Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080215g.jpg" width="353">
During early February, the University of Michigan&#39;s consumer sentiment index fell a hard 11.2% from the January average to a level of 69.6. A reading of 76 had been expected. It was the largest m/m decline since 2005 and it was to the lowest level since early 1992.
The index of expected business conditions during the next year fell the hardest with a 12.8% m/m decline to its lowest level since the recession of 1990. Expectations for business conditions during the next five years fell 10.2% while expectations for personal finances fell 6.9%.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080215h.jpg" width="353">
The current conditions index more than reversed the January rise with a 9.5% drop. Current conditions for buying large household goods fell out of bed with a 15.1% plunge to the lowest level since 1992. The view of current personal finances fell slightly.
Expectations for inflation during the next twelve months were unchanged at 4.0% and for the next five to ten years expectations ticked up to 3.5%.
Opinions about government policy fell sharply. The 9.0% m/m decline was one of the largest and dropped this measure of opinions to the lowest level since 1993.
The University of Michigan survey is not seasonally adjusted.The reading is based on telephone interviews with about 500 households at month-end; the mid-month results are based on about 300 interviews. The summary indexes are in Haver&#39;s USECON database, with details in the proprietary UMSCA database.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF14/@EF1402/@EF1402.HTM">University of Michigan</a></th>
<th scope="col">Feb (Prelim.</th>
<th scope="col">Jan</th>
<th scope="col">Dec</th>
<th scope="col">Feb&nbsp; 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">Consumer Sentiment</td>
<td>69.6</td>
<td>78.4</td>
<td>75.5</td>
<td>-23.8% </td>
<td>85.6</td>
<td>87.3</td>
<td>88.5</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Current Conditions</td>
<td>85.4</td>
<td>94.4</td>
<td>91.0</td>
<td>-20.0%</td>
<td>101.2</td>
<td>105.1</td>
<td>105.9</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Expectations</td>
<td>59.4</td>
<td>68.1</td>
<td>65.6</td>
<td>-27.1%</td>
<td>75.6</td>
<td>75.9</td>
<td>77.4</td>
</tr>
</tbody>
</table>
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During early February, the University of Michigan's consumer sentiment index fell a hard 11.2% from the January average to a level of 69.6. A reading of 76 had been expected. It was the largest m/m decline since 2005 and it was to the [...]

Michigan Consumer Sentiment Dropped Hard

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080215e.jpg" width="353">
Industrial production ticked 0.1% higher last month following an upwardly revised 0.1% rise during December. The latest increase was as expected.
Factory output also rose 0.1% after an upwardly revised 0.2% December increase. The m/m gains have picked up a bit since scattered declines last Summer. As a result the three month growth in output rose to 2.1% (AR) from a low of -4.1% in September. Some of that improvement owes to the high tech sector. Less high tech factory output was unchanged in January and three month growth was 1.1%.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080215f.jpg" width="353">
Production of computers &amp; electronics surged 1.4% (14.4% y/y) after a very much upwardly revised 1.0% December gain. Output of furniture &amp; appliances fell 2.1% and three month dropped to -14.3%. Chemical product output also fell by 0.4%. There was scattered improvement elsewhere. Output of automotive products dropped 1.2% but rose 5.3% on a three month basis. Apparel product output fell 0.1% and three month growth rose to 2.6%.
Output of construction supplies fell again, last month by 1.1% and three month remained negative at -2.6%.
Output of business equipment rose 0.4% with three month growth up to 8.0%. Output of industrial equipment fell 0.4% but three month improved to 2.5%.
Capacity utilization was unchanged for the third month at 81.5%. Utilization in the factory sector slipped a hair to 79.7% from 78.8% where it had been for three months. That ias down from an 80.1% average last year.

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<th scope="col" class="firstcol">INDUSTRIAL PRODUCTION (SA)</th>
<th scope="col">January</th>
<th scope="col">December</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>
<td class="firstcol">Total</td>
<td>0.1%</td>
<td>0.1%</td>
<td>2.2%</td>
<td>1.9%</td>
<td>4.0%</td>
<td>3.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Manufacturing</td>
<td>0.1%</td>
<td>0.2%</td>
<td>2.0%</td>
<td>1.9%</td>
<td>4.7%</td>
<td>3.9%</td>
</tr>
</tbody>
</table>


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Industrial production ticked 0.1% higher last month following an upwardly revised 0.1% rise during December. The latest increase was as expected. Factory output also rose 0.1% after an upwardly revised 0.2% December increase. The m/m [...]

U.S. Industrial Production Ticked 0.1% Higher

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080215a.jpg" width="353">
Overall import prices during January rose a strong 1.7%. The rise, which was three times expectations, followed the December respite when temporarily lower oil prices produced a revised 0.2% decline initially reported as no change. Consensus expectations had been for a 0.5% rise in January prices.
Petroleum prices jumped 5.5% after a 1.9% decline to close out last year. Crude petroleum prices surged 4.5% (69.7% y/y) after December&#39;s 1.3% decline. That strength was exceeded by a 10.2% (73.7% y/y) jump in fuel oil prices and an 8.1% (44.2% y/y) rise in other petroleum product prices.
Less petroleum, import prices rose 0.6% after a 0.3% December increase. The latest m/m rise was near the strongest since November 2006. 
 During the last ten years there has been a 66% (negative) correlation between the nominal trade-weighted exchange value of the US dollar vs. major currencies and the y/y change in non oil import prices. The correlation is a reduced 47% against a broader basket of currencies.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080215b.jpg" width="353">
Prices for industrial supplies &amp; materials excluding petroleum surged 2.2% (10.1% y/y) led by strength in paper prices and a 9.7% (21.1% y/y) blowout in chemical prices. The detailed import price series can be found in the Haver USINT database. 
Capital goods import prices fell 0.2% (+0.5% y/y) as prices of computers, peripheral and semiconductors declined again, last month by 1.4% (-5.4% y/y). Less the high tech sector, January capital goods prices rose a modest 0.2% (3.0% y/y) though that rate of gain has accelerated from 2.7% growth last year and 1.4% during 2006.
Prices for imports of nonauto consumer goods rose 0.3% (1.6% y/y) and that y/y rise in prices has been stable since early last year. Apparel prices rose 0.3% (1.9% y/y). These prices had been unchanged or declining through 2004 to 2006. Prices for household goods rose 0.4% (1.5% y/y), a y/y change that has been fairly stable.
Overall export prices surged 1.2% due to a 5.0% (28.9% y/y) rise in agricultural prices. Prices for nonagricultural goods also rose a relatively strong 0.8% (4.8% y/y). 
Some Simple Tests of the Globalization and Inflation Hypothesis from the Federal Reserve Board can be found <a href="http://www.federalreserve.gov/pubs/ifdp/2007/891/default.htm"> here</a>.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E807/@E807.HTM">Import/Export Prices (NSA)</a></th>
<th scope="col">January</th>
<th scope="col">December</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">Import - All Commodities</td>
<td>1.7%</td>
<td>-0.2%</td>
<td>13.7%</td>
<td>4.2%</td>
<td>4.9%</td>
<td>7.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Petroleum</td>
<td>5.5%</td>
<td>-1.9%</td>
<td>66.9%</td>
<td>11.5%</td>
<td>20.6%</td>
<td>37.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Non-petroleum</td>
<td>0.6%</td>
<td>0.3%</td>
<td>3.6%</td>
<td>2.7%</td>
<td>1.7%</td>
<td>2.7%</td>
</tr>
<tr>
<td class="firstcol">Export- All Commodities</td>
<td>1.2%</td>
<td>0.4%</td>
<td>6.7%</td>
<td>4.9%</td>
<td>3.6%</td>
<td>3.2%</td>
</tr>
</tbody>
</table>


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Overall import prices during January rose a strong 1.7%. The rise, which was three times expectations, followed the December respite when temporarily lower oil prices produced a revised 0.2% decline initially reported as no change. [...]

U.S. Import Price Rise Strong

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080214f.jpg" width="353">
The latest figures from the Commerce Department indicate that total business inventory accumulation in December of 0.6% followed a 0.4% November rise. The three month change in inventories of 4.5% (AR) was down from a 4.9% rate of accumulation during 3Q. The deceleration was not, however, quite as drastic as indicated by the 1.2 percentage point subtraction inventories made from economic growth, indicated in the advance read of 4Q GDP. 
Retail inventories fell 0.1% during December following a revised 0.3% November decline. Inventories of motor vehicles fell 1.6% in December and the three month change swung to -8.2% (AR) from an 18.5% rate of accumulation during 3Q. Inventories excluding autos rose 0.7% in December (3.2% y/y) and the rate of accumulation last quarter nearly tripled that in 3Q. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080214e.jpg" width="353">
The acceleration was due to building materials which grew 0.3% in December but rose at a 6.8% rate in 4Q versus a 1.4% rate of decline during 3Q. Furniture inventories fell 0.5% (+4.8% y/y) after a 0.9% November drop and the three month change fell to 2.8% (AR) from 10.4% in 3Q. At clothing &amp; accessory stores December inventories rose 0.5% after two months of modest decline. The three month rate held steady last quarter with 3Q at roughly unchanged. Inventories at general merchandise stores rose 0.9% in December and recouped about half of a November decline. For the quarter decumulation held steady with 3Q at a 2.5% rate.
Wholesale inventories jumped 1.1% after a 0.8% November surge. Petroleum inventories skyrocketed 9.2%, more than double the November rise. Less petroleum wholesale inventories rose 0.9% but the three month change fell to 5.3% (AR) from 7.4% during 3Q. During the last ten years there has been a 59% correlation between the annual change in wholesale inventories les petroleum and the change in merchandise imports.
Factory inventories increased 0.8% after a firm 0.7% rise during November. The three month growth in factory inventories accelerated to 6.7% from 2.5% during 3Q. Some of that acceleration owed to petroleum refineries, but excluding petroleum factory inventories still rose 5.8% (AR), nearly triple the 3Q rise.
Business sales fell 0.5% (+6.0% y/y) due to declines in wholesale sales and factory shipments. The decline lifted the ratio of inventories to sales off its lowest level since early 2006.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED06/@ED0601/@ED0601.HTM">Business Inventories</a></th>
<th scope="col">December</th>
<th scope="col">November</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>4.0%</td>
<td>4.0%</td>
<td>5.8%</td>
<td>6.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Retail</td>
<td>-0.1%</td>
<td>-0.3%</td>
<td>2.9%</td>
<td>2.9%</td>
<td>3.2%</td>
<td>2.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Retail excl. Autos</td>
<td>0.7%</td>
<td>-0.4%</td>
<td>3.2%</td>
<td>3.2%</td>
<td>4.5%</td>
<td>4.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wholesale</td>
<td>1.1%</td>
<td>0.8%</td>
<td>6.1%</td>
<td>6.1%</td>
<td>8.5%</td>
<td>7.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Manufacturing</td>
<td>0.8%</td>
<td>0.7%</td>
<td>3.6%</td>
<td>3.6%</td>
<td>6.4%</td>
<td>8.9%</td>
</tr>
</tbody>
</table>
</body>
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The latest figures from the Commerce Department indicate that total business inventory accumulation in December of 0.6% followed a 0.4% November rise. The three month change in inventories of 4.5% (AR) was down from a 4.9% rate of [...]

U.S. Business Inventory Accumulation Down in 4Q Due To Autos

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080214d.jpg" width="353">
Initial claims for jobless insurance slipped another 9,000 to 348,000 last week after the prior week&#39;s 21,000 decline. For February, claims so far are up 26,000, or 8.0%, from the January average. The latest weekly level remained near the highest since October of 2005.
The four-week moving average of initial claims, a measure which smoothes out most of the series&#39; w/w volatility, rose again to 347,250 (+5.6% y/y), the highest level since late 2005.
A claims level below 400,000 typically has been associated with growth in nonfarm payrolls. During the last ten years there has been a (negative) 76% correlation between the level of initial claims and the m/m change in nonfarm payroll employment.
Continuing claims for unemployment insurance slipped 9,000 after a downwardly revised jump of 60,000 during the prior week. The figure provides some indication of workers&#39; ability to find employment but here again difficulties of seasonal adjustment this time of year are great.
The continuing claims numbers lag the initial claims figures by one week.
The insured rate of unemployment held at 2.1% for the second week.
Business Volatility, Job Destruction and Unemployment from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/economics/conferences/0711/haltiwanger.pdf">here</a>.
A Minimum Wager from the Federal Reserve Bank of Minneapolis is available <a href="http://www.minneapolisfed.org/pubs/fedgaz/07-03/wage.cfm">here</a>.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a>&nbsp;</th>
<th scope="col">02/08/08</th>
<th scope="col">02/01/07</th>
<th scope="col">Y/Y</th>
<th scope="col">2006&nbsp;</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>&nbsp;348</td>
<td>357</td>
<td>-2.2%</td>
<td>313</td>
<td>331</td>
<td>343</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,761</td>
<td>8.3%</td>
<td>2,459</td>
<td>2,662</td>
<td>2,924</td>
</tr>
</tbody>
</table>
</body>
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Initial claims for jobless insurance slipped another 9,000 to 348,000 last week after the prior week's 21,000 decline. For February, claims so far are up 26,000, or 8.0%, from the January average. The latest weekly level remained near [...]

U.S. Weekly Initial Jobless Insurance Claims Slipped, Monthly Rose

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080214c.jpg" align="left" border="0" height="265" width="353">
The U.S. foreign trade deficit in December narrowed sharply to
$58.8B from an unrevised $63.1B during November. The figure compared to
Consensus expectations for a deficit of $61.4B and it pulled the annual
deficit for 2007 to $771.6B, its lowest since 2004.
For December U.S. exports jumped 1.5%, the largest monthly
increase since July. Strong economies abroad and the lower value of the
dollar helped exports during all of last year to rise 12.2% after a
12.7% gain in 2006 and a 10.9% rise in 2005.
Exports of goods surged 1.9% in December (14.5% y/y) and for
the full year rose 12.2%. Growth in exports of foods, feeds &amp;
beverages slipped 1.7% in December but for the year this was the
strongest export category with a 27.7% rise. Exports of industrial
supplies &amp; materials also were strong last year and rose 14.3%.
During December exports of capital goods surged 5.2% to finish a year
of 7.8% growth after a 14.2% jump in 2006. Exports of civilian aircraft
rose 20.8% during all of last year while exports of computers jumped
18.3%.Nonauto consumer goods exports also were strong in December. They
rose 4.6% and were firm all year with a 12.6% increase. That was
similar to the gains during the prior three years.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080214b.jpg" align="right" border="0" height="265" width="353">
U.S. exports of services slipped 0.3% in December but finished
a year of 11.8% growth. That annual gain was paced by 14.1% growth in
travel exports and a 12.1% rise in passenger fares.
Overall imports fell 1.1% in December and the annual gain of
5.9% was the weakest since 2002. Higher oil prices did raise petroleum
imports by 4.2% in December and by 9.5% for the year, however, that was
the weakest annual rise since 2002. Petroleum imports in constant
dollars fell as the per barrel price of crude petroleum rose 11.1% for
the year. That followed price gains of 23.2% in 2006 and of 36.3% in
2005. Imports of nonauto consumer goods rose 7.3% last year, the
weakest gain since 2001 and capital goods imports increased 6.3% for
the year, the weakest gain since 2003.
The U.S. trade deficit in goods with China during 2007
deepened to $25.6B from $23.3B. Imports rose 11.7% and exports rose
18.2%, the weakest rise since 2002.
The Economy and Financial Markets is
today's testimony by Fed Chairman Ben S. Bernanke and it is available <a href="http://www.federalreserve.gov/newsevents/testimony/bernanke20080214a.htm">
here</a>.
Today's speech by Treasury Secretary Henry M. Paulson, Jr., Economy
and Financial Markets, can be found <a href="http://www.ustreas.gov/press/releases/hp828.htm"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EE/@EE01/@EE01.HTM">Foreign
Trade&nbsp;</a></th>
<th scope="col">December</th>
<th scope="col">November</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">U.S. Trade Deficit</td>
<td>$58.8B</td>
<td>$63.1B</td>
<td>$60.3B 
(12/06)</td>
<td>$711.6</td>
<td>$758.5</td>
<td>$714.4B</td>
</tr>
<tr>
<td class="firstcol">Exports - Goods &amp;
Services</td>
<td>1.5%</td>
<td>0.5%</td>
<td>13.6%</td>
<td>12.2%</td>
<td>12.7%</td>
<td>10.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Imports - Goods &amp;
Services</td>
<td>-1.1%</td>
<td>2.9%</td>
<td>8.4%</td>
<td>5.9%</td>
<td>10.4%</td>
<td>12.9%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Petroleum</td>
<td>4.2%</td>
<td>16.3%</td>
<td>52.4%</td>
<td>9.5%</td>
<td>20.1%</td>
<td>39.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Nonpetroleum Goods</td>
<td>-2.8%</td>
<td>0.9%</td>
<td>0.5%</td>
<td>4.6%</td>
<td>9.1%</td>
<td>10.3%</td>
</tr>
</tbody>
</table>
</body></html>

The U.S. foreign trade deficit in December narrowed sharply to $58.8B from an unrevised $63.1B during November. The figure compared to Consensus expectations for a deficit of $61.4B and it pulled the annual deficit for 2007 to [...]

U.S. Trade Deficit Narrowed Sharply

Robert Brusca

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080214a.jpg" align="left" border="0" height="265" width="353">
GDP growth is slowing on a broad front. German GDP is slowing
year/year for four straight quarters. For most other countries Q3
growth brought an up tick that quarter and interrupted what would have
been similar long strings of GDP deceleration. GDP growth year/year in
2007-Q4 slowed everywhere except in the Netherlands. Quarter-to-quarter
GDP growth rates slowed everywhere except Japan.

With the European releases on GDP we have no detail on GDP,
except for France. There weaker consumption and inventory reduction
brought GDP growth lower. We have seen the reduction in the growth
rates of the industrial sectors in recent months even though some of
the industrial indicators have displayed some firmer signals. The EU
sentiment indexes have marked this slowdown correctly.

The fact of the matter is that GDP here and now is slowing.
The recent rhetoric of the ECB is sounding much less certain and much
more like it is about to really keep its options open. Remember that
when the credit problems hit in the US at first the Fed did not think
that they would be so bad. Now UBS, a large Swiss bank, has just
reported larger subprime losses than expected and more exposure to
leverage type loans of the variety that have fallen into disregard.

German unions (IG Metall) are using feisty rhetoric to justify
pay hikes even saying that ECB is wrong and that policy should be
accommodative. Professional EMU forecasters (see ECB survey) now look
for weaker growth and more inflation in the Euro Area. Eurogroup
Chairman Jean-Claude Juncker has admitted that the situation is &#8216;not
completely clear any more&#8217;. Guy Quaden, ECB council member, has said
that the economy could decelerate faster than the ECB previously
thought. All of this suggests a situation, outlook and policy in flux.


<table border="0" cellspacing="0" width="100%">
</table>

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr><th colspan="8" scope="col"> Euro Area and Main G-10 Country GDP Results</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">Quarter over quarter</td>
<td colspan="4">Year/Year</td>
</tr>
<tr class="odd">
<td class="firstcol">GDP</td>
<td>Q4-07</td>
<td>Q3-07</td>
<td>Q2-07</td>
<td>Q4-07</td>
<td>Q3-07</td>
<td>Q2-07</td>
<td>Q1-07</td>
</tr>
<tr>
<td class="firstcol">EMU-13</td>
<td>1.7%</td>
<td>3.1%</td>
<td>1.2%</td>
<td style="color: red;">2.3%</td>
<td>2.7%</td>
<td style="color: red;">2.5%</td>
<td style="color: red;">3.2%</td>
</tr>
<tr>
<td class="firstcol">France</td>
<td>1.4%</td>
<td>3.2%</td>
<td>1.4%</td>
<td style="color: red;">2.1%</td>
<td>2.2%</td>
<td style="color: red;">1.3%</td>
<td style="color: red;">1.9%</td>
</tr>
<tr>
<td class="firstcol">Germany</td>
<td>1.1%</td>
<td>2.7%</td>
<td>0.7%</td>
<td style="color: red;">1.7%</td>
<td style="color: red;">2.5%</td>
<td style="color: red;">2.6%</td>
<td style="color: red;">3.7%</td>
</tr>
<tr>
<td class="firstcol">Italy</td>
<td>--</td>
<td>1.7%</td>
<td>0.2%</td>
<td>--</td>
<td>1.9%</td>
<td style="color: red;">1.8%</td>
<td style="color: red;">2.4%</td>
</tr>
<tr>
<td class="firstcol">The Netherlands</td>
<td>4.7%</td>
<td>7.7%</td>
<td>1.1%</td>
<td>4.3%</td>
<td>3.9%</td>
<td style="color: red;">2.4%</td>
<td>3.2%</td>
</tr>
<tr>
<td class="firstcol">UK</td>
<td>2.5%</td>
<td>2.5%</td>
<td>3.3%</td>
<td style="color: red;">2.9%</td>
<td style="color: red;">3.2%</td>
<td>3.2%</td>
<td style="color: red;">3.2%</td>
</tr>
<tr>
<td class="firstcol">US</td>
<td>0.6%</td>
<td>4.9%</td>
<td>3.8%</td>
<td style="color: red;">2.5%</td>
<td>2.8%</td>
<td>1.9%</td>
<td style="color: red;">1.5%</td>
</tr>
<tr>
<td class="firstcol">Japan</td>
<td>3.7%</td>
<td>1.3%</td>
<td>-1.4%</td>
<td style="color: red;">1.8%</td>
<td>1.9%</td>
<td style="color: red;">1.7%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>
</body></html>

GDP growth is slowing on a broad front. German GDP is slowing year/year for four straight quarters. For most other countries Q3 growth brought an up tick that quarter and interrupted what would have been similar long strings of GDP [...]

GDP Slows on a Very Broad Front

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

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

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

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Michael J. Moran

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The headline index on import prices rose 1.9% in May, close to the blistering pace in April and the fourth consecutive high-side reading. This recent pressure has pulled the year-over-year change to 6.7%, a distinct shift from last year when import prices showed no change over the 12 months of 2025.

Prices of petroleum products have been the most important factor behind the recent surge, increasing 13.0% in May after an average of 17.8% in the prior two months. However, prices excluding petroleum products also have stirred this year, as they have increased more than 0.6% in each of the past five months. May posted the firmest increase in this string of brisk readings (1.3%). Prices of consumer goods had been increasing moderately in early 2026, but they jumped 0.5% in May. The changes in capital and consumer goods led to an increase of 0.8% in nonpetroleum prices in May and an average of 0.6% in the first five months of the year.

Some observers might seek to look for the effects of tariffs on import prices, but these figures would not be especially helpful in this regard, as prices are recorded before the imposition of tariffs. However, if foreign producers wished to absorb the tariff burden to remain competitive in the US market, they could reduce invoiced prices to keep post-tariff prices steady. Indeed, nonpetroleum prices softened after April of last year following the announcement of President Trump’s Liberation Day tariffs. The subsequent easing of some of the draconian tariffs and the nullification of tariffs imposed under the International Emergency Economic Powers Act might be factors leading importers to return to original prices this year. Given that the pressure on import prices ex-petroleum has been concentrated in the capital goods area, there does not seem to be a rush to return to pre-tariff pricing.

On the export side, prices rose 1.3% in May, continuing the firm pace seen in the preceding four months. Petroleum prices have played a role in this pressure, as shown by an increase of 2.4% in the industrial supply category (petroleum prices alone are not available on the export side). Food prices also have jumped this year, increasing 0.8% in May after an average of 1.2% in the prior three months. Prices of capital goods were tame in the early months of the year, but they have firmed in the past two months (0.5% in April and 0.7% in May).

These import and export price series are not seasonally adjusted; they can be found in Haver’s **USECON** database. Detailed figures are available in the **USINT** database. The expectations figure from the Action Economics Forecast Survey is in the **AS1REPNA** database.

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- Petroleum products led import prices higher, but capital goods also had an influence.
- Petroleum was also a factor on the export side; some stirring in food and capital goods.

Import and Export Prices: Firm in May

Sandy Batten

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Weighed down by further rises in longer-term interest rates, housing construction continued to languish in May. Housing starts plunged 15.4% m/m (-8.7% y/y) in May on top of a downwardly revised 8.5% monthly decline in April (previously -2.8% m/m). The level of starts plummeted to 1.177 million, the lowest since May 2020 when the economy was locked down during the COVID pandemic. The Action Economics Forecast Survey expected a 2.4% m/m decline to a level of 1.432 million units. The April/May average for starts was 1.285 million, 9.4% below the Q1 average. Residential investment has been a persistent drag on real GDP growth recently, subtracting from overall growth in each of the previous five quarters. Today’s report points to another subtraction in Q2.

Single-family starts fell 1.9% m/m (-6.7% y/y) in May on top of a downwardly revised 11.6% monthly plunge in April (previously -9.0% m/m). Multi-family starts, which had generally been trending up over the past year or so, albeit with quite a bit of volatility, plummeted 40.2% m/m (-14.2% y/y) in May following a downwardly revised 2.4% m/m decline in April (previously +10.3% m/m).

Starts fell in three of the four major geographic regions. Starts rose 3.7% m/m in the Midwest with gains in both single-family and multi-family starts. By contrast, starts fell in each of the other three regions, plunging 26.8% m/m in the Northeast, the third monthly decline in the past four months, falling 17.0% m/m in the South, also the third monthly decline in the past four months, and declining 17.2% m/m in the West, the fourth monthly decline in the past five months.

The performance of building permits is typically less volatile than that of starts. Total permits edged down 0.7% m/m (-0.2% y/y) to 1.413 million units in May following a 4.4% monthly gain in April and an 11.5% m/m fall in March. Expectations were for a 0.3% monthly increase in May. Single-family permits edged up 0.6% m/m (-1.8% y/y) in May versus a 1.6% monthly decline in April and a 3.7% m/m drop in March. By contrast, multi-family permits fell 2.8% m/m (+2.5 y/y) in May but this was after a 15.8% monthly surge in April.

In contrast to the regional performance of starts, permits fell in the Midwest (-18.7% m/m) but rose in each of the other three major geographic regions. Permits increased 3.1% m/m in the Northeast in May on top of a 18.1% monthly jump in April. They edged up 1.6% m/m in the South and rose 5.5% m/m in the West, the first monthly gain in three months.

The housing starts and permits figures can be found in Haver’s **USECON** database. The expectations figure is contained in the **AS1REPNA** database.

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- Housing starts plunged 15.4% m/m in May to the lowest level since May 2020 with a significant downward revision to the previously reported April decline.
- Single family starts fell 1.9% m/m while multi-family starts plummeted 40.2% m/m to their lowest level since November 2024.
- Less volatile permits slid 0.7% m/m in May with a slight rise (+0.6% m/m) in single-family permits and a 2.8% monthly drop in multi-family permits.

U.S. Housing Starts Plunged in May

260616E.jpg

The ZEW diffusion survey (an up-minus-down survey) showed mixed improvements in the economic situation and improvements for macroeconomic expectations in June. The report shows the economic situation improving in the United States and China, with the euro area taking a small step back (to -43.4 in June from -41.4 in May), while Germany also saw a step back in the economic situation (to -81.0 from -77.8). The ranking metrics show the German reading as lower only 13.8% of the time—the weakest showing among the four. The EMU ranking is at a 36.7 percentile, with the U.S. ranking close to that at a 42.5 percentile. China has a 76.2 percentile ranking over a shorter timeline.

Macro expectations show solid improvements reported in Germany, the U.S., and China. Macroeconomic rankings all are muted, with the U.S. at a 39.9 percentile standing as the strongest, followed by Germany at a 35.2 percentile standing and China at a 22.2 percentile standing.

Inflation expectations are still high across the board, ranging from a low percentile standing for the EMU, Germany, and China—from a euro area low of 78.6 to a high standing for this group at 85.7 for China. In contrast, the U.S. ranking is still high, but only at its 61.8 percentile. And all the inflation expectations readings fell in June as optimism on opening the Strait of Hormuz has been growing. 

Nonetheless, expectations for short-term rates have been rising. They rose solidly in the EMU and China, and strongly in the U.S., from 10.5 in May to 38.5 in June.

In contrast, long-term rate expectations rose across the board as well but by modest amounts. The rankings for short-term expectations are stronger for all three countries compared to the ranking on long-term rate expectations. I suppose we can understand that as expectations of anti-inflation medicine.

Stock markets are assessed as higher month-to-month in the EMU and in all three countries. China has a strong ranking for its stock market assessment at its 81st percentile. The U.S. standing is above its median at its 51.5 percentile; the euro area expectation is at its 34.2 percentile, with German stock market expectations still weak at its 23.6 percentile.

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The pending conflict-ending deal in the Middle East should be a catalyst for further improvement. While the U.S.-Iran deal is not yet announced in detail—or even signed—market reactions are clear-cut across the board; there is no sign that this deal is expected to wither so soon. But it still has issues and contentious elements, such as Iran’s nuclear ambitions and the fact that the Israel is not on board with what it regards as a too-early exit from hostilities. Israel wants regime change and warns of a more difficult future without one.

ZEW Shows Mixed Conditions and an Expectations Rebound

Winnie Tapasanun

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Industrial production (IP) increased a less-than-expected 0.1% m/m in May, the third monthly gain in four months, following an upwardly revised 0.9% rise in April (+0.7% initially) and a 0.3% decline in March (unrevised), according to data from the Federal Reserve Board. A 0.3% m/m May increase had been expected in the Action Economics Forecast Survey. The year-on-year rate accelerated to 1.7% in May, the highest since January, from 1.4% in April (0.3% in May 2025). The May IP index at 102.6 was 3.3% above a low of 99.3 in November 2024 and 3.4% above a low of 99.2 in January 2024.

By **industry groups**, manufacturing production was essentially unchanged m/m (+1.4% y/y) in May after upwardly revised gains of 0.7% in April (+0.6% initially) and 0.2% in March (+0.1% previously). Durable goods production rose 0.8% (3.2% y/y) in May, the fourth m/m rise in five months, after a 1.1% increase in April. Within durables, almost all categories rose m/m in May, led by a 2.3% gain (-2.0% y/y) in wood products, followed by increases of 1.8% (3.1% y/y) in nonmetallic mineral products, 1.3% (4.4% y/y) in primary metals, 1.2% (-1.7% y/y) in motor vehicles & parts, 1.0% (-4.5% y/y) in furniture & related products, 0.9% (10.3% y/y) in computer & electronic products, 0.8% (2.5% y/y) in fabricated metal products, 0.5% (6.9% y/y) in aerospace & miscellaneous transportation equipment, 0.5% (2.7% y/y) in electrical equipment, appliances & components, and 0.2% (4.3% y/y) in machinery. Notably, aircraft & parts production climbed 1.1% (11.7% y/y), the fourth consecutive m/m rise, after a 2.6% April gain. Meanwhile, miscellaneous durable goods were virtually unchanged m/m (+0.9% y/y) in May following a 0.8% decline in April.

Nondurable goods production slid 0.9% (-0.6% y/y) in May, the first m/m slide since January, after a 0.3% increase in April. The May output decline was led by a 3.0% drop (-1.1% y/y) in petroleum & coal products, followed by decreases of 2.4% (-4.1% y/y) in textiles & product mills, 1.6% (-2.3% y/y) in printing & related support activities, 0.8% (0.0% y/y) in chemicals, 0.8% (-3.0% y/y) in paper, 0.5% (-0.4% y/y) in food, beverages & tobacco, and 0.3% (-0.2% y/y) in plastics & rubber products. In contrast, apparel & leather goods—the only rising category—recovered 2.4% (-0.1% y/y) in May following two successive m/m declines.

Mining activity advanced 1.3% (2.0% y/y) in May, the fourth m/m gain in five months, after a 0.2% increase in April (-0.1% initially). Utilities output, however, fell 0.4% (+3.1% y/y) following a 2.2% April rebound (+1.9% initially), reflecting a 1.7% drop (+1.8% y/y) in electric utilities output and an 8.5% rise (12.5% y/y) in natural gas utilities output.

By **market groups**, construction supplies production increased 1.1% (2.3% y/y) in May, up for the second time in three months, reversing a 0.3% decline in April. Business equipment output rose 0.6% (5.7% y/y), the fifth m/m rise in six months, following a 1.8% April gain. Materials production grew 0.3% (1.9% y/y), the third m/m increase in four months, after a 0.7% April rise. In contrast, consumer goods output fell 0.5% (-0.6% y/y) after a 1.2% April rebound, reflecting a 0.5% increase (-3.0% y/y) in durable consumer goods and a 0.8% decrease (+0.1% y/y) in nondurable consumer goods.

In **special classifications**, factory output of selected high-tech industries rose 1.8% (12.6% y/y) in May on top of an upwardly revised 2.2% rise in April (+1.0% initially)—marking the third straight m/m gain and the seventh in eight months. Manufacturing production excluding selected high-tech industries held steady m/m (+1.1% y/y) in May after a 0.7% increase in April, while manufacturing production excluding selected high-tech and motor vehicles & parts dipped 0.1% (+1.3% y/y) following a 0.5% April rise.

Capacity utilization inched up to 76.2% in May, the highest since July 2025, from 76.1% in April (unrevised). The result matched the forecast by the Action Economics Forecast Survey. The May reading was 3.2 percentage points below its long-run (1972–2025) average. Manufacturing capacity utilization held at 75.7% in May and April (75.8% previously), the highest since September 2025; the May rate was 2.5 percentage points below its long-run average.

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

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- May IP +0.1% (+1.7% y/y), third m/m increase in four months, led by a 1.3% gain in mining.
- Manufacturing unchanged (+1.4% y/y), w/ durables +0.8% and nondurables -0.9%.
- Selected high-tech +1.8%, third straight m/m rise; motor vehicles +1.2%, fifth gain in six mths.
- Utilities -0.4%, led by a 1.7% drop in electric utilities output.
- Key categories in market groups mostly up.
- Capacity utilization up to a 10-month-high 76.2%; mfg. capacity utilization steady at 75.7%.

U.S. Industrial Production Up Marginally in May; Manufacturing Flat

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The economy watchers survey, along with other surveys, was doing fine until about March in the wake of the Iran war and the closing of the Strait of Hormuz. With that action, the economy watchers index dove sharply from a level of 48.9 in February to 42.2 in March and slipped further to 40.8 in April. The various sector gauges for the retail sector, eating & drinking places, the service sector, and employment are all lower. The only improvement in April came from the future index, where there was some minor optimism about the potential for conditions to improve ahead. And, of course, over the weekend, there is the announcement of a U.S.-Iran deal to end the hostilities between the two countries. That is expected to be signed on Friday and then will put the war into a pause phase for the next 60 days, with the hope that the two sides can come to agreement on some of the stickier elements, including Iran's access to nuclear materials, which has yet to be hammered out.

That omission makes the announcement of this arrangement as a conflict ending deal hugely speculative. Another sticking point is that Israel is not on board and is still engaged in fighting with Hezbollah.

The Teikoku survey, another survey using diffusion indexes that describes Japanese sectors, weakened sharply in March and weakened across the board again in April. Manufacturing, retailing, wholesaling, services, and construction sectors all are posting weaker numbers in April than in March.

The percentile rankings for the economy watchers survey and the Teikoku surveys are both very weak, with the economy watchers standings in the 10th percentile range or lower; the Teikoku rankings are generally higher, around the 30th percentile or perhaps as low as the 20th percentile, as seen in construction. These are still very weak readings. All the raw diffusion readings are below 50, indicating contraction.

The sector indexes from METI on manufacturing and services, which both weakened in March, rebounded in April; in both cases, the April readings were above the February readings. Standings of these indexes based on growth rates are around the 80th percentile; at the 79th percentile for industry and at the 82.5 percentile for the tertiary or services index. Based on the value of the index itself, the tertiary index has a standing at its 98.9 percentile, which we would expect over time for an index that simply grows, as is the case for the METI indexes that are not diffusion indexes. However, the industrial index for Japan has only a 19.9 percentile standing, indicating the stress that Japan's industrial sector has been through, although the current ranking based on the growth rate shows that there is some recovery in progress. The industry level index is 6.3% below its January 2020 level, while the tertiary index is 3.1% above its January 2020 level.

The leading economic index has continued to rise during all these times. It rose in February compared to January, and it rose again in March compared to February; now in April compared to March, it was up again to 115.9, from the March reading of 115.4. Based on year-over-year growth, the leading economic index has a 95.1 percentile standing, which is relatively strong. Based on the index level, we get another strong reading at the 93.2 percentile mark. The leading index is also up 12.9% from its January 2020 level.

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The report of a deal to end the U.S. embargo of Iran and open the Strait of Hormuz without tolls is potentially a real gamechanger for the economic outlook. However, the deal still had pieces to be negotiated, and I, for one, am very wary since we know Iran wants to have nuclear access and the U.S. wants to block it. I just don’t see what a 60-day cooling period for negotiation will do. It will push the U.S. closer to midterm elections and make Trump less willing to engage in conflict with Iran, which is likely to remain intransigent on this issue of nuclear access. I view this as the eye of a hurricane, a period in which there will be calm, with the potential for a reset of confrontation down the road, say 60 days on.

Economy in Brief

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Michigan Consumer Sentiment Dropped Hard

U.S. Industrial Production Ticked 0.1% Higher

U.S. Import Price Rise Strong

Michigan Consumer Sentiment Dropped Hard

U.S. Business Inventory Accumulation Down in 4Q Due To Autos

U.S. Weekly Initial Jobless Insurance Claims Slipped, Monthly Rose

U.S. Trade Deficit Narrowed Sharply

GDP Slows on a Very Broad Front