Carol Stone, CBE

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070629e.jpg" width="353">
New construction put-in-place surged by 0.9% in May, following 0.2% in April and 0.1% in March. This was the best performance since February 2006 and compared with Action Economics&#39; forecast survey that called for just 0.1%. This month&#39;s report includes annual revisions of the construction data; besides the usual seasonal adjustment changes, a new sampling procedure is being used for public construction projects. Other alterations were made. As seen in the first graph, the net result is a downward shift in construction spending in the most recent months, with April lower by 2%, although the peak in early 2006 is now seen to be somewhat higher than before.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070629f.jpg" width="353">
Residential building continued its contraction, although May&#39;s 0.8% decrease and April&#39;s -0.4% were not as bad as many recent months. This sector has declined continuously beginning in March 2006 and the monthly shrinkage has averaged 1.6%. So, indeed, April and May definitely look &quot;less bad&quot; with their smaller losses. Among types of residential construction, multi-family eked out a 0.3% increase in May and home improvements were flat after a 0.9% rise in April. These helped steady the sector even as single-family home construction weakened somewhat to a 1.4% decline after two smaller monthly reductions.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070629g.jpg" width="353">
Private nonresidential and public construction both had impressive gains in May: 2.7% and 2.2%, respectively. And both have been strong for some time. Public construction has been up in 7 of the last 8 months, particularly at the state and local level. Private nonresidential has seen only 1 decrease since the middle of 2005. The wide range of building and structure types and uses probably helps this latter strength. Office building, for example, has slowed, but it is offset currently by advances in amusements and recreation. The biggest year-to-year growth is in hotel construction, up a whopping 65% over May 2006. There have been uptrends recently in communications and transportation. Health care and education spending, by contrast, are slowing.
These construction put-in-place data are in Haver&#39;s &quot;flagship&quot; USECON database. &quot;Old&quot; data, prior to the latest annual revisions, is in USARC07. The forecast of the monthly headline number comes from ASREP1NA, which includes Action Economics weekly forecast surveys and each indicator&#39;s initially reported figure for each period.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Construction Put-in-Place</th>
<th scope="col">May 2007*</th>
<th scope="col">Apr 2007*</th>
<th scope="col">Mar 2007*</th>
<th scope="col">Year/ Year</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>0.9</td>
<td>0.2</td>
<td>0.1</td>
<td>-3.2</td>
<td>5.3</td>
<td>10.6</td>
<td>11.1</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Former</td>
<td>--</td>
<td>0.1</td>
<td>0.6</td>
<td>--</td>
<td>4.7</td>
<td>10.5</td>
<td>11.6</td>
</tr>
<tr class="odd">
<td class="firstcol">Private Residential</td>
<td>-0.8</td>
<td>-0.4</td>
<td>-1.3</td>
<td>-17.7</td>
<td>0.0</td>
<td>13.5</td>
<td>18.7</td>
</tr>
<tr>
<td class="firstcol">Private Nonresidential </td>
<td>2.7</td>
<td>0.9</td>
<td>1.4</td>
<td>18.2</td>
<td>15.2</td>
<td>7.6</td>
<td>4.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Public</td>
<td>2.2</td>
<td>0.6</td>
<td>1.6</td>
<td>12.8</td>
<td>9.0</td>
<td>6.3</td>
<td>1.9</td>
</tr>
</tbody>
</table>
</body>
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New construction put-in-place surged by 0.9% in May, following 0.2% in April and 0.1% in March. This was the best performance since February 2006 and compared with Action Economics' forecast survey that called for just 0.1%. This [...]

Construction Spending Up 0.9% in May, Much Better Than Expected

Robert Brusca

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070629c.jpg" width="353">
The EU sentiment reading is strong in June at 114.9 but off from 115.0 in May. 
The accompanying charts plot the main component indicators for EU. Construction seems already to have hit a peak since it has been moving sideways for a number of months after peaking in September of 2006. Retail reached a reading of 5 in November 2006 and since has peaked at 6 in April. It is off in May and June. Clearly retailing is another sector that has lost the thrust of upward momentum. The services sector is a bit harder to read. It has backtracked in June but the series seems, other than that, to be in an uptrend but one that has lost a good degree of its up thrust. Consumer confidence spurted in May but has taken a strong setback in June. It&#146;s too soon to read anything into that. The industrial sector is one clear bright spot for the EU region. It is moving up at what has been a slower but unrelenting pace since roughly April of 2006 after a period of much more rapid growth. 
The table below provides some specifics on the indexes and their trends plus some country detail as to overall sentiment. First note that among the various EU indexes only the industrial sector is at its top reading. Retail is also strong in its 92nd percentile and construction, while flat for months, is in its 96th percentile. The consumer is lagging with an index that is only in its 86th percentile and services in the top 30 percentile of its somewhat shorter range. Clearly we are assessing different things here. The percentiles speak of the absolute strength of the sector relative to past readings. In the graphs we looked more at momentum, whether sectors are advancing or advancing as strongly as they had been. Both concepts are valid. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070629d.jpg" width="353">
In the country section we look at the changes in recent sentiment readings m/m as well as the position of index levels relative to history. All key EMU countries have showed some waffling for their overall sentiment sometime within the past three months. But only the UK is on a two month back-to-back string of very strong increases. Italy has seen its sentiment fall for three months in a row. France, Germany and EMU are experiencing single month declines in overall sentiment. None of the key countries is experiencing super strong levels in sentiment since most are only in about the top 25 percentile of their respective country ranges. Spain is weaker as it is only in the top 40% of its range. Among the largest countries France is doing better, in the top 14 percentile of its range; Germany is in the top 23rd percentile. Overall the EU/EMU readings are stronger, in the 87th percentile, implying that the smaller countries of EMU must be doing relatively better. 
There is evidence of a loss in momentum in EU/EMU. But the industrial sector is still very strong. 
A similar table with values for the EMU industrial sector shows surprisingly that the relatively strongest component for industry across EMU is export orders &#150; despite the relatively strong value for the euro. Order value is strong overall. But production expectations and selling price expectations are relatively weaker with prices only in the top third of their range and expected production in the top 18 percentile of its range. These are not weak showings, it&#146;s just that they are showings that are weaker than other MFG components and they may be &#145;telling us something&#146;, especially as they are explicitly forward-looking. 
As for countries, Germany and the UK (the later, an EU member not an EMU member) have the strongest industrial readings relative to their own history. France and Italy are lagging to some extent. 
EMU industrial components by and large saw their momentum peak in June of 2006 (Yr/Yr gain) and have been losing momentum ever since. For example, industry confidence had gained 13 points Yr/Yr back in June of 2006; in June of 2007 its Yr/Yr gain is +3. The same is true for countries with the notable exception of non-EMU member UK whose 17 point gain Yr/Yr in June of 2007 for industrial confidence represents acceleration and it matches its current cycle peak of 17 made in February of this year.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
EU Sectors and Country level Overall Sentiment R-SQ
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">EU</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Percentile</td>
<td>Rank</td>
<td>Max</td>
<td>Min</td>
<td>Range</td>
<td>Mean</td>
<td>w/Confid</td>
</tr>
<tr>
<td class="firstcol">Overall</td>
<td>114.9</td>
<td>115</td>
<td>113.6</td>
<td>113.8</td>
<td>95.4</td>
<td>6</td>
<td>117</td>
<td>74</td>
<td>43</td>
<td>100</td>
<td>1.00</td>
</tr>
<tr>
<td class="firstcol">Industrial</td>
<td>7</td>
<td>6</td>
<td>6</td>
<td>6</td>
<td>100.0</td>
<td>1</td>
<td>7</td>
<td>-27</td>
<td>34</td>
<td>-7</td>
<td>0.89</td>
</tr>
<tr>
<td class="firstcol">Consumer Confidence</td>
<td>-2</td>
<td>-1</td>
<td>-4</td>
<td>-4</td>
<td>86.2</td>
<td>18</td>
<td>2</td>
<td>-27</td>
<td>29</td>
<td>-11</td>
<td>0.81</td>
</tr>
<tr>
<td class="firstcol">Retail</td>
<td>4</td>
<td>5</td>
<td>6</td>
<td>4</td>
<td>92.6</td>
<td>4</td>
<td>6</td>
<td>-21</td>
<td>27</td>
<td>-6</td>
<td>0.46</td>
</tr>
<tr>
<td class="firstcol">Construction</td>
<td>1</td>
<td>1</td>
<td>1</td>
<td>1</td>
<td>95.6</td>
<td>6</td>
<td>3</td>
<td>-42</td>
<td>45</td>
<td>-18</td>
<td>0.43</td>
</tr>
<tr>
<td class="firstcol">Services</td>
<td>21</td>
<td>23</td>
<td>22</td>
<td>22</td>
<td>71.1</td>
<td>55</td>
<td>32</td>
<td>-6</td>
<td>38</td>
<td>17</td>
<td>0.80</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td colspan="4">% m/m</td>
<td colspan="2">Based on Level</td>
<td colspan="4">Level</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">EMU</td>
<td>-0.4%</td>
<td>1.0%</td>
<td>-0.1%</td>
<td>1.3%</td>
<td>87.0</td>
<td>21</td>
<td>117</td>
<td>74</td>
<td>44</td>
<td>100</td>
<td>0.94</td>
</tr>
<tr>
<td class="firstcol">Germany</td>
<td>-0.4%</td>
<td>0.8%</td>
<td>1.3%</td>
<td>1.4%</td>
<td>77.5</td>
<td>17</td>
<td>121</td>
<td>79</td>
<td>42</td>
<td>100</td>
<td>0.60</td>
</tr>
<tr>
<td class="firstcol">France</td>
<td>-0.1%</td>
<td>3.0%</td>
<td>0.1%</td>
<td>0.6%</td>
<td>86.1</td>
<td>18</td>
<td>119</td>
<td>72</td>
<td>47</td>
<td>100</td>
<td>0.79</td>
</tr>
<tr>
<td class="firstcol">Italy</td>
<td>-1.3%</td>
<td>-1.4%</td>
<td>-1.0%</td>
<td>1.1%</td>
<td>72.0</td>
<td>58</td>
<td>121</td>
<td>72</td>
<td>49</td>
<td>100</td>
<td>0.80</td>
</tr>
<tr>
<td class="firstcol">Spain</td>
<td>1.2%</td>
<td>-1.2%</td>
<td>-2.2%</td>
<td>1.1%</td>
<td>61.9</td>
<td>138</td>
<td>118</td>
<td>67</td>
<td>50</td>
<td>100</td>
<td>0.68</td>
</tr>
<tr>
<td class="firstcol">Memo: UK</td>
<td>1.6%</td>
<td>3.4%</td>
<td>-0.8%</td>
<td>1.5%</td>
<td>93.7</td>
<td>5</td>
<td>119</td>
<td>69</td>
<td>50</td>
<td>100</td>
<td>0.36</td>
</tr>
<tr>
<td colspan="5">Since 1990 except Services (Oct 1996)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 208</td>
<td>-Count</td>
<td>Services:</td>
<td>126</td>
<td>-Count</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td colspan="12">Sentiment is an index, sector readings are net balance diffusion measures</td>
</tr>
</tbody>
</table>
<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
EMU Industrial Sectors and Country level Performance R-SQ
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">EMU</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Percentile</td>
<td>Rank</td>
<td>Max</td>
<td>Min</td>
<td>Range</td>
<td>Mean</td>
<td>w/Confid</td>
</tr>
<tr>
<td class="firstcol">Industry Confidence</td>
<td>6</td>
<td>6</td>
<td>7</td>
<td>6</td>
<td>97.3</td>
<td>2</td>
<td>7</td>
<td>-30</td>
<td>37</td>
<td>-7</td>
<td>1.00</td>
</tr>
<tr>
<td class="firstcol">Prod Expectations</td>
<td>15</td>
<td>14</td>
<td>15</td>
<td>14</td>
<td>82.5</td>
<td>16</td>
<td>22</td>
<td>-18</td>
<td>40</td>
<td>6</td>
<td>0.90</td>
</tr>
<tr>
<td class="firstcol">Order Volume</td>
<td>7</td>
<td>8</td>
<td>9</td>
<td>8</td>
<td>96.8</td>
<td>5</td>
<td>9</td>
<td>-54</td>
<td>63</td>
<td>-17</td>
<td>0.96</td>
</tr>
<tr>
<td class="firstcol">Stocks (finished)</td>
<td>4</td>
<td>5</td>
<td>4</td>
<td>4</td>
<td>9.5</td>
<td>186</td>
<td>23</td>
<td>2</td>
<td>21</td>
<td>10</td>
<td>0.91</td>
</tr>
<tr>
<td class="firstcol">Export Order (Vol)</td>
<td>5</td>
<td>6</td>
<td>5</td>
<td>5</td>
<td>98.2</td>
<td>2</td>
<td>6</td>
<td>-51</td>
<td>57</td>
<td>-19</td>
<td>0.90</td>
</tr>
<tr>
<td class="firstcol">Selling Prod Expectations</td>
<td>14</td>
<td>12</td>
<td>11</td>
<td>13</td>
<td>66.7</td>
<td>27</td>
<td>26</td>
<td>-10</td>
<td>36</td>
<td>6</td>
<td>0.37</td>
</tr>
<tr>
<td class="firstcol">Prod Trend (recent)</td>
<td>13</td>
<td>13</td>
<td>14</td>
<td>12</td>
<td>93.5</td>
<td>7</td>
<td>15</td>
<td>-16</td>
<td>31</td>
<td>1</td>
<td>0.92</td>
</tr>
<tr>
<td class="firstcol">Employment Expect</td>
<td>3</td>
<td>3</td>
<td>2</td>
<td>2</td>
<td>95.8</td>
<td>4</td>
<td>4</td>
<td>-20</td>
<td>24</td>
<td>-9</td>
<td>0.80</td>
</tr>
<tr class="odd">
<td class="firstcol">Sentiment:</td>
<td colspan="4">Level</td>
<td colspan="2">Based on Level</td>
<td colspan="4">Level</td>
<td>w/EMU</td>
</tr>
<tr>
<td class="firstcol">Germany</td>
<td>9</td>
<td>9</td>
<td>9</td>
<td>9</td>
<td>95.7</td>
<td>6</td>
<td>11</td>
<td>-35</td>
<td>46</td>
<td>-10</td>
<td>0.79</td>
</tr>
<tr>
<td class="firstcol">France</td>
<td>2</td>
<td>0</td>
<td>2</td>
<td>2</td>
<td>76.8</td>
<td>40</td>
<td>15</td>
<td>-41</td>
<td>56</td>
<td>-8</td>
<td>0.82</td>
</tr>
<tr>
<td class="firstcol">Italy</td>
<td>5</td>
<td>6</td>
<td>8</td>
<td>5</td>
<td>77.1</td>
<td>34</td>
<td>13</td>
<td>-22</td>
<td>35</td>
<td>-3</td>
<td>0.78</td>
</tr>
<tr>
<td class="firstcol">Spain</td>
<td>0</td>
<td>0</td>
<td>2</td>
<td>3</td>
<td>86.3</td>
<td>44</td>
<td>7</td>
<td>-44</td>
<td>51</td>
<td>-8</td>
<td>0.65</td>
</tr>
<tr>
<td class="firstcol">UK</td>
<td>10</td>
<td>4</td>
<td>2</td>
<td>4</td>
<td>98.0</td>
<td>2</td>
<td>11</td>
<td>-40</td>
<td>51</td>
<td>-11</td>
<td>0.17</td>
</tr>
<tr>
<td class="firstcol">Since 1990</td>
<td></td>
<td></td>
<td>208</td>
<td>-Count</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
</tbody>
</table>
</body>
</html>

The EU sentiment reading is strong in June at 114.9 but off from 115.0 in May. The accompanying charts plot the main component indicators for EU. Construction seems already to have hit a peak since it has been moving sideways for a [...]

EU Sentiment Reading is Strong in June at 114.9 but Off from 115.0 in May

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070629b.jpg" width="353">
The Chicago PMI is a good guide to the ISM but not infallible; often its strength overshoots the ISM. Still any reasonable reading of the historic relationship leaves you positive on the outlook for the ISM in June. 
The Chicago index keeps to stronger readings than the ISM in general. That explains why the strong Chicago readings are not so elevated when displayed as percentile standings within their historic ranges. The 60.2 headline reading stands in the top 25% of the measure&#146;s range since 1996. It is 6% above its median reading. Indeed, if the ISM for this period is also some 6% above its median it will post a value of 56.3 this month, an increase of more than one point on the month. 
Most Chicago survey components are in the upper 25 percent (or so) of their range of values since 1996. Deliveries are an exception as they have been for some time and as they are in many other regional MFG surveys. I take this as a sign that there is still a lot of slack in MFG; it&#146;s a sign that orders can be filled quickly when they rise. Order back logs are only in the top third of their range and that component dropped three points this month in Chicago. Order backlogs and jobs are well correlated so it is not surprising to see the Chicago job component fell very sharply to 52.7 from 57.3, but it still stands well above its April reading of 50.5. Employment trends have become volatile but this month is the first pull-back in a job recovery in the Chicago region that dates back to a low reading in January of this year. The Cincinnati MFG report that was also released today shows an improvement from 27 previously to 30 in June. 
On balance, the Chicago report is more upbeat than expected and it points to a strong ISM reading for June. It sides more with the strong reports we have seen in NY and Philadelphia and is NOT part of the weak reading reports such as we have seen in Dallas and Kansas City. The final column in the table below applies ISM-type weights to the Chicago components to recast the headline. On that basis the Chicago index is even stronger at least in its historic range. That tells us that the Chicago components are strong as a group although m/m they fell by a bit more that the &#145;headline&#146; barometer.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Chicago Regional Survey: Analytical Properties
</tr>
</thead>
<tbody>
<tr class="grey4">
<td class="firstcol">Since 1996</td>
<td>Index</td>
<td>Orders</td>
<td>Production</td>
<td>Delivery</td>
<td>Inventories</td>
<td>Prices Paid</td>
<td>Employment</td>
<td>Backlogs</td>
<td>Weight</td>
</tr>
<tr class="grey3">
<td class="firstcol">Date</td>
<td colspan="9">1994 To Date</td>
</tr>
<tr class="grey2">
<td class="firstcol">Jun.07</td>
<td>60.2</td>
<td>65.7</td>
<td>66.5</td>
<td>52.1</td>
<td>55.9</td>
<td>68.2</td>
<td>52.7</td>
<td>50.8</td>
<td>60.2</td>
</tr>
<tr class="grey2">
<td class="firstcol">May.07</td>
<td>61.7</td>
<td>71.1</td>
<td>69.8</td>
<td>45.3</td>
<td>52.6</td>
<td>70.2</td>
<td>57.3</td>
<td>53.0</td>
<td>62.4</td>
</tr>
<tr class="grey2">
<td class="firstcol">Apr.07</td>
<td>52.9</td>
<td>56.5</td>
<td>62.2</td>
<td>43.4</td>
<td>43.2</td>
<td>64.9</td>
<td>50.5</td>
<td>48.4</td>
<td>53.9</td>
</tr>
<tr class="grey2">
<td class="firstcol">Std Dev</td>
<td>6.6</td>
<td>8.3</td>
<td>7.9</td>
<td>5.5</td>
<td>6.4</td>
<td>12.1</td>
<td>6.7</td>
<td>6.6</td>
<td>6.4</td>
</tr>
<tr class="grey2">
<td class="firstcol">Median</td>
<td>56.6</td>
<td>59.6</td>
<td>60.8</td>
<td>51.7</td>
<td>48.4</td>
<td>61.2</td>
<td>50.6</td>
<td>49.4</td>
<td>56.3</td>
</tr>
<tr class="grey2">
<td class="firstcol">Mean</td>
<td>55.0</td>
<td>57.9</td>
<td>59.1</td>
<td>52.2</td>
<td>48.3</td>
<td>61.6</td>
<td>48.6</td>
<td>48.7</td>
<td>54.4</td>
</tr>
<tr class="grey2">
<td class="firstcol">SD%MN</td>
<td>12.0</td>
<td>14.3</td>
<td>13.4</td>
<td>10.5</td>
<td>13.3</td>
<td>19.7</td>
<td>13.7</td>
<td>13.6</td>
<td>11.8</td>
</tr>
<tr class="grey2">
<td class="firstcol">Max</td>
<td>67.2</td>
<td>74.9</td>
<td>74.9</td>
<td>67.6</td>
<td>66.7</td>
<td>87.8</td>
<td>63.1</td>
<td>60.8</td>
<td>65.9</td>
</tr>
<tr class="grey2">
<td class="firstcol">Min</td>
<td>37.2</td>
<td>36.5</td>
<td>37.8</td>
<td>41.0</td>
<td>33.3</td>
<td>34.8</td>
<td>23.6</td>
<td>30.2</td>
<td>36.6</td>
</tr>
<tr class="grey1">
<td class="firstcol">% MEDIAN</td>
<td>106%</td>
<td>110%</td>
<td>109%</td>
<td>101%</td>
<td>116%</td>
<td>111%</td>
<td>104%</td>
<td>103%</td>
<td>107%</td>
</tr>
<tr class="grey1">
<td class="firstcol">Percent-Range</td>
<td>76.7%</td>
<td>76.0%</td>
<td>77.4%</td>
<td>41.7%</td>
<td>67.7%</td>
<td>63.0%</td>
<td>73.7%</td>
<td>67.3%</td>
<td>80.4%</td>
</tr>
<tr class="grey1">
<td class="firstcol">%of2stdev</td>
<td>69.7%</td>
<td>73.5%</td>
<td>73.3%</td>
<td>49.4%</td>
<td>79.5%</td>
<td>63.6%</td>
<td>65.3%</td>
<td>58.0%</td>
<td>72.3%</td>
</tr>
<tr class="grey1">
<td class="firstcol">% Average</td>
<td>109%</td>
<td>113%</td>
<td>113%</td>
<td>100%</td>
<td>116%</td>
<td>111%</td>
<td>108%</td>
<td>104%</td>
<td>111%</td>
</tr>
</tbody>
</table>
</body>
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The Chicago PMI is a good guide to the ISM but not infallible; often its strength overshoots the ISM. Still any reasonable reading of the historic relationship leaves you positive on the outlook for the ISM in June. The Chicago index [...]

Chicago PMI Off at 60.32 from 61.7

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070629a.jpg" width="353">
Personal income +0.4% in May. 
Real PCE spending is up by just 01% in May as services spending falls by 0.1%.
Core PCE +0.1% and +1.9% Yr/Yr.
Consumption has a moderate contribution to growth in Q2 advancing by just 1.6% in the quarter after its weak performance in May (see far right-hand column in table). The 0.5% gain in the overall PCE hit spending hard, reducing it. 
Real disposable personal income is falling in Q2 down by 1.5%. 
Core inflation continues lower&#133; much like with CPI. 
Inflation took a large bite out of nominal spending trends this month. Previously Q2 spending was on a much stronger track. On top of that, current dollar spending was weaker than expected, posting at a gain of 0.5%. That was made worse when translated into real terms by the 0.5% hike in the overall PCE deflator. As a result real spending was left with a gain of just 0.1% reducing its growth in Q2 to just 1.6%. (SAAR). The jump in the deflator also cut real disposable personal income down and it is now falling in the quarter as well as falling by 0.1% in the month. The saving rate continues negative and shows no sign of rising. 
Perhaps the most surprising development in the report is the drop in services spending. While it spurted in April it had also fallen sharply in May. Services spending has now dropped in two of the past three months and is growing at just an annual rate of 0.7% over those three months. This is very weak for a sector that supplies the bulk of our employment. This weakness is the most troubling thing in this report. 
The core deflator is, however, well behaved and the Fed will be happy with its trend. At 2.9% it is now inside the Fed&#146;s comfort zone and the CPI is well inside of its zone as well. 

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Consumer Spending And Income Trends
</tr>
</thead>
<tbody>
<tr class="odd">
<td colspan="6">Percentage Changes At Annualized Rates: Various Horizons</td>
</tr>
<tr class="odd">
<td class="firstcol">Inflation-adjusted</td>
<td>1-Mo:AR</td>
<td>3-Mos</td>
<td>6-Mos</td>
<td>One Year</td>
<td>Q2/Q1</td>
</tr>
<tr>
<td class="firstcol">Consumption</td>
<td>0.8%</td>
<td>0.9%</td>
<td>2.8%</td>
<td>3.1%</td>
<td>1.6%</td>
</tr>
<tr>
<td class="firstcol">Goods</td>
<td>3.7%</td>
<td>1.3%</td>
<td>3.0%</td>
<td>3.7%</td>
<td>0.3%</td>
</tr>
<tr>
<td class="firstcol">Durable Goods</td>
<td>7.0%</td>
<td>3.5%</td>
<td>5.3%</td>
<td>5.9%</td>
<td>1.5%</td>
</tr>
<tr>
<td class="firstcol">Nondurable Goods</td>
<td>2.0%</td>
<td>0.2%</td>
<td>1.8%</td>
<td>2.6%</td>
<td>-0.4%</td>
</tr>
<tr>
<td class="firstcol">Services</td>
<td>-1.0%</td>
<td>0.7%</td>
<td>2.9%</td>
<td>2.8%</td>
<td>2.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Consumer Income</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">Real DPI</td>
<td>-1.1%</td>
<td>-1.5%</td>
<td>1.5%</td>
<td>3.4%</td>
<td>-1.5%</td>
</tr>
<tr>
<td class="firstcol">Per Capita</td>
<td>-2.0%</td>
<td>-2.4%</td>
<td>0.7%</td>
<td>2.4%</td>
<td>&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">Memo:</td>
<td>May.07</td>
<td>3-Mos</td>
<td>6-Mos</td>
<td>One-Year</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">Savings Rate (Pct)</td>
<td>-1.4</td>
<td>-1.0</td>
<td>-1.0</td>
<td>-1.1</td>
<td>--</td>
</tr>
</tbody>
</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">&nbsp;</th>
<th scope="col">113%</th>
<th scope="col">113%</th>
<th scope="col">100%</th>
<th scope="col">116%</th>
<th scope="col">111%</th>
<th scope="col">108%</th>
<th scope="col">104%</th>
<th scope="col">111%</th>
</tr>
</thead>

</table>
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Personal income +0.4% in May. Real PCE spending is up by just 01% in May as services spending falls by 0.1%. Core PCE +0.1% and +1.9% Yr/Yr. Consumption has a moderate contribution to growth in Q2 advancing by just 1.6% in the quarter [...]

PCE Report is Weaker Than Expected With Good Inflation

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070628e.jpg" width="353">
The quip in our title isn&#39;t universally applicable, but it does describe some housing market behavior in the last few years. On Monday, our colleague Bob Brusca brought us up to date on existing home sales; he interpreted these data from the National Association of Realtors (NAR) as showing &quot;diminishing&quot; weakness through May. Today, NAR published some details on its housing affordability indexes, and it is evident that an improvement in the affordability situation is giving some support to sales volumes.
However, we also see that the relationship between sales and affordability has largely broken down since early 2004. Buyers, sellers and financiers appeared to be in some denial as financing costs were rising from that time to the middle of last year. We can see this in the nation as a whole and in a couple of regions in particular.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070628f.jpg" width="353">
&quot;Housing affordability&quot; is calculated from home prices, mortgage rates and incomes. NAR analysts calculate the mortgage payment on a home at the median price financed by an average mortgage rate with a 20% down payment. Assuming the mortgage payment is 25% of household income, they can derive the &quot;qualifying income&quot; associated with the prevailing market conditions. The affordability index is the ratio of actual median income to the calculated qualifying income. Ordinarily, one would expect affordability and sales volume to be positively correlated: more affordability should support more sales and less affordability should be associated with fewer sales. In the first graph this is plainly the case, with a 63% correlation ratio from 1989 through 2003. But in the second graph, the 14-plus-year span from 1993 through the latest month carries a -44% ratio. People kept buying -- and lenders kept lending -- long after affordability had begun to fall sharply.
This is especially the case in the West. See in the third graph that &quot;affordability&quot; over the more recent time span has a whopping 75% negative relationship with sales. Affordability was already much lower there than in other areas, as seen in the table below. It shows that homes are most affordable in the Midwest and least in the West. Affordability is just about in equilibrium (that is, near 100) in the Northeast, which we find a bit surprising. This says incomes and home prices are fairly well balanced in this region, while the West faces substantially over-priced housing relative to incomes. The median household devotes a major fraction of its income to housing expense.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070628g.jpg" width="353">
What did happen in 2004 to break up the relation of sales to so-called affordability? We show this in the fourth graph: home prices were continuing to climb, but prior to 2004, interest rates were declining enough so that the monthly payment was fairly steady as a percentage of income, hovering around 20%. All it took for affordability to start to suffer was for interest rates to stop falling. Even before they began to rise in earnest in mid-2005, affordability was dropping. It continued to decline until prices leveled out in mid-2006 and only began to recover when both mortgage rates and home prices were easing. [In the graph, we have indexed the price series to 2000=100, so it will fit nicely on the graph with an affordability index and an interest rate. Indexing is a simple-to-apply function in the DLXVG3 software.]<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070628h.jpg" width="353">
All these data are in Haver&#39;s REALTOR database, information we get from the National Association of Realtors, which also contains other detail and a national calculation of affordability for first-time homebuyers. A few summary series are contained in USECON.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Housing Affordability Indexes</th>
<th scope="col">May 2007</th>
<th scope="col">Apr 2007</th>
<th scope="col">Mar 2007</th>
<th scope="col">May 2006</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total US</td>
<td>109.9</td>
<td>112.4</td>
<td>113.3</td>
<td>101.8</td>
<td>106.1</td>
<td>111.8</td>
<td>123.9</td>
</tr>
<tr>
<td class="firstcol">Northeast</td>
<td>96.7</td>
<td>94.1</td>
<td>99.7</td>
<td>91.8</td>
<td>95.5</td>
<td>99.1</td>
<td>108.7</td>
</tr>
<tr class="odd">
<td class="firstcol">Midwest</td>
<td>149.1</td>
<td>156.0</td>
<td>157.3</td>
<td>140.1</td>
<td>145.5</td>
<td>150.2</td>
<td>167.5</td>
</tr>
<tr>
<td class="firstcol">South</td>
<td>120.6</td>
<td>124.7</td>
<td>124.0</td>
<td>109.9</td>
<td>115.7</td>
<td>121.9</td>
<td>129.9</td>
</tr>
<tr class="odd">
<td class="firstcol">West</td>
<td>73.6</td>
<td>73.6</td>
<td>75.1</td>
<td>69.3</td>
<td>70.4</td>
<td>76.0</td>
<td>88.3</td>
</tr>
</tbody>
</table>
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The quip in our title isn't universally applicable, but it does describe some housing market behavior in the last few years. On Monday, our colleague Bob Brusca brought us up to date on existing home sales; he interpreted these data [...]

"I'm Going To Buy That House Whether I Can Afford It or Not!" "And I'm Going To Lend You the Money!"

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070628c.jpg" width="353">
Germany&#39;s consumer goods sector is losing momentum: current situation is still improving but expectations and orders have soured. 
Same picture for capital goods: current situation is still improving; expectations have gone flat while orders are getting volatile. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070628d.jpg" width="353">
The IFO percentile readings show that orders on hand have slipped to the 85th percentile. Month-to-month demand has slipped to the low 70th percentile. Business expectations have fallen out of their 80th percentile. These readings are still elevated but are less than other components. The current situation is still improving. Foreign orders on hand also are still growing. But business expectations, activity (m/m) and orders on hand are shrinking. 
The IFO three month outlook shows that orders expectations are faltering in wholesaling and falling in retail. Business export expectations are also fading. Only employment expectations are still improving and at a quickening pace. But employment is a notoriously lagging variable.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
IFO Survey: Germany
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="5">Percent: Yr/Yr</td>
<td colspan="4">Index Numbers</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>CURRENT</td>
<td>Average</td>
<td>Curr/Avg</td>
<td>Percentile</td>
</tr>
<tr class="odd">
<td class="firstcol">Biz Climate</td>
<td>0.2%</td>
<td>2.8%</td>
<td>2.5%</td>
<td>2.1%</td>
<td>3.4%</td>
<td>107.0</td>
<td>95.6</td>
<td>111.9%</td>
<td>92.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">Current Situation</td>
<td>1.7%</td>
<td>4.7%</td>
<td>6.3%</td>
<td>6.7%</td>
<td>9.3%</td>
<td>111.4</td>
<td>94.7</td>
<td>117.7%</td>
<td>87.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Biz Expectations</td>
<td>-1.3%</td>
<td>1.0%</td>
<td>-0.9%</td>
<td>-2.3%</td>
<td>-2.1%</td>
<td>102.8</td>
<td>96.6</td>
<td>106.4%</td>
<td>87.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>CURRENT</td>
<td>Average</td>
<td>Curr/Avg</td>
<td>Percentile</td>
</tr>
<tr class="odd">
<td class="firstcol">Biz Climate</td>
<td>0.2%</td>
<td>2.8%</td>
<td>2.5%</td>
<td>2.1%</td>
<td>3.4%</td>
<td>107.0</td>
<td>95.6</td>
<td>111.9%</td>
<td>92.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">Current Situation</td>
<td>1.7%</td>
<td>4.7%</td>
<td>6.3%</td>
<td>6.7%</td>
<td>9.3%</td>
<td>111.4</td>
<td>94.7</td>
<td>117.7%</td>
<td>87.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; MFG</td>
<td>4.3%</td>
<td>6.6%</td>
<td>7.6%</td>
<td>9.4%</td>
<td>12.1%</td>
<td>112.0</td>
<td>92.1</td>
<td>121.6%</td>
<td>97.0%</td>
</tr>
<tr class="even">
<td class="firstcol">Biz Expectations</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>CURRENT</td>
<td>Average</td>
<td>Curr/Avg</td>
<td>Percentile</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; MFG</td>
<td>-2.8%</td>
<td>1.0%</td>
<td>-1.4%</td>
<td>-3.0%</td>
<td>-4.1%</td>
<td>100.6</td>
<td>96.4</td>
<td>104.4%</td>
<td>78.1%</td>
</tr>
<tr class="even">
<td class="firstcol">Activity (m/m)</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>CURRENT</td>
<td>Average</td>
<td>Curr/Avg</td>
<td>Percentile</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; MFG</td>
<td>-3.7%</td>
<td>2.0%</td>
<td>-0.5%</td>
<td>0.4%</td>
<td>4.4%</td>
<td>103.8</td>
<td>96.8</td>
<td>107.2%</td>
<td>81.6%</td>
</tr>
<tr class="even">
<td class="firstcol">Demand (m/m)</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>CURRENT</td>
<td>Average</td>
<td>Curr/Avg</td>
<td>Percentile</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; MFG</td>
<td>-7.1%</td>
<td>0.5%</td>
<td>-3.6%</td>
<td>-1.6%</td>
<td>1.6%</td>
<td>102.6</td>
<td>97.0</td>
<td>105.8%</td>
<td>73.3%</td>
</tr>
<tr class="even">
<td class="firstcol">Orders on hand</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>CURRENT</td>
<td>Average</td>
<td>Curr/Avg</td>
<td>Percentile</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; MFG</td>
<td>-3.6%</td>
<td>-0.9%</td>
<td>-3.0%</td>
<td>-2.7%</td>
<td>-0.6%</td>
<td>105.9</td>
<td>96.3</td>
<td>110.0%</td>
<td>85.8%</td>
</tr>
<tr class="even">
<td class="firstcol">Foreign orders on hand</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>CURRENT</td>
<td>Average</td>
<td>Curr/Avg</td>
<td>Percentile</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; MFG</td>
<td>2.0%</td>
<td>2.5%</td>
<td>1.9%</td>
<td>5.4%</td>
<td>7.6%</td>
<td>112.1</td>
<td>94.1</td>
<td>119.2%</td>
<td>98.1%</td>
</tr>
<tr class="odd">
<td colspan="10">Yr/Yr percentage changes in underlying Indices</td>
</tr>
<tr>
<td colspan="10">IFO outlook for 3-Months ahead</td>
</tr>
<tr class="even">
<td class="firstcol">3-Mos ahead</td>
<td colspan="5">Percent Year over Year</td>
<td colspan="4">Index Numbers</td>
</tr>
<tr class="even">
<td class="firstcol">Expected Activity</td>
<td>Jun-07</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>CURRENT</td>
<td>Average</td>
<td>Curr/Avg</td>
<td>Percentile</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; MFG</td>
<td>3.4%</td>
<td>0.5%</td>
<td>0.7%</td>
<td>-1.6%</td>
<td>-2.2%</td>
<td>103.4</td>
<td>96.7</td>
<td>107.0%</td>
<td>96.0%</td>
</tr>
<tr class="even">
<td colspan="10">Orders Expectations</td>
</tr>
<tr class="odd">
<td class="firstcol">Retail Orders Expectations</td>
<td>-1.1%</td>
<td>-4.6%</td>
<td>-10.9%</td>
<td>-10.0%</td>
<td>-11.4%</td>
<td>-10.8</td>
<td>-17.4</td>
<td>62.2%</td>
<td>64.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Wholesale</td>
<td>0.6%</td>
<td>15.8%</td>
<td>15.0%</td>
<td>10.7%</td>
<td>10.9%</td>
<td>5.8</td>
<td>-14.1</td>
<td>-41.3%</td>
<td>80.4%</td>
</tr>
<tr class="even">
<td colspan="10">Export Biz Expectations</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; MFG</td>
<td>0.4%</td>
<td>-0.5%</td>
<td>-1.1%</td>
<td>-1.9%</td>
<td>-1.3%</td>
<td>104.5</td>
<td>98.3</td>
<td>106.3%</td>
<td>94.7%</td>
</tr>
<tr class="even">
<td colspan="10">Employment Expectations</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; MFG</td>
<td>8.4%</td>
<td>7.5%</td>
<td>6.4%</td>
<td>8.3%</td>
<td>7.3%</td>
<td>105.5</td>
<td>95.8</td>
<td>110.1%</td>
<td>81.0%</td>
</tr>
</tbody>
</table>
</body>
</html>

Germany's consumer goods sector is losing momentum: current situation is still improving but expectations and orders have soured. Same picture for capital goods: current situation is still improving; expectations have gone flat while [...]

IFO Detail Shows Strong Readings but Slipping Momentum

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070628b.jpg" width="353">
Japan&#146;s industrial output trend is slipping as it has fallen for the third month in a row. The data show a steady deterioration in both short term and Yr/Yr trends. Still, Japanese officials are not worried. They see a snap back in the months ahead. Japanese officials are convinced of ongoing demand for Japanese made electronics. A METI survey looks for output to be up by 1.9% in June and 1.7% in July. For the time being Japan&#39;s nonmanufacturing economy is carrying growth ahead, much as it has done for the US when MFG slumped. Japan&#146;s IP still is up by 3.7% Y/Y &#150; but is slowing. 
Despite the upbeat posture by METI, and recent comments made by the BOJ&#146;s Fukui, the risk seems palpable and greater than the official positions admit. Fukui is worried that the output gap has been pressured too much to relieve the zero inflation situation, as his view is just one example of how Japan continues to take an optimistic view of economic events. The BoJ is ostensibly worried about causing a boom/bust cycle but doing so with no evidence of a boom at all. Growth is in fact barely moderate as the BoJ worries about the size of its output GAP and finds that the economy has been growing beyond potential for some time; Fukui says that the Japanese economy has been growing above its potential of 1.5% to 2.0% in the past few years, boosting production capacity and causing labor shortages, which has resulted in tighter supply and demand conditions. But this has gotten no traction on prices. Still Japan&#146;s central bank is worried about overheating in the midst of a mild frost and METI is sure of rebound even as production suffers a series of setbacks.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Japan Industrial Production Trends
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">M/M %</td>
<td colspan="3">SAAR %</td>
<td>Yr/Yr</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>May-07</td>
<td>Apr-07</td>
<td>Mar-07</td>
<td>3-mo</td>
<td>6-mo</td>
<td>12-mo</td>
<td>Yr-Ago</td>
</tr>
<tr>
<td class="firstcol">Mining &amp; Manufacturing</td>
<td>-0.4%</td>
<td>-0.2%</td>
<td>-0.3%</td>
<td>-3.3%</td>
<td>-3.1%</td>
<td>2.3%</td>
<td>3.7%</td>
</tr>
<tr>
<td class="firstcol">Total Industry</td>
<td>-0.6%</td>
<td>0.3%</td>
<td>-0.1%</td>
<td>-1.8%</td>
<td>-2.7%</td>
<td>2.3%</td>
<td>3.7%</td>
</tr>
<tr>
<td class="firstcol">Manufacturing</td>
<td>-0.4%</td>
<td>-0.2%</td>
<td>-0.4%</td>
<td>-3.7%</td>
<td>-3.1%</td>
<td>2.3%</td>
<td>3.7%</td>
</tr>
<tr>
<td class="firstcol">Food &amp; Tobacco</td>
<td>0.0%</td>
<td>-0.6%</td>
<td>1.5%</td>
<td>3.5%</td>
<td>1.3%</td>
<td>0.4%</td>
<td>-0.2%</td>
</tr>
<tr>
<td class="firstcol">Textiles</td>
<td>0.3%</td>
<td>0.0%</td>
<td>-2.1%</td>
<td>-6.9%</td>
<td>-4.7%</td>
<td>-4.1%</td>
<td>-3.5%</td>
</tr>
<tr>
<td class="firstcol">Transportation</td>
<td>4.3%</td>
<td>-2.4%</td>
<td>-1.4%</td>
<td>1.5%</td>
<td>-2.5%</td>
<td>9.5%</td>
<td>4.8%</td>
</tr>
<tr class="odd">
<td colspan="8">Product</td>
</tr>
<tr>
<td class="firstcol">Consumer Goods</td>
<td>-3.5%</td>
<td>0.6%</td>
<td>-2.1%</td>
<td>-18.3%</td>
<td>-8.2%</td>
<td>-1.5%</td>
<td>2.1%</td>
</tr>
<tr>
<td class="firstcol">Intermediate Goods</td>
<td>-0.4%</td>
<td>-0.3%</td>
<td>1.0%</td>
<td>0.7%</td>
<td>-1.7%</td>
<td>4.2%</td>
<td>5.8%</td>
</tr>
<tr>
<td class="firstcol">Investment Goods</td>
<td>1.7%</td>
<td>0.6%</td>
<td>-2.9%</td>
<td>-2.3%</td>
<td>-1.0%</td>
<td>2.2%</td>
<td>0.8%</td>
</tr>
<tr>
<td class="firstcol">Mining</td>
<td>0.2%</td>
<td>0.4%</td>
<td>0.9%</td>
<td>5.8%</td>
<td>3.5%</td>
<td>6.2%</td>
<td>2.4%</td>
</tr>
<tr>
<td class="firstcol">Electricity &amp; Gas</td>
<td>-1.7%</td>
<td>2.0%</td>
<td>2.6%</td>
<td>12.1%</td>
<td>0.5%</td>
<td>2.6%</td>
<td>4.3%</td>
</tr>
</tbody>
</table>
</body>
</html>

Japans industrial output trend is slipping as it has fallen for the third month in a row. The data show a steady deterioration in both short term and Yr/Yr trends. Still, Japanese officials are not worried. They see a snap back in [...]

Japan’s Industrial Production Falls by 0.4% Third M/M Drop in a Row

Only modest evidence of AI-related surge in US productivity growth

Previous Trump tariffs fading. A boost from new tariffs ahead?

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

Economic activity is picking up in the US but remains lackluster abroad

Policy uncertainty has surged since the US national elections.

Recent turnaround in US economic surprises leading to increases in rate-cut expectations

The outlook has brightened in the US, while it has dimmed for other major economies

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

Blue Chip forecasters look for further significant monetary easing apart from Japan

Recent rise in global supply chain pressures could augur a pickup in global inflation pressures

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

Resilient US economy is pushing up longer-term inflation expectations and interest rates

Positive US economic data surprises leading to upward adjustment of interest rate expectations

Recent aggressive policy easing in China has given a massive boost to equity prices

FOMC expects much more easing now than in June

US is clear world leader in business capital spending on artificial intelligence

Blue Chip forecasters expect US to lead aggressive policy rate cuts over coming year—apart from Japan

Ratio of job openings to the number unemployed in the US now below pre-pandemic level

U.S. layoffs not showing as much cooling in labor markets as unemployment rate

While goods prices have moderated, service price inflation remains elevated and sticky

Since Jan 2023, BCEI US outlook has improved, worsened for Japan and the euro area

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Andrew Cates

**Global current account imbalances**
Several US economic commentators have argued that US trade imbalances are fundamentally driven by capital account dynamics rather than trade policies or unfair competition. In other words, the US runs a persistent current account deficit not because of trade flows, but because of an excess capital account surplus—meaning that the US absorbs foreign savings surpluses from economies such as China, Germany, and Japan. These countries save more than they invest domestically, and their surplus savings are recycled into US financial markets due their deep and flexible capital markets, and superior return prospects. This explains why fluctuations in Germany’s, Japan’s, and China’s current account surpluses in recent years have been mirrored by corresponding shifts in the US current account deficit (chart 1).

250206Z1.jpg

**The US dollar**
As noted, this continuous inflow of foreign capital has pushed up the value of the dollar (chart 2), making US exports less competitive while encouraging domestic consumption and imports, reinforcing the trade deficit. That means that policies aimed at reducing US trade deficits via tariffs could be ineffective because they fail to address these underlying global savings and investment imbalances.

250206Z2.jpg

**Potential growth rates**
As further noted, another key factor behind the global imbalances concerns the US economy’s superior growth prospects compared with elsewhere. As Chart 3 illustrates, the US has maintained slightly higher potential GDP growth over the past 10–15 years, in stark contrast to the declining potential growth rates in Germany and China (albeit from much higher levels). Meanwhile, Japan’s potential growth has remained relatively stable but at already subdued levels.

250206Z3.jpg

**Reserve currencies**
Another key driver of the dollar – and the US current account deficit – is arguably the continued dominance of the US dollar in central banks’ reserves. Chart 4 below illustrates the global share of allocated foreign exchange reserves across major currencies over time. It shows that the US dollar has maintained a dominant share of these reserves, consistently accounting for over 55-60% of the total. This means that policies aimed at reducing the allure of the US dollar – and its financial markets – may find more success in reducing US trade imbalances compared with bilateral tariff policies.

250206Z4.jpg

**Savings, investment and demographics**
Policies aimed at reducing savings surpluses in overseas economies could also be more effective than bilateral tariffs in addressing trade imbalances, but they are difficult to implement. Chart 5 highlights a (small) negative correlation between current account balances and dependency ratios, indicating that economies with higher dependency ratios (i.e., more children and elderly relative to the workforce) tend to have lower current account balances. This occurs because higher dependency ratios reduce national savings, as dependent populations consume more while contributing less to production and savings, leading to current account deficits. The US deficit appears broadly in line with other major economies, given its demographic structure and investment needs. However, Germany and Japan stand out as big outliers, running very large savings surpluses despite ageing populations. This is a function of several factors including their strong industrial base and a cultural aversion to debt accumulation, partly shaped by historical legacies. Policies that trigger a reduced aversion to debt and encourage greater domestic consumption and investment could help rebalance global savings and trade flows. In Germany, this could involve higher public spending, stronger wage growth, and tax incentives to boost household consumption, while in Japan, reforms to pension systems and labour markets could incentivize higher domestic investment.

250206Z5.jpg

**Global trade and supply chain pressures**
Predicting how these developments will unfold and their broader impact on the global economy remains highly uncertain. The latest daily data from the Baltic Dry Index indicates that global shipping costs have fallen sharply in recent weeks, likely due to weaker demand for bulk shipping and container freight. Additionally, uncertainty surrounding trade policy may have led businesses to delay investment in global supply chains, further dampening shipping demand. However, in the longer term, higher tariffs could introduce new supply chain pressures. If tariffs provoke retaliatory trade measures from China or other key partners, logistics networks could come under renewed strain, leading to heightened supply chain volatility. This could, in turn, drive up costs, disrupt trade flows, and re-ignite global inflation risks, and add further complexity to an already fragile global economy.

250206Z6.jpg

President Trump’s tariff policies have been a major driver of financial market volatility in recent days, sparking sharp swings in equities and currencies. While the administration has temporarily reversed its proposal for a 25% tariff on imported goods from Canada and Mexico, uncertainty surrounding US trade relationships, the risk of retaliatory measures from key trading partners, and broader concerns about global growth continue to unsettle investors. A fundamental irony is that the US trade deficit—the very issue that President Trump purportedly aims to correct—is not primarily driven by so-called “unfair” trade practices but rather by global savings and investment imbalances (chart 1). Nations such as China, Germany, and Japan have maintained high savings rates for several years, and their excess capital is continually recycled into US financial markets, where superior returns and deep liquidity have made the US an attractive investment destination. The persistent inflow of foreign capital strengthens the US dollar, reinforcing the trade deficit rather than narrowing it (charts 3 and 4). Indeed, the multi-year highs in the trade-weighted value of the dollar serve as clear evidence that capital has continued to flow into the US, sustaining deficits despite protectionist measures. Ultimately, Trump’s tariff-driven policies risk doing more harm than good, as they threaten to slow global growth, strain relationships with allies, and exacerbate inflationary pressures by raising input costs for US businesses and consumers. Rather than addressing the root causes of global imbalances (chart 5), such measures distort supply chains (chart 6), impair productivity growth, and fail to alter the fundamental drivers of trade deficits.

Charts of the Week: Tariff Trouble

Tom Moeller

250206F5.jpg

250206G5.jpg

The National Association of Realtors' Fixed Rate Mortgage Housing Affordability Index (HAI) increased 1.3% (0.2% y/y) in December to 100.7 after falling 2.9% to 99.4 in November and 2.4% to 102.4 in October. The level of home affordability has risen 12.0% from its low of 89.9 in October 2023. It remains 43.8% below the high of 179.2 in April 2020.

The rise in affordability in December reflected an unchanged (+6.1% y/y) median price of an existing single-family home of $409,300. This followed declines in four of the prior five months from the record $432,900 in June. In December, the average mortgage rate slipped to 6.80% from 6.89% in November. It remained below a 7.14% May high but up sharply from the December 2020 low of 2.73%. These lowered the principal & interest payment by 0.9% (+5.0% y/y) to $2,135 per month. That was well above the most recent low of $984 in February 2020. Monthly mortgage payments averaged 24.8% of income during December versus 25.1% in November. They remained up from a low of 14.0% in April 2020.

The rise in housing costs was accompanied by improvement in median family income. It increased 0.3% in December (5.1% y/y) to a record $103,148 after rising 0.4% in November and 0.3% in October.

Housing affordability improved across the country in December. The index rose 2.3% (-2.9% y/y) to 132.9 in the Midwest, which remains the most affordable region of the country to live. In the South, the index improved 1.4% (2.9% y/y) to 103.7 and the affordability index in the Northeast rose 0.3% (-6.6% y/y) to 91.6. In the West, where homes are the least affordable, the index improved 3.2% (0.3% y/y) to 71.1 in December.

The Housing Affordability Index (HAI) equals 100 when a median-income borrower qualifies for an 80% mortgage on a median-priced existing single-family home. The HAI had exceeded 100 in each month since July 1990 and reached its all-time high of 213.3 in January 2013; since then, it fell below 100 for the first time in June 2022 (98.8).

Data on Housing Affordability can be found in Haver’s **REALTOR** database. Median home sales prices are also available in USECON. Higher frequency interest rate data are found in **SURVEYS**, **WEEKLY**, and **DAILY**.

250206H5.jpg

250206I5.jpg

- Home prices are little changed & mortgage rates fall.
- Median income improves.
- Affordability improves throughout country.

U.S. Housing Affordability Edges Up in December

250206N2.jpg

250206O2.jpg

Nonfarm business productivity increased 1.2% (SAAR) during Q4’24 after a 2.3% rise in Q3, revised from 2.2%. The figure compared to expectations for a 1.8% rise in the Action Economics Survey. During all of last year (Q4/Q4), productivity rose 1.6% after rising 2.7% in 2023, up from a 1.4% decline in 2022. Nonfarm business output increased 2.3% (2.6% y/y) after an unrevised 3.6% gain, while hours-worked rose 1.0% (0.9% y/y) after increasing 1.3% in Q3.

Compensation growth picked up to 4.2% (4.3% y/y) last quarter from 2.9% in Q3, revised from 3.1%. As a result, unit labor costs surged 3.0% (2.7% y/y) following a 0.5% rise, revised from 0.8% in Q3 and falling 1.1% in Q2. The Action Economics survey expected unit labor costs to rise 3.3% last quarter.

In the manufacturing sector, productivity in Q4 rose 0.8% (0.2% y/y) after increasing 0.5% in Q3, revised from 0.9%, and gaining 0.2% in Q2. Compensation grew 4.1% (1.7% y/y) last quarter after a 2.3% rise, revised from 2.6%, and falling 5.6% in Q2.  Unit labor costs rose 3.3% (1.5% y/y) after increasing a little-changed 1.8% in Q3 and falling 5.7% in Q2.

The productivity and labor cost data are available in Haver’s **USECON** database. The Action Economics expectations figures are in the **AS1REPNA** database.

250206P2.jpg

250206Q2.jpg

- Annual increase remains below 2023 gain.
- Compensation growth accelerates.
- Quarterly Increase in unit labor costs is strongest since Q1’23.

U.S. Productivity Growth Slows in Q4’24

250206A1.jpg

250206B1.jpg

Initial claims for unemployment insurance rose 11,000 in the week ended February 1 to 219,000, seasonally adjusted, from 208,000 the week before; that was revised slightly from 207,000 reported before. The Action Economics Forecast Survey had expected 214,000 in the latest week. The four-week moving average of initial claims was 216,750 through the latest week, up from 212,750 the week before.

The total number of unemployment insurance beneficiaries – also known as “continuing claims” – was 1.886 million in the week ended January 25, up from 1.85 million the prior week. The four-week moving average of this total was 1,872.25 million through the week ended January 25, slightly more than the 1,870.00 through the prior week.

The insured unemployment rate – that is, the total number of beneficiaries as a percent of covered employment – still held at 1.2%, where it has been almost continuously since early 2023.

Unemployment rates vary widely across states and territories. The Labor Department reports that in the week ended January 18, the highest rates were in New Jersey (2.88%), Rhode Island (2.82%), Minnesota (2.52%), Illinois (2.43%), and Massachusetts (2.36%). The lowest rates were in Florida (0.34%), Virginia (0.43%), Alabama (0.45%), Tennessee and North Carolina (both 0.58%), and New Hampshire (0.59%).  Rates in other notable states include California (2.2%), Pennsylvania (2.04%), New York and Connecticut (both 1.88%) and Texas and Missouri (both 1.08%). These state unemployment rates 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. The expectations figure is from the Action Economics Forecast Survey in the **AS1REPNA** database.

250206C1.jpg

250206D1.jpg

- Total beneficiaries had increased the week before.
- Insured unemployment rate holds at long-standing 1.2%.

U.S. Initial Claims for Unemployment Insurance Increase Slightly in February 1 Week

250205N12.jpg

250205O12.jpg

The U.S. ISM Services PMI fell to 52.8 in January following an increase to 54.0 in December, according to today’s report by the Institute for Supply Management. The reading indicated service sector expansion for the seventh consecutive month. The Action Economics Forecast Survey expected 54.2 for January.

Haver Analytics constructs a composite index combining the services index and the manufacturing index released on Monday. This index declined to 52.6 in January from 53.4 in December. The latest figure remains above its June low of 49.1.

Amongst the services component series, the business activity index fell to 54.5 in January after rising to 58.0 in December. The index remains higher than its recent low of 50.2 in June. A lessened 19.6% (NSA) of respondents reported higher orders last month while an increased 18.3% reported an activity decline. The new orders index declined to 51.3 in January after rising to 54.4 in December, indicating expansion in new orders for the seventh straight month. An increased 19.5% of respondents (NSA) reported higher orders in January and an increased 23.2% reported a decline.

Improvement was recorded on the labor front. The employment index rose to 52.3 in January after moving up to 51.3 in December. The latest reading stands well above its low of 43.7 in December 2023. A lessened 13.6% of respondents (NSA) indicated higher employment in January while 14.1% reported a decline. The supplier deliveries index (NSA) rose to 53.0 in January from 52.5 in December, indicating slower supplier delivery speeds.

On the inflation front, the prices index fell to 60.4 in January after jumping to 64.4 in December, which was the highest level in nearly two years.  An increased 25.0% of respondents reported higher prices while a fairly steady 3.1% reported lower.

Additionally, the new export orders index increased to 52.0 in January (NSA) following a rise to 50.1 in December. The imports index eased to 49.8 in January from 50.7 in December. The inventory change index fell to 47.5 in January after rising to 49.4 in December. These series are not seasonally adjusted and not included in the ISM Services PMI total.

The ISM Services PMI is a composite index consisting of four equally weighted diffusion indexes: Business Activity, New Orders, Employment, and Supplier Deliveries. A reading above 50 indicates expansion in the services sector, while below 50 suggests contraction. Supplier Deliveries is the only ISM index that is inversed; a reading above 50 indicates slower deliveries. The ISM figures are available in Haver's **USECON** database, with additional detail in the **SURVEYS** database. The expectations figure from Action Economics is in the **AS1REPNA** database.

250205P12.jpg

250205Q12.jpg

- Total index remains below October high.
- Business Activity index falls to five-month low; new orders weaken but employment firms.
- Prices Index moves lower, reversing sharp December gain.


Economy in Brief: June 2007

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Construction Spending Up 0.9% in May, Much Better Than Expected

EU Sentiment Reading is Strong in June at 114.9 but Off from 115.0 in May

Chicago PMI Off at 60.32 from 61.7

PCE Report is Weaker Than Expected With Good Inflation

PCE Report is Weaker Than Expected With Good Inflation

"I'm Going To Buy That House Whether I Can Afford It or Not!" "And I'm Going To Lend You the Money!"

IFO Detail Shows Strong Readings but Slipping Momentum

Japan’s Industrial Production Falls by 0.4% Third M/M Drop in a Row