Tom Moeller

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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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<body>
 



<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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<body>
 



<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>

Louise Curley

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081230g.jpg" align="right" border="0" height="265" width="353">The small
Baltic states, Estonia with a population of 1.34 million, Latvia with
2.26 million and Lithuania with 3.36 million have been hit hard by the
world financial crisis.&nbsp;GDP in Lithuania grew 2.95% in the
third quarter from the same period last year. Growth has decelerated
rapidly from the 10.54% recorded in the third quarter of
2007.&nbsp;&nbsp; Lithuania, however, has fared better than its
two fellow Baltic states.&nbsp; GDP in Estonia in the third quarter
of 2008 was actually 3.76% below the corresponding period of
2007.&nbsp; The comparable figure for GDP in Latvia was
4.68%.&nbsp; The year-to-year changes in GDP for the three
countries are shown in the first chart.&nbsp;The speed and
seriousness with which the world financial crisis had hit the Baltics
is due in part to the fragility of their economies as a result of years
of running large current account deficits and borrowing abroad.The
second chart shows the current account balances as a percent of GDP for
the three countries.&nbsp; The ratios for all three countries have
generally been in the negative teens, but Latvia has had current
account deficits/GDP as high as -28%.&nbsp;All three countries
have borrowed heavily abroad.&nbsp; The gross external debt in
euros for each country is shown in the third chart and the ratio of
debt to GDP is shown in the table below. Lithuania's debt to GDP ratio
rose from 42.5% in 2000 to 72.2% in 2004.&nbsp; In Estonia the
ratio rose from .53 in 2000 to 1.12 in 2007, while the ratio in Latvia,
rose from .61 to 1.34. Latvia recently agreed to a $105 billion
stabilization package with the IMF and the EU designed to avoid the
devaluation of its currency which is tied to the Euro as are
the&nbsp;
<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081230h.jpg" border="0" height="265" width="312"><img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081230i.jpg" border="0" height="265" width="312">
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol">BALTIC
STATES &nbsp;</th>
<th scope="col">Q3&nbsp; 08</th>
<th scope="col">Q2&nbsp;&nbsp;&nbsp;
08&nbsp;</th>
<th scope="col">Q1&nbsp;&nbsp; 08</th>
<th scope="col">Q4&nbsp; 07&nbsp;</th>
<th scope="col">Q3&nbsp; 07&nbsp;</th>
<th></th>
<th></th>
<th></th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol" colspan="9">Y/Y % CHANGE IN GDP</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Latvia</td>
<td>-4.57</td>
<td>0.07</td>
<td>3.33</td>
<td>8.21</td>
<td>10.90</td>
<td style="background-color: rgb(204, 204, 204);" colspan="3" rowspan="3"></td>


</tr>
<tr>
<td class="firstcol">&nbsp; Lithuania</td>
<td>2.95</td>
<td>4.19</td>
<td>7.04</td>
<td>8.84</td>
<td>10.54</td>



</tr>
<tr>
<td class="firstcol">&nbsp; Estonia</td>
<td>-3.54</td>
<td>-1.11</td>
<td>0.19</td>
<td>4.81</td>
<td>5.53</td>



</tr>
<tr class="odd">
<td class="firstcol" colspan="9">CURRENT ACCOUNT
BALANCE/GDP</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Latvia</td>
<td>-11.25</td>
<td>-16.31</td>
<td>-17.89</td>
<td>-19.95</td>
<td>-24.63</td>
<td style="background-color: rgb(204, 204, 204);" colspan="3" rowspan="3"></td>


</tr>
<tr>
<td class="firstcol">&nbsp; Lithuania</td>
<td>-9.96</td>
<td>-16.05</td>
<td>-18.34</td>
<td>-14.26</td>
<td>-14.23</td>



</tr>
<tr>
<td class="firstcol">&nbsp; Estonia</td>
<td>-10.45</td>
<td>-16.30</td>
<td>-9.53</td>
<td>-15.74</td>
<td>-19.81</td>



</tr>
<tr class="odd">
<td class="firstcol" colspan="9">&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">GROSS EXTERNAL DEBT/GDP</td>
<td>2007</td>
<td>2006</td>
<td>2005</td>
<td>2004</td>
<td>2003</td>
<td>2002</td>
<td>2001</td>
<td>2000</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Latvia</td>
<td>1.34</td>
<td>1.14</td>
<td>.99</td>
<td>.93</td>
<td>.50</td>
<td>.72</td>
<td>.68</td>
<td>.61</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Lithuania</td>
<td>.72</td>
<td>.61</td>
<td>.51</td>
<td>.42</td>
<td>.40</td>
<td>.39</td>
<td>.43</td>
<td>.42</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Estonia</td>
<td>1.12</td>
<td>.98</td>
<td>.86</td>
<td>.76</td>
<td>.64</td>
<td>.58</td>
<td>.53</td>
<td>.53</td>
</tr>
</tbody>
</table>

</body></html>

The small Baltic states, Estonia with a population of 1.34 million, Latvia with 2.26 million and Lithuania with 3.36 million have been hit hard by the world financial crisis. GDP in Lithuania grew 2.95% in the third quarter from the [...]

Trouble in the Baltic States

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081230f.jpg" align="left" border="0" height="265" width="353">
Japan &#8217;s Industrial output fell sharply in November. The 8.1%
drop has driven the three-month growth rate to -24% at an annual rate.
Declines sweep across the various categories. Transportation is down
especially sharply given the trouble in the worldwide auto market.
In the quarter&#8211;to-date IP is falling at a 31% annual rate;
transportation at a 52% annual rate.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr><th colspan="9" scope="col">Japan Industrial Production Trends </th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td colspan="3">m/m %</td>
<td colspan="3">Saar %</td>
<td>Yr/Yr</td>
<td>Qtr-2-Date</td>
</tr>
<tr class="odd">
<td class="firstcol">seas adjusted</td>
<td>Nov-08</td>
<td>Oct-08</td>
<td>Sep-08</td>
<td>3-mo</td>
<td>6-mo</td>
<td>12-mo</td>
<td>Yr-Ago</td>
<td>% AR</td>
</tr>
<tr>
<td class="firstcol">Mining &amp; Manufacturing</td>
<td>-8.1%</td>
<td>-3.1%</td>
<td>1.1%</td>
<td>-34.5%</td>
<td>-26.0%</td>
<td>-13.3%</td>
<td>2.0%</td>
<td>-31.3%</td>
</tr>
<tr>
<td class="firstcol">Total Industry</td>
<td>-7.5%</td>
<td>-3.4%</td>
<td>1.1%</td>
<td>-33.4%</td>
<td>-25.3%</td>
<td>-12.8%</td>
<td>1.9%</td>
<td>-31.2%</td>
</tr>
<tr>
<td class="firstcol">MFG</td>
<td>-8.1%</td>
<td>-3.2%</td>
<td>1.1%</td>
<td>-34.5%</td>
<td>-26.0%</td>
<td>-13.3%</td>
<td>2.0%</td>
<td>-31.4%</td>
</tr>
<tr>
<td class="firstcol">Textiles</td>
<td>-0.9%</td>
<td>-0.2%</td>
<td>-0.9%</td>
<td>-7.7%</td>
<td>-12.7%</td>
<td>-9.8%</td>
<td>-6.9%</td>
<td>-6.3%</td>
</tr>
<tr>
<td class="firstcol">T-port</td>
<td>-14.2%</td>
<td>-7.4%</td>
<td>4.8%</td>
<td>-51.9%</td>
<td>-45.0%</td>
<td>-21.9%</td>
<td>5.4%</td>
<td>-52.4%</td>
</tr>
<tr class="odd">
<td colspan="9" class="firstcol">Product Group</td>
</tr>
<tr>
<td class="firstcol">Consumer Goods</td>
<td>-5.3%</td>
<td>-2.2%</td>
<td>-0.2%</td>
<td>-27.0%</td>
<td>-19.5%</td>
<td>-7.9%</td>
<td>0.5%</td>
<td>-25.7%</td>
</tr>
<tr>
<td class="firstcol">Intermediate Goods</td>
<td>-8.1%</td>
<td>-4.7%</td>
<td>0.7%</td>
<td>-39.3%</td>
<td>-26.8%</td>
<td>-14.7%</td>
<td>4.2%</td>
<td>-35.7%</td>
</tr>
<tr>
<td class="firstcol">Investment Goods</td>
<td>-9.7%</td>
<td>-2.6%</td>
<td>4.6%</td>
<td>-28.7%</td>
<td>-29.2%</td>
<td>-15.7%</td>
<td>-1.8%</td>
<td>-26.8%</td>
</tr>
<tr>
<td class="firstcol">Mining</td>
<td>7.6%</td>
<td>-7.5%</td>
<td>-4.4%</td>
<td>-18.1%</td>
<td>5.2%</td>
<td>-4.0%</td>
<td>6.5%</td>
<td>-27.0%</td>
</tr>
<tr>
<td class="firstcol">Electricity &amp; Gas</td>
<td>0.1%</td>
<td>1.4%</td>
<td>2.3%</td>
<td>16.0%</td>
<td>-3.2%</td>
<td>-1.3%</td>
<td>2.6%</td>
<td>1.0%</td>
</tr>
</tbody>
</table>
</body></html>

Japan ’s Industrial output fell sharply in November. The 8.1% drop has driven the three-month growth rate to -24% at an annual rate. Declines sweep across the various categories. Transportation is down especially sharply given the [...]

Japan Manufacturing Collapses

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081230e.jpg" align="left" border="0" height="265" width="353">
Italian business confidence has been weakening but has now hit
extreme proportions. We are day by day getting confirmation that the
economic signals are every bit as bad as the worst of our expectations
for recession. We are looking at recession forces much more like
1973-75 and 1981-82 than like in 1990 or 2001.
For Italian business, the readings across categories are the
worst we have seen since 1996 except for inventories which are not the
highest seen but still high readings and clearly into the undesirable
range.
Domestic and foreign readings are showing extreme weakness as
the year draws to a close.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr><th colspan="7" scope="col"> Italy ISAE Business Sentiment</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td colspan="2">Since Oct 1996</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td>Dec-08</td>
<td>Nov-08</td>
<td>Oct-08</td>
<td>Sep-08</td>
<td>Percentile</td>
<td>Rank</td>
</tr>
<tr class="odd">
<td class="firstcol">Biz Confidence</td>
<td>66.6</td>
<td>71.6</td>
<td>76.4</td>
<td>81</td>
<td>0.0</td>
<td>147</td>
</tr>
<tr>
<td class="firstcol" colspan="7">TOTAL INDUSTRY</td>
</tr>
<tr class="odd">
<td class="firstcol" colspan="7">Order books &amp;
Demand</td>
</tr>
<tr class="odd">
<td class="firstcol">Total</td>
<td>-54</td>
<td>-45</td>
<td>-38</td>
<td>-28</td>
<td>0.0</td>
<td>147</td>
</tr>
<tr class="odd">
<td class="firstcol">Domestic</td>
<td>-58</td>
<td>-47</td>
<td>-39</td>
<td>-31</td>
<td>0.0</td>
<td>147</td>
</tr>
<tr class="odd">
<td class="firstcol">Foreign</td>
<td>-54</td>
<td>-44</td>
<td>-33</td>
<td>-28</td>
<td>0.0</td>
<td>147</td>
</tr>
<tr class="odd">
<td class="firstcol">Inventories</td>
<td>9</td>
<td>8</td>
<td>6</td>
<td>9</td>
<td>83.3</td>
<td>14</td>
</tr>
<tr class="odd">
<td class="firstcol">Production</td>
<td>-46</td>
<td>-37</td>
<td>-29</td>
<td>-20</td>
<td>0.0</td>
<td>147</td>
</tr>
<tr>
<td class="firstcol">INTERMEDIATE</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">Order books &amp;
Demand</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">Total</td>
<td>-68</td>
<td>-52</td>
<td>-42</td>
<td>-31</td>
<td>0.0</td>
<td>147</td>
</tr>
<tr class="odd">
<td class="firstcol">Domestic</td>
<td>-69</td>
<td>-53</td>
<td>-40</td>
<td>-33</td>
<td>0.0</td>
<td>147</td>
</tr>
<tr class="odd">
<td class="firstcol">Foreign</td>
<td>-67</td>
<td>-50</td>
<td>-38</td>
<td>-32</td>
<td>0.0</td>
<td>147</td>
</tr>
<tr class="odd">
<td class="firstcol">Inventories</td>
<td>7</td>
<td>10</td>
<td>9</td>
<td>8</td>
<td>75.9</td>
<td>19</td>
</tr>
<tr class="odd">
<td class="firstcol">Production</td>
<td>-58</td>
<td>-43</td>
<td>-29</td>
<td>-22</td>
<td>0.0</td>
<td>147</td>
</tr>
<tr>
<td class="firstcol" colspan="7">INVESTMENT GOODS</td>
</tr>
<tr class="odd">
<td class="firstcol" colspan="7">Order books &amp;
Demand</td>
</tr>
<tr class="odd">
<td class="firstcol">Total</td>
<td>-62</td>
<td>-52</td>
<td>-39</td>
<td>-18</td>
<td>0.0</td>
<td>147</td>
</tr>
<tr class="odd">
<td class="firstcol">Domestic</td>
<td>-64</td>
<td>-56</td>
<td>-44</td>
<td>-32</td>
<td>0.0</td>
<td>147</td>
</tr>
<tr class="odd">
<td class="firstcol">Foreign</td>
<td>-56</td>
<td>-45</td>
<td>-27</td>
<td>-21</td>
<td>0.0</td>
<td>147</td>
</tr>
<tr class="odd">
<td class="firstcol">Inventories</td>
<td>9</td>
<td>11</td>
<td>6</td>
<td>15</td>
<td>68.4</td>
<td>27</td>
</tr>
<tr class="odd">
<td class="firstcol">Production</td>
<td>-50</td>
<td>-41</td>
<td>-28</td>
<td>-12</td>
<td>0.0</td>
<td>147</td>
</tr>
<tr>
<td class="firstcol" colspan="7">CONSUMER GOODS</td>
</tr>
<tr class="odd">
<td class="firstcol" colspan="7">Order books &amp;
Demand</td>
</tr>
<tr class="odd">
<td class="firstcol">Total</td>
<td>-36</td>
<td>-32</td>
<td>-33</td>
<td>-27</td>
<td>0.0</td>
<td>147</td>
</tr>
<tr class="odd">
<td class="firstcol">Domestic</td>
<td>-39</td>
<td>-32</td>
<td>-34</td>
<td>-29</td>
<td>0.0</td>
<td>147</td>
</tr>
<tr class="odd">
<td class="firstcol">Foreign</td>
<td>-42</td>
<td>-36</td>
<td>-32</td>
<td>-28</td>
<td>0.0</td>
<td>147</td>
</tr>
<tr class="odd">
<td class="firstcol">Inventories</td>
<td>10</td>
<td>5</td>
<td>3</td>
<td>2</td>
<td>80.8</td>
<td>14</td>
</tr>
<tr class="odd">
<td class="firstcol">Production</td>
<td>-28</td>
<td>-27</td>
<td>-29</td>
<td>-22</td>
<td>2.5</td>
<td>146</td>
</tr>
<tr class="odd">
<td colspan="7" class="firstcol">Total number of months: 147</td>
</tr>
</tbody>
</table>
</body></html>

Italian business confidence has been weakening but has now hit extreme proportions. We are day by day getting confirmation that the economic signals are every bit as bad as the worst of our expectations for recession. We are looking [...]

Italian Business Confidence Drops Like Stone

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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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.

260626.jpg

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.

260625Z2.jpg

**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.

260625Z3.jpg

**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.

260625Z6.jpg

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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Charts of the Week: Calmer Waters, New Currents

Michael J. Moran

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The price index for personal consumption expenditures rose 0.4% in May, although the measure almost rounded up to 0.5% (0.4498%). May marked the sixth consecutive month with headline prices increasing 0.3% or more. This series of changes has pulled the year-over-year inflation rate to 4.1%, up from 2.3% just over one year ago (April 2025). Energy prices, of course, have been the most important factor behind the acceleration in inflation, and they remained an issue in May, increasing 4.0% after advances of 3.9% and 11.6% in the prior two months. Food prices have moved erratically in the past year, with jumps and lulls leaving an average monthly increase of 0.2%. The noise was evident in recent months, with food prices increasing only 0.1% in May after a jump of 0.5% in April.

Core prices also have contributed to the pickup in inflation. After averaging monthly increases of 0.24% during 2025, core prices have increased at an average rate of 0.34% so far this year. The year-over-year increase in core inflation totaled 3.4% in May, up from a recent low of 2.6% in April of last year. Both the headline and core inflation rates are uncomfortably above the Federal Reserve’s target of 2.0%.

Total personal income rose briskly in May (0.7%). A surge in farm income played an important role (up 125% month-to-month, most likely reflecting government support payments), but nominal results also were firm elsewhere (up 0.5% ex farm income). Inflation reduced the purchasing power of this income gain, but aggregate income still advanced slightly in real terms (0.2%).

Given the recent surge in energy-driven inflation, May marked only the second monthly increase in real income so far this year. Tight budgets have dampened consumer spending, but individuals have not pulled to the sidelines. Real consumption expenditures rose 0.5% (annual rate) in the first quarter, and results for April and May suggest that real PCE is on track to increase 1.5% to 2.0% in the second quarter.

Households have managed to remain moderately active in their spending by limiting their saving. The saving rate has drifted lower since early 2024 moving to 3.0% in May (chart, below right). The erosion in saving perhaps seems reckless, but some of the reduction could be a response to the strength in the equity market, where wealth gains have possibly limited the incentive to save. Also, larger-than-normal tax refunds this year because of tax cuts in the One Big Beautiful Budget Act have allowed many households to spend actively despite modest increases in real income.

The personal income and consumption figures are available in Haver’s **USECON** database with detail in the **USNA** database. The Action Economics forecasts are in **AS1REPNA**.

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- Energy prices rose sharply for the third consecutive month; core prices were unsettling as well.
- A jump in nominal income translated to a modest advance in real terms, allowing consumers to remain reasonably active.

Personal Income, Consumption, and Prices in May

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New orders for durable goods fell 4.5% m/m in May, the first monthly fall in three months, following an upwardly revised 8.5% gain in April (+7.9% initially reported on May 28) and a 1.3% increase in March (unrevised), according to today’s advance report by the U.S. Census Bureau. The Action Economics Forecast Survey had expected a 4.4% m/m May decrease. The year-on-year rate decelerated to -3.5% in May from +17.7% in April (+20.0% in May 2025), marking the first negative reading since December 2024 (-4.5%). Excluding transportation, durable goods orders rose 1.3% (10.2% y/y) in May, the 13th consecutive m/m rise, after a 1.4% increase in April. Meanwhile, durable goods orders excluding defense dropped 4.6% (-5.0% y/y), down for the third time in four months, following an 8.4% April rebound.

The m/m fall in May durable goods orders was driven by a 51.8% m/m plunge in orders for nondefense aircraft & parts, following a 167.4% surge in April and a 23.0% slump in March. Orders for defense aircraft & parts rose 7.9% (63.5% y/y), the fourth successive m/m increase, after gains of 2.5% in April and 23.7% in March. Orders excluding aircraft climbed 1.0% (9.8% y/y), the six straight m/m rise and the 10th in 11 months, after a 1.3% April increase.

Durable goods orders for transportation dropped 14.0% (-22.1% y/y) in May, the first m/m decline since February, following a 22.4% gain in April. In addition to May’s m/m plunge in nondefense aircraft orders and increase in defense aircraft orders, motor vehicles & parts orders rose 1.1% (12.4% y/y), the sixth straight m/m rise, after a 0.7% April increase. Orders for primary metals advanced 3.0% (15.9% y/y), the largest of six successive m/m gains, after a 2.6% April rise. Machinery orders climbed 1.9% (14.0% y/y), up for the 13th straight month, on top of a 1.3% April rise. Orders for fabricated metal products grew 1.5% (11.2% y/y), the third m/m increase in four months, following a 4.1% April gain. Orders for all other durable goods rose 0.8% (3.2% y/y), the strongest of nine consecutive m/m increases, after a 0.1% April uptick. Orders for computers & electronic products rebounded 0.3% (13.3% y/y), the eighth m/m gain in nine months, following a 0.4% April decrease. Orders for electrical equipment, appliances & components recovered 0.3% (5.8% y/y), the second increase in three months, after a 0.2% April decline.

Capital goods orders fell 13.6% (-21.1% y/y) in May, the first m/m fall in three months and the deepest since June 2025, following a 22.2% jump in April. Nondefense capital goods orders dropped 15.7% (-26.4% y/y), the fifth m/m decrease in six months, after a 24.9% April rebound. Core capital goods orders (i.e., nondefense capital goods orders excluding aircraft) rose 1.6% (10.5% y/y), the third m/m gain in four months, reversing a 0.7% April decline. Defense capital goods orders slid 3.4% (+14.4% y/y), the first m/m slide since January, after a 10.4% April gain. Notably, core capital goods shipments (core capex shipments)—a reliable coincident indicator of business spending on equipment in the national accounts—rose 0.3% (7.6% y/y), the eighth m/m rise in nine months, after a 0.5% April increase.

Shipments of all manufactured goods climbed 1.6% (8.9% y/y) in May following a 1.3% gain in April. Durable goods shipments rose 1.0% (8.9% y/y) after a 0.7% April increase. Nondurable goods shipments advanced 2.2% (9.0% y/y), building on a 1.9% April gain. All three series posted the sixth consecutive m/m increase.

Unfilled orders of durable goods rose 0.6% (8.5% y/y) in May, the 10th straight m/m rise, after a 1.8% gain in April. Excluding transportation, unfilled orders increased 0.9% (4.3% y/y), also up for the 10th consecutive month, following a 0.7% April rise.

Manufacturing inventories edged up 0.2% (1.9% y/y) in May, the seventh successive m/m gain, after a 0.3% rise in April. Durable goods inventories grew 0.2% (2.1% y/y), the eighth straight m/m increase, after rising 0.3% in April and March. Nondurable goods inventories, up for the fourth consecutive month, rose 0.3% (1.6% y/y), matching April's pace.

Manufacturers’ orders and shipments of durable and nondurable goods, along with unfilled orders and inventories, are compiled by the U.S. Census Bureau. They are available in Haver’s **USECON** database. The Action Economics forecast data are in the **AS1REPNA** database.

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- May headline orders -4.5% m/m, first fall in three mths.; -3.5% y/y, first negative reading since Dec. ’24.
- Nondefense aircraft & parts -51.8% m/m vs. April’s +167.4%.
- Transportation orders -14.0%, first m/m drop since Feb.; orders ex transp. +1.3%, 13th straight m/m rise.
- Core capital goods shipments +0.3%, eighth gain in nine mths., pointing to a moderate contribution to Q2’26 GDP from business equipt. spending.
- Durable goods shipments +1.0%; unfilled orders +0.6%; inventories +0.2%.

Economy in Brief

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