Tom Moeller

U.S. sales of light vehicles inched slightly higher last month but not by enough to prevent the twelve-month sales average from falling 18.5% to 13.18M, their lowest since 1993 according to the Autodata Corporation and Ward's [...]

U.S. Light Vehicle Sales Inched Upin December; Down 18.5% For The Full Year

Louise Curley

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090105h.jpg" align="left" border="0" height="265" width="353">
Among the data released today were the Consumer Price Indexes
in December for a number of countries--Spain and Italy in Europe and
Indonesia, Thailand and Taiwan in Asia. The year to year percentage
changes in the indexes show that inflation has come down dramatically
in all but Indonesia since mid year. And even in Indonesia, which has
experienced relatively high inflation, partly as a result of the
natural disasters that have plagued the nation since the devastating
tsunami of 2004, inflation has fallen in each month since September.
The first chart show inflation in Spain and Italy and the second,
inflation in Thailand, Taiwan and Indonesia.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090105i.jpg" align="right" border="0" height="265" width="353">
Much of the decline in inflation is due to the decline in the
price of oil. Brent crude was $144 a barrel on July 11 and $35 on
December 30. But increasingly it has been the performance of the
economy that is exerting downward pressure on prices. Residential
construction is way down, consumer demand is falling as is business
investment. Fear of deflation is beginning to replace fear of
inflation. Inflation in Thailand, for example, was less than 0.5% in
the month of December, down from 9.2% in July. Less dramatic but still
significant is the decline in inflation in Spain from 5.3% in July to
1.5% in December.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol">INFLATION
Y/Y % CHANGE IN CPI</th>
<th scope="col">Dec 08</th>
<th scope="col">Nov 08&nbsp;</th>
<th scope="col">Oct&nbsp; 08&nbsp;</th>
<th scope="col">Sep 08&nbsp;</th>
<th scope="col">Aug 08&nbsp;</th>
<th scope="col">July 08</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Italy</td>
<td>2.26</td>
<td>2.74</td>
<td>3.60</td>
<td>3.92</td>
<td>4.23</td>
<td>4.03</td>
</tr>
<tr class="odd">
<td class="firstcol">Spain</td>
<td>1.50</td>
<td>2.40</td>
<td>3.60</td>
<td>4.60</td>
<td>4.90</td>
<td>5.30</td>
</tr>
<tr>
<td class="firstcol"></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Thailand</td>
<td>0.42</td>
<td>2.19</td>
<td>3.89</td>
<td>6.05</td>
<td>6.43</td>
<td>9.21</td>
</tr>
<tr class="odd">
<td class="firstcol">Taiwan</td>
<td>1.21</td>
<td>1.88</td>
<td>2.39</td>
<td>3.10</td>
<td>4.68</td>
<td>5.81</td>
</tr>
<tr class="odd">
<td class="firstcol">Indonesia</td>
<td>11.06</td>
<td>11.42</td>
<td>11.77</td>
<td>12.15</td>
<td>11.85</td>
<td>11.90</td>
</tr>
</tbody>
</table>
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Among the data released today were the Consumer Price Indexes in December for a number of countries--Spain and Italy in Europe and Indonesia, Thailand and Taiwan in Asia. The year to year percentage changes in the indexes show that [...]

More Evidence of Declining Inflation

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090105f.jpg" width="353">
During November, the value of construction put in place fell another 0.6% though the decline during October was lessened to 0.4%. So far this year total construction spending is down 1.4%. The 20.7% decline in the value of residential building has been mitigated by an 11.6% gain in the nonresidential category and an 8.8% rise in public construction. Consensus expectations had been for a 1.2% November decline.
Residential building activity led the latest monthly decline. The 4.2% drop was the third in a row and activity remained off by one quarter from last year. Single-family construction activity fell 6.6% and it&#39;s off by nearly one half year-to-year. Building activity on multi-family units also was weak and it posted a 1.8% decline (-2.6 y/y), off 20% from the early-2007 peak. Spending on improvements fell a sharp 2.1% m/m (+8.1% y/y).
During the last twenty years there has been an 84% correlation between the q/q change in the value of residential building and its contribution to growth in real GDP.
The value of nonresidential building activity has remained firm relative to the residential sector. During November it posted a 0.7% gain and that pulled activity up 10.3% y/y, though that momentum is down by half from last year. Spending on office construction rose about as it did during October, by 0.9%, but the y/y gain of 5.0% is much reduced from the near 20% growth of the prior two years. Building in the multi-retail sector was unchanged m/m and it was down 15.0% y/y after a 17.0% gain last year and a 28.3% pop during 2006. Spending on health care facilities reversed much of an October decline with a 0.8% increase and y/y growth near 8.6% has been steady.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090105g.jpg" width="353">
Public construction rose another 1.4% and the 1.7% October gain was revised sharply upward from the preliminary report. Spending on public safety surged by 10.2% and it&#39;s up by one-third year-to-year. The value of spending on transportation facilities fell 1.9% but the y/y increase of 5.4% remained firm. Spending on highways &amp; streets rose 1.3% (8.3% y/y). The value of construction on highways &amp; streets is roughly one-third of the value of total public construction spending.
The more detailed categories of construction represent the Census Bureau&#146;s reclassification of construction activity into end-use groups. Finer detail is available for many of the categories; for instance, commercial construction is shown for automotive sales and parking facilities, drugstores, building supply stores, and both commercial warehouses and mini-storage facilities. Note that start dates vary for some seasonally adjusted line items in 2000 and 2002, and that constant-dollar data are no longer computed.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E9/@E907/@E907.HTM">Construction</a> (%)</th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">Y/Y</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>-0.6</td>
<td>-0.4</td>
<td>-3.3</td>
<td>-2.7</td>
<td>6.3</td>
<td>11.2</td>
</tr>
<tr>
<td class="firstcol">Private</td>
<td>-1.5</td>
<td>-1.2</td>
<td>-7.4</td>
<td>-6.9</td>
<td>5.5</td>
<td>12.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Residential</td>
<td>-4.2</td>
<td>-2.1</td>
<td>-23.4</td>
<td>-19.8</td>
<td>1.0</td>
<td>14.9</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Nonresidential</td>
<td>0.7</td>
<td>-0.4</td>
<td>10.3</td>
<td>19.6</td>
<td>16.2</td>
<td>7.8</td>
</tr>
<tr>
<td class="firstcol">Public</td>
<td>1.4</td>
<td>1.7</td>
<td>7.9</td>
<td>12.3</td>
<td>9.3</td>
<td>6.2</td>
</tr>
</tbody>
</table>
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During November, the value of construction put in place fell another 0.6% though the decline during October was lessened to 0.4%. So far this year total construction spending is down 1.4%. The 20.7% decline in the value of residential [...]

U.S. Construction Spending Off Further Due to Housing Decline

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090105c.jpg" width="353">
Federal Reserve Board Chairman Ben S. Bernanke recently addressed <a href="http://www.federalreserve.gov/newsevents/speech/bernanke20081201a.htm">the effects of the housing market&#39;s contraction on the financial markets</a>. In reaction to the market&#39;s meltdown, and the depressing effects on consumer &amp; business spending, the U.S. Federal Reserve has eased monetary policy quite aggressively. Though targeted at 0.5% to 1.0%, the effective Federal funds rate now trades near 0.2% or lower, the lowest in fifty years. Also, the Fed created a new lending facility called the <a href="http://www.federalreserve.gov/newsevents/press/monetary/20081125a.htm">Term Asset-Backed Securities Loan Facility (TALF).</a>
In reaction, the adjusted monetary base has surged. It has nearly doubled to $1.5 trillion as the Federal Reserve has provided banks with billions of added liquidity to shore up balance sheets and provide lending. Moreover, the Fed has accommodated an increase in the demand for cash balances. That has prompted the money stock (M2) to rise at an accelerated 13.6% annual rate during the last three months, up from little growth this passed summer.
As of yet, the current round of easing has paid few economic dividends. Consumer spending has collapsed as have corporate profits and business spending. A crisis of confidence, consumer and business, is in evidence. Is the Fed pushing on the proverbial string? Monetary ease does not usually generate an economic impact for three-to-six months after rates are lowered. But these are not normal times. Credit creation played a large part in the U.S. economy&#39;s growth during the last several years and the unwinding of that leverage should similarly take some time. Just how much leverage was created during the last few years and might now need to be unwound? Since the last recession occurred in 2001, and it was a mild one, the growth in assets (debt) held by commercial U.S. banks averaged 9.2% per year. That was the quickest growth since the mid-1980s, a time of faster growth in productive capacity, both of labor and of capital. Finance companies extended credit at an average rate of 11.5% annually. Therefore credit extension could be modest for the foreseeable future.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090105d.jpg" width="353">
So why was there the overshoot of debt creation for which there now is a period of payback? Interest rates were held low from 2002 to 2004 as worries about price inflation subsided. In 2003, FOMC meeting minutes indicate a focus on economic growth that had been below its potential lifted by strong productivity gains, declining inflation expectations and a general absence of pricing power. Indeed inflation was more than under control. Occasionally, in the early-2000&#39;s, there was use of the word deflation and a modest concern on the part of the Fed that as inflation fell, monetary policy was tightening. Low interest rates were deemed appropriate. After 2004, debt growth surged as new credit vehicles were created, employment rose and home prices surged.
Will the Fed&#39;s current flood of liquidity be successful in stimulating economic growth? The answer is eventually, but most forecasters suggest not until the middle of next year. Chairman Bernanke recently <a href="http://www.federalreserve.gov/newsevents/speech/bernanke20081204a.htm">observed</a> that even if financial markets start to improve, consumer spending would remain depressed by the fall in household wealth and a lack of credit availability. Most agree that it will not be a V-shaped recovery. Credit extension could be under wraps for some time.
Typically, the Fed might worry that aggressive easing (flooding the economy with money) would eventually spur inflation higher. In fact the credit markets already are worrying. The spread between the yield on 10-year Treasury notes and the Fed funds rate has widened to 207 basis points. Though that&#39;s down in recent weeks from its steepest spread of over 300 basis points, it compares to a zero or negative spread during 2006 and 2007. <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090105e.jpg" width="353">
With regard to the more steeply sloped interest rate yield curve, is the market&#39;s concern about a rise in inflation justified? The definitive answer is &quot;probably not.&quot; A pickup in inflation would normally be expected to appear after economic growth exceeded its &quot;potential&quot; for some time. Current potential growth in GDP, which is labor force growth plus productivity growth, likely is 2.5%. Thus, in this case given the current multi-year period of moderate growth that seems yet to come, inflation should not pick up for years. The recent collapse in oil prices, if sustained, certainly will diffuse inflationary pressure. However, there is a wild card scenario ... one of &quot;stagflation.&quot; It could colloquially be described as too much money chasing too few goods. We&#39;ll have to keep our eyes open for that is a threat.
From one respected source for comprehensive economic forecasts, go to the Haver database MA4CAST which has forecasts from <a href="http://www.macroadvisers.com/"> Macroeconomic Advisers</a> in St. Louis, MO. They foresee inflation declining through the end of next year then picking up slightly. As for economic growth, modest after the current recession ends next quarter then a healthy rebound later in 2010.
The data used for the charts above can be found in Haver&#39;s USECON and USWEEKLY databases. Go to <a href="http://www.haver.com/">http://www.haver.com/</a> to learn more.
Globalization and the Changing Nature of the U.S. Economy&#146;s Influence in the World from the Federal Reserve Bank of Dallas is available <a href="http://dallasfed.org/research/eclett/2008/el0811.html">here</a>.

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Federal Reserve Board Chairman Ben S. Bernanke recently addressed the effects of the housing market's contraction on the financial markets. In reaction to the market's meltdown, and the depressing effects on consumer & business [...]

U.S. Monetary Policy: Pushing On A String?

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090105a.jpg" width="353">
On Friday, the Institute for Supply Management (ISM) reported that its December Composite Index of Activity in the manufacturing sector fell further to 32.4, the lowest level since the recession year of 1980. The index fell 3.8 points from November for the sixth consecutive monthly decline. The break-even level for this diffusion index of factory sector activity is a level of 50.
During the last twenty years there has been a 64% correlation between the level of the Composite Index and the three-month growth in factory sector industrial production.
It is appropriate to correlate the ISM index level with factory sector growth because the ISM index is a diffusion index. It measures growth by using all of the positive changes in activity added to one half of the zero change in activity measures.
The separate index of prices paid fell another 7.5 points to 18.0 which remained the lowest level since 1949. During the last twenty years there has been a 79% correlation between the price index and the three-month change in the PPI for intermediate goods.
During the last three months the ISM index composite index fell by nearly eighteen points, the steepest three-month decline since 1981, near the beginning of that year&#39;s recession. The current index level is, in addition, below the level reached during that downturn suggesting that the current drop in factory sector activity will exceed the five-to-seven percent rates of decline reached then.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090105b.jpg" width="353">
The new orders index during December fell to a record low of 22.7. Only 5% of survey participants reported higher orders while 64% reported that orders fell. The export order index continued to reflect economic weakness outside of the U.S. as it fell to 35.5, the lowest level in this index&#39;s short twenty year history. During the last ten years there has been a 53% correlation between the index and the q/q change in real exports of goods in the GDP accounts.
The production sub-series also fell to a record low of 25.5, off 26 points during the last six months. Sixty percent of survey participants reported lower production while seven percent indicated that production rose. In addition, the employment index fell 4.3 points to 29.9, the lowest reading since 1981. Fifty percent reported that they reduced employment. During the last twenty years there has been a 67% correlation between the level of the ISM employment index and the three-month growth in factory sector employment.
Deficits, Debt and Looming Disaster from the Federal Reserve Bank of St. Louis can be found <a href="http://www.stlouisfed.org/publications/re/2009/a/pages/debts.html"> here</a>

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S2/@S201/@S201.HTM">ISM Mfg</a></th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">December &#39;07</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">Composite Index</td>
<td>32.4</td>
<td>36.2</td>
<td>48.4</td>
<td>45.6</td>
<td>51.1</td>
<td>53.1</td>
</tr>
<tr>
<td class="firstcol">&nbsp; New Orders Index</td>
<td>22.7</td>
<td>27.9</td>
<td>46.9</td>
<td>42.1</td>
<td>54.3</td>
<td>55.4</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Employment Index</td>
<td>29.9</td>
<td>34.2</td>
<td>48.7</td>
<td>43.3</td>
<td>50.5</td>
<td>51.7</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index (NSA)</td>
<td>18.0</td>
<td>25.5</td>
<td>68.0</td>
<td>66.5</td>
<td>64.6</td>
<td>65.0</td>
</tr>
</tbody>
</table>
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On Friday, the Institute for Supply Management (ISM) reported that its December Composite Index of Activity in the manufacturing sector fell further to 32.4, the lowest level since the recession year of 1980. The index fell 3.8 points [...]

ISM Index Fell To The Lowest Since 1980

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090105a.jpg" align="left" border="0" height="265" width="353">
On Friday, the Institute for Supply Management (ISM) reported
that its December Composite Index of Activity in the manufacturing
sector fell further to 32.4, the lowest level since the recession year
of 1980. The index fell 3.8 points from November for the sixth
consecutive monthly decline. The break-even level for this diffusion
index of factory sector activity is a level of 50.
During the last twenty years there has been a 64% correlation
between the level of the Composite Index and the three-month growth in
factory sector industrial production.
It is appropriate to correlate the ISM index level
with factory sector growth because the ISM index
is a diffusion index. It measures growth by using all of the positive
changes in activity added to one half of the zero change in activity
measures.
The separate index of prices paid fell another 7.5 points to
18.0 which remained the lowest level since 1949.
During the last twenty years there has been a 79% correlation between
the price index and the three-month change in the PPI for intermediate
goods.
During the last three months the ISM index composite index
fell by nearly eighteen points, the steepest three-month decline since
1981, near the beginning of that year's recession. The current index
level is, in addition, below the level reached during that downturn
suggesting that the current drop in factory sector activity will exceed
the five-to-seven percent rates of decline reached then.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090105b.jpg" align="right" border="0" height="265" width="353">
The new orders index during December fell to a record low of
22.7. Only 5% of survey participants reported higher orders while 64%
reported that orders fell. The export order index continued to reflect
economic weakness outside of the U.S. as it fell to 35.5, the lowest
level in this index's short twenty year history. During the last ten
years there has been a 53% correlation between the index and the q/q
change in real exports of goods in the GDP accounts.
The production sub-series also fell to a record low of 25.5,
off 26 points during the last six months. Sixty percent of survey
participants reported lower production while seven percent indicated
that production rose. In addition, the employment index fell 4.3 points
to 29.9, the lowest reading since 1981. Fifty percent reported that
they reduced employment. During the last twenty years there has been a
67% correlation between the level of the ISM employment index and the
three-month growth in factory sector employment.
Deficits, Debt and Looming Disaster from
the Federal Reserve Bank of St. Louis can be found <a href="http://www.stlouisfed.org/publications/re/2009/a/pages/debts.html">
here</a>

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S2/@S201/@S201.HTM">ISM
Mfg</a></th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">December '07</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">Composite Index</td>
<td>32.4</td>
<td>36.2</td>
<td>48.4</td>
<td>45.6</td>
<td>51.1</td>
<td>53.1</td>
</tr>
<tr>
<td class="firstcol">&nbsp; New Orders Index</td>
<td>22.7</td>
<td>27.9</td>
<td>46.9</td>
<td>42.1</td>
<td>54.3</td>
<td>55.4</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Employment Index</td>
<td>29.9</td>
<td>34.2</td>
<td>48.7</td>
<td>43.3</td>
<td>50.5</td>
<td>51.7</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index (NSA)</td>
<td>18.0</td>
<td>25.5</td>
<td>68.0</td>
<td>66.5</td>
<td>64.6</td>
<td>65.0</td>
</tr>
</tbody>
</table>
 U.S. Monetary Policy: Pushing On A
String? 
by <a href="/comment/Moeller.html">Tom
Moeller</a> January 5, 2009


<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090105c.jpg" align="left" border="0" height="265" width="353">
Federal Reserve Board Chairman Ben S. Bernanke recently
addressed <a href="http://www.federalreserve.gov/newsevents/speech/bernanke20081201a.htm">the
effects of the housing market's contraction on the financial markets</a>.
In reaction to the market's meltdown, and the depressing effects on
consumer &amp; business spending, the U.S. Federal Reserve has
eased monetary policy quite aggressively. Though targeted at 0.5% to
1.0%, the effective Federal funds rate now trades near 0.2% or lower,
the lowest in fifty years. Also, the Fed created a new lending facility
called the <a href="http://www.federalreserve.gov/newsevents/press/monetary/20081125a.htm">Term
Asset-Backed Securities Loan Facility (TALF).</a>
In reaction, the adjusted monetary base has surged. It has
nearly doubled to $1.5 trillion as the Federal Reserve has provided
banks with billions of added liquidity to shore up balance sheets and
provide lending. Moreover, the Fed has accommodated an increase in the
demand for cash balances. That has prompted the money stock (M2) to
rise at an accelerated 13.6% annual rate during the last three months,
up from little growth this passed summer.
As of yet, the current round of easing has paid few economic
dividends. Consumer spending has collapsed as have corporate profits
and business spending. A crisis of confidence, consumer and business,
is in evidence. Is the Fed pushing on the proverbial string? Monetary
ease does not usually generate an economic impact for three-to-six
months after rates are lowered. But these are not normal times. Credit
creation played a large part in the U.S. economy's growth during the
last several years and the unwinding of that leverage should similarly
take some time. Just how much leverage was created during the last few
years and might now need to be unwound? Since the last recession
occurred in 2001, and it was a mild one, the growth in assets (debt)
held by commercial U.S. banks averaged 9.2% per year. That was the
quickest growth since the mid-1980s, a time of faster growth in
productive capacity, both of labor and of capital. Finance companies
extended credit at an average rate of 11.5% annually. Therefore credit
extension could be modest for the foreseeable future.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090105d.jpg" align="right" border="0" height="265" width="353">
So why was there the overshoot of debt creation for which
there now is a period of payback? Interest rates were held low from
2002 to 2004 as worries about price inflation subsided. In 2003, FOMC
meeting minutes indicate a focus on economic growth that had been below
its potential lifted by strong productivity gains, declining inflation
expectations and a general absence of pricing power. Indeed inflation
was more than under control. Occasionally, in the early-2000's, there
was use of the word deflation and a modest concern on the part of the
Fed that as inflation fell, monetary policy was tightening. Low
interest rates were deemed appropriate. After 2004, debt growth surged
as new credit vehicles were created, employment rose and home prices
surged.
Will the Fed's current flood of liquidity be successful in
stimulating economic growth? The answer is eventually, but most
forecasters suggest not until the middle of next year. Chairman
Bernanke recently <a href="http://www.federalreserve.gov/newsevents/speech/bernanke20081204a.htm">observed</a>
that even if financial markets start to improve, consumer spending
would remain depressed by the fall in household wealth and a lack of
credit availability. Most agree that it will not be a V-shaped
recovery. Credit extension could be under wraps for some time.
Typically, the Fed might worry that aggressive easing
(flooding the economy with money) would eventually spur inflation
higher. In fact the credit markets already are worrying. The spread
between the yield on 10-year Treasury notes and the Fed funds rate has
widened to 207 basis points. Though that's down in recent weeks from
its steepest spread of over 300 basis points, it compares to a zero or
negative spread during 2006 and 2007. 
<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090105e.jpg" align="left" border="0" height="265" width="353">
With regard to the more steeply sloped interest rate yield
curve, is the market's concern about a rise in inflation justified? The
definitive answer is "probably not." A pickup in inflation would
normally be expected to appear after economic growth exceeded its
"potential" for some time. Current potential growth in GDP, which is
labor force growth plus productivity growth, likely is 2.5%. Thus, in
this case given the current multi-year period of moderate growth that
seems yet to come, inflation should not pick up for years. The recent
collapse in oil prices, if sustained, certainly will diffuse
inflationary pressure. However, there is a wild card scenario ... one
of "stagflation." It could colloquially be described as too much money
chasing too few goods. We'll have to keep our eyes open for that is a
threat.
From one respected source for comprehensive economic
forecasts, go to the Haver database MA4CAST which
has forecasts from <a href="http://www.macroadvisers.com/">
Macroeconomic Advisers</a> in St. Louis, MO. They foresee
inflation declining through the end of next year then picking up
slightly. As for economic growth, modest after the current recession
ends next quarter then a healthy rebound later in 2010.
The data used for the charts above can be found in Haver's USECON
and USWEEKLY databases. Go to <a href="http://www.haver.com/">http://www.haver.com/</a>
to learn more.
Globalization and
the Changing Nature of the U.S. Economy&#8217;s Influence in the World from
the Federal Reserve Bank of Dallas is available <a href="http://dallasfed.org/research/eclett/2008/el0811.html">here</a>.

 U.S. Construction Spending Off
Further Due to Housing Decline 
by <a href="/comment/Moeller.html">Tom
Moeller</a> January 5, 2009


<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090105f.jpg" align="left" border="0" height="265" width="353">
During November, the value of construction put in place fell
another 0.6% though the decline during October was lessened to 0.4%. So
far this year total construction spending is down 1.4%. The 20.7%
decline in the value of residential building has been mitigated by an
11.6% gain in the nonresidential category and an 8.8% rise in public
construction. Consensus expectations had been for a 1.2% November
decline.
Residential building activity led the latest monthly decline.
The 4.2% drop was the third in a row and activity remained off by one
quarter from last year. Single-family construction activity fell 6.6%
and it's off by nearly one half year-to-year. Building activity on
multi-family units also was weak and it posted a 1.8% decline (-2.6
y/y), off 20% from the early-2007 peak. Spending on improvements fell a
sharp 2.1% m/m (+8.1% y/y).
During the last twenty years there has been an 84% correlation
between the q/q change in the value of residential building and its
contribution to growth in real GDP.
The value of nonresidential building activity has remained
firm relative to the residential sector. During November it posted a
0.7% gain and that pulled activity up 10.3% y/y, though that momentum
is down by half from last year. Spending on office construction rose
about as it did during October, by 0.9%, but the y/y gain of 5.0% is
much reduced from the near 20% growth of the prior two years. Building
in the multi-retail sector was unchanged m/m and it was down 15.0% y/y
after a 17.0% gain last year and a 28.3% pop during 2006. Spending on
health care facilities reversed much of an October decline with a 0.8%
increase and y/y growth near 8.6% has been steady.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090105g.jpg" align="right" border="0" height="265" width="353">
Public construction rose another 1.4% and the 1.7% October
gain was revised sharply upward from the preliminary report. Spending
on public safety surged by 10.2% and it's up by one-third year-to-year.
The value of spending on transportation facilities fell 1.9% but the
y/y increase of 5.4% remained firm. Spending on highways &amp;
streets rose 1.3% (8.3% y/y). The value of construction on highways
&amp; streets is roughly one-third of the value of total public
construction spending.
The more detailed categories of construction represent the
Census Bureau&#8217;s reclassification of construction activity into end-use
groups. Finer detail is available for many of the categories; for
instance, commercial construction is shown for automotive sales and
parking facilities, drugstores, building supply stores, and both
commercial warehouses and mini-storage facilities. Note that start
dates vary for some seasonally adjusted line items in 2000 and 2002,
and that constant-dollar data are no longer computed.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E9/@E907/@E907.HTM">Construction</a>
(%)</th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">Y/Y</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>-0.6</td>
<td>-0.4</td>
<td>-3.3</td>
<td>-2.7</td>
<td>6.3</td>
<td>11.2</td>
</tr>
<tr>
<td class="firstcol">Private</td>
<td>-1.5</td>
<td>-1.2</td>
<td>-7.4</td>
<td>-6.9</td>
<td>5.5</td>
<td>12.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Residential</td>
<td>-4.2</td>
<td>-2.1</td>
<td>-23.4</td>
<td>-19.8</td>
<td>1.0</td>
<td>14.9</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Nonresidential</td>
<td>0.7</td>
<td>-0.4</td>
<td>10.3</td>
<td>19.6</td>
<td>16.2</td>
<td>7.8</td>
</tr>
<tr>
<td class="firstcol">Public</td>
<td>1.4</td>
<td>1.7</td>
<td>7.9</td>
<td>12.3</td>
<td>9.3</td>
<td>6.2</td>
</tr>
</tbody>
</table>
 More Evidence of Declining
Inflation 
by <a href="/comment/Curley.html">Louise
Curley</a> January 5, 2009



<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090105h.jpg" align="left" border="0" height="265" width="353">
Among the data released today were the Consumer Price Indexes
in December for a number of countries--Spain and Italy in Europe and
Indonesia, Thailand and Taiwan in Asia. The year to year percentage
changes in the indexes show that inflation has come down dramatically
in all but Indonesia since mid year. And even in Indonesia, which has
experienced relatively high inflation, partly as a result of the
natural disasters that have plagued the nation since the devastating
tsunami of 2004, inflation has fallen in each month since September.
The first chart show inflation in Spain and Italy and the second,
inflation in Thailand, Taiwan and Indonesia.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090105i.jpg" align="right" border="0" height="265" width="353">
Much of the decline in inflation is due to the decline in the
price of oil. Brent crude was $144 a barrel on July 11 and $35 on
December 30. But increasingly it has been the performance of the
economy that is exerting downward pressure on prices. Residential
construction is way down, consumer demand is falling as is business
investment. Fear of deflation is beginning to replace fear of
inflation. Inflation in Thailand, for example, was less than 0.5% in
the month of December, down from 9.2% in July. Less dramatic but still
significant is the decline in inflation in Spain from 5.3% in July to
1.5% in December.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol">INFLATION
Y/Y % CHANGE IN CPI</th>
<th scope="col">Dec 08</th>
<th scope="col">Nov 08&nbsp;</th>
<th scope="col">Oct&nbsp; 08&nbsp;</th>
<th scope="col">Sep 08&nbsp;</th>
<th scope="col">Aug 08&nbsp;</th>
<th scope="col">July 08</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Italy</td>
<td>2.26</td>
<td>2.74</td>
<td>3.60</td>
<td>3.92</td>
<td>4.23</td>
<td>4.03</td>
</tr>
<tr class="odd">
<td class="firstcol">Spain</td>
<td>1.50</td>
<td>2.40</td>
<td>3.60</td>
<td>4.60</td>
<td>4.90</td>
<td>5.30</td>
</tr>
<tr>
<td class="firstcol"></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Thailand</td>
<td>0.42</td>
<td>2.19</td>
<td>3.89</td>
<td>6.05</td>
<td>6.43</td>
<td>9.21</td>
</tr>
<tr class="odd">
<td class="firstcol">Taiwan</td>
<td>1.21</td>
<td>1.88</td>
<td>2.39</td>
<td>3.10</td>
<td>4.68</td>
<td>5.81</td>
</tr>
<tr class="odd">
<td class="firstcol">Indonesia</td>
<td>11.06</td>
<td>11.42</td>
<td>11.77</td>
<td>12.15</td>
<td>11.85</td>
<td>11.90</td>
</tr>
</tbody>
</table>
</body></html>

ISM Index Fell To The Lowest Since1980

Robert Brusca

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081231a.jpg" align="left" border="0" height="265" width="353">
European money supply trends show that Yr/Yr money supply
growth is steady or slowing slightly on a Yr/Yr basis (chart). Over
other time horizons (see table) some stimulus is indicated. Inflation
adjusted &#8220;real balances&#8217; show a bit more stimulus. But credit growth in
EMU is clearly slowing. If the objective of monetary stimulus has been
to get credit growth higher, it is not working.
Across other select G-7 countries the same trends with money
hold forth &#8211; Japan is an exception of sorts. The US and the UK show
sharply escalating money growth rates over more recent periods. Japan
shows nominal money growth is decelerating. But in terms of real
balances US, UK and Japan real balance growth is expanding.
Still, the lesson in the Euro Area is telling. For all the
monetary stimulus that is in train, there is little evidence that
credit growth is being rekindled.

 

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="8" scope="col">Look at
Global and Euro Liquidity Trends </th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Saar-all</td>
<td colspan="3">Euro Measures (EA 15):
Money &amp; Credit</td>
<td colspan="3">G-10 Major Markets: Money</td>
<td>Memo</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&#8364;&#8364;-Supply M2</td>
<td>Credit:Resid</td>
<td>Loans</td>
<td>$US M2</td>
<td>&#163;&#163;UK M4</td>
<td>&#165;&#165;Jpn M2+Cds</td>
<td>OIL:WTI</td>
</tr>
<tr>
<td class="firstcol">3-MO</td>
<td>11.9%</td>
<td>2.9%</td>
<td>4.7%</td>
<td>14.5%</td>
<td>25.6%</td>
<td>0.0%</td>
<td>-94.0%</td>
</tr>
<tr>
<td class="firstcol">6-MO</td>
<td>10.0%</td>
<td>5.9%</td>
<td>5.4%</td>
<td>7.8%</td>
<td>21.8%</td>
<td>1.5%</td>
<td>-78.6%</td>
</tr>
<tr>
<td class="firstcol">12-MO</td>
<td>9.9%</td>
<td>8.4%</td>
<td>7.6%</td>
<td>7.6%</td>
<td>16.6%</td>
<td>1.8%</td>
<td>-39.1%</td>
</tr>
<tr>
<td class="firstcol">2Yr</td>
<td>10.7%</td>
<td>10.3%</td>
<td>9.2%</td>
<td>6.7%</td>
<td>13.9%</td>
<td>1.9%</td>
<td>-1.3%</td>
</tr>
<tr>
<td class="firstcol">3Yr</td>
<td>10.0%</td>
<td>10.7%</td>
<td>9.8%</td>
<td>6.2%</td>
<td>13.6%</td>
<td>1.4%</td>
<td>-0.3%</td>
</tr>
<tr class="odd">
<td colspan="8" class="firstcol">Real Balances: deflated by
Own CPI. Oil deflated by US CPI</td>
</tr>
<tr>
<td class="firstcol">3-MO</td>
<td>12.8%</td>
<td>3.7%</td>
<td>5.4%</td>
<td>27.6%</td>
<td>24.2%</td>
<td>2.8%</td>
<td>-93.3%</td>
</tr>
<tr>
<td class="firstcol">6-MO</td>
<td>9.2%</td>
<td>5.1%</td>
<td>4.6%</td>
<td>9.9%</td>
<td>17.7%</td>
<td>0.9%</td>
<td>-78.1%</td>
</tr>
<tr>
<td class="firstcol">12-MO</td>
<td>7.6%</td>
<td>6.2%</td>
<td>5.4%</td>
<td>6.5%</td>
<td>12.0%</td>
<td>0.8%</td>
<td>-39.7%</td>
</tr>
<tr>
<td class="firstcol">2Yr</td>
<td>7.9%</td>
<td>7.5%</td>
<td>6.5%</td>
<td>3.9%</td>
<td>10.5%</td>
<td>1.1%</td>
<td>-3.9%</td>
</tr>
<tr>
<td class="firstcol">3Yr</td>
<td>7.5%</td>
<td>8.2%</td>
<td>7.3%</td>
<td>3.6%</td>
<td>10.3%</td>
<td>0.8%</td>
<td>-2.6%</td>
</tr>
</tbody>
</table>
</body></html>

European money supply trends show that Yr/Yr money supply growth is steady or slowing slightly on a Yr/Yr basis (chart). Over other time horizons (see table) some stimulus is indicated. Inflation adjusted “real balances’ show a bit [...]

Various Money Supplies are Showing the Impact of Stimulus

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081231a.jpg" align="left" border="0" height="265" width="353">
European money supply trends show that Yr/Yr money supply
growth is steady or slowing slightly on a Yr/Yr basis (chart). Over
other time horizons (see table) some stimulus is indicated. Inflation
adjusted &#8220;real balances&#8217; show a bit more stimulus. But credit growth in
EMU is clearly slowing. If the objective of monetary stimulus has been
to get credit growth higher, it is not working.
Across other select G-7 countries the same trends with money
hold forth &#8211; Japan is an exception of sorts. The US and the UK show
sharply escalating money growth rates over more recent periods. Japan
shows nominal money growth is decelerating. But in terms of real
balances US, UK and Japan real balance growth is expanding.
Still, the lesson in the Euro Area is telling. For all the
monetary stimulus that is in train, there is little evidence that
credit growth is being rekindled.

 

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="8" scope="col">Look at
Global and Euro Liquidity Trends </th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Saar-all</td>
<td colspan="3">Euro Measures (EA 15):
Money &amp; Credit</td>
<td colspan="3">G-10 Major Markets: Money</td>
<td>Memo</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&#8364;&#8364;-Supply M2</td>
<td>Credit:Resid</td>
<td>Loans</td>
<td>$US M2</td>
<td>&#163;&#163;UK M4</td>
<td>&#165;&#165;Jpn M2+Cds</td>
<td>OIL:WTI</td>
</tr>
<tr>
<td class="firstcol">3-MO</td>
<td>11.9%</td>
<td>2.9%</td>
<td>4.7%</td>
<td>14.5%</td>
<td>25.6%</td>
<td>0.0%</td>
<td>-94.0%</td>
</tr>
<tr>
<td class="firstcol">6-MO</td>
<td>10.0%</td>
<td>5.9%</td>
<td>5.4%</td>
<td>7.8%</td>
<td>21.8%</td>
<td>1.5%</td>
<td>-78.6%</td>
</tr>
<tr>
<td class="firstcol">12-MO</td>
<td>9.9%</td>
<td>8.4%</td>
<td>7.6%</td>
<td>7.6%</td>
<td>16.6%</td>
<td>1.8%</td>
<td>-39.1%</td>
</tr>
<tr>
<td class="firstcol">2Yr</td>
<td>10.7%</td>
<td>10.3%</td>
<td>9.2%</td>
<td>6.7%</td>
<td>13.9%</td>
<td>1.9%</td>
<td>-1.3%</td>
</tr>
<tr>
<td class="firstcol">3Yr</td>
<td>10.0%</td>
<td>10.7%</td>
<td>9.8%</td>
<td>6.2%</td>
<td>13.6%</td>
<td>1.4%</td>
<td>-0.3%</td>
</tr>
<tr class="odd">
<td colspan="8" class="firstcol">Real Balances: deflated by
Own CPI. Oil deflated by US CPI</td>
</tr>
<tr>
<td class="firstcol">3-MO</td>
<td>12.8%</td>
<td>3.7%</td>
<td>5.4%</td>
<td>27.6%</td>
<td>24.2%</td>
<td>2.8%</td>
<td>-93.3%</td>
</tr>
<tr>
<td class="firstcol">6-MO</td>
<td>9.2%</td>
<td>5.1%</td>
<td>4.6%</td>
<td>9.9%</td>
<td>17.7%</td>
<td>0.9%</td>
<td>-78.1%</td>
</tr>
<tr>
<td class="firstcol">12-MO</td>
<td>7.6%</td>
<td>6.2%</td>
<td>5.4%</td>
<td>6.5%</td>
<td>12.0%</td>
<td>0.8%</td>
<td>-39.7%</td>
</tr>
<tr>
<td class="firstcol">2Yr</td>
<td>7.9%</td>
<td>7.5%</td>
<td>6.5%</td>
<td>3.9%</td>
<td>10.5%</td>
<td>1.1%</td>
<td>-3.9%</td>
</tr>
<tr>
<td class="firstcol">3Yr</td>
<td>7.5%</td>
<td>8.2%</td>
<td>7.3%</td>
<td>3.6%</td>
<td>10.3%</td>
<td>0.8%</td>
<td>-2.6%</td>
</tr>
</tbody>
</table>
</body>
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China's export growth rotating away from the US

More pronounced upward revisions in countries more exposed to AI investment

Stable job openings and hiring rates point to cautious hiring

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

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

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

Tighter US immigration enforcement adversely impacting labor force

Economic policy uncertainty, while still elevated, is declining

Gradual disinflation and easier monetary policies across advanced economies

Largest October layoffs since 2003, led by technology

Subdued global shipping costs not yet pointing to supply chain problems

PMIs show still-elevated but slowing US inflation

AI boosting US investment in data centers

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

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

US financial markets have gotten used to elevated policy uncertainty

FOMC now expects more rate cuts going forward than in June

China gaining ASEAN exports while US exports slump

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

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

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

Equity market exuberance outpacing macroeconomic data

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

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Andrew Cates

**US trade with Europe** 
Geopolitical tensions surrounding Greenland have abruptly sharpened investor sensitivity to US trade and foreign-policy risk. What might once have been dismissed as rhetorical brinkmanship has taken on greater macro-financial relevance as Donald Trump has coupled renewed interest in Greenland’s strategic importance with explicit threats of higher tariffs on European imports. The first chart below highlights that the US is materially more exposed to EU goods than the EU is to US trade, making any escalation asymmetrically more costly for the US economy. Beyond the direct inflationary impact of higher tariffs, the more immediate risk lies in confidence effects and capital flows: early signs of capital reallocation away from US assets over the past 24 hours suggest that markets could be beginning to price a broader erosion of policy predictability. In this environment, tariffs risk functioning less as a targeted trade tool and more as a systemic confidence shock—tightening financial conditions, unsettling the dollar’s safe-haven status and increasing downside risks to US growth via weaker investment and higher risk premia.

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**Japan’s JGB yields**
That said, recent capital outflows from US assets may owe as much to developments in Japan as to geopolitical and trade-related shocks. While tariff threats and policy unpredictability have clearly unsettled sentiment, an underappreciated driver of the sell-off in US Treasuries has been the sharp repricing in the Japanese government bond market. Renewed domestic political uncertainty and intensifying concerns over Japan’s debt dynamics have triggered a rapid rise in JGB yields, prompting portfolio rebalancing by Japanese investors and reducing the relative appeal of US duration. Given Japan’s role as one of the largest foreign holders of US Treasuries, yield gyrations at home can translate quickly into capital repatriation, hedging adjustments and reduced demand for US bonds. In this sense, recent moves in US yields may reflect less a direct reaction to geopolitical risk and more a globally transmitted capital-flow shock—originating in Japan but felt most acutely in US financial markets.

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**Inflation expectations and oil prices**
Capital-flow dynamics may have also begun to spill over into how markets are pricing US inflation risk and monetary credibility. Historically, medium-term US inflation expectations have remained closely anchored to global energy prices, as illustrated by the strong co-movement between the 5-year forward inflation rate and Brent crude prices. More recently, however, that relationship has begun to fray: inflation expectations have proven notably resilient even as oil prices have softened, suggesting that markets are increasingly pricing political and policy risk rather than cost-push fundamentals alone. Renewed tariff threats under President Trump, combined with heightened geopolitical tensions involving Greenland and transatlantic relations, risk reinforcing concerns that future inflation outcomes could be shaped as much by political intervention as by macroeconomic conditions. Any perception that the Federal Reserve may face constraints on its operational independence would compound this shift—loosening inflation anchors, raising term premia and increasing the sensitivity of capital flows to US policy credibility.

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**UK inflation** 
UK inflation data released this week show a small upside surprise in headline CPI at year-end. Headline CPI inflation specifically rose from 3.2% y/y in November to 3.4% in December, a little more than expected. The chart below shows that the pickup was driven by persistent underlying pressures—most notably in services. While a negative drag from energy prices has largely faded, services inflation continues to account for a disproportionate share of overall price growth, probably reflecting ongoing wage pressures and limited slack in parts of the domestic economy.

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**Wage growth in the US and Europe** 
Labour-market data from the Indeed Hiring Lab reinforce the picture of persistent services-side pressure in the UK inflation mix. As the chart shows, UK posted wage growth remains elevated relative to both the euro area and the US, even though momentum has eased from its 2023 peak. At around the mid-5% range on a three-month moving average basis, UK wage growth is still running at a pace that is difficult to reconcile with a rapid return of services inflation to target. By contrast, posted wage growth in the euro area has slowed more decisively, while the US has seen a sharper deceleration from earlier extremes.

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**China’s property market**
Finally, the Q4 GDP figures released in China this week sit uneasily alongside continued weakness in its domestic property sector, which remains a key drag on both investment and consumption. While Q4 growth of 4.5% y/y brought full-year GDP broadly in line with the authorities’ 5% target, the chart highlights how property-market adjustment is still running deep beneath the surface. Prices of existing homes across China’s 70 cities remain in year-on-year decline, while real estate investment continues to contract sharply, underscoring the scale and persistence of the sector’s retrenchment. This helps explain why fixed asset investment has softened further and why household demand remains subdued, despite more resilient industrial output.

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This week’s data and market moves have been framed by an abrupt escalation in geopolitical tensions surrounding Greenland, which has served as a catalyst for broader financial unease rather than a standalone shock. The episode has sharpened investor focus on US policy predictability, amplifying concerns already evident in the charts on EU–US trade exposure, where tariff threats risk feeding directly into confidence effects and capital flows. At the same time, recent turbulence in Japanese government bonds appears to have been an underappreciated driver of the sell-off in US Treasuries, highlighting how global capital reallocation—rather than geopolitics alone—has contributed to higher US yields. These forces intersect with growing questions around the durability of US monetary credibility, as inflation expectations have shown signs of decoupling from traditional oil-price anchors, raising the sensitivity of markets to any perceived constraints on the Federal Reserve. Beyond the US, UK data delivered a modest upside surprise in headline inflation, with persistent services and wage pressures reinforcing a cautious policy backdrop for the Bank of England. In China, meanwhile, Q4 GDP growth of 4.5% y/y kept full-year expansion aligned with the government’s target, but continued weakness in the property sector remains a significant drag on investment and household confidence. Taken together, the week’s developments point to a global outlook increasingly shaped by geopolitical risk, capital-flow dynamics and domestic  structural constraints, rather than by straightforward cyclical momentum alone.

Charts of the Week: Seeing Green

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The S&P PMIs for January show flash readings that indicate broadly stronger conditions across the early reporters in this table. Exceptions are the European Monetary Union as a whole with its composite reading weaker and France with its composite reading weaker, but Germany, the United Kingdom, Japan, Australia, India, and the United States all have composite readings that are stronger month-to-month in January. With these eight countries, there are 24 readings in each period, three for each country: a composite, one for manufacturing, and one for services. Among these 24 readings, only five of them were weaker month-to-month in January. Of course, this follows a December when only 6 of the readings were stronger month-to-month.

The sequential readings, that we calculate only off hard data (which means that calculations are done from December backward) are still mixed. Substantially weaker conditions period-to-period are reported comparing three-months to six-months. Over three months, only nine of the 24 readings are stronger whereas over six months only one of the 24 readings is weaker when compared to the 12-month average. Over 12 months, the average is stronger than it was one-year ago in 15 of the 24 readings. 

Only the United States and France have service sectors that are below their medians over this period back to 2022. Only France and India have composite readings that are below their respective medians over this period. But by comparison, there are very strong composite readings as well. There is a 91-percentile standing on the composite in Australia, an 87-percentile standing in Japan and the United Kingdom. The German composite has a 79-percentile standing.

The recent data have been running sporadically hot and cold, making it difficult to make sense out of what's happening. But broadly, it's clear that the PMIs in the European Monetary Union have been working their way higher and this is the general theme.

For the 8 reporters in the table back to January 2022, all of them except India show weaker manufacturing readings in January 2026 than what they showed in January 2022. But January 2022 was, of course, part of the COVID recovery move. Manufacturing in the European Monetary Union slipped from its high point over this period to its low point around mid-2023.

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Looking at point-to-point changes over the last three months, we find 3-sector cumulative drops in the United States, the European Monetary Union, and Germany. India has two sectors weakening with a decline in its composite as well as its manufacturing reading. Meanwhile, all the rest of the readings in the table over these three months show improved results. On a broad basis, we have to conclude there's more strength than weakness. However, since the weakness is concentrated and widespread and the largest economic units: the United States, the European Monetary Union, and the German economy, it's better to refer to the last three months as generating mixed economic statistics.

Looking forward, conditions are still hard to sort out. There's this obvious recovery in January after an equally obvious weak spot in December. The two of them cancel one another out in some sense. The average composite reading for all countries in the table shows some improvement in the manufacturing sector but waffling on the services sector. We get the same sort of readings looking at sequential averages; they do more of waffling than any kind of clear trend. On balance, the S&P readings don't give us a lot to go on this month. The survey is a bounce-back after a weak December and that's good news. But that doesn't give us a good handle on the trend yet.

S&P Flash PMIs Rebound But Emit No Clear Signal

Sandy Batten

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Real GDP increased 4.4% q/q saar in the third quarter of 2025 in the final estimate, up marginally from 4.3% in the first release. The Action Economics Forecast Survey expected no revision. Growth from a year ago was unrevised at 2.3% y/y. Growth of corporate profits was revised up to 4.5% q/q not annualized from 4.2% in the previous report.

The revision to GDP mostly reflected slightly stronger nonresidential fixed investment, a larger increase in exports and a smaller decrease in inventory investment. Nonresidential fixed investment increased a revised 3.2% q/q saar versus a 2.8% gain in the previous release. This reflected a smaller decline in structures, a smaller increase in equipment and a larger increase in intellectual property products than previously estimated. Residential investment was revised weaker with a 7.1% quarterly decline versus -5.1% in the previous estimate.

Upon revision, exports rose 9.6% q/q in Q3 versus 8.8% in the first estimate. Consequently, the trade deficit narrowed a little more than in the first estimate, resulting in net exports adding 1.62%-points to overall growth, 0.03%-point more previously estimated. The decline in inventory investment in Q3 was smaller than previously estimated, reducing the drag from inventories by 0.1%-point versus the previous estimate. The decline in inventories subtracted 0.12%-point in Q3 on top of a 3.44%-point subtraction in Q2.

Domestic demand growth remained solid in Q3 but was revised down 0.1%-point. Final sales to domestic purchasers grew a revised 2.8% q/q saar in Q3 versus 2.9% in the first estimate. Final sales to private domestic purchasers increased 2.9% q/q, down slightly from 3.0% previously.

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The primary driver of overall growth continued to be personal consumption expenditures. They increased an unrevised 3.5% q/q saar in Q3, adding 2.34%-points to total GDP growth. This reflected a 3.0% increase in spending on goods versus 3.1% previously and a 3.6% gain in spending on services versus 3.7% previously. The rise in government spending was unrevised at 2.2% q/q. However, spending by the federal government was revised slightly slower to 2.7% from 2.9% while spending by state and local governments was revised up slightly to 2.0% from 1.8%.

Key measures of inflation were unrevised. Inflation as measured by the GDP price index remained at 3.8% q/q saar in Q3, but this was up markedly from 2.1% in Q2. Similarly, PCE inflation in Q3 was unrevised at 2.8% versus 2.1% in Q2. Core PCE inflation was also unrevised at 2.9% in Q3.

The GDP data can be found in Haver’s **USECON** and **USNA** databases. **USNA** contains virtually all of the Bureau of Economic Analysis detail in the national accounts. The Action Economics consensus estimates can be found in **AS1REPNA**.

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- Real GDP grew 4.4% q/q saar in Q3 2025, up slightly from 4.3% previously reported.
- The modest upward revision was due mostly to slightly stronger nonresidential fixed investment, a larger increase in exports and a smaller decrease in inventories.
- Growth of domestic demand remained solid in Q3 but was revised down 0.1%-point.
- GDP and PCE inflation were unrevised at 3.8% and 2.8%, respectively. Both are meaningful accelerations from Q2.

U.S. Q3 GDP Growth Revised Slightly Faster

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance edged up 1,000 to 200,000 in the week ending January 17, from 199,000 in the week ending January 10, revised from 198,000. The four-week moving average of initial claims was 201,500 in the January 17 week, down 3,750 from 205,250 in the January 10 week, revised from 205,000, and reaching the lowest level for this average since January 13, 2024, when it was 200,000.

Federal government employees initially filed 1010 (NSA) jobless insurance claims in the week ended January 10, after filing 646 (NSA) claims in the week ended January 3.

The total number of unemployment insurance beneficiaries – also known as “continuing claims” –decreased by 26,000 to 1.849 million in the week ended January 10 from 1.875 million in the week ending January 3, revised from 1.884 million. The four-week moving average was 1.871 million in the latest week, down from 1.887 million in the January 3 week, revised from 1.889 million. The insured unemployment rate remained at 1.2% in the week of January 10, unchanged from previous 6 weeks.

Federal government employees’ continuing benefits claims were 12,977 (NSA) in the week ending January 3, from 12,803 (NSA) in the week of December 27.

The insured unemployment rate varied greatly across individual states and territories. In the week ending January 3, the highest unemployment rates were in Rhode Island (3.27%), New Jersey (3.17%), Washington (2.85%), Minnesota (2.75%), Massachusetts (2.74%), Oregon (2.37%), Connecticut (2.31%), Montana (2.26%), California (2.21%), and Alaska (2.06%). The lowest rates were in Florida (0.29%), North Carolina (0.40%), and Louisiana (0.43%). Rates in other notable states include New York (2.28%), Pennsylvania (2.23%), Illinois (2.21%), and Texas (1.14%). These state data are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor itself, not the Bureau of Labor Statistics. They begin in 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in **USECON**. Data for individual states are in **REGIONW** back to December 1986.

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U.S. Initial Claims for Unemployment Insurance Edged Up in Latest Week

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The National Bank of Belgium index for January 2026 rose to +4 from -1 in December, stronger than its November 2025 reading of +2. The survey value is exceptionally strong, lying in the top 6% of all observations back to 1991, even as the survey contains significant variations that range from strong to quite weak across its various components. What is most notable is that the index itself is extremely high-ranking; the current situation appraisal is also quite high-ranking; and, that the forecast for unemployment embedded in this survey is at a 35-year low. Considering current circumstances, against the events of the last 35 years, that's a rather remarkable finding especially considering the world situation.

**The times, they are a changin’ was Dylan 50 years early?** 
These have been remarkable times in a number of different ways with a clear transition from the circumstances of the post-war period under way. The solidarity of the NATO alliance is clearly in a situation in flux, revealed since Russia invaded Ukraine. Prior to that, the Europeans had resisted putting more money into the NATO pot as the United States had been frantically asking them while it funded most of the security umbrella. Now, in the wake of these new events, and with the changes to the global stage wrought by climate shifting, the U.S. finds Greenland to be a more important piece on the geopolitical chess board and wants to have more say there in order to protect its own flank as Arctic ice packs recede. This is after a period when NATO basically failed to engage in the front-line protections of its own doorstep that the U.S. had thought were necessary. Not surprisingly, the U.S. found that whole episode unsatisfactory and is now reluctant to give up control to NATO of what it regards as the protection of its own back door for the area around Greenland. But at last, Europe and the U.S. appear to have a deal or the makings of one, so, stay tuned. Maybe all civility is not lost.

**Geopolitical shifts meld with economic issues to change the landscape**
Geopolitical shifts are part of the problem because geopolitics and economics help shape one another. And there has been a great deal of economic turmoil as well. The U.S., after reassessing the Post War order, is bringing back to life tariffs, in order to try to get economic leverage after running 33 consecutive years of current account deficits under what people want to call a free trade system. The U.S. finds itself with a still very overvalued dollar and in a situation where its current account deficits are poised to continue to run high and perhaps get higher. Economists say tariffs are not the solution, but maybe they ARE the wake-up call that will lead to a solution? Europeans have also shifted to embracing a larger and larger government sector and ever larger fiscal deficits and more fiscal debt while absorbing migrants. This is constraining its ability to have any kind of a flexible macroeconomic policy and is a severe problem already for the U.K. and France. And these changes are wreaking havoc with what has been a very solid post-war Atlantic alliance.

**Views change**
But the changes that the U.S. has pushed on to the system from its geopolitical adventurism to its use of tariffs and other strong rhetorical comments have led economists to focus on the elevation of uncertainty in the economic system. Elevating uncertainty has an adverse impact on the economy and on growth. I mentioned this with the obvious caveat that this warning by economists seems to have been completely wrong. U.S. growth has turned out to be quite resilient and even strong. It is not the only adamant position that has proved to be wrong and malleable. Despite the reality of climate change, the view that once took carbon as the main and unequivocal climate change agent, itself is shifting. Opposition to carbon has dwindled, more as the U.S. is embracing nuclear power. Artificial intelligence is becoming a strong bet for stronger growth in the future, and this explains why there have been so many shifting views on energy since artificial intelligence requires massive amounts of energy and would make it impossible to make progress on carbon and to push ahead with the AI agenda at the same time. So, instead of delaying AI, the view on carbon had to go. So much for ‘science.’

**Why are Belgians so satisfied?**
The finding that in Belgium consumer confidence has risen sharply in this environment and fears of unemployment are the lowest they've been in 35 years is another shocking development in this pantheon of incredible and shocking changes. As the above discussion points out, a lot is changing and NATO is at odds with the U.S., its lynchpin. Yet, there is no clear increase in uncertainty in Belgium, while they maybe more in Brussels.

**The Belgian Survey: strong despite waffles**
Belgians do not read the economic situation over the next 12 months as that strong at a reading of -29 on the survey; it has weakened over the last few months, and the economic situation assessment is only at its 8.3 percentile, an extremely weak standing. Price trends are the opposite; they have eased somewhat in the recent months, but over the next 12 months the assessment still has a top 14-percentile evaluation. It is in this context that the unemployment forecast, which is the lowest in 35 years, emerges as surprising. The environment to make major household purchases over the next 12 months is only a mid-range at a 45.7 percentile standing. And people rate their financial situation over the next 12 months slightly better than at the end of last year but at only a 34.2 percentile standing. However, the appraisal of the current situation moved up sharply in January and has a 97.7 percentile standing, which is extremely strong.

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**Low unemployment fear spurs confidence**
The reason for consumer confidence to be strong is clear when you see how low concerns are about unemployment. But it's hard to understand why concerns about unemployment are so low with the rest of the economic metrics so varied in the survey. This is especially true with Belgium nestled in the heart of Europe and all of these concerns between the U.S. and NATO swirling around as well as a still very hot war occurring on Europe's border between Ukraine and Russia. Meanwhile, the U.S. position about this war continues to seem to back Ukraine a lot less than it should.

**Belgium is a good bellwether**
The Belgian survey is not the most important bit of economic activity. Belgium is not an extremely important country in Europe, although it's in the heart of the European Union, a member of the European Monetary Union, linked closely to Germany, and to other key European economies through trade, so that its performance likely is a good reflection of what's going on in Europe. It is not a European border country. It is in the heartland of Europe. That may explain a little bit why Belgians are not perhaps as nervous as Poles, are or Finns or the small Baltic countries, and others, with potentially more border proximity and vulnerability to the Russia-Ukraine conflict.

**Belgian optimism flies in out of the blue**
This is an observation. I think it's the kind of observation in this world economy that we find striking and unusual and will bear some further watching and some watching of other similar readings in Europe to see if there's evidence that there's some kind of new resilience that we might have missed. Economists seem hung-up broken-record style on uncertainty. Certainly, there's something here that economists have missed who have only seen these new actions by the U.S. as creating more uncertainty since we do not know what the new Greenland deal is. And uncertainty should create more adversity for growth except that it hasn't worked out that way. And it's a reminder that separating economics from geopolitics may take more than a crowbar. And also that uncertainty comes in many shapes and sizes while some may argue that there still is not a Greenland deal, what we see is a lowering of the temperature, a calming of the rhetoric and a sense that the parties have a horse trade they think they can do to resolve their differences. And while there is still uncertainty, there is also clear progress and a clear reduction in risk. Still, the times are changing.

Economy in Brief

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