advances when they
saw the meager cut. Markets regained some ground on the Trichet remark
that there could be more cuts. Markets are playing attention to
everything. 
 

European nations are better protected from bad times compared
to the US as evidenced by their higher continuing rates of unemployment
and more generous social welfare programs. 
 

But the recent backtracking in the Baltic Dry index and
continuing sharp downward pressure on inflation of all sorts in France
are harsh reminders that the recession is still with us and is still
virulent. France was one of the few EMU countries in which the Markit
Manufacturing PMI rose in March. Even so in the EU-Commission scheme of
things France&#8217;s industrial sector slipped in March, consumer confidence
stayed at a cycle low, the services sector was on a cycle low and
overall sentiment continued to slip. Weakening price trend are just
another way to underscore this sort of very broad weakness. It is hard
to look at the current needs of the global economy and to square it
with some of the policy work being done in international forums and by
central banks. Being mindful of fiscal discipline is good and wary of
setting of inflation too, but there is a time and place for those
worries and this time and place seem inappropriate for them. 
 

Still European stock markets are hopeful of some sort of turn
in the economy and they are improving. That fits the policy tack of the
European policymakers which is to not worry about growth because enough
has been done. The ECB wants to turn attention to being mindful of
launching irascible inflation trends by not overdoing it. The mixed
signals of the times offer justification for just about anything. Only
time will tell if an opportunity was missed or a hand overplayed. 
 
 


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="8" scope="col">France PPI
</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">m/m</td>
<td colspan="4">Saar</td>
</tr>
<tr class="odd">
<td class="firstcol">France</td>
<td>Feb-09</td>
<td>Jan-09</td>
<td>Dec-08</td>
<td>3-Mo</td>
<td>6-Mo</td>
<td>Yr/Yr</td>
<td>Y/Y Yr Ago</td>
</tr>
<tr>
<td class="firstcol">Total</td>
<td>-0.6%</td>
<td>-2.6%</td>
<td>-1.1%</td>
<td>-15.6%</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">Consumer</td>
<td>#N/A</td>
<td>-0.6%</td>
<td>0.0%</td>
<td>-2.4%</td>
<td>-1.6%</td>
<td>-1.0%</td>
<td>0.3%</td>
</tr>
<tr>
<td class="firstcol">Intermediate</td>
<td>#N/A</td>
<td>-2.7%</td>
<td>-0.7%</td>
<td>-16.6%</td>
<td>-8.7%</td>
<td>-0.8%</td>
<td>2.5%</td>
</tr>
<tr>
<td class="firstcol">Investment</td>
<td>#N/A</td>
<td>-0.6%</td>
<td>-0.1%</td>
<td>-1.8%</td>
<td>0.4%</td>
<td>2.1%</td>
<td>1.6%</td>
</tr>
<tr>
<td class="firstcol">PPI excl Food and
Energy</td>
<td>#N/A</td>
<td>-1.5%</td>
<td>-0.3%</td>
<td>-8.6%</td>
<td>-4.4%</td>
<td>0.1%</td>
<td>1.7%</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">HIPP excl Constructions</td>
<td>#N/A</td>
<td>-2.2%</td>
<td>-1.2%</td>
<td>-18.9%</td>
<td>-13.0%</td>
<td>-2.9%</td>
<td>5.4%</td>
</tr>
<tr>
<td colspan="8" class="firstcol">Shaded
growth rates lag by one -month</td>
</tr>
</tbody>
</table>
</body></html>

Headline and sector inflation rates for France are showing consistent declines. The core is also on a decelerating trend. Excluding construction the PPI is falling over rapidly. Anyway you cut the inflation signals at the PPI level [...]

French PPI Shows Year/Year Weakness

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090402e.jpg" width="353">
The manufacturing sector continued to shed inventories during February at a record rate. A 1.2% cutback followed declines of 1.1% and 1.9% during the prior two months. Moreover, that amounted to a 15.4% annualized rate of stockpile decumulation which was a record for a three-month period. The series dates back to 1958. Of course, that accelerated rate stems somewhat from the 72.0% rate of decline in petroleum inventories, due mostly to lower prices. Nevertheless, excluding oil factory inventories fell roughly 1.0% during the last two months. The 10.6% three-month rate of decumulation was only slightly exceeded in 2001.
The three-month rates of inventory destocking in several industries have been more than notable. Inventories of electrical equipment &amp; appliances have fallen at a 27.6% rate while textile product inventories were down at a 36.6% clip. Steep production cutbacks pulled furniture inventories down at a 21.7% rate since November while inventories of primary metals fell at a 32.9% pace. Lesser rates of decline were registered in the machinery industry (-4.7%) and by computers &amp; electronic products (2.3%).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090402f.jpg" width="353">
Factory shipments continued lower during February prompting the continued lowering of inventory levels. Shipments fell a modest 0.1% but even excluding oil and its lower prices shipments fell at 17.8% rate over the last three months. That was led by a 67.1% rate of decline in automobile shipments. Electrical equipment shipments also fell hard at a 22.8% rate and computers were off at a 20.8% rate. In the nondurable goods area, apparel shipments fell at a 16.4% rate, about the same as for paper products.
Total factory orders recovered during February roughly half of the sharp January drop but over three months the decline was at a 24% annual rate. That was led by a 26% rate of decline in computer orders while motor vehicle orders fell at a 25.1% rate and electrical equipment orders fell at a 13.2% rate.As for order backlogs, they are easing substantially. Sharp declines during the last three months have been at a record 18.1% annual rate.
The Manufacturers&#39; Shipments, Inventories and Orders (MSIO) data is available in Haver&#39;s USECON database.
What do we know and not know about potential output? from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/papers/2009/wp09-05bk.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED01/@ED0101/@ED01016/@ED01016.HTM">Factory Survey</a> (NAICS, %)</th>
<th scope="col">February</th>
<th scope="col">January</th>
<th scope="col">Y/Y</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Inventories</td>
<td>-1.2</td>
<td>-1.1</td>
<td>-2.0</td>
<td>2.1</td>
<td>3.7</td>
<td>8.2&nbsp;</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Excluding Transportation</td>
<td>-1.4</td>
<td>-1.2</td>
<td>-4.8</td>
<td>-0.6</td>
<td>2.7</td>
<td>7.9</td>
</tr>
<tr class="odd">
<td class="firstcol">New Orders</td>
<td>1.8</td>
<td>-3.5</td>
<td>-18.8</td>
<td>0.1</td>
<td>1.9</td>
<td>6.2</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Excluding Transportation</td>
<td>1.6</td>
<td>-2.4</td>
<td>-15.1</td>
<td>3.1</td>
<td>1.2</td>
<td>7.4</td>
</tr>
<tr class="odd">
<td class="firstcol">Shipments</td>
<td>-0.1</td>
<td>-2.6</td>
<td>-14.8</td>
<td>1.7</td>
<td>1.2</td>
<td>5.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Excluding Transportation</td>
<td>-0.1</td>
<td>-2.4</td>
<td>-14.0</td>
<td>3.7</td>
<td>1.5</td>
<td>6.7</td>
</tr>
<tr class="odd">
<td class="firstcol">Unfilled Orders</td>
<td>-1.4</td>
<td>-2.0</td>
<td>-1.7</td>
<td>3.5</td>
<td>17.1</td>
<td>15.3</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Excluding Transportation</td>
<td>-1.5</td>
<td>-2.8</td>
<td>-6.0</td>
<td>-1.0</td>
<td>8.2</td>
<td>16.0</td>
</tr>
</tbody>
</table>
</body>
</html>

The manufacturing sector continued to shed inventories during February at a record rate. A 1.2% cutback followed declines of 1.1% and 1.9% during the prior two months. Moreover, that amounted to a 15.4% annualized rate of stockpile [...]

U.S. Factory Inventory Decumulation At A Record Pace

More pronounced upward revisions in countries more exposed to AI investment

Stable job openings and hiring rates point to cautious hiring

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

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

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

Tighter US immigration enforcement adversely impacting labor force

Economic policy uncertainty, while still elevated, is declining

Gradual disinflation and easier monetary policies across advanced economies

Largest October layoffs since 2003, led by technology

Subdued global shipping costs not yet pointing to supply chain problems

PMIs show still-elevated but slowing US inflation

AI boosting US investment in data centers

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

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

US financial markets have gotten used to elevated policy uncertainty

FOMC now expects more rate cuts going forward than in June

China gaining ASEAN exports while US exports slump

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

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

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

Equity market exuberance outpacing macroeconomic data

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

US production rebounded in Q2, but demand continued to slow

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

Negative US inflation surprises leading G10 down

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260120E.jpg

The ZEW survey for January showed improvement all around with both economic expectations and macroeconomic conditions showing improvements in the United States, Germany, and the euro area.

The economic situation in January in the euro area improved to a reading of -18.1 from -28.5 in December. In Germany, the reading improved to -72.7 from -81 in December, while in the United States the reading improved to +17.7 from -0.6 in December. The message here clearly is the month-to-month improvement. Still, the January readings leave the assessments of conditions in these three areas as quite different. The percentile-queue standings place each one of these topical readings in their queue of data back to December 1992, expressing the standing in percentile terms. Viewed in this way, the euro area has a 57.2 percentile standing, the U.S. has nearly a 45-percentile standing, while Germany has a 22.6 percentile standing, leaving each of these areas in their own distinctive positions relative to their historic norms. The euro area has a firm and above-median ranking since the reading is above the 50th percentile (where the median is located). The U.S. is slightly weaker than that, with a reading that's marginally below its median. Germany has a reading between the lower quartile and the one-fifth mark of its historic data, branding it as weak.

Macroeconomic expectations find that Germany in January moved up to a positive reading of 59.6 from 45.8 in December. The U.S. also improved, moving up to -3 from -12 in December. The macro-expectations find Germany and the U.S. in very different places with German expectations in an 80.4 percentile of their queue, placing them in the top 20% while the U.S. has a 45-percentile standing, below its historic median and essentially the same relative position as its current situation ranking. In contrast, Germany has a weak current economic assessment versus a stronger expectations assessment.

Inflation expectations weaken across the board in January, with the euro area falling to -7.6 from -4.6 in December, Germany falling to -6.0 from -1.7 and the U.S. falling to 44.2 from 54.9. The ZEW experts see a disinflationary environment, and they see that despite the pickup in current conditions and improved macroeconomic expectations. Expectations in the U.S. have a 61.1 percentile standing; the German and the euro area readings are much weaker and closer together, with the German standing at its 31.2 percentile and the euro area at its 25.8 percentile.

On the back of these expectations, short-term interest rates in the euro area are less weak, with the January reading at -7.7, up from -10.8 in December. The U.S. has a -65.6 reading, stronger than Decembers -73.9. On a ranking basis, the euro area’s short-term rates have a 37.4 percentile standing The U.S. has a 9.3 percentile standing. The interest rate assessment is that short-term rates are going to be modest to lower over the outlook.

Long-term interest rates in Germany and the U.S. weaken slightly in January from December to 44.5 in January for Germany, compared to 49.2 in December, and in the U.S., there is a very modest ‘decimal point’ change to 44.1 in January from 44.9 in December. German long-term rates have a 58.8 percentile standing while the U.S. has rates at about a 50-percentile standing, placing them just about on top of their historic median. Neither one of these expectations has long-term expectations different from historic norms.

Stock market expectations from December to January, however, are little changed and mostly weaker, with the euro area gauge falling to 35.2 from 41.3 in December. The German gauge slips to 35.9 from 36.3 in December. The January gauge for the U.S. is ticking slightly higher to 31.5 January from 30.2 in December. The rankings for the January gauges show the U.S. above its median at a 59.3 percentile mark, the euro area slightly below its median with a 44.9 percentile reading; the German stock market still scores as the weakest at a 39.7 percentile standing.

260120.jpg

On balance, there are improvements expected in the macroeconomic realm as well as improvements detected in the current economic situation. Inflation is expected to remain tame; short-term interest rates are expected to continue declining, while long-term interest rates are going to be showing some pressure or in the case of the U.S. will continue to oscillate around current levels or firm slightly. Stock market conditions in the U.S. are modestly higher than their historic norms; however, the euro area stocks are in for modest weakness; German stocks weakened and are historically weak. Looking ahead, the thing to do is to watch the market metrics in particular to see how the recent U.S.-European rift over Greenland is going to play out in markets and how much it's going to affect expectations. That's the newest trend in play. How quickly they forget drug running boat sinkings, Maduro’s capture, threats on Iran, and cage rattling the Fed Chair. It’s all about Greenland now- at least for now, don’t blink!

ZEW Survey Shows Advancement All Around

Tian Yong Woon

This week, we dive into several key developments across Asia. China’s Q4 GDP marked a further extension of its recent growth slowdown, yet full-year growth still came in exactly at the government’s 5% target for 2025 (chart 1). That said, the road ahead remains challenging, as December’s data delivered a mixed set of outcomes. Encouragingly, new external inroads, starting with Canada’s opening up of EV trade with China, could pave the way for additional opportunities (chart 2). In semiconductors, the latest US tariff measures proved far more limited in scope than initially feared, helping to explain the muted market reaction to the announcement (chart 3). Relatedly, commitments by major Taiwanese chipmakers to expand investment in the US have brought Washington and its largest chip supplier closer together, culminating in a US–Taiwan trade deal (chart 4).

In Japan, attention has turned to the possibility of a snap Lower House election in February. The interim political uncertainty, alongside expectations around future policy, has weighed on the yen and pushed Japanese yields higher (chart 5), with some observers increasingly concerned about the narrowing window to pass the FY2026 budget by April, given the likely dissolution of the Lower House. In South Korea, President Lee’s recent visits to China and Japan point to improving bilateral ties, although he continues to navigate a delicate balancing act amid still-elevated China–Japan tensions. Domestically, elevated house prices and high household debt continue to limit the scope for further monetary policy easing (chart 6).

**China**
Alongside its regular slate of monthly economic releases, China unveiled its Q4 GDP figures earlier today, with the economy expanding by 4.5% y/y during the quarter. While Q4 growth continues the recent trend of deceleration seen over the past few quarters, the outcome brings China’s full-year growth for 2025 right in line with the government’s 5% target (chart 1). This defied expectations among some investors that the economy would fall short. This outcome aligns with earlier discussions that China remained within reach of its growth target despite slowing momentum. That said, the outlook ahead remains challenging. December’s monthly data painted a mixed picture, with declines in fixed asset investment accelerating and retail sales growth cooling further, even as industrial production growth remained relatively resilient.

260119T1.jpg

On China’s external developments, another high-profile outcome followed Canadian Prime Minister Carney’s visit to Beijing. Canada and China unveiled a trade deal lowering tariffs on Canada’s imports of 49,000 Chinese EVs to 6.1% from 100%, in exchange for China easing tariffs on Canadian agricultural products. Carney remarked that China is now a “more predictable” trading partner than the US and that “a new world order” is taking hold. These comments likely reflect longstanding trade frictions between the US and Canada, as US President Trump has sought to renegotiate what he views as unfair trade arrangements. The new Canada–China agreement is also expected to catalyse significant Chinese joint-venture investment in Canada over the coming years. The move marks a notable shift for Canada, which has traditionally been an exceptionally close partner of the US, not only economically (chart 2). That Ottawa has inked a trade deal with Beijing while US–China tensions remain elevated represents a clear break from its previous stance and has, unsurprisingly, drawn criticism from Washington.

260119T2.jpg

**US semiconductor tariffs**
Turning to US-originated developments, President Trump signed a proclamation last week imposing a 25% tariff on certain advanced computing chips, including Nvidia’s H200 and AMD’s MI325X. The tariff will not apply to chips imported to support the buildout of the US tech supply chain or to strengthen domestic manufacturing capacity for semiconductor derivatives. The move stops short of a blanket tariff on all AI chips and semiconductor imports, easing—at least for now—initial investor concerns and likely explaining the market’s relatively muted reaction to the announcement (chart 3). A broader tariff would have had far more severe implications, given the  US economy’s substantial imports of semiconductor goods. In the case of Nvidia’s H200—designed to comply with US export restrictions and primarily targeted at the Chinese market—the tariff appears intended to capture a 25% levy before the chips are shipped onward to China. That said, China’s demand response remains uncertain, particularly as the H200 is reportedly banned in China.

260119T3.jpg

Not long after the tariff announcement, the US and Taiwan — the largest source of US semiconductor imports, as shown in chart 4 — were reported to have reached a trade deal. Under the agreement, Taiwanese chipmakers such as TSMC that expand production in the US will face lower tariffs on semiconductors and related manufacturing equipment, with duty-free treatment applying to some imports. In addition, tariffs on most other Taiwanese exports to the US will be reduced to 15% from 20%. In return, Taiwanese companies will invest $250 billion in the US, including an expanded manufacturing footprint by TSMC in Arizona, aimed at boosting domestic production of semiconductors, energy, and AI. As illustrated in chart 4, Taiwan already dominates US semiconductor imports, with its share having risen sharply in recent years and far outstripping contributions from other major suppliers such as Southeast Asian economies and South Korea.

260119T4.gif

**Japan snap elections**
Turning to Japan, the country is drumming up for an anticipated February Lower House snap election as Prime Minister Takaichi looks poised to capitalize on her strong approval ratings to secure a firmer parliamentary footing. In reaction, opposition parties have already started galvanizing for the expected upcoming electoral fight, with the opposition Constitutional Democratic Party (CDP) and the ruling party’s former coalition partner, Komeito, having announced a plan to form a new Centrist Reform Alliance (CRA) to fight the current ruling bloc. Given this interim bout of uncertainty, there is now some doubt cast on whether Japan’s budget this year can be debated robustly and passed in time by April 2026 (when the new fiscal year starts), especially if the Lower House gets dissolved soon, meaning less parliamentary time will be available for the purpose. Tracking such developments, the yen had extended its recent slide, whilst Japanese yields have firmed further (chart 5).

260119T5.jpg

**South Korea**
Lastly, we turn to South Korea, where President Lee has embarked on visits to China and Japan that point to a warming of regional ties. In China, Lee’s meeting with President Xi yielded agreements to restore strategic dialogue channels and deepen cooperation in areas such as critical minerals, with Lee calling for a “full restoration” of bilateral relations. In Japan, his visit similarly signalled a thaw in ties following previous periods of tension. Overall, South Korea appears to be seeking closer relations with its two major Asian neighbours even as China–Japan tensions remain elevated. Domestically, however, while the semiconductor sector has benefited from the AI-driven upswing, South Korea continues to face challenges such as elevated house prices and high household debt. These factors have constrained the scope for further monetary policy easing (chart 6).

260119T6.jpg

Asia

Economic Letter from Asia: Shifting Gears

Winnie Tapasanun

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Industrial production (IP) rose a more-than-expected 0.4% m/m in December following a 0.4% rise in November (+0.2% initially) and a 0.3% decline in October (-0.1% previously), data from the Federal Reserve Board showed. December marked the third m/m gain in four months. A 0.1% m/m December increase had been expected in the Action Economics Forecast Survey. The year-on-year growth rate slowed to 2.0% in December, the lowest since September, from 2.5% in November; this compared with a 0.3% y/y decline in December 2024. The December IP index at 102.3 was 3.1% above a low of 99.2 in January 2024. IP rose 0.2% q/q in Q4 2025 after a 0.6% q/q gain in Q3 2025, increasing at a 0.7% annualized rate following a 2.3% Q3 annualized pace. In 2025, IP rose 1.3% after declines of 0.7% in 2024 and 0.2% in 2023.

By **industry groups**, manufacturing production grew 0.2% (2.0% y/y) in December, up for the third time in four months, following a 0.3% increase in November (0.0% initially) and a 0.6% drop in October (-0.4% previously). Durable goods production edged up 0.1% (3.1% y/y) in December, the first m/m increase since September, after a 0.1% downtick in November. Within durables, the following categories rose m/m in December, including output rises of 2.4% (3.5% y/y) in primary metals, 1.7% (1.3% y/y) in electrical equipment, appliances & components, 1.5% (17.2% y/y) in aerospace & miscellaneous transportation equipment, 0.8% (-2.2% y/y) in furniture & related products, 0.2% (4.8% y/y) in machinery, and 0.1% (7.4% y/y) in computer & electronic products. Notably, aircraft & parts production climbed 2.1% (30.0% y/y), the third m/m increase in four months, reversing a 2.1% November drop. To the downside, the following durable goods categories fell m/m in December, including drops of 2.3% (-5.5% y/y) in wood products, 1.1% (-2.8% y/y) in motor vehicles & parts, 1.1% (-1.0% y/y) in nonmetallic mineral products, 0.1% (+2.6% y/y) in fabricated metal products, and 0.1% (-3.7% y/y) in miscellaneous durables goods.

Nondurable goods production increased 0.3% (1.0% y/y) in December, the third m/m gain in four months, after a 0.8% rebound in November. The December increase reflected m/m output rises of 1.8% (2.1% y/y) in petroleum & coal products, 0.5% (1.9% y/y) in food, beverages & tobacco, and 0.3% (-0.2% y/y) in plastics & rubber products. In contrast, the following nondurable goods categories declined m/m in December, including output drops of 1.3% (-0.8% y/y) in textiles & product mills, 1.1% (-0.5% y/y) in apparel & leather goods, 0.3% (-3.1% y/y) in paper, 0.3% (-3.4% y/y) in printing & related support activities, and 0.1% (+1.6% y/y) in chemicals.

Utilities output recovered 2.6% (2.3% y/y) in December, the third m/m rise in four months, following a 0.3% decline in November (-0.4% initially), reflecting a 1.2% rebound (1.3% y/y) in electric utilities output and a 12.0% jump (8.7% y/y) in natural gas utilities output. Mining activity, however, fell 0.7% (+1.7% y/y), the third m/m slide in four months, after an unrevised 1.7% November gain.

By **market groups**, business equipment output advanced 0.8% (10.1% y/y) in December, up for the third time in four months, after a 0.3% increase in November. Consumer goods output rose 0.7% (0.7% y/y) after a 0.7% November rebound, reflecting a 0.7% decline (-3.5% y/y) in durable consumer goods and a 1.1% gain (1.8% y/y) in nondurable consumer goods. Materials production grew 0.2% (1.7% y/y), the third m/m increase in four months, after a 0.5% November rise. In contrast, construction supplies production fell 0.3% (+1.3% y/y) in December, the second m/m fall in three months, reversing a 0.3% increase in November.

In **special classifications**, factory output of selected high-tech industries increased 0.7% (10.9% y/y) in December, the third successive m/m gain, following a downwardly revised 0.5% rise in November (+1.1% initially). Manufacturing production excluding selected high-tech industries rose 0.2% (1.7% y/y) in December after a 0.3% gain in November, and manufacturing production excluding selected high-tech and motor vehicles & parts rose 0.3% (2.1% y/y) after a 0.4% increase; both measures posted their third m/m gain in four months.

Capacity utilization rose to 76.3% in December, the highest since July, from 76.1% in November (76.0% initially). The Action Economics Forecast Survey forecasted 76.0%. The December reading was 3.2 percentage points below its long-run (1972–2024) average. Manufacturing capacity utilization held at 75.6% in December and November (75.4% previously); the December rate was 2.6 percentage points below its long-run average.

Industrial production and capacity data are in Haver’s **USECON** database. Additional detail on production and capacity utilization can be found in the **IP** database. The expectations figures come from the **AS1REPNA** database.

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- December IP +0.4% (+2.0% y/y), third m/m rise in four months, led by a 2.6% gain in utilities.
- Manufacturing +0.2% (+2.0% y/y), w/ durables +0.1% and nondurables +0.3%.
- Selected high-tech +0.7%, third consecutive m/m rise; motor vehicles -1.1%, fourth straight m/m fall.
- Mining -0.7%, third m/m decline in four months.
- Key categories in market groups mostly increase.
- Capacity utilization at a five-month-high 76.3%; mfg. capacity utilization steady at 75.6%.

U.S. Industrial Production Increases in December on Utilities Rebound

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The European Monetary Union has concluded a year of weak-to-moderate growth with inflation largely toeing the line. As always, the inflation picture is more complicated than a simple statement. When we look at inflation, we look at the headline, we look at the core, to make sure that the volatile food & energy elements aren't dominating the index, and then we look across some of the main participants to see if the trend for inflation is shared broadly across the largest countries in the Monetary Union. When we apply those kinds of standards, the grading for the year is reduced. However, based on the headline alone, it was an excellent year for the ECB.

**Headline Inflation in 2025**
Headline inflation in 2025 rose by 2%, exactly on the target of the European Central Bank. It rose over six months at a 2% annual rate and then concluded the year over the last three months, rising at a 1.6% annual rate with some margin below the target set by the central bank itself.

**Country Headline Inflation Trends**
On a country basis, the performance is not nearly as good. While year-on-year results look pretty good, with Germany at 2%, France at 0.7% and Italy at 1.3%, Spain comes in at 3.1%. So the three largest monetary union economies come in at or below 2% with Spain as a rogue observation. When we look further at the sequence of inflation within the year, we see Germany at 2% over 12 months, rising to 3.1% over 6 months, rising further to 4% over 3 months. Inflation is accelerating at the end of the year even as Germany hits the target! This is something to keep an eye on. For France, the inflation rate also accelerates slightly but stays below the bar of 2% over three months, six months, and 12 months. For Italy, inflation is decelerating from 1.3% over 12 months to -0.3% over six months, and then inflation in Italy is contracting at a 1.9% annual rate over three months. Spanish inflation shows clear trouble with a 3.1% 12-month pace, rising to 4.6% at an annual rate over six months, and rising further to 5.9% at an annual rate over three months.

**Core Inflation**
For core inflation, the Monetary Union’s consolidated numbers are not yet compiled. However, for the four largest economies, we do have core or ex-energy inflation. For Germany, it's inflation excluding energy. On that basis, German inflation is 2.2% over 12 months, it rises to 2.7% over six months, then falls back to a 2% annual pace over three months All-in-all not a bad performance. For France, core inflation is below 2% over 12 months, six months, and three months. In Italy, once again, we see inflation decelerating: Italian inflation is 2% over 12 months - right on the ECB target. It falls to a 1.3% annual rate over six months and then falls further to a 0.3% annual rate over three months. For Spain, the core has another very difficult story for the Monetary Union. Inflation is 2.7% over 12 months, it rises to 3.1% over six months and stays at an annual rate of about 3% over three months. This is too high and it looks stubborn, particularly because it is the core.

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**Across the Big Four**
On balance, what we see is that the ECB grades-out well, based on headline inflation and based on its sequential performance for the European economic union as a whole. But large countries, show headline inflation building some steam particularly in the largest economy, Germany, and in Spain, the smallest of the BIG-4 economies. Inflation is once again mixed in the Monetary Union with German and Spanish inflation too high and with French and Italian inflation running either at or below the 2% mark and with Italy showing a tendency towards weaker prices for both the headline and the core. The change in prices over these various periods shows inflation gets the most help from oil prices over 12 months where Brent, measured in euros, falls by 22.6%; over six months Brent prices fall by 37% at an annual rate; and over three months Brent oil prices are unchanged, so that the headline isn't getting help at all from oil prices except through lagged effects.

**Summing Up**
Meanwhile, there are some signs of stronger growth taking root in Europe, especially in Germany with better industrial production being logged and with German industrial production looking significantly stronger than the PMI data, suggesting that perhaps PMI data are missing something about the rebound that is developing. Nonetheless, it was a good year for inflation and the ECB; however, it doesn't exactly end the year in the catbird’s seat. On the other hand, it does not end the year behind the curve. There are scattered pressures and needs among member countries which always makes monetary policy difficult. When some countries need higher interest rates and others need lower interest rates, the ECB is in a difficult spot. Clearly, Spain and Germany are experiencing different phenomenon than France and Italy. That could be the policy challenge for the year ahead.

Europe

Big Four Inflation in EMU 2025-Final

Andrew Cates

**The growth consensus for 2026** 
Consensus growth forecasts for 2026 have continued to firm over the past six months, with upward revisions most pronounced in economies that are more directly exposed to the global AI investment cycle. Taiwan stands out, reflecting its central role in advanced semiconductor manufacturing and the spillovers from sustained AI-related capex across the global tech supply chain. The US has also seen a sizeable upgrade, consistent with strong domestic investment in AI infrastructure and data-centre capacity, alongside resilient demand for high-value tech services. Elsewhere in Asia, upgrades to South Korea and, to a lesser extent, China and India point to a broader regional benefit from the AI-driven electronics and capital-goods cycle, even as underlying macro conditions remain mixed. Canada has also seen modest upward revisions, likely reflecting its close integration with US investment trends. By contrast, revisions across much of Europe and Japan have been more muted, while forecasts for Russia remain under downward pressure.

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**The next steps for central bank policy** 
Based on responses to the special questions in the latest Blue Chip survey, the chart highlights how uncertain panelists remain about the precise timing of the next policy move, even where there is broad agreement on direction. Expectations for both the Fed and the Bank of England are now loosely centred on March 2026 as the most likely window for the next easing step, but the spread of responses points to limited conviction and a high sensitivity to incoming data. By contrast, panelists continue to see the ECB as largely through its easing cycle, with a clear majority expecting any further move only later, if at all. The Bank of Japan remains the clear outlier: while further tightening is still the central expectation, views are split on timing, with panelists divided between a March move and a hike pushed beyond April 2026—highlighting ongoing uncertainty over the durability of domestic inflation and wage dynamics.

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**The UK economy and BoE policy** 
While Blue Chip panelists remain divided on the precise timing of the Bank of England’s next policy cut, the latest run of UK data is tilting market expectations toward an earlier move. Economic releases have increasingly fallen short of expectations, a pattern that has coincided with a steady decline in short-dated gilt yields. The negative surprise profile reflects a combination of weak household demand and softer labour-market indicators. This has generated downside momentum in the data, reinforcing the case—at least from a market perspective—for earlier or deeper policy easing.

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**The impact of Artificial Intelligence**
Responses to the special questions in the latest Blue Chip survey also suggest that panelists are divided over the timing of AI’s macroeconomic impact in the US. A sizeable share already reports seeing noticeable effects, consistent with the rapid pace of AI-related investment and adoption over the past year. At the same time, a similarly large group expects AI’s impact to become more evident only over the next one to three years, implying a belief that productivity and growth effects will materialise with a lag. These views are notable given that a majority of panelists continue to judge anticipated AI-related gains as being overstated in financial markets, underscoring the risk of disappointment—and potential equity market volatility—if realised outcomes fail to match elevated expectations.

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**US business formation and productivity growth**
The chart points to a renewed pick-up in US productivity growth alongside a marked step-up in business applications, a combination that has naturally fuelled interest in the role of AI. The acceleration in output per hour over the past year coincides with a surge in corporate formations, potentially reflecting both heightened investment in new technologies and the emergence of new, AI-enabled business models. That said, productivity growth has historically been highly cyclical, often strengthening late in the cycle or during periods of labour hoarding and cost discipline, before fading again. As such, while AI may be contributing at the margin, it remains too early to conclude that the recent improvement marks a durable, technology-driven shift rather than another cyclical upswing.

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**China’s export growth**
This week’s China trade data revealed that its export growth has continued to rotate away from the US and toward Europe and ASEAN, a pattern that has become more pronounced over the past year. While exports to the US have fallen sharply on a year-on-year basis, shipments to both Europe and ASEAN have held up markedly better, and in recent months have returned to positive growth. This divergence is consistent with the tightening of US trade policy toward China, including higher tariffs, expanded export controls and broader efforts to “de-risk” supply chains. By contrast, trade with Europe and ASEAN appears to be benefiting from trade diversion and re-routing, as Chinese firms redirect exports toward markets where barriers remain lower and supply-chain integration is deeper.

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The global backdrop remains unsettled, reflected in rising gold prices amid geopolitical tensions—most recently around Venezuela—and renewed political noise, including questions over Federal Reserve independence. At the same time, however, many major equity indices remain at or close to all-time highs, buoyed by optimism around AI and reinforced by a run of relatively benign US inflation readings. Against this mixed backdrop, the charts this week point to a global outlook that is becoming more differentiated rather than uniformly weaker. Blue Chip forecasts for 2026 growth have edged higher over the past six months, with upgrades concentrated in economies most exposed to the AI investment cycle, notably the US and parts of Asia (chart 1). Central bank expectations remain fluid: while panelists broadly anticipate easing by the Fed and Bank of England, conviction around timing is limited, and the Bank of Japan remains an outlier with further tightening still expected (chart 2). In the UK, that uncertainty sits alongside a deteriorating data flow, with negative economic surprises increasingly tilting market expectations toward an earlier BoE rate cut (chart 3). Turning to the US, special questions highlight a divide over whether AI is already having a noticeable macro impact or whether its effects will emerge more gradually, a tension that mirrors concerns about over-optimism in financial markets (chart4). That debate is echoed in the recent pick-up in US productivity growth and the step-change in business formation—developments that may reflect AI-related dynamics but which also warrant caution given the historically cyclical nature of productivity (chart 5). Finally, China’s trade data point to a continued re-orientation of export growth away from the US and toward Europe and ASEAN, consistent with evolving US trade policy and broader supply-chain realignment (chart 6).

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