Robert Brusca

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080205f.jpg" width="353">
So much for de-coupling&#133; The US and Europe, arguably, have never been more in sync (or maybe I should say &#145;sink&#146;) than they are right now. Europe&#146;s MFG PMI is holding up as is the MFG index in the US. Oddly, in both countries, it is the non-MFG index that is falling sharply. In the US Manufacturing tends to be the most directional of these two sorts of surveys, while in Europe they have tended to move more in concert. Still, the rise in the manufacturing PMI in Europe for January as the service index sinks lower is unconventional. 
Across the Euro Area there is plenty of evidence of service sector weakness with Spain&#145;s index on an all-time low and Italy&#146;s near the bottom of its all-time range. Germany&#146;s Service sector is below the midpoint of its normal range. France&#146;s absolute reading is strong but it is also eroding with a new sense of urgency. 
There is something unique about this cycle if a down leg is being featured. It is that it is being led by services&#133; AND that services weakness seems to be leading weakness even in the job market where that sector makes a much more than a proportionate contribution. 
As a cyclical signal, these PMI readings are the worst in the US and in Europe while other gauges like consumer spending and consumer confidence are lower, they are only lower and not &#145;signaling&#146; anything. It is unusual for the PMIs to lead the parade of weakness lower. In Europe the fall is sharp in January. In the US drop off is more dramatic and clearly recessionary in nature. These are clearly variables whose trends we will want to watch; we will also want to watch to see if Manufacturing PMI&#146;s eventually succumb to this weakness or not. 

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
NTC Services Indices for EU/EMU
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td>Jan-08</td>
<td>Dec-07</td>
<td>Nov-07</td>
<td>3Mo</td>
<td>6Mo</td>
<td>12Mo</td>
<td>Percentile</td>
</tr>
<tr class="odd">
<td class="firstcol">Euro-13</td>
<td>50.56</td>
<td>53.14</td>
<td>54.14</td>
<td>52.61</td>
<td>54.32</td>
<td>55.97</td>
<td>27.3%</td>
</tr>
<tr>
<td class="firstcol">Germany</td>
<td>49.17</td>
<td>51.24</td>
<td>53.09</td>
<td>51.17</td>
<td>53.57</td>
<td>55.74</td>
<td>33.2%</td>
</tr>
<tr>
<td class="firstcol">France</td>
<td>56.60</td>
<td>58.89</td>
<td>59.15</td>
<td>58.21</td>
<td>58.05</td>
<td>58.41</td>
<td>46.8%</td>
</tr>
<tr>
<td class="firstcol">Italy</td>
<td>47.86</td>
<td>49.71</td>
<td>50.77</td>
<td>49.45</td>
<td>52.28</td>
<td>54.23</td>
<td>3.8%</td>
</tr>
<tr>
<td class="firstcol">Spain</td>
<td>44.24</td>
<td>50.99</td>
<td>50.69</td>
<td>48.64</td>
<td>50.71</td>
<td>53.31</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">Ireland</td>
<td>51.90</td>
<td>53.53</td>
<td>52.81</td>
<td>52.75</td>
<td>54.41</td>
<td>56.39</td>
<td>29.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">EU only</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">UK</td>
<td>52.46</td>
<td>52.36</td>
<td>51.95</td>
<td>52.26</td>
<td>54.02</td>
<td>55.69</td>
<td>43.2%</td>
</tr>
<tr>
<td colspan="8">percentile is over range since May 2000</td>
</tr>
</tbody>
</table>
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So much for de-coupling The US and Europe, arguably, have never been more in sync (or maybe I should say sink) than they are right now. Europes MFG PMI is holding up as is the MFG index in the US. Oddly, in both countries, it is [...]

Europe’s Service Index Drops as US ‘Service’ Index Collapses

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080205c.jpg" width="353">
Chain store sales last week recovered the prior period&#39;s loss with a 1.7% rise, according to the International Council of Shopping Centers (ICSC)-UBS. The gain followed a 1.2% decline at the end of January. Sales for all of January fell 0.3% from the December average.
The latest week&#39;s increase was enough to lift sales 0.8% above the January average level.
During the last ten years there has been a 45% correlation between the y/y change in chain store sales and the change in nonauto retail sales less gasoline.
The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.
During the last week of January the leading indicator of chain store sales from ICSC-UBS collapsed by 1.8% w/w after a 0.3% decline during the prior week. For all of January the leading indicator fell 0.1%, the third consecutive slight m/m decline.
Monday&#39;s speech, Protecting Homeowners and Sustaining Home Ownership, by Federal Reserve Board Governor Kroszner is available <a href="http://www.federalreserve.gov/newsevents/speech/kroszner20080204a.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/surveyw/@S2/@S2.HTM">ICSC-UBS (SA, 1977=100)</a></th>
<th scope="col">02/02/08</th>
<th scope="col">01/26/08</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 Weekly Chain Store Sales</td>
<td>490.6</td>
<td>482.6</td>
<td>1.6 %</td>
<td>2.8%</td>
<td>3.3%</td>
<td>3.6%</td>
</tr>
</tbody>
</table>


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Chain store sales last week recovered the prior period's loss with a 1.7% rise, according to the International Council of Shopping Centers (ICSC)-UBS. The gain followed a 1.2% decline at the end of January. Sales for all of January [...]

U.S. Chain Store Sales in Modest Uptrend

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080205a.jpg" width="353">
The January Business Activity Index for the non-manufacturing sector, from the Institute for Supply Management, fell out of bed to 41.9 from 54.4 in December. A figure above 50 indicates rising activity and the latest was quite a bit lower than Consensus expectations for a reading of 52.5.
Since the series&#39; inception in 1997 there has been a 44% correlation between the level of the Business Activity Index in the non-manufacturing sector and the Q/Q change in real GDP for the services and the construction sectors. The correlation of the factory sector ISM index with the change in real GDP less just services is a higher 57%, though over the last ten years it only has been 34%.
The January level was the lowest since October 2001 and it was the first below 50 since 2003. October 2001 was about the end of that year&#39;s economic recession. The 12.5 point drop in the index from December was a record m/m decline.
The new orders sub index dropped ten points m/m to a reading of 43.5, the lowest since 2001. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080205b.jpg" width="353">
The employment sub index similarly fell sharply to its lowest level since 2002. Since the series&#39; inception in 1997 there has been a 56% correlation between the level of the ISM non-manufacturing employment index and the m/m change in payroll employment in the service producing plus the construction industries.
Pricing power eased slightly m/m for the second month. Since inception ten years ago, there has been a 60% correlation between the price index and the q/q change in the GDP services chain price index.
ISM surveys more than 370 purchasing managers in more than 62 industries including construction, law firms, hospitals, government and retailers. The non-manufacturing survey dates back to July 1997.
The Business Activity Index for the non-manufacturing sector reflects a question separate from the subgroups mentioned above. In contrast, the ISM manufacturing sector composite index is a weighted average of five components.
Released yesterday, The Budget Message of the President can be found <a href="http://www.whitehouse.gov/omb/budget/fy2009/pdf/budget/message.pdf"> here</a> and The Nation&#39;s Fiscal Outlook is available <a href="http://www.whitehouse.gov/omb/budget/fy2009/pdf/budget/outlook.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF03/@EF03.HTM">ISM Nonmanufacturing Survey</a></th>
<th scope="col">January</th>
<th scope="col">December</th>
<th scope="col">January &#39;07</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Business Activity Index</td>
<td>41.9</td>
<td>54.4</td>
<td>57.9</td>
<td>56.0</td>
<td>58.0</td>
<td>60.2</td>
</tr>
<tr>
<td class="firstcol">Prices Index</td>
<td>70.7</td>
<td>71.5</td>
<td>56.1</td>
<td>63.8</td>
<td>65.3</td>
<td>68.0</td>
</tr>
</tbody>
</table>


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The January Business Activity Index for the non-manufacturing sector, from the Institute for Supply Management, fell out of bed to 41.9 from 54.4 in December. A figure above 50 indicates rising activity and the latest was quite a bit [...]

U.S. ISM Non-Manufacturing Index Down Sharply, Lowest Since 2001

Louise Curley

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080204h.jpg" align="left" border="0" height="265" width="353">
Both the Australian and New Zealand dollars have rebounded, if
somewhat irregularly, since the U. S. Federal Reserve Board started to
lower interest rates in September, as can be seen in the first chart,
showing the daily values of the two currencies for the past year or so.
A longer term perspective is shown in the second chart where the broad
J. P. Morgan effective nominal trade weighted indexes are shown. This
chart shows not only that the appreciations of these currencies have
been underway since the beginning of this decade, but it also shows
that the appreciations have been widespread and not simply with the U.
S. dollar.
While interest rate differentials are not the only factor in
the relative value of one country vis-à-vis another, they are among the
more important. The third chart shows the yield on a 2-year government
security in the three countries. Interest rates in Australia and New
Zealand have been substantially above those in the U. S and steady
while those in the U. S. have dropped sharply since the Fed began to
cut rates. As of January of this year the differential between the
2-year security in Australia and the U. S. was 4.25 points and in New
Zealand and the U. S. security, 4.73 points.
<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080204g.jpg" height="265" width="312"><img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080204f.jpg" height="265" width="312">

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol">AUSTRALIA
AND NEW ZEALAND&nbsp;</th>
<th scope="col">Jan 31, 2008</th>
<th scope="col">Sep 7, 2007&nbsp;</th>
<th scope="col">Jul 24, 2007&nbsp;</th>
<th scope="col">Jan 31, 2007</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Australian $&nbsp;
(U. S.$)</td>
<td>.8968</td>
<td>.8259</td>
<td>.8841</td>
<td>.7740</td>
</tr>
<tr class="odd">
<td class="firstcol">New Zealand $ (U. S.$)</td>
<td>.7884</td>
<td>.6889</td>
<td>.8069</td>
<td>.6856</td>
</tr>
<tr class="grey3">
<td class="firstcol"></td>
<td>Jan 2008</td>
<td>Sep 2007&nbsp;</td>
<td>Jan 2007&nbsp;</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">Australian Trade
Weighted 2000=100</td>
<td>129.6</td>
<td>128.7</td>
<td>122.7</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol"> New Zealand Trade
Weighted (2000=100)</td>
<td>140.4</td>
<td>135.1</td>
<td>135.9</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol"></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="grey3">
<td class="firstcol" colspan="5">2-Year
Government
Security&nbsp;&nbsp;(EOP) %</td>
</tr>
<tr class="odd">
<td class="firstcol">Australia</td>
<td>6.63</td>
<td>6.43</td>
<td>6.15</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">New
Zealand&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;</td>
<td>7.21</td>
<td>6.97</td>
<td>9.57</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">U. S.</td>
<td>2.48</td>
<td>3.97</td>
<td>4.88</td>
<td>--</td>
</tr>
</tbody>
</table>
</body></html>

Both the Australian and New Zealand dollars have rebounded, if somewhat irregularly, since the U. S. Federal Reserve Board started to lower interest rates in September, as can be seen in the first chart, showing the daily values of [...]

Currencies in Australia and New Zealand Continue to Strengthen

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080204e.jpg" align="left" border="0" height="265" width="353">PPI Trends. 


PPI trends are accelerating for the headline measure as well
as for key country level headlines for inflation. In the Euro area inflation continues to flare for energy and
for MFG goods more generally. Capital goods inflation has remained
subdued at a low of 1.5% Yr/Yr pace. Consumer goods inflation has
backed off its highs but is still strong at 3.9% Yr/Yr. Intermediate
goods inflation has worked its way lower as well. Inflation ex-energy
has come back down to 2.1%, just a small step over the 2% rate that the
ECB has set as its overall inflation ceiling for the Euro area-wide
HICP. In that respect inflation is beginning to behave. Once energy
prices stop boosting headline inflation there is every reason to
believe that the overall rate will revert to the core.
By country&#8230; 



For Germany, Italy and France, while headline inflation is
clearly over the top, ex-energy inflation shows hopeful trends, for
Germany and Italy, ex-energy inflation is at a 1.4% pace over three
months and is below the 2% over the three- and six-month horizons. In
France, the ex-energy inflation rate is at 2.2% above the 2% headline
ceiling pace but in a mode of deceleration. The UK shows that over the top inflation is still
accelerating. At 3.6% ex-energy inflation is over the top as well and
roughly stable at that pace making the BOE&#8217;s task difficult.&nbsp;Summing up 


On balance there is reason for some optimism since the
ex-energy measures are in better shape than the headline inflation
rates, except for the UK. Ex-energy rates are decelerating as well and
in the case of Germany and Italy they already are well below the 2%
top-allowable pace for inflation generally. This progress may be enough
to keep the ECB on hold and waiting for these core trends to take root.
In time it should dominate the now higher headline rates of inflation
across the Euro area nations as oil prices settle lower in the wake of
the global slowing in growth. 


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr><th colspan="7" scope="col"> Euro Area and UK PPI Trends</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="2">M/M</td>
<td colspan="4">Saar</td>
</tr>
<tr class="odd">
<td class="firstcol">Ezone-13</td>
<td>Dec-07</td>
<td>Nov-07</td>
<td>3-Mo</td>
<td>6-Mo</td>
<td>Yr/Yr</td>
<td>Y/Y Yr Ago</td>
</tr>
<tr>
<td class="firstcol">Total excl Constructions</td>
<td>0.1%</td>
<td>0.9%</td>
<td style="color: red;">6.8%</td>
<td style="color: red;">4.9%</td>
<td style="color: red;">4.3%</td>
<td>4.1%</td>
</tr>
<tr>
<td class="firstcol">Excl Energy</td>
<td>0.1%</td>
<td>0.1%</td>
<td>2.1%</td>
<td>2.5%</td>
<td>3.1%</td>
<td>3.4%</td>
</tr>
<tr>
<td class="firstcol">Capital Goods</td>
<td>0.1%</td>
<td>0.0%</td>
<td>0.9%</td>
<td>1.0%</td>
<td>1.5%</td>
<td>1.8%</td>
</tr>
<tr>
<td class="firstcol">Consumer Goods</td>
<td>0.3%</td>
<td>0.3%</td>
<td>4.8%</td>
<td style="color: red;">5.3%</td>
<td style="color: red;">3.9%</td>
<td>1.5%</td>
</tr>
<tr class="even">
<td class="firstcol">Intermediate &amp; Capital
Goods</td>
<td>-0.1%</td>
<td>0.0%</td>
<td>0.7%</td>
<td>1.0%</td>
<td>2.7%</td>
<td>4.4%</td>
</tr>
<tr>
<td class="firstcol">Energy</td>
<td>0.1%</td>
<td>3.4%</td>
<td style="color: red;">23.2%</td>
<td style="color: red;">13.0%</td>
<td style="color: red;">8.3%</td>
<td>6.2%</td>
</tr>
<tr>
<td class="firstcol">Manufacturing</td>
<td>0.0%</td>
<td>0.8%</td>
<td style="color: red;">5.3%</td>
<td>4.3%</td>
<td style="color: red;">4.7%</td>
<td>2.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Germany</td>
<td>-0.1%</td>
<td>0.8%</td>
<td style="color: red;">4.8%</td>
<td style="color: red;">2.7%</td>
<td>2.5%</td>
<td>4.4%</td>
</tr>
<tr>
<td class="firstcol">Germany excl Energy</td>
<td>0.0%</td>
<td>-0.1%</td>
<td>1.4%</td>
<td>1.4%</td>
<td>2.2%</td>
<td>2.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">France</td>
<td>0.2%</td>
<td>0.8%</td>
<td style="color: red;">6.8%</td>
<td style="color: red;">5.6%</td>
<td style="color: red;">4.5%</td>
<td>2.7%</td>
</tr>
<tr>
<td class="firstcol">France excl Energy</td>
<td>0.2%</td>
<td>0.1%</td>
<td>2.2%</td>
<td>3.1%</td>
<td>3.0%</td>
<td>2.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">Italy</td>
<td>-0.1%</td>
<td>1.1%</td>
<td style="color: red;">6.4%</td>
<td style="color: red;">5.4%</td>
<td>4.6%</td>
<td>5.2%</td>
</tr>
<tr>
<td class="firstcol">Italy excl Energy</td>
<td>-0.1%</td>
<td>0.2%</td>
<td>1.4%</td>
<td>1.9%</td>
<td>3.0%</td>
<td>4.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">UK</td>
<td>0.5%</td>
<td>2.9%</td>
<td style="color: red;">23.8%</td>
<td style="color: red;">15.2%</td>
<td style="color: red;">4.0%</td>
<td>0.4%</td>
</tr>
<tr>
<td class="firstcol">UK excl Energy</td>
<td>0.3%</td>
<td>0.2%</td>
<td style="color: red;">3.6%</td>
<td>3.4%</td>
<td style="color: red;">3.5%</td>
<td>3.1%</td>
</tr>
<tr class="grey2">
<td colspan="7" class="firstcol">E-zone 13 Harmonized PPI excluding
Construction</td>
</tr>
<tr class="grey2">
<td colspan="7" class="firstcol">The EA 13 countries are Austria,
Belgium, Finland, France, Germany,</td>
</tr>
<tr class="grey2">
<td colspan="7" class="firstcol">Greece, Ireland, Italy, Luxembourg,
the Netherlands, Portugal, Slovenia</td>
</tr>
</tbody>
</table>
</body></html>

PPI Trends. PPI trends are accelerating for the headline measure as well as for key country level headlines for inflation.In the Euro area inflation continues to flare for energy and for MFG goods more generally. Capital goods [...]

PPI Main Sector Trends Still Excessive But Lose Some Momentum

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<div align="left"><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080204a.jpg" width="353">
During December, the value of construction put in place fell 1.1% after a downwardly revised 0.4% November dip. The latest decline was the third consecutive monthly drop and it finished a year where activity fell 2.7%, the largest y/y drop since 1991.
Deep recession in the housing industry weighed on residential building and dropped construction activity by 2.8% m/m after a huge 3.0% plunge during November. The annual decline of 18.3% in residential building was a record. Construction activity on new single family units was off 5.4% in December and by 27.3% for the entire year. Building activity on multi-family units also fell by a sharp 1.9% and by 6.5% for the year. Spending on improvements registered the only m/m increase in December with a 1.0% rise that limited the drop in activity to 0.3% for the year.
Housing and the &quot;R&quot; Word from the Federal Reserve Bank of St. Louis can be found <a href="http://research.stlouisfed.org/publications/net/20080201/cover.pdf"> here</a> .
During the last twenty years there has been an 84% correlation between the q/q change in the value of residential building and its contribution to growth in real GDP.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080204b.jpg" width="353">
Firm gains in nonresidential building activity continued in December to cushion the downside in overall building spending. Nonresidential building activity rose 1.3% in December for the fifth straight strong monthly gain. It raised spending by 18.2% for the year after a another double digit rise in 2006. Building in the lodging area rose a huge 62.9% during all of last year while office construction surged 20.1%. Multi-unit retail (shopping malls) rose 15.3% after gains of 28.0% and of 20.9% during the two prior years and commercial building activity surged 13.5%.
The bright spots last year in the nonresidential area also were a 20.4% gain in education and an 11.6% rise in the health care industry. Spending in the factory sector also rose by 9.2% last year after a 14.4% 2006 gain &amp; a 26.6% 2005 surge. Spending in the transportation area increased 8.3% on the heels of a 12.2% rise during 2006.
Public construction spending also was strong last year and rose 12.5%. Construction on highways &amp; streets rose 7.6% after increases of 11.9% and 8.8% during the two prior years. The value of construction on highways &amp; streets is nearly one third of the value of total public construction spending. Construction spending in education area also surged by 12.8% last year after strong gains during the two prior years while spending on health care facilities jumped 28.5%.
These more detailed categories represent the Census Bureau&#146;s reclassification of construction activity into end-use groups. Finer detail is available for many of the categories; for instance, commercial construction is shown for Automotive sales and parking facilities, drugstores, building supply stores, and both commercial warehouses and mini-storage facilities. Note that start dates vary for some seasonally adjusted line items in 2000 and 2002 and that constant-dollar data are no longer computed. </div>

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">&nbsp;</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>-1.1%</td>
<td>-0.4%</td>
<td>-2.3%</td>
<td>-2.7%</td>
<td>5.6%</td>
<td>10.7%</td>
</tr>
<tr>
<td class="firstcol">Private</td>
<td>-1.0%</td>
<td>-1.0%</td>
<td>-6.1%</td>
<td>-6.8%</td>
<td>4.7%</td>
<td>12.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Residential</td>
<td>-2.8%</td>
<td>-3.0%</td>
<td>-20.4%</td>
<td>-18.3%</td>
<td>0.5%</td>
<td>13.7%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Nonresidential</td>
<td>1.3%</td>
<td>1.8%</td>
<td>20.4%</td>
<td>18.2%</td>
<td>15.2%</td>
<td>7.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">Public</td>
<td>-1.5%</td>
<td>1.3%</td>
<td>10.1%</td>
<td>12.5%</td>
<td>9.2%</td>
<td>6.2%</td>
</tr>
</tbody>
</table>
</body>
</html>

During December, the value of construction put in place fell 1.1% after a downwardly revised 0.4% November dip. The latest decline was the third consecutive monthly drop and it finished a year where activity fell 2.7%, the largest y/y [...]

U.S. Construction Spending Decline Largest Since 1991

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080204d.jpg" width="353">
U.S. sales of light vehicles in January fell 6.3% m/m to a 15.24M unit annual selling rate, according to the Autodata Corporation. That rate of sales was the lowest since October of 2005. After two years when sales fell 2.2% in 2007 and 2.5% in 2006, sales started 2008 5.8% below the 2007 average.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080204c.jpg" width="353">
Sales of domestically made light vehicles fell 3.8% last month after a 0.6% dip in December. Sales of U.S. made cars dropped 3.8% after the 4.8% December decline. Sales of domestically made cars also dropped 3.8% after a 4.8% m/m December decline while sales of domestically made light trucks also fell 3.8%. That gave back all of a 2.9% December gain.
Sales of imported light vehicles plunged 13.6% to 3.57M units, the lowest since early 2006. Sales of imported autos were off 15.4% m/m while sales of imported light trucks dropped 10.6%.
Import&#39;s share of the U.S. light vehicle market fell back to 23.5% from a record 24.6% for of last year.
Economy in Slower Traffic Through 2008 from the Federal Reserve Bank of Chicago is available <a href="http://www.chicagofed.org/publications/fedletter/cflaugust2007_241a.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED09/@ED0901/@ED0901.HTM">Light Vehicle Sales (SAAR, Mil. Units)</a></th>
<th scope="col">January</th>
<th scope="col">&nbsp;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">Total</td>
<td>15.24</td>
<td>16.27</td>
<td>-8.5%</td>
<td>16.18</td>
<td>16.55</td>
<td>16.96</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Autos</td>
<td>7.22</td>
<td>7.82</td>
<td>-5.7%</td>
<td>7.58</td>
<td>7.77</td>
<td>7.65</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Domestic</td>
<td>5.01</td>
<td>5.21</td>
<td>-2.2%</td>
<td>5.07</td>
<td>5.31</td>
<td>5.40</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Imported</td>
<td>2.21</td>
<td>2.62</td>
<td>-12.9%</td>
<td>2.51</td>
<td>2.45</td>
<td>2.25</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Light Trucks</td>
<td>8.02</td>
<td>8.44</td>
<td>-10.8%</td>
<td>8.60</td>
<td>8.78</td>
<td>9.32</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Domestic</td>
<td>6.66</td>
<td>6.92</td>
<td>-10.4%</td>
<td>7.12</td>
<td>7.42</td>
<td>8.12</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Imported</td>
<td>1.36</td>
<td>1.52</td>
<td>-12.5%</td>
<td>1.48</td>
<td>1.37</td>
<td>1.20</td>
</tr>
</tbody>
</table>
</body>
</html>

U.S. sales of light vehicles in January fell 6.3% m/m to a 15.24M unit annual selling rate, according to the Autodata Corporation. That rate of sales was the lowest since October of 2005. After two years when sales fell 2.2% in 2007 [...]

U.S. Vehicle Sales in January Lowest in Over Two Years

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

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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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