Robert Brusca

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090601c.jpg" align="right" border="0" height="265" width="353">The UK MFG
PMI is up to a level of 45.37, the second highest reading in this group
of EU/EMU reporters (Greece is the highest). The UK index also is 10%
from its cycle high and 10% above its cycle low. The EMU measure is 17%
from its high and 7% up from its low.&nbsp; 
 The UK MFG measure is up an EU best gain of 10.4 points
over the past three months. France Germany and Spain have the next best
increases up by 8.5, 7.98 and 7.44 points respectively. <img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090601d.jpg" align="right" border="0" height="265" width="353">
Europe is
improving, but the UK seems to be making the strongest MFG rebound so
far. With the release of the US MFG PMI on Monday, the US index shows that
it continues to hold its lead on Europe, signaling that the US recovery
remains in the vanguard of the global expansion. It has about a
four-month head start on EMU but its lead in terms of the level of the
PMI index itself is small. The UK MFG rise has been ahead of the US
sector for the past few months but that sector does not carry the
global punch that the US does.&nbsp;

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr><th colspan="8" scope="col"> Markit MFG Indexes</th>
</tr>
</thead>
<tbody>
<tr class="grey4">
<td class="firstcol">&nbsp;</td>
<td>May-09</td>
<td> Apr-09</td>
<td> Mar-09</td>
<td> 3Mo</td>
<td> 6Mo</td>
<td> 12Mo</td>
<td> Percentile</td>
</tr>
<tr class="grey3">
<td class="firstcol"> Euro-Area</td>
<td> 40.68</td>
<td> 36.83</td>
<td> 33.93</td>
<td> 37.15</td>
<td> 35.55</td>
<td> 39.92</td>
<td> 29.5%</td>
</tr>
<tr class="grey3">
<td class="firstcol">Germany</td>
<td>39.58</td>
<td>35.40</td>
<td>32.36</td>
<td>35.78</td>
<td>34.02</td>
<td>40.26</td>
<td> 27.7%</td>
</tr>
<tr class="grey3">
<td class="firstcol">France</td>
<td>43.32</td>
<td>40.10</td>
<td>36.51</td>
<td>39.98</td>
<td>37.93</td>
<td>40.87</td>
<td> 38.0%</td>
</tr>
<tr class="grey3">
<td class="firstcol">Italy</td>
<td>41.11</td>
<td>37.21</td>
<td> 34.59</td>
<td>37.64</td>
<td>36.58</td>
<td>39.82</td>
<td> 28.5%</td>
</tr>
<tr class="grey3">
<td class="firstcol">Spain</td>
<td>39.83</td>
<td>34.61</td>
<td>32.92</td>
<td>35.79</td>
<td>33.20</td>
<td>35.31</td>
<td> 39.5%</td>
</tr>
<tr class="grey3">
<td class="firstcol">Austria</td>
<td>39.30</td>
<td>38.97</td>
<td> 33.68</td>
<td>37.32</td>
<td>35.78</td>
<td>40.53</td>
<td> 24.0%</td>
</tr>
<tr class="grey3">
<td class="firstcol">Greece</td>
<td>46.08</td>
<td>40.88</td>
<td> 38.17</td>
<td>41.71</td>
<td>40.83</td>
<td>45.34</td>
<td> 46.3%</td>
</tr>
<tr class="grey3">
<td class="firstcol">Ireland</td>
<td>39.35</td>
<td>36.10</td>
<td>35.12</td>
<td>36.86</td>
<td>36.76</td>
<td>39.50</td>
<td> 27.8%</td>
</tr>
<tr class="grey2">
<td colspan="8"> EU</td>
</tr>
<tr class="grey3">
<td class="firstcol">UK</td>
<td>45.37</td>
<td>43.07</td>
<td>39.51</td>
<td>42.65</td>
<td>39.17</td>
<td>40.44</td>
<td> 48.7%</td>
</tr>
<tr class="grey1">
<td colspan="8" class="firstcol">percentile is over range since March
2000</td>
</tr>
</tbody>
</table>
</body></html>

The UK MFG PMI is up to a level of 45.37, the second highest reading in this group of EU/EMU reporters (Greece is the highest). The UK index also is 10% from its cycle high and 10% above its cycle low. The EMU measure is 17% from its [...]

UK MFG Is On The Mend... So Is Europe And The US

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090601b.jpg" width="353">
The personal savings rate jumped last month to the highest level since early-1995. That rise may help explain earlier reports that confidence and sentiment are improving. Consumers are rebuilding their personal balance sheets, mending their old ways of easy spending. That is the message from the latest Commerce Department report showing that the personal savings rate jumped during April to 5.7% which was its highest level in over thirteen years.
Spending restraint was evidenced in a slight 0.1% decline in personal expenditures during April. It followed a revised 0.3% March decline which was slightly deeper than initially reported. Adjusted for inflation, April spending also fell a slight 0.1% producing a level of real spending that has been unchanged since January.
As might be expected, spending on the largest durable good, motor vehicles, took a large hit and fell 1.3% (-16.9% y/y). Real spending on furniture &amp; appliances also was cut back a slight 0.4% last month (-4.4% y/y) after the sharp 2.8% March drop. Real spending on apparel slipped just 0.1% (-6.5% y/y) after a 1.7% decline. The weakness extends to spending on services which rose all of 0.2% (1.1% y/y).
The sense of consumers&#39; caution stems from weaker income which remains under extreme pressure from the soft job market. Despite a 0.5% rise during April, personal income has been flat this year though the latest rise beat expectations for a 0.2% decline. Wages and salaries reflected higher unemployment and were unchanged (-0.8% y/y) following seven consecutive months of decline. In addition, the recent decline in interest rates took its toll on interest income which in April was off 5.5% y/y.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090601a.jpg" width="353">
In light of weak income growth, what additional factor has kicked up the savings rate other than spending restraint? Lower taxes. They are off by nearly one-quarter during the last twelve months. Disposable personal income jumped 1.1% during April and over the last year has risen 4.1%, well in excess of the gain in total personal income. Adjusted for inflation, real disposable income also rose 1.1% last month and over the last year is up 3.7%. So far this year, real disposable income is up at a 6.3% annual rate.
Finally, the PCE chain price index benefited from a 2.6% seasonally adjusted decline in gasoline prices (-37.4% y/y) and rose just 0.1%. A bit firmer were core prices which posted a 0.3% April rise to lift the YTD rate of increase to 2.5% (AR). The latest gain in the overall price deflator exceeded Consensus expectations for a 0.2% rise.
The personal income &amp; consumption figures are available in Haver&#39;s USECON and USNA databases.

<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/@E7/@E711/@E71102/@E71102.HTM">Disposition of Personal Income</a> (%)&nbsp;</th>
<th scope="col">April</th>
<th scope="col">March</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">Personal Income</td>
<td>0.5</td>
<td>-0.2</td>
<td>0.7</td>
<td>3.8</td>
<td>6.1</td>
<td>7.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Disposable Personal Income</td>
<td>1.1</td>
<td>0.1</td>
<td>3.7</td>
<td>4.6</td>
<td>5.5</td>
<td>6.4</td>
</tr>
<tr class="odd">
<td class="firstcol">Personal Consumption Expenditures</td>
<td>-0.1</td>
<td>-0.3</td>
<td>-1.5</td>
<td>3.6</td>
<td>5.5</td>
<td>5.9</td>
</tr>
<tr>
<td class="firstcol">Saving Rate</td>
<td>5.7</td>
<td>4.5</td>
<td>0.0 (April &#39;08)</td>
<td>1.8</td>
<td>0.5</td>
<td>0.7</td>
</tr>
<tr class="odd">
<td class="firstcol">PCE Chain Price Index</td>
<td>0.1</td>
<td>0.0</td>
<td>0.4</td>
<td>3.3</td>
<td>2.6</td>
<td>2.8</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Less food &amp; energy</td>
<td>0.3</td>
<td>0.2</td>
<td>1.9</td>
<td>2.2</td>
<td>2.2</td>
<td>2.3</td>
</tr>
</tbody>
</table>
</body>
</html>

The personal savings rate jumped last month to the highest level since early-1995. That rise may help explain earlier reports that confidence and sentiment are improving. Consumers are rebuilding their personal balance sheets, mending [...]

U.S. Savings Rate Still Rising As Consumers Remain Cautious

U.S. Savings Rate Still Rising AsConsumers Remain Cautious

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090529f.jpg" width="353">
The University of Michigan&#39;s reading of consumer sentiment for all of May rose to the highest level since September of last year. At 68.7 the latest level was up from the mid-month figure and slightly exceeded Consensus expectations for a reading of 68.0. The increase bodes well for the consumer spending outlook because during the last ten years, there has been a 61% correlation between the level of sentiment and the growth in real spending during the next five months.
The expectations component of consumer sentiment, which had been improving, jumped another 10.0% m/m to its highest level since late-2007. The gain was fueled by improved expectations for business conditions during the next year which jumped also to the highest level since 2007. Expected conditions during the next year surged by a similar degree. Unlike last month, however, the higher stock market failed to lift the expected change in personal finances which dipped slightly m/m but were up significantly y/y.
The opinion of government policy, which may eventually influence economic expectations, jumped sharply to the highest level since 2002. Thirty percent of respondents thought that a good job was being done by government, up from the four percent low of last December, while a much reduced 22 percent of respondents thought that a poor job was being done.
The current economic conditions index stuttered, but just slightly, as the reading for current personal finances dipped. The drop was offset, however, by an improved read of current conditions for buying large household goods to the highest level since last August.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090529g.jpg" width="353">
Inflation expectations for the next year rose to 3.2%. That compares to a low of 1.7% last December but remained down from a reading which was as high as 7.0% last May.
The University of Michigan survey data is not seasonally adjusted. The reading is based on telephone interviews with about 500 households at month-end; the mid-month results are based on about 300 interviews. The summary indexes are in Haver&#39;s USECON database with details in the proprietary UMSCA database.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF14/@EF1402/@EF1402.HTM">University of Michigan</a></th>
<th scope="col">May</th>
<th scope="col">Mid-May</th>
<th scope="col">April</th>
<th scope="col">March</th>
<th scope="col">May 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">Consumer Sentiment</td>
<td>68.7</td>
<td>67.9</td>
<td>65.1</td>
<td>57.3</td>
<td>14.9%</td>
<td>63.8</td>
<td>85.6</td>
<td>87.3</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Current Conditions</td>
<td>67.7</td>
<td>66.2</td>
<td>68.3</td>
<td>63.3</td>
<td>-7.6</td>
<td>73.7</td>
<td>101.2</td>
<td>105.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Expectations</td>
<td>69.4</td>
<td>69.0</td>
<td>63.1</td>
<td>53.5</td>
<td>35.8</td>
<td>57.3</td>
<td>75.6</td>
<td>75.9</td>
</tr>
</tbody>
</table>
</body>
</html>

The University of Michigan's reading of consumer sentiment for all of May rose to the highest level since September of last year. At 68.7 the latest level was up from the mid-month figure and slightly exceeded Consensus expectations [...]

Michigan Consumer Sentiment Rose Throughout May

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090529a.jpg" align="right" border="0" height="265" width="353">
Last quarter, economic weakness in the U.S. was not quite as
severe as reported initially by the Commerce Department. The latest
estimate of a 5.7% (AR) drop in real GDP compares to the advance
estimate of a 6.1% decline and the revision about matched Consensus
expectations. Nevertheless, combined with the 6.3% drop during 4Q '08
the GDP declines were still the worst since early-1958.
As the financial sector recovered from its fourth quarter
swoon, it lifted the overall measure of corporate profitability. Total
corporate profits rose 3.4% (-18.0% y/y) last quarter due to a
near-doubling (-41.5% y/y) of financial sector earnings. That recovery
followed declines in the financial sector during the prior three
quarters which had dropped them to nearly one-quarter of the level at
the start of 2008. <img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090529b.jpg" align="right" border="0" height="265" width="353">
Earnings in the nonfinancial sector countered that
1Q rise with an 8.6% decline (-13.4% y/y) which about matched the 4Q
shortfall. Earnings in the foreign sector continued down by 2.3% (-3.0%
y/y) as recessions abroad deepened.
The cutback of unwanted levels of inventories still is
estimated to have subtracted significantly from GDP growth last
quarter, but the estimate was lessened to 2.3 percentage points from
2.8 points. Regardless, the subtraction was the most since the first
quarter of 2000 and it rivals the largest negative contribution from
inventories since the early-1980s.
<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090529c.jpg" align="right" border="0" height="265" width="353">
Unwanted inventory levels were reduced following the drop-off
in real U.S. final sales to domestic purchasers. They fell at a 5.3%
rate which was revised slightly from the earlier estimate of a 5.1%
decline. Combined with the 4Q '08 decline, final sales to domestic
purchasers fell the most since 1958.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090529d.jpg" align="right" border="0" height="265" width="353">
The rise in personal consumption expenditures last quarter was
lessened to 1.6% (-1.4% y/y) from the initial estimate of a 2.2%
increase. This modest increase followed sharp declines during the prior
two quarters. Spending on motor vehicles rose moderately during the
quarter (-18.7% y/y) after five consecutive down periods. Business
fixed investment fell at a 36.9% rate (-16.0% y/y) and residential
investment dropped at a 38.7% rate (-23.4% y/y) from 4Q. Both of these
declines were significantly deeper than reported initially.
U.S. Household Deleveraging and Future
Consumption Growth from the Federal Reserve Bank of San
Francisco is available <a href="http://www.frbsf.org/publications/economics/letter/2009/el2009-16.pdf">
here</a>.
The significant shortfall in expenditures by the government
sector still accounts for much of last quarter's weakness in GDP. It
was little revised at -3.5% and was the first decline since late-2005.
The drop was led by a surprising 4.3% decline (+5.5% y/y) in Federal
spending that was paced by a 6.7% decline (+5.1% y/y) in defense
expenditures. State &amp; local spending also fell at a 3.0% annual
rate (-0.3% y/y).
The foreign trade sector made up for some of the economy's
weakness as net exports contributed a little-revised 2.2 percentage
points to 1Q GDP growth. Imports fell at a 34.1% annual rate (-16.5%
y/y) while recessions abroad pulled U.S. exports down at a lesser 28.7%
rate (-10.9% y/y).
Inflation continued to show signs of firming. The little
revised 2.8% increase in the GDP chain price index
was up from the 0.5% annual rate of increase during 4Q. The reason for
the acceleration is that import prices fell at a faster rate than
export prices. Domestic prices, however, reflected the weak economy.
The PCE price index fell at a 1.0% annual rate (+0.8% y/y) while the
residential investment chain price index fell at a 4.6% rate (-5.2%
y/y). The weakness in business spending caused the nonresidential
investment price index also to slip at a 1.2% rate (+2.4% y/y), the
first quarterly decline since 2007. Overall, domestic prices fell at a
1.0% annual rate (+0.8% y/y) after a 4.3% 4Q decline.
The U.S. National Income &amp; Product Account data is
available in Haver's USECON and the USNA
databases.
The Fed's Monetary Policy Response to the
Current Crisis from the Federal Reserve Bank of San
Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2009/el2009-17.pdf">
here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E7/@E701/@E701.HTM">Chained
2000$, % AR</a></th>
<th scope="col">1Q '09&nbsp;
(Preliminary)</th>
<th scope="col">1Q '09 (Advance)</th>
<th scope="col">4Q '08</th>
<th scope="col">1Q 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">GDP</td>
<td>-5.7</td>
<td>-6.1</td>
<td>-6.3</td>
<td>-2.5</td>
<td>1.1</td>
<td>2.0</td>
<td>2.8</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Inventory
Effect</td>
<td>-2.3</td>
<td>-2.8</td>
<td>-0.1</td>
<td>-0.8</td>
<td>0.1</td>
<td>-0.4</td>
<td>0.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Final Sales</td>
<td>-3.4</td>
<td>-3.4</td>
<td>-6.2</td>
<td>-1.7</td>
<td>1.4</td>
<td>2.4</td>
<td>2.8</td>
</tr>
<tr>
<td class="firstcol">Foreign Trade Effect</td>
<td>2.2</td>
<td>2.0</td>
<td>-0.2</td>
<td>-1.4</td>
<td>1.4</td>
<td>0.6</td>
<td>0.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Domestic Final Demand</td>
<td>-5.3</td>
<td>-5.1</td>
<td>-5.8</td>
<td>-3.1</td>
<td>-0.0</td>
<td>1.8</td>
<td>2.6</td>
</tr>
<tr>
<td class="firstcol">Chained GDP Price Index</td>
<td>2.8</td>
<td>2.9</td>
<td>0.5</td>
<td>2.1</td>
<td>2.2</td>
<td>2.7</td>
<td>3.2</td>
</tr>
</tbody>
</table>
</body></html>

Last quarter, economic weakness in the U.S. was not quite as severe as reported initially by the Commerce Department. The latest estimate of a 5.7% (AR) drop in real GDP compares to the advance estimate of a 6.1% decline and the [...]

U.S. 1Q GDP Decline Lessened, Yet Two-Quarter Drop Rivals 1958 Stats; Profits Recovered Modestly

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090529a.jpg" align="right" border="0" height="265" width="353">
Last quarter, economic weakness in the U.S. was not quite as
severe as reported initially by the Commerce Department. The latest
estimate of a 5.7% (AR) drop in real GDP compares to the advance
estimate of a 6.1% decline and the revision about matched Consensus
expectations. Nevertheless, combined with the 6.3% drop during 4Q '08
the GDP declines were still the worst since early-1958.
As the financial sector recovered from its fourth quarter
swoon, it lifted the overall measure of corporate profitability. Total
corporate profits rose 3.4% (-18.0% y/y) last quarter due to a
near-doubling (-41.5% y/y) of financial sector earnings. That recovery
followed declines in the financial sector during the prior three
quarters which had dropped them to nearly one-quarter of the level at
the start of 2008. <img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090529b.jpg" align="right" border="0" height="265" width="353">
Earnings in the nonfinancial sector countered that
1Q rise with an 8.6% decline (-13.4% y/y) which about matched the 4Q
shortfall. Earnings in the foreign sector continued down by 2.3% (-3.0%
y/y) as recessions abroad deepened.
The cutback of unwanted levels of inventories still is
estimated to have subtracted significantly from GDP growth last
quarter, but the estimate was lessened to 2.3 percentage points from
2.8 points. Regardless, the subtraction was the most since the first
quarter of 2000 and it rivals the largest negative contribution from
inventories since the early-1980s.
<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090529c.jpg" align="right" border="0" height="265" width="353">
Unwanted inventory levels were reduced following the drop-off
in real U.S. final sales to domestic purchasers. They fell at a 5.3%
rate which was revised slightly from the earlier estimate of a 5.1%
decline. Combined with the 4Q '08 decline, final sales to domestic
purchasers fell the most since 1958.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090529d.jpg" align="right" border="0" height="265" width="353">
The rise in personal consumption expenditures last quarter was
lessened to 1.6% (-1.4% y/y) from the initial estimate of a 2.2%
increase. This modest increase followed sharp declines during the prior
two quarters. Spending on motor vehicles rose moderately during the
quarter (-18.7% y/y) after five consecutive down periods. Business
fixed investment fell at a 36.9% rate (-16.0% y/y) and residential
investment dropped at a 38.7% rate (-23.4% y/y) from 4Q. Both of these
declines were significantly deeper than reported initially.
U.S. Household Deleveraging and Future
Consumption Growth from the Federal Reserve Bank of San
Francisco is available <a href="http://www.frbsf.org/publications/economics/letter/2009/el2009-16.pdf">
here</a>.
The significant shortfall in expenditures by the government
sector still accounts for much of last quarter's weakness in GDP. It
was little revised at -3.5% and was the first decline since late-2005.
The drop was led by a surprising 4.3% decline (+5.5% y/y) in Federal
spending that was paced by a 6.7% decline (+5.1% y/y) in defense
expenditures. State &amp; local spending also fell at a 3.0% annual
rate (-0.3% y/y).
The foreign trade sector made up for some of the economy's
weakness as net exports contributed a little-revised 2.2 percentage
points to 1Q GDP growth. Imports fell at a 34.1% annual rate (-16.5%
y/y) while recessions abroad pulled U.S. exports down at a lesser 28.7%
rate (-10.9% y/y).
Inflation continued to show signs of firming. The little
revised 2.8% increase in the GDP chain price index
was up from the 0.5% annual rate of increase during 4Q. The reason for
the acceleration is that import prices fell at a faster rate than
export prices. Domestic prices, however, reflected the weak economy.
The PCE price index fell at a 1.0% annual rate (+0.8% y/y) while the
residential investment chain price index fell at a 4.6% rate (-5.2%
y/y). The weakness in business spending caused the nonresidential
investment price index also to slip at a 1.2% rate (+2.4% y/y), the
first quarterly decline since 2007. Overall, domestic prices fell at a
1.0% annual rate (+0.8% y/y) after a 4.3% 4Q decline.
The U.S. National Income &amp; Product Account data is
available in Haver's USECON and the USNA
databases.
The Fed's Monetary Policy Response to the
Current Crisis from the Federal Reserve Bank of San
Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2009/el2009-17.pdf">
here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E7/@E701/@E701.HTM">Chained
2000$, % AR</a></th>
<th scope="col">1Q '09&nbsp;
(Preliminary)</th>
<th scope="col">1Q '09 (Advance)</th>
<th scope="col">4Q '08</th>
<th scope="col">1Q 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">GDP</td>
<td>-5.7</td>
<td>-6.1</td>
<td>-6.3</td>
<td>-2.5</td>
<td>1.1</td>
<td>2.0</td>
<td>2.8</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Inventory
Effect</td>
<td>-2.3</td>
<td>-2.8</td>
<td>-0.1</td>
<td>-0.8</td>
<td>0.1</td>
<td>-0.4</td>
<td>0.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Final Sales</td>
<td>-3.4</td>
<td>-3.4</td>
<td>-6.2</td>
<td>-1.7</td>
<td>1.4</td>
<td>2.4</td>
<td>2.8</td>
</tr>
<tr>
<td class="firstcol">Foreign Trade Effect</td>
<td>2.2</td>
<td>2.0</td>
<td>-0.2</td>
<td>-1.4</td>
<td>1.4</td>
<td>0.6</td>
<td>0.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Domestic Final Demand</td>
<td>-5.3</td>
<td>-5.1</td>
<td>-5.8</td>
<td>-3.1</td>
<td>-0.0</td>
<td>1.8</td>
<td>2.6</td>
</tr>
<tr>
<td class="firstcol">Chained GDP Price Index</td>
<td>2.8</td>
<td>2.9</td>
<td>0.5</td>
<td>2.1</td>
<td>2.2</td>
<td>2.7</td>
<td>3.2</td>
</tr>
</tbody>
</table>
German Retail Sales Lose Some
Weakness 
by <a href="/comment/Brusca.html">Robert
Brusca</a> May 28, 2009


<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090529e.jpg" align="left" border="0" height="265" width="353">
Retail sales are falling on a Yr/Yr basis but, in recent
months, spending has been higher; over three months spending (ex-autos)
is actually rising. As we saw in the first quarter German GDP report,
consumers have been mildly affected by the German downturn but the real
weakness has been in the industrial measures such as business
investment, exports plus in housing. Find that retail sales are holding
up is a good sign that the German recession is not spreading and that
its social welfare support system is holding together the ability of
consumers to participate in the economy. 
 

German consumption figures are somewhat encouraging. Still the
German consumer is not likely to be an engine of growth. Consumption is
a core part of GDP that is stabilizing and that is an important
contribution. The industrial weakness is still present and remains a
threat, But that depends on demand elsewhere since the threatening
weakness is to German investment goods output and exports. Exports
remain weak. 
 


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="8" scope="col">German
Real and Nominal Retail Sales
</th>
<th scope="col">QTR</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Nominal</td>
<td>Apr-09</td>
<td>Mar-09</td>
<td>Feb-09</td>
<td>3-MO</td>
<td>6-MO</td>
<td>12-MO</td>
<td>YrAgo</td>
<td>Saar</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Retail Ex auto</td>
<td>0.9%</td>
<td>-0.6%</td>
<td>0.2%</td>
<td>2.0%</td>
<td>-2.7%</td>
<td>-0.4%</td>
<td>-1.6%</td>
<td>3.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Real</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Retail Ex auto</td>
<td>0.5%</td>
<td>-0.4%</td>
<td>0.0%</td>
<td>0.4%</td>
<td>-1.5%</td>
<td>-0.3%</td>
<td>-4.5%</td>
<td>1.5%</td>
</tr>
</tbody>
</table>
Michigan Consumer Sentiment Rose
Throughout May 
by <a href="/comment/Moeller.html">Tom
Moeller</a> May 29, 2009


<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090529f.jpg" align="left" border="0" height="265" width="353">
The University of Michigan's reading of consumer sentiment for
all of May rose to the highest level since September of last year. At
68.7 the latest level was up from the mid-month figure and slightly
exceeded Consensus expectations for a reading of 68.0. The increase
bodes well for the consumer spending outlook because during the last
ten years, there has been a 61% correlation between the level of
sentiment and the growth in real spending during the next five months.
The expectations component of consumer sentiment, which had
been improving, jumped another 10.0% m/m to its highest level since
late-2007. The gain was fueled by improved expectations for business
conditions during the next year which jumped also to the highest level
since 2007. Expected conditions during the next year surged by a
similar degree. Unlike last month, however, the higher stock market
failed to lift the expected change in personal finances which dipped
slightly m/m but were up significantly y/y.
The opinion of government policy, which may eventually
influence economic expectations, jumped sharply to the highest level
since 2002. Thirty percent of respondents thought that a good job was
being done by government, up from the four percent low of last
December, while a much reduced 22 percent of respondents thought that a
poor job was being done.
The current economic conditions index stuttered, but just
slightly, as the reading for current personal finances dipped. The drop
was offset, however, by an improved read of current conditions for
buying large household goods to the highest level since last August.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090529g.jpg" align="right" border="0" height="265" width="353">
Inflation expectations for the next year rose to 3.2%. That
compares to a low of 1.7% last December but remained down from a
reading which was as high as 7.0% last May.
The University of Michigan survey data is not seasonally
adjusted. The reading is based on telephone interviews with about 500
households at month-end; the mid-month results are based on about 300
interviews. The summary indexes are in Haver's USECON database
with details in the proprietary UMSCA database.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF14/@EF1402/@EF1402.HTM">University
of Michigan</a></th>
<th scope="col">May</th>
<th scope="col">Mid-May</th>
<th scope="col">April</th>
<th scope="col">March</th>
<th scope="col">May 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">Consumer Sentiment</td>
<td>68.7</td>
<td>67.9</td>
<td>65.1</td>
<td>57.3</td>
<td>14.9%</td>
<td>63.8</td>
<td>85.6</td>
<td>87.3</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Current Conditions</td>
<td>67.7</td>
<td>66.2</td>
<td>68.3</td>
<td>63.3</td>
<td>-7.6</td>
<td>73.7</td>
<td>101.2</td>
<td>105.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Expectations</td>
<td>69.4</td>
<td>69.0</td>
<td>63.1</td>
<td>53.5</td>
<td>35.8</td>
<td>57.3</td>
<td>75.6</td>
<td>75.9</td>
</tr>
</tbody>
</table>
</body></html>

U.S. 1Q GDP Decline Lessened, YetTwo-Quarter Drop Rivals 1958 Stats; Profits Recovered Modestly

<!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.01 Transitional//EN">
<html><head>
<style>
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<body>
 



<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090529e.jpg" align="left" border="0" height="265" width="353">
Retail sales are falling on a Yr/Yr basis but, in recent
months, spending has been higher; over three months spending (ex-autos)
is actually rising. As we saw in the first quarter German GDP report,
consumers have been mildly affected by the German downturn but the real
weakness has been in the industrial measures such as business
investment, exports plus in housing. Find that retail sales are holding
up is a good sign that the German recession is not spreading and that
its social welfare support system is holding together the ability of
consumers to participate in the economy. 
 

German consumption figures are somewhat encouraging. Still the
German consumer is not likely to be an engine of growth. Consumption is
a core part of GDP that is stabilizing and that is an important
contribution. The industrial weakness is still present and remains a
threat, But that depends on demand elsewhere since the threatening
weakness is to German investment goods output and exports. Exports
remain weak. 
 


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr><th colspan="8" scope="col">German Real and Nominal Retail Sales
</th><th scope="col">QTR</th>

</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Nominal</td>
<td>Apr-09</td>
<td>Mar-09</td>
<td>Feb-09</td>
<td>3-MO</td>
<td>6-MO</td>
<td>12-MO</td>
<td>YrAgo</td>
<td>Saar</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Retail Ex auto</td>
<td>0.9%</td>
<td>-0.6%</td>
<td>0.2%</td>
<td>2.0%</td>
<td>-2.7%</td>
<td>-0.4%</td>
<td>-1.6%</td>
<td>3.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Real</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Retail Ex auto</td>
<td>0.5%</td>
<td>-0.4%</td>
<td>0.0%</td>
<td>0.4%</td>
<td>-1.5%</td>
<td>-0.3%</td>
<td>-4.5%</td>
<td>1.5%</td>
</tr>
</tbody>
</table>
</body></html>

Retail sales are falling on a Yr/Yr basis but, in recent months, spending has been higher; over three months spending (ex-autos) is actually rising. As we saw in the first quarter German GDP report, consumers have been mildly affected [...]

German Retail Sales Lose Some Weakness

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<body>
 



<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090528f.jpg" width="353">
Perhaps the factory sector&#39;s distress is nearing its end. At least some moderation of last year&#39;s woes was evident in the latest report of durable goods orders. During April orders rose 1.9% following a 2.1% March decline which was greater than reported initially. Consensus expectations were for a 0.5% April increase and during the last three months orders have risen at a 1.4% annual rate.That follows a 5.8% decline during all of last year.
A 5.4% rise (-27.5% y/y) in transportation equipment orders led last month&#39;s increase in total durables bookings after having been unchanged during March. Orders for motor vehicles &amp; parts recovered 2.4% (-24.7% y/y) for the first monthly increase since last September. Machinery orders also rose but by a lesser 2.4% (-33.4% y/y) and electrical equipment orders ticked up 0.3% (-24.9% y/y). Orders for computers &amp; electronic products, however, worked lower again and fell 2.7% (-10.9% y/y). Finally, primary metals bookings did increase 1.0% for the month but remained down by one-half from April of last year.
As is common during recession, the capital goods sector will lag any improvement in new orders for early cycle products. As such, orders for nondefense capital goods fell 2.0% last month and they have fallen in nearly each month since early last year. Orders excluding aircraft also fell by 1.5% during April and they are down by one-quarter over the last year. During the last ten years there has been an 80% correlation between the y/y change in nondefense capital goods orders and the change in equipment &amp; software spending in the GDP accounts. The correlation of the GDP figure with capital goods shipments is, as one would expect, a larger 92%.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090528g.jpg" width="353">
Shipments of durable goods continued lower and slipped 0.2% last month (-18.4% y/y). They have fallen at a 22.8% annual rate so far this year and the decline has been accompanied by a like three-month rate of decline in industrial production of durable goods. During the last ten years, there has been an 80% correlation between the change in shipments of durable goods and the change in durables industrial production.
Inventories of durable goods fell for the fourth consecutive month. The 0.8% decline was the fourth in a row and it brought the annual rate of change to -13.7%, the quickest since 2001. Decumulation of metals and machinery inventories has been notably fast. Backlogs in order books have fallen in each of the last seven months and during the last year by 6.7%, a rate of decline which is the sharpest since 2003.
The durable goods figures are available in Haver&#39;s USECON database.
Recession and Recovery Across the Nation: Lessons from History from the Federal Reserve Bank of Kansas City is available <a href="http://www.kansascityfed.org/PUBLICAT/ECONREV/pdf/09q2Wilkerson.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/@ED0101.HTM">NAICS Classification</a> (%)</th>
<th scope="col">April</th>
<th scope="col">March</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">Durable Goods Orders</td>
<td>1.9</td>
<td>-2.1</td>
<td>-24.4</td>
<td>-5.8</td>
<td>1.4</td>
<td>6.2</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Excluding Transportation</td>
<td>0.8</td>
<td>-2.7</td>
<td>-23.3</td>
<td>-1.2</td>
<td>-0.3</td>
<td>9.1</td>
</tr>
<tr class="odd">
<td class="firstcol">Nondefense Capital Goods</td>
<td>-2.0</td>
<td>-0.9</td>
<td>-32.8</td>
<td>-6.8</td>
<td>3.5</td>
<td>9.4</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Excluding Aircraft</td>
<td>-1.5</td>
<td>-1.4</td>
<td>-24.4</td>
<td>-0.3</td>
<td>-2.7</td>
<td>10.7</td>
</tr>
</tbody>
</table>
</body>
</html>

Perhaps the factory sector's distress is nearing its end. At least some moderation of last year's woes was evident in the latest report of durable goods orders. During April orders rose 1.9% following a 2.1% March decline which was [...]

U.S. Durable Goods Orders Recover Earlier Decline And Are Up Slightly 'YTD

Surging orders for computers and electronics propelling durable goods orders

Next year's inflation forecasts are on the rise and above target

Disrupted global supply chains placing upward pressure on US goods prices

Construction of data centers has overtaken transportation construction in US

Elevated energy prices putting intense upward pressure on input prices around the globe

US is big leader in global surge in private AI investment

Larger-than-usual income tax refunds this year are supporting consumer spending

Sharply rising share of AI-related jobs

Inflationary impact of surge in oil prices larger in Europe than in the US

Futures market thinks the price of oil will recede significantly over the next six months

Recent pickup in US defense orders could help support overall growth ahead

Cost of transporting crude oil has soared to series high

Market-based inflation expectations have not yet reflected recent surge in oil prices

Global equity markets are fearing a major economic disruption from soaring oil prices

Is recent drop in sentiment signaling softer growth ahead?

With the Iran conflict, geopolitical risk has soared to alarming levels

Soaring AI-related investment in US underpinning strong contribution of business spending to overall growth

AI-related outperformance of IP in Advanced Asia ex Japan

Resilient US economy pushing up Blue Chip 2026 outlook

US and China big leaders in adoption of AI models

Robust US demand for advanced technology products

China's export growth rotating away from the US

More pronounced upward revisions in countries more exposed to AI investment

Stable job openings and hiring rates point to cautious hiring

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

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Tian Yong Woon

In this week's Letter, we explore the significant pullback in oil prices that followed the US-Iran memorandum of understanding and consider its broader economic implications. The agreement saw a fragile ceasefire ensue and a gradual resumption of shipping flows through the Strait of Hormuz (chart 1). We acknowledge that this major pullback will certainly be welcome to policymakers across the region and beyond. Previously elevated energy prices had added to the fiscal burdens of governments and sharpened the dilemma facing central banks (chart 2). That dilemma pits the need to rein in inflation against the risk of choking off economic growth. That said, while one source of inflationary pressure seems to be ebbing, another looks to be emerging on the horizon. It stems from a potential "Super El Niño" event, which meteorologists have been warning about for some time now. Asia sits at the centre of such risks, as past strong El Niño events have directly and adversely affected crop production (chart 3). The impact is not limited to potential surges in headline inflation via food supply shocks, especially in Asia. It extends directly to growth as well (chart 4), given the nontrivial share of GDP that agriculture still commands in many Asian economies (chart 5). Should price pressures simply rotate from energy to food, government subsidies may follow suit (chart 6). Central bankers, for their part, may find themselves unable to ease off the tightening pedal just yet. Some Asian economies, however, would still manage to offset such a growth shock through other engines. Electronics and semiconductors, buoyed by the current AI upcycle, offer one such cushion for the more fortunate. For others, lacking such offsets, the agricultural hit may simply have to be borne in full.

**The US-Iran conflict and oil prices**
The recent memorandum of understanding between the US and Iran, aimed at working towards a final deal, has already brought visible relief to crude oil markets (chart 1). This relief has held despite the renewed tensions that have followed the agreement, which markets seem to have largely looked past. The easing in prices should go a long way towards unwinding the inflation concerns that elevated oil prices had previously stoked. Much of the pullback reflects anticipation of the substantial supply now expected to return to global markets. Yet some shipping trackers, such as the IMF's, already point to a marked pickup in traffic through the Strait of Hormuz. Even so, those volumes still remain well below the levels seen before the conflict began in the region. 

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**Oil prices and inflation in Asia**
Should this normalisation of shipping flows through the Strait of Hormuz persist, it would support a corresponding easing in oil prices and energy inflation. That moderation in energy costs would, in turn, help bring down broader headline inflation across the economy. As chart 2 shows, energy has been a large contributor to headline inflation in recent years, though other important forces have been at play too. Such an outcome, in which restored oil supply cools energy inflation, would be a welcome development for central bankers. They face the delicate task of reining in price pressures without tightening policy so far that growth stalls or tips into contraction. That said, while one driver of price pressures now seems to be ebbing, albeit not without the risk of renewed tensions, another source of inflation is building on the horizon.

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**Risks of a “Super El Niño”**
As meteorological agencies have warned for some time, the world may be on the cusp of a Super El Niño. The probability of such an event has risen sharply in recent months. Were it to materialise, it would unleash a range of disruptions from the second half of this year, chief among them shifts in weather and climate patterns that can severely dent crop yields. Asian staples such as rice, wheat and palm oil are especially exposed, since strong El Niño events tend to bring drier conditions and reduced rainfall, in turn cutting output across affected economies in the region. Chart 3 illustrates just how tightly some crops are bound to these conditions: SOI readings correlate closely with certain economies' production, notably Thailand's rice harvest, underscoring how dependent such output remains on the weather. These supply shortfalls would then feed inflationary pressures through the food channel. So central bankers may not be able to rest entirely easy following the easing of tensions between the US and Iran, finding themselves wrestling with a fresh set of emerging inflation risks instead.

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Delving deeper, an examination of recent strong El Niño episodes against the growth of Asian economies' agricultural sectors shows that extreme weather weighs not just on food prices but on economic growth itself. As chart 4 shows, previous major El Niño episodes—notably in 2014–16 and 2023–24—were associated with weaker agricultural growth across parts of Asia, with India and Thailand appearing particularly vulnerable. This is understandable, since these episodes coincided with reduced crop production and, in turn, lower crop revenue. Should these past episodes serve as a gauge and given that the coming event is potentially the worst on record, these economies stand to suffer once more should it hit as hard as feared.

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Beyond the sensitivity of individual economies to extreme El Niño events, vulnerability also depends on the size of the agricultural sector itself. Economies where agriculture accounts for a larger share of output are naturally more exposed to weather-related disruptions. As chart 5 shows, economies such as India, Indonesia and, to a lesser extent, Vietnam carry a comparatively higher share of agriculture in their GDP, which presents a further source of risk. That said, this dimension should not be read in isolation, since the eventual impact would turn on a combination of factors: the degree of exposure, the intensity of El Niño's effect on each economy's agricultural output, and the actual weather conditions that come to pass.

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Bringing it all together, the recent de-escalation between the US and Iran and the early normalisation of flows through the Strait of Hormuz are certainly welcome news. Businesses, consumers and policymakers alike stand to benefit from the relief that lower energy prices would bring. Yet the formation of extreme El Niño conditions presents a looming inflation risk over the months ahead. It may displace energy as the dominant driver, shifting the pressure from the energy channel to the food channel. For Asia's central bankers, this could mean they are unable to ease off the tightening pedal just yet (chart 6). Food inflation may simply pick up where energy inflation leaves off, keeping price pressures elevated for longer. Regional governments, too, may have to redirect funds from energy subsidies to food subsidies should the supply shock play out. On growth, however, the picture may prove more uneven across the region than a single narrative suggests. Economies exposed to the current AI upcycle could keep leaning on those sectors for continued support. Those less exposed, by contrast, may simply have to absorb the hit to agriculture with little to offset it.

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Asia

Economic Letter from Asia: Oil Down, Emerging Risks

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Headline indexes for the European Monetary Union improved in June to a reading of 95.0 from 93.7 in May. The index had been stronger at 96.4 in March; however, it fell to 93.3 in April, recovered slightly to 93.7 in May, and has now reached 95.0. While still below its March high, the index has made progress in the wake of the outbreak of war-like conditions and the closure of the Strait of Hormuz.

**Sector performance**
The industrial reading for the sector, at -8, has a 36.3 percentile standing, which better than the headline index for the Monetary Union with a 25.4 percentile standing. The EMU-wide sector index, consumer confidence, improved to a net diffusion reading of -17.7 in June from -19 in May, but that still leaves it with a very weak 8.1 percentile standing, the lowest among sector readings. Retailing improved to a net diffusion reading of -10 in June from -11 in May and posted a 38.1 percentile standing. The construction sector deteriorated, falling back to -5 from -4 in May; it has been undergoing steady degradation since at least March, but it still has a 68.4 percentile standing. It is the only sector with a percentile standing above 50, placing it above its historic median. The services sector had a net diffusion reading of +3, identical to its May reading and has a 24-percentile standing.

**Sector index ranking**
The sector readings clearly show that the monetary union is exhibiting a number of sectors with subpar growth; beyond ‘subpar,’ many are quite weak. The exception is—and has been for some time—the construction sector, which continues to perform above average and post an above-median metric. It is, perhaps surprising that we often think of consumer confidence as being relatively forward-looking, but in this schematic, consumer confidence is the weakest of the sectors; in fact, like statistics from the U.S., we find the same prevailing situation with consumer readings exceptionally weak. These weak consumer readings coexist with much stronger retailing readings and stronger industrial readings, although both of those are below their historic medians in Europe. This report is a sort of gut check for what consumer confidence means; it may not be as important as we used to think it was. Although the business cycle at this juncture seems to be concentrated more on the supply side and on recovery in the business community, that effect compounded by the influence of AI is much stronger in the U.S. than in Europe.

**Country detail – Large economies**
The country detail shows 16 of 20 early reporting countries with only one of the top four countries showing a decline month-to-month, and that's France. France recorded a 0.2% decline in June, while Germany posted a 1.9% increase, Italy gained 1.3%, and Spain rose 0.7%. Spain had the lone small decrease in May, while in April all of the large countries showed significant monthly declines in their overall indexes in the wake of the onset of the war with Iran.

**Smaller economies in EMU**
Apart from the Big Four economies, 12 other EMU members report in June; of those, 5 showed month-to-month declines in their country level indexes. This was up from three showing declines in May, although it was a vast improvement from April, when all of the country indexes turned negative and generated substantial month-to-month declines, except for Slovakia and Lithuania.

**Big Four economy rankings**
Among the Big Four economies, the strongest ranking reading in June is Spain at a 52.3 percentile standing, followed by Italy at a 41.6 percentile standing, France at a 22.7 percentile standing, and Germany at an 18.7 percentile standing.

**Other economy rankings**
Among the other 12 countries, the percentile standing readings range from a high of 76.1% for Greece to a low of 9.3% for Austria. Five of 12 of the smaller EMU members have percentile standings of 50% or greater, putting them above their historic medians, while the other 7 have rankings that range from a high of 44.6% in Portugal to a low of 9.3% in Austria.

**Summing up**
Conditions in the monetary union have improved over the last two months after a substantial stumble in the wake of the war in the Middle East with Iran and the closure of the Strait of Hormuz. However, the rebound in the European recovery is in gear; it is slow and measured. Conditions are still weak on balance.

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Europe

EU Indexes Show European Improvement in June

Winnie Tapasanun

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The U.S. international trade deficit in goods ballooned to a larger-than-expected $105.75 billion in May after narrowing to $83.01 billion in April, according to the advance estimate from the U.S. Census Bureau. The May reading marked the third widening in the goods trade deficit in four months, exceeding a $91.55 billion shortfall in May 2025. A deficit of $84.0 billion for May had been expected by the Action Economics Forecast Survey. The deficit reached a low of $61.44 billion in October 2025 (the smallest since February 2020) and a record high of $158.73 billion in March 2025. On a quarterly basis, the deficit averaged $94.38 billion so far in Q2'26 versus $81.96 billion in Q1'26.

Total goods exports fell 5.4% m/m (+14.7% y/y) to $207.67 billion in May, the first monthly fall since December and a three-month low, following a 3.8% rise to a record-high $219.52 billion in April. Exports were up 27.7% from a June 2023 low. The m/m fall in exports in May reflected declines of 9.2% (-5.0% y/y) in nonfood consumer goods excluding autos, 7.0% (+23.2% y/y) in industrial supplies & materials, 6.8% (+19.5% y/y) in other goods, and 5.0% (+14.8% y/y) in capital goods excluding autos. To the upside, exports of foods, feeds & beverages (+3.9%; +19.1% y/y) and automotive vehicles & parts (+0.5%; -3.6% y/y) rebounded m/m in May.

Total goods imports, up for the fourth consecutive month, rose 3.6% m/m (15.0% y/y) to $313.43 billion in May, after a 2.0% increase to $302.53 billion in April, marking the highest level since the March 2025 record high of $340.11 billion. Imports were up 25.0% from a March 2023 low. The m/m rise in imports in May was broad-based across all end-use categories, led by an 11.5% gain (22.0% y/y) in other goods, followed by increases of 6.3% (1.4% y/y) in automotive vehicles & parts, 5.7% (-9.1% y/y) in nonfood consumer goods excluding autos, 4.8% (11.7% y/y) in industrial supplies & materials, 4.3% (-0.2% y/y) in foods, feeds & beverages, and 0.4% (41.9% y/y) in capital goods excluding autos. 

The advance international trade data can be found in Haver's **USECON** database. The expectation figure is from the Action Economics Forecast Survey, which is in **AS1REPNA**.

- Deficit: $105.75 bil. in May, up $22.75 bil. (+27.4%) from April’s $83.01 bil.
- Exports -5.4%, first m/m decline since Dec., led by a 9.2% drop in nonauto consumer goods exports.
- Imports +3.6%, fourth straight m/m rise to highest level since Mar. ’25, driven by an 11.5% gain in imports of other goods.

U.S. Goods Trade Deficit Balloons in May, Largest Since March ’25

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In June, there's a slight divergence in the performance of industry climate and service sector climate, although broadly the two sectors have seen their composite indexes moving in more or less the same direction. Since 2024, the industry survey has moved up slightly after falling faster than the services gauge. The services survey has been locked in a slow trend of deterioration, largely since it reached a peak in 2021 in the wake of COVID.

The industry climate gauge has a 30.8 percentile standing, but the recent production trend, while declining, logs a more substantial 42.8 percentile standing. Contributing survey members find their own industry ‘likely trend’ much weaker, at a 21.2 percentile standing. Demand overall, however, has standings above the 50th percentile, putting overall and foreign orders & demand each above their respective medians for this period of ranking back to 2001. Inventories have a strong 81-percentile ranking. Prices are extremely strong, with 87-percentile and 86-percentile standings for respondents for their personal industry trend for prices as well as for the overarching manufacturing sector estimate of prices. Higher prices seem to be the one thing that everyone can agree on by a large margin.

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As for services, the service climate index improved slightly to 93.4 in June from 92.6 in May. The three-month moving average was weaker in June than in May as well; the 12-month moving average has been stuck at its current level for a number of months. The outlook in June improved slightly to a reading of -12 from -15 in May, but the outlook ranking is still a weak 26.8 percentile standing. The three-month expectations and observations of past sales trends haven't changed much in the last two months, but there has been a slight improvement for sales expectations. However, both sales metrics have low 20th percentile standings. Sales prices have deteriorated slightly in June compared to May for both the observed and the expected trends, but prices have standings above their 50th percentiles, logging above-median performance. Employment over the last three months has weakened noticeably, and expected employment is weaker by a small amount.

In terms of rankings, all of the sector rankings are below the 50th percentile on all of these observations, including the climate headline except for sales prices where both the past three-month observed trend and the expected trend have readings above their respective 50th percentiles, indicating past and expected price pressures in excess of normal.

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**Assessment**
On balance, the readings for the French industry, manufacturing sector and services are not encouraging. In addition, concerns about prices linger. The services sector, those concerns seem moderate compared to the concerns in manufacturing.

The hot war continues between Ukraine and Russia, while in the Middle East there was talk of some improvement and a potential peace deal between the United States and Iran, but every time there is some talk of a breakthrough, there appears to be a breakdown. In the most recent development, Iran has asserted its right to control traffic through the Strait of Hormuz, and it's not clear how that demand would ever be consistent with the U.S. allowing a ceasefire. It appears that Iran may have traded its irreconcilable demand for nuclear weapons for a more pragmatic and real-world argument—that it will control the traffic through the Strait of Hormuz simply because it can—and it still is doing exactly that, even after all the destruction it suffered.

Stopping Iran from controlling the Strait would take a commitment to restart the war. All this makes me personally more pessimistic. I think Iran sees the need for Trump to cut a deal and stop the war before the U.S. mid-term elections, and it is pressing that need to its advantage. Trading its nuclear ambitions for real world control of the Strait would elevate Iran’s power from being dangerous but ethereal to a real world event with constant consequences.

France

French Industry and Services Confidence Diverge in June

Andrew Cates

**Equity Momentum and Global Surprises — Still Moving Together**
One of the more telling features of global equity markets in 2026 has been the persistence of the correlation between non-US equity momentum and global growth and inflation surprise indices. Equity markets outside the United States have generally prospered when economic data have beaten consensus expectations and when inflation surprises have been negative  — a combination that has historically been associated with stronger corporate earnings and a more benign policy backdrop in economies other than the US. That correlation has held reasonably well through the turbulence of the past few months, even as the Middle East conflict introduced significant noise into both the economic data and the financial market signal. What the chart reveals this week is a picture of moderate but not alarming deterioration: global growth surprises have softened at the margin, consistent with the energy cost headwinds that have weighed on European and Asian activity, but the relationship between equity momentum and the broader data pulse remains intact. It is a signal that market participants continue to track economic fundamentals rather than purely geopolitical newsflow — a modestly reassuring sign that the underlying framework for assessing the global cycle has not broken down.

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**The Fed Decouples: Why Oil and US Two-Year Yields Have Parted Ways**
For much of 2026, oil prices and US two-year Treasury yields moved in close alignment. The logic was straightforward: higher oil prices raised inflation expectations, which in turn pushed market participants to anticipate a more hawkish Federal Reserve, lifting short-dated yields in the process. That relationship held with notable consistency through the March escalation and the months that followed, as energy market shocks and monetary policy expectations fed off each other. What this week’s chart captures is a striking breakdown in that correlation. As oil prices have fallen on the back of the US-Iran memorandum of understanding and the associated unwinding of the geopolitical risk premium, US two-year yields have not followed them lower. The reason is last week’s Federal Reserve meeting. Under new chair Kevin Warsh, the Fed delivered a hawkish dot plot that shifted the median year-end projection to a hike, making clear that the easing cycle previously priced by some market participants is no longer the central scenario. The message is important: the deflationary impulse from lower oil prices is being offset — at least in the Fed’s framing — by persistent underlying inflation pressures and a commitment to keeping policy tight.

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**Flash PMIs Signal Easing Supply Chain Stress and Softer Price Pressures**
June’s flash PMI surveys, released this week across the major advanced economies, provide a timely read on how the global manufacturing and services sectors are absorbing the shifting macro backdrop. Two findings stand out. First, supplier delivery times have improved (or not lengthened as much as they had in the prior two months). This finding coheres naturally with the broader narrative: lower oil prices reduce transport and energy input costs, while the resumption of Strait of Hormuz shipping flows — examined in more detail in chart 4 — is beginning to reduce the freight disruption and re-routing costs that had been building since the conflict escalated. Second, output price inflation in manufacturing has softened, suggesting that some of the pipeline pressure from earlier energy cost spikes is beginning to fade.

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**Hormuz Traffic and Oil: A Coherent Story of Tentative Normalisation**
The recent US-Iran memorandum of understanding to work towards a final deal, though not without subsequent flare-ups, has already brought relief to markets, most visibly in crude oil prices. This should go a long way towards unwinding the inflation-related concerns that previously elevated oil prices had stoked. While the pullback has owed much to anticipation of the glut of pent-up supply expected to follow, certain trackers of shipping volume through the Strait of Hormuz, such as the IMF’s, already point to a marked pickup in traffic, even if it remains well below pre-conflict levels. Should this normalisation of shipping flows persist, it would lend continued justification to a corresponding easing in oil prices, energy-related inflation and, by extension, headline inflation — a welcome development for central banks grappling with the delicate balancing act of reining in price pressures without dampening growth too sharply.

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**South Korea’s Trade Data Flag a Modest Softening in Global Demand**
South Korea’s trade data serve as one of the global economy’s most useful early warning systems. As one of the world’s most open economies, with exports spanning semiconductors, petrochemicals, steel, automobiles and consumer electronics, South Korea’s monthly trade figures provide a timely and broad-based read on the state of global demand. This week’s data show a slightly softer picture than the strong prints that characterised much of the first quarter. Headline export growth has moderated at the margin, and crucially, semiconductor exports — which had been the most dynamic component of the trade data, propelled by AI-related chip demand — have also come in a touch below the exceptional run rates seen earlier in the year. This is not, in itself, alarming: some moderation from peak rates was always to be expected, and the semiconductor cycle remains structurally supported by the scale of AI infrastructure investment globally.

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**A Super El Niño on the Horizon — The Next Inflation Risk**
With that said, while one driver of price pressures seems to be ebbing for now — albeit not without the risk of future flare-ups — another potential inflationary risk looms on the horizon. The chart illustrates the transmission mechanism. It plots Thailand’s milled rice production (left axis) against Australia’s Southern Oscillation Index (right axis), a well-established barometer of El Niño and La Niña conditions. The convention is straightforward: SOI readings persistently above +8 indicate La Niña, associated with above-average rainfall across Southeast Asia and broadly supportive crop conditions; readings persistently below -8 signal El Niño, which brings drought stress and reduced water availability across the region. The historical relationship is striking. The sharp negative SOI troughs around 2002–03, 2009–10 and most dramatically around 2015 all coincide with visible falls in Thai milled rice output. The severe El Niño of 2014–16 produced both the deepest SOI trough in the series and the sharpest single drop in rice production, to below 24,000 thousand tonnes. As meteorological authorities have been warning for some time, the world appears to be facing an imminent Super El Niño event, with the SOI already drifting back towards negative territory in recent months. Were a significant El Niño to materialise in the second half of this year, the implications for Thai rice output — and by extension for Asian food price inflation — could be substantial. Central bankers, in other words, may find themselves having to wrestle with a new inflationary impulse just as they had begun to hope the worst was behind them.

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The mood in global financial markets this week is more settled, though “settled” should not be confused with resolved. The US-Iran memorandum of understanding, signed last week, has continued to do its work: oil prices have fallen further, Strait of Hormuz shipping traffic has picked up measurably, and the risk premium that had been embedded in energy markets since the conflict escalated in March is now visibly unwinding. That is a material development for the inflation outlook, and central bankers will be watching carefully. Yet the picture is not without its complications. Technology stocks — the most conspicuous beneficiary of the prevailing low-rate, high-growth narrative — have been subject to renewed jitters this week, as investors grow more attentive to stretched valuations and the implications of a Federal Reserve that, under new chair Kevin Warsh, is no longer signalling the easing cycle previously priced into markets. Against this backdrop, this week’s charts draw on the latest data to assess where the global economic cycle stands. Equity momentum outside the United States has tracked closely with global growth and inflation surprises, a correlation that tells us something important about how activity is being perceived (chart 1). Meanwhile, the breakdown of the previously tight relationship between oil prices and US two-year yields is arguably one of the more telling market signals of recent weeks (chart 2). June’s flash PMI surveys point to easing supply chain stress and softer output price inflation in manufacturing — a finding that chimes naturally with lower crude prices and the resumption of Hormuz flows (chart 3). The Strait of Hormuz itself deserves a closer look: traffic data and the mechanics of the oil price pullback are telling a coherent story that supports the PMI picture (chart 4). South Korea’s trade data, including semiconductors, offer a slightly softer read on global demand momentum at the margin (chart 5). And looming on the horizon, one new risk is drawing the attention of meteorological authorities: a Super El Niño event whose probability has been rising, with potentially significant implications for food commodity prices and Asian agriculture (chart 6).

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