Robert Brusca

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080131e.jpg" align="left" border="0" height="265" width="353">
German retail sales in December did nothing to make large
piles of presents appear under the old tanenbaum. Retail sales ex
autos, German clothing sales and vehicle sales (that lag for now) each
shows a dwindling trend. In the fourth quarter, nominal ex auto sales
are lower at a 7.4% annual rate; in real terms that becomes a -11.4%
annual rate.

The German unemployment rate continues to drop but German
unemployment still hovers above 8%. Despite ongoing e-Zone improvements
the consumer remains a lagging sector and now creeping evidence shows a
slowing across the e-Zone itself. Consumer confidence and retailing
continue to be the lagging sectors that optimists look to become
sources of growth as the Germany economy shifts into its next gear. The
problem is that various consumer measures suggest that no such pick-up
lies ahead for the consumer sentiment or for consumer spending.
Strength in the euro, while a source of contentment to the ECB - and
many Germans as well - is also a source of angst for what it means to
German export prospects.

With the release of the EU Commission indexes today the German
economy showed a drop to -1 in sentiment for the consumer sector in
January. Retailing, too, saw sentiment fall back from a -18 rating in
December to -22 in January. Germany&#8217;s industrial sector, the back bone
of the economy, stepped back to post a +1 reading from +2 in December.
The services and construction sectors (the latter still very weak) each
posted month-to-month improvements. But by and large German sectors
took a step back in January with Germany&#8217;s overall sentiment reading
falling by two full points. The consumer sector does not seem about to
get out of its rough patch at all.


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="9" scope="col"> German
Real and Nominal Retail Sales&nbsp;</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Nominal</td>
<td>Dec-07</td>
<td>Nov-07</td>
<td>Oct-07</td>
<td>3-Mo</td>
<td>6-Mo</td>
<td>12-Mo</td>
<td>Year Ago</td>
<td>SAAR (QTR)</td>
</tr>
<tr class="grey1">
<td class="firstcol">Retail Ex Auto</td>
<td>-0.4%</td>
<td>-1.1%</td>
<td>-1.4%</td>
<td>-11.0%</td>
<td>-4.0%</td>
<td>-4.9%</td>
<td>9.8%</td>
<td>-7.4%</td>
</tr>
<tr>
<td class="firstcol">Motor Vehicle and Parts</td>
<td>--</td>
<td>-1.2%</td>
<td>0.4%</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>38.2%</td>
<td>--</td>
</tr>
<tr class="grey1">
<td class="firstcol">Food Beverages &amp; Tobacco</td>
<td>-1.4%</td>
<td>-2.3%</td>
<td>0.1%</td>
<td>-13.5%</td>
<td>-5.3%</td>
<td>-3.3%</td>
<td>5.7%</td>
<td>-4.5%</td>
</tr>
<tr>
<td class="firstcol">Clothing Footwear</td>
<td>2.3%</td>
<td>-1.5%</td>
<td>-8.5%</td>
<td>-27.8%</td>
<td>-3.7%</td>
<td>-2.1%</td>
<td>10.9%</td>
<td>-18.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">Real</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr class="grey1">
<td class="firstcol">Retail Ex Auto</td>
<td>-0.1%</td>
<td>-1.9%</td>
<td>-1.8%</td>
<td>-14.3%</td>
<td>-6.9%</td>
<td>-6.8%</td>
<td>9.4%</td>
<td>-11.4%</td>
</tr>
</tbody>
</table>
</body></html>

German retail sales in December did nothing to make large piles of presents appear under the old tanenbaum. Retail sales ex autos, German clothing sales and vehicle sales (that lag for now) each shows a dwindling trend. In the fourth [...]

German Retail Sales Continue to Slow

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080131f.jpg" width="353">
Rising 0.8% last quarter, the employment cost index for private industry workers remained steady with the 3Q increase. The gain matched Consensus expectations. Moreover, the gain in total compensation in 4Q was roughly steady at 3.0% with the gains since 2005.
During the last twenty years there has been a 54% correlation between the growth in employee compensation and the rise in the PCE price index. That level of correlation goes neither up or down, when either series is led or lagged the other. This suggests a self reinforcing effect between the two series.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080131g.jpg" width="353">
Wage and salary growth held at the 0.8% rate of 3Q. Wages account for roughly 70% of the compensation index. Wages in the services industries rose 0.8% (3.3% y/y). Wages in the leisure &amp; hospitality sector have been relatively strong with a 4.2% rise and professional &amp; business services wages also have been strong with a 4.0% y/y gain. Wages in the goods producing industries rose 0.9% (2.5% y/y) have lagged.
The gain in benefit costs also held about steady with a 0.9% 4Q rise. For all of last year, the 2.4% growth rate was the lowest since 1997. The slowdown has been pronounced in most service industries, but perhaps most pronounced in the goods producing sector where a 1.4% y/y growth rate last year is down from 8.7% growth in 2004.
The slowdown in benefit cost inflation for the year is due in part to a more moderate rise in the cost of health benefits:up 4.8% last year versus 10%+ rates of gain in 2002 and 2003. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EB/@EB08/@EB08.HTM">ECI- Private Industry Workers</a></th>
<th scope="col">4Q &#39;07</th>
<th scope="col">3Q &#39;07</th>
<th scope="col">2Q &#39;07</th>
<th scope="col">4Q 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">Compensation</td>
<td>0.8%</td>
<td>0.8%</td>
<td>0.9%</td>
<td>3.0%</td>
<td>3.1%</td>
<td>2.9%</td>
<td>3.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wages &amp; Salaries</td>
<td>0.8%</td>
<td>0.8%</td>
<td>0.8%</td>
<td>3.4%</td>
<td>3.4%</td>
<td>2.9%</td>
<td>2.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Benefit Costs</td>
<td>0.9%</td>
<td>0.8%</td>
<td>1.1%</td>
<td>2.4%</td>
<td>2.4%</td>
<td>2.9%</td>
<td>4.6%</td>
</tr>
</tbody>
</table>
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Rising 0.8% last quarter, the employment cost index for private industry workers remained steady with the 3Q increase. The gain matched Consensus expectations. Moreover, the gain in total compensation in 4Q was roughly steady at 3.0% [...]

U.S. Employment Cost Index Steady At 0.8% Quarterly Increase

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080131c.jpg" width="353">
Last week, initial claims for jobless insurance surged to a level which now exceeds the late 2007 highs. A 69,000 w/w jump to 375,000 followed declines during the prior several weeks. The latest level is the highest since October of 2005. The difficulties of seasonal adjusting the data during the holiday season clearly played a role in the earlier declines. A more modest rise in claims to 317,000 had been generally expected.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080131d.jpg" width="353">
The four-week moving average of initial claims, a measure which smoothes out most of the series&#39; w/w volatility, rose to 325,750 (+5.0% y/y).
A claims level below 400,000 typically has been associated with growth in nonfarm payrolls. During the last six years there has been a (negative) 78% correlation between the level of initial claims and the m/m change in nonfarm payroll employment.
Continuing claims for unemployment insurance rose 47,000 after a little revised 78,000 decline during the week prior. 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 steady w/w at 2.0%.
Credit Derivatives, Macro Risks, and Systemic Risks from the Federal Reserve Bank of Atlanta can be found <a href="http://www.frbatlanta.org/filelegacydocs/erq407_weithers.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/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a>&nbsp;</th>
<th scope="col">01/26/08</th>
<th scope="col">01/19/07</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;375&nbsp;</td>
<td>306</td>
<td>18.3%</td>
<td>313</td>
<td>331</td>
<td>343</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,716</td>
<td>8.1%</td>
<td>2,459</td>
<td>2,662</td>
<td>2,924</td>
</tr>
</tbody>
</table>
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Last week, initial claims for jobless insurance surged to a level which now exceeds the late 2007 highs. A 69,000 w/w jump to 375,000 followed declines during the prior several weeks. The latest level is the highest since October of [...]

U.S. Initial Claims for Unemployment Insurance Surged

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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/080131a.jpg" width="353">
Personal income slightly beat Consensus expectations last month with a 0.5% rise. Three-month growth in income totaled 4.4% (AR), a growth rate that has been roughly steady.
Wage &amp; salary income rose 0.4% (4.8% y/y) after a 0.6% November rise. Three-month growth amounted to 4.1% which has been a roughly steady rate of growth. Factory sector wages, however, fell 0.3% (+0.9% y/y) after rising 0.3% during the prior month.Wage &amp; salary income in the private service-providing industries rose 0.5% (5.8% y/y). Wages in the government sector again increased 0.3% (4.8% y/y).
Lower interest rates caused the third straight 0.3% decline in interest income (+6.7% y/y). Dividend income held steady at 0.9% (12.4% y/y).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080131b.jpg" width="353">
Personal current taxes rose 0.5% (7.1% y/y. That y/y growth rate is less than one half the rate of rise during 2005. That left disposable personal income to rise 0.5% (5.6% y/y). Adjusted for inflation, disposable personal income increased 0.2% (2.1% y/y). The three-month growth in remained negative at -0.5%.
Personal consumption expenditures rose a hair more than the Consensus expectation for a 0.1% uptick. The 0.2% rise, however, left spending real spending during December down slightly and the three-month growth rate fell to 1.3%, its lowest since July.
Spending on discretionary items slipped as real spending on autos (-0.4% y/y) fell for the third straight month. Growth in real spending on household furniture &amp; appliances also fell back to 0.1% (7.1 y/y) after a 1.5% pop in November. Spending on apparel, however, was quite weak and fell 2.0% (+1.8% y/y). Medical care spending rose 0.3% (2.8% y/y. The detailed spending figures are available in Haver&#39;s USNA database.
The PCE chain price index rose 0.2% after the 0.6 surge during November. The gain in the core PCE price index held steady for the third month at 0.2%. However, the three-month growth in core prices recently has been far from steady, rising to 2.7% from its low in May due to faster growth in services prices.
IMF Sees World Growth Slowing, With U.S. Marked Down from the International Monetary Fund can be found <a href="http://www.imf.org/external/pubs/ft/survey/so/2008/RES012908A.htm"> here</a>.</div>

<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/@E7/@E711/@E71102/@E71102.HTM">Disposition of Personal Income</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">Personal Income</td>
<td>0.5%</td>
<td>0.4%</td>
<td>5.8%</td>
<td>6.2%</td>
<td>6.6%</td>
<td>5.9%</td>
</tr>
<tr>
<td class="firstcol">Personal Consumption</td>
<td>0.2%</td>
<td>1.0%</td>
<td>5.7%</td>
<td>5.5%</td>
<td>5.9%</td>
<td>6.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">Saving Rate</td>
<td>0.2%</td>
<td>0.0%</td>
<td>0.3% (Dec. 06)</td>
<td>0.5%</td>
<td>0.4%</td>
<td>0.5%</td>
</tr>
<tr>
<td class="firstcol">PCE Chain Price Index</td>
<td>0.2%</td>
<td>0.6%</td>
<td>3.5%</td>
<td>2.5%</td>
<td>2.8%</td>
<td>2.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Less food &amp; energy</td>
<td>0.2%</td>
<td>0.2%</td>
<td>2.2%</td>
<td>2.1%</td>
<td>2.2%</td>
<td>2.2%</td>
</tr>
</tbody>
</table>
</body>
</html>

Personal income slightly beat Consensus expectations last month with a 0.5% rise. Three-month growth in income totaled 4.4% (AR), a growth rate that has been roughly steady. Wage & salary income rose 0.4% (4.8% y/y) after a 0.6% [...]

U.S. Personal Income Firm, Spending Light

Personal income slightly beat Consensus expectations last month with a 0.5% rise. Three- month growth in income totaled 4.4% (AR), a growth rate that has been roughly steady. Wage & salary income rose 0.4% (4.8% y/y) after a 0.6% [...]

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080130g.jpg" align="left" border="0" height="265" width="353">
<div align="left">

According to the S&amp;P/Case-Shiller
Composite 10 home price index, U.S. home prices fell
another 2.2% m/m in November to the lowest level since April 2005. Home
prices have fallen in every month since June of 2006 and the total
decline over that period amounts to 9.4%. The November decline pulled
the y/y comparison to a negative 8.4%.

The index of 10 U.S. cities and their surrounding areas is not
adjusted for the quality or the size of the home. The home price index
from the Office of Federal Housing Enterprise Oversight (OFHEO) does
make these adjustments. This series indicates that through the third
quarter home prices still were rising, but at a reduced 1.8% y/y rate.
The composite index of homes in 20 metropolitan areas fell
2.1% (-7.7% y/y) last month.
<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080130f.jpg" align="right" border="0" height="265" width="353">
Home prices in San Diego California continued quite weak and
registered a 13.4% y/y decline and they have fallen 16.3% from the late
2005 peak. Prices in Miami Florida also are down sharply, by 15.1% y/y.
Home prices in Las Vegas Nevada registered a 13.2% y/y decline and in
Los Angeles prices fell 11.9% y/y.
Relatively moderate declines were registered in New York
(-4.8% y/y), Chicago (-3.39% y/y) and Denver (-3.1%).
An overview of the S&amp;P/Case-Shiller home price series
can be found <a href="http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_csmahp/0,0,0,0,0,0,0,0,0,1,1,0,0,0,0,0.html">
here</a>.
The S&amp;P/Case-Shiller home price series can be found in
Haver's REGIONAL database.
Masters of Illusion from the Federal
Reserve Bank of Minneapolis explores why home prices soar in both high
and low inflation eras? It is available <a href="http://www.minneapolisfed.org/pubs/region/07-12/masters.cfm">
here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol">S&amp;P/Case-Shiller
Home Price Index (NSA, Jan 00 = 100)</th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Ten City
Composite Index</td>
<td>205.09</td>
<td>209.75</td>
<td>-8.4%</td>
<td>224.56</td>
<td>209.16</td>
<td>178.90</td>
</tr>
</tbody>
</table>
</div></body></html>

According to the S&P/Case-Shiller Composite 10 home price index, U.S. home prices fell another 2.2% m/m in November to the lowest level since April 2005. Home prices have fallen in every month since June of 2006 and the total decline [...]

Case-Shiller Home Price Index Lowest Since 2005

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<img align="left" border="0" height="264" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080130e.jpg" width="353">
The Federal Open Market Committee today lowered the Federal funds rate by fifty basis points to 3.0%. The move was as expected following the seventy-five basis point reduction last week. The rate was last at 3.0% in June of 2005.
The discount rate also was reduced fifty basis points to 3.50%.
The Fed indicated that &quot;Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.&quot;
The Fed further indicated that &quot;The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.&quot;
Voting against taking the action was Richard W. Fisher, President of the Federal Reserve Bank of Dallas, who preferred no change in the target for the federal funds rate at this meeting.
For the complete text of the Fed&#39;s latest press release please follow this <a href="http://www.federalreserve.gov/newsevents/press/monetary/20080130a.htm">link</a>.
Credit Derivatives: An Overview from the Reserve Bank of Atlanta can be found <a href="http://www.frbatlanta.org/filelegacydocs/erq407_mengle.pdf"> here</a>.
Booms and Busts: The Case of Subprime Mortgages from the Federal Reserve Bank of Kansas City is available <a href="http://www.kansascityfed.org/PUBLICAT/ECONREV/PDF/4q07Gramlich.pdf"> here</a>.

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The Federal Open Market Committee today lowered the Federal funds rate by fifty basis points to 3.0%. The move was as expected following the seventy-five basis point reduction last week. The rate was last at 3.0% in June of 2005. The [...]

FOMC Lowers Interest Rates Further

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080130c.jpg" align="left" border="0" height="265" width="353">
The ADP National Employment Report, reported by the payroll
processor, indicated that private nonfarm payroll growth improved
sharply to 130,000 in January from a revised 37,000 worker advance in
December.
The U.S. Bureau of Labor Statistics employment figure for
January will be published this coming Friday.Last
month, the 37,000 gain ADP's measure of private nonfarm payrolls was
followed by a decline of 13,000 in the BLS measure of private nonfarm
payrolls.
According to ADP and Macro Advisers, the correlation between
the monthly percentage change in the ADP estimate and that in the BLS
data is 0.90
The ADP sub-index for large payrolls nudged up 8,000 after a
35,000 worker collapse during December

Medium sized payrolls showed great improvement by 52,000 after
a 5,000 December increase.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/080130d.jpg" align="right" border="0" height="265" width="353">
Growth in small payrolls of 70,000 was near the very recent
rate but there has been a halving of the annual growth rate over the
last three years.
Employment in the goods producing industries continued to
decline (-1.7% y/y) while services rose (1.5% y/y).
ADP compiled the estimate from its database of individual
companies' payroll information. Macroeconomic Advisers, LLC, the St.
Louis economic consulting firm, developed the methodology for
transforming the raw data into an economic indicator.
The ADP National Employment Report data is maintained in
Haver's USECON database; historical data
go back to December 2000. The figures in this report cover only private
sector jobs and exclude employment in the public sector, which rose an
average 11,083 during the last twelve months. 
The full ADP National Employment Report can be found <a href="http://www.adpemploymentreport.com/PDF/FINAL_Report_DEC_07.pdf">here</a>,
and the ADP methodology is explained <a href="http://www.adpemploymentreport.com/PDF/ADPNERMethodology.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/@EB/@EB25/@EB25.HTM">LAXEPA@USECON</a></th>
<th scope="col">January</th>
<th scope="col">December</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Nonfarm Private Payroll
Employment (m/m Chg.)</td>
<td>130,000</td>
<td>37,000</td>
<td>0.9%</td>
<td>1.7%</td>
<td>1.8%</td>
<td>1.3%</td>
</tr>
</tbody>
</table>
</body></html>

The ADP National Employment Report, reported by the payroll processor, indicated that private nonfarm payroll growth improved sharply to 130,000 in January from a revised 37,000 worker advance in December. The U.S. Bureau of Labor [...]

ADP Report: Private Payroll Growth Much Improved

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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German Retail Sales Continue to Slow

U.S. Employment Cost Index Steady At 0.8% Quarterly Increase

U.S. Initial Claims for Unemployment Insurance Surged

U.S. Personal Income Firm, Spending Light

U.S. Personal Income Firm, Spending Light

Case-Shiller Home Price Index Lowest Since 2005

FOMC Lowers Interest Rates Further

ADP Report: Private Payroll Growth Much Improved