Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070117a.jpg" width="353">
The producer price index for finished goods gained another 0.9% last month after the 2.0% surge during November. Led by a 2.5% rise in energy prices and a 1.7% increase in food prices, the gain nearly doubled Consensus expectations for a 0.5% rise.
The 0.2% core PPI rise calmed down after November&#39;s surprise 1.3% surge though that was double Consensus expectations for a 0.1% uptick.
The strength in finished energy goods prices was led by a 7.1% (1.8% y/y) surge in gasoline prices and a 4.0% (6.5% y/y) increase in fuel oil prices. Natural gas prices also increased 0.7% (-11.4% y/y). <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070117b.jpg" width="353">
Finished consumer goods prices less food &amp; energy rose 0.2% (2.0% y/y) after the 1.3% November surge. Passenger car prices fell 0.2% (-0.5% y/y) but furniture prices rose 0.1% (2.1% y/y).
Capital equipment prices increased 0.2% (2.3% y/y) as light truck prices rose 0.7% (2.2% y/y) after the 13.7% November spike. 
Intermediate goods prices increased another 0.5% but prices less food &amp; energy fell again with a 0.1% downtick which reflected another decline (-0.4%, +11.6% y/y) in steel mill product prices. 
The crude materials PPI surged again by 2.9% led by a strength in crude petroleum prices which has since reversed. The core crude materials PPI also was firm led by a 12.4% rebound in iron &amp; steel scrap prices (2.8% y/y).

<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/@E8/@E802/@E80201/@E80201.HTM">Producer Price Index</a></th>
<th scope="col">December</th>
<th scope="col">November</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 class="odd">
<td class="firstcol">Finished Goods</td>
<td>0.9%&nbsp;</td>
<td>2.0%</td>
<td>&nbsp; 1.2%&nbsp;</td>
<td>2.9%</td>
<td>&nbsp;4.9%&nbsp;</td>
<td>3.6%&nbsp;</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.2%</td>
<td>1.3%</td>
<td>&nbsp;2.0%</td>
<td>1.4%</td>
<td>2.4%</td>
<td>1.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Intermediate Goods</td>
<td>0.5%</td>
<td>0.7%</td>
<td>2.8%</td>
<td>6.5%</td>
<td>&nbsp;8.0%</td>
<td>6.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>-0.1%</td>
<td>-0.3%</td>
<td>4.7%</td>
<td>6.1%</td>
<td>&nbsp;5.5%</td>
<td>5.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Crude Goods</td>
<td>&nbsp;2.9%&nbsp;</td>
<td>15.7%</td>
<td>&nbsp;-2.4%</td>
<td>1.8%</td>
<td>14.6%</td>
<td>&nbsp;17.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>1.0%</td>
<td>0.5%</td>
<td>&nbsp;16.8%</td>
<td>20.9%</td>
<td>4.8%</td>
<td>&nbsp;26.5%</td>
</tr>
</tbody>
</table>
December Industrial Output Gained, But Vigor Questionable with Downward Revisions 
by <a href="/comment/Moeller.html">Tom Moeller & Carol Stone</a> January 17, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070117c.jpg" width="353">
Total U.S. industrial production rose 0.4% last month but revisions generally had the effect of lowering the gains in output during the prior two months. Consensus expectations had been for a 0.1% December rise.
Factory sector output rose 0.7% but a November&#39;s 0.3% increase was revised to zero. Even so, the strong December brought manufacturing back to within a hairbreadth of its August high.
With a 1.5% (0.1% y/y) increase, production of durable consumer goods added to a slightly revised 1.6% gain in November, recovering further from its October plunge, which was revised lower still to a 2.3% fall. Both automotive products and home electronics had December increases of around 2%.
Nondurable consumer goods output slipped 0.2% (0.8% y/y) a second consecutive monthly decline. November was revised from a 0.1% decrease to -0.4%. Food and energy goods both fell, the former by 0.3% and the latter, 0.8%. Clothing had a nice rebound of 1.4% to partially offset.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070117d.jpg" width="353">
Business equipment production jumped 1.6% but both November and October were reduced, November to 0.9% from 1.2% reported before and October, registered a month ago at +0.2%, was trimmed to 0.1%. Output of all major types of equipment -- transit, information processing and industrial -- showed sizable December gains, but the downward revisions, which were the second in a row, leave us a bit cautious about characterizing the overall trend as a vigorous one.
Total industry capacity utilization increased to 81.8% in December from 81.6% in November. This latter period was, however, revised from an initial 81.8% reported last month. Factory sector utilization increased to 80.2% from downwardly revised 79.8% in November and 79.9% in October, both somewhat lower than reported a month ago. Factory sector capacity again rose 0.2%; November&#39;s 2.8% y/y gain represents a slight upward revision, but December&#39;s yearly increase in capacity eased to 2.7%.

<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/output.htm">Production &amp; Capacity</a></th>
<th scope="col">December</th>
<th scope="col">November</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 class="odd">
<td class="firstcol">Industrial Production</td>
<td>0.4%</td>
<td>-0.1%</td>
<td>3.0%</td>
<td>4.1%</td>
<td>3.2%</td>
<td>2.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Manufacturing (NAICS)</td>
<td>0.7%</td>
<td>0.0%</td>
<td>3.5%</td>
<td>5.0%</td>
<td>4.0%</td>
<td>3.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Consumer Goods</td>
<td>0.2%</td>
<td>0.1%</td>
<td>0.6%</td>
<td>1.3%</td>
<td>2.8%</td>
<td>1.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Business Equipment</td>
<td>1.6%</td>
<td>0.9%</td>
<td>10.4%</td>
<td>11.7%</td>
<td>7.9%</td>
<td>4.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Capacity Utilization</td>
<td>81.8%</td>
<td>81.6%</td>
<td>81.3% (12/05)</td>
<td>81.8</td>
<td>80.2%</td>
<td>78.1%</td>
</tr>
</tbody>
</table>
Treasury TIC Data Show Sizable Foreign Investment in November, but Also Record US Investment Abroad 
by <a href="/comment/Stone.html">Carol Stone</a> January 17, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070117f.jpg" width="353">
The US Treasury&#39;s monthly compilation of capital flows shows sizable foreign investment in US securities in November, amounting to $107.4 billion, purchases net of sales. This is modestly more than October&#39;s $104.2 billion and $107.0 billion in November 2005.
Press reports highlight another net figure, foreign investment in US securities less US residents&#39; purchases of foreign securities. These were $39.1 billion in November, putting &quot;net long term securities transactions&quot; at $68.4 billion, down noticeably from October&#39;s $85.3 billion. Since, as we see, foreign purchases were nearly the same, the big difference in the month was the sharp increase in US investor purchases of foreign instruments, which had been $18.9 billion in October, less than half of the November amount. Even more interesting, the major part of that increase came in equities. US investors bought a significant $21.2 billion, $3.8 billion more than last November, which was the previous record amount. Net purchases of foreign bonds were $17.8 billion, which, while less than the equity purchases, was still the third largest month for that market segment.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070117g.jpg" width="353">
The foreign investments themselves took new paths. Usually months when Treasury refunding operations occur, as in November, contain outsized amounts of foreign purchases of that debt. This was moderately large, at $27 billion, but well down from the year-ago $51.8 billion.
The big difference this month was in corporate bonds. Foreign investors accumulated $63.9 billion in November. The previous record was $58.7 billion in September. The only other month above $50 billion is June 2005, at $50.5 billion. Investors in the UK seem to be the biggest net buyers, although the &quot;clearinghouse&quot; nature of the London markets means that the ultimate purchasers could be anywhere, not just in Britain.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070117e.jpg" width="353">
Speaking of countries, the ones show the biggest numbers this month are not who you think. While China has made sizable purchases all year long, they added only $3.1 billion in November, the smallest amount in 19 months. Japan has also not made outsized purchases lately, and some oil exporters [not much data on this sector is available] have actually been net sellers. The biggest gains recently have come from France and offshore Caribbean centers. UK investors have bought considerable volumes this year, but their purchases of US securities were much larger a year ago.
These variations and where they come from are another cautionary signal to us not to put much store in the notion that capital flows only serve to cover the trade deficit. If that were the case, the investments would match the trade partners and they would not likely be in equities or long-term bonds, but in trade financing vehicles, like loans. Global investors look for rate of return opportunities and those may be related to trade flows positively, negatively or not consistently at all. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Net Foreign Purchases from US Residents, Bil $</th>
<th scope="col">Nov 2006</th>
<th scope="col">Oct 2006</th>
<th scope="col">Nov 2005</th>
Monthly Averages
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Last 12 Months</td>
<td>2005</td>
<td>2004</td>
<td>2003</td>
</tr>
<tr>
<td class="firstcol">1. Domestic Securities</td>
<td>107.4</td>
<td>104.2</td>
<td>107.0</td>
<td>92.4</td>
<td>84.3</td>
<td>76.4</td>
<td>60.0</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Treasuries</td>
<td>27.1</td>
<td>26.3</td>
<td>51.8</td>
<td>15.5</td>
<td>28.2</td>
<td>29.3</td>
<td>22.0</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Agencies</td>
<td>14.7</td>
<td>15.2</td>
<td>11.1</td>
<td>22.2</td>
<td>18.3</td>
<td>18.9</td>
<td>13.0</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Corporate Bonds</td>
<td>63.9</td>
<td>39.5</td>
<td>38.3</td>
<td>40.8</td>
<td>31.0</td>
<td>25.8</td>
<td>22.1</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Equities</td>
<td>1.8</td>
<td>23.2</td>
<td>5.7</td>
<td>12.3</td>
<td>6.8</td>
<td>2.4</td>
<td>2.9</td>
</tr>
<tr class="odd">
<td class="firstcol">2. Foreign Securities&nbsp;</td>
<td>-39.1</td>
<td>-18.9</td>
<td>-17.7</td>
<td>-19.3</td>
<td>-14.4</td>
<td>-12.7</td>
<td>-4.7</td>
</tr>
<tr>
<td class="firstcol">3. &quot;Other Acquisition&quot;*</td>
<td>-10.4</td>
<td>-10.4</td>
<td>-11.1</td>
<td>-11.8</td>
<td>-11.7</td>
<td>-3.2</td>
<td>-11.6</td>
</tr>
<tr class="odd">
<td class="firstcol">4. Net Foreign Acquisition (1+2+3)</td>
<td>58.0</td>
<td>74.9</td>
<td>78.1</td>
<td>59.7</td>
<td>58.3</td>
<td>60.4</td>
<td>43.7</td>
</tr>
<tr>
<td class="firstcol">5. Short-Term Liabilities</td>
<td>15.6</td>
<td>0.5</td>
<td>2.5</td>
<td>9.4</td>
<td>-4.0</td>
<td>15.8</td>
<td>1.3</td>
</tr>
<tr class="odd">
<td class="firstcol">6. Total TIC Flows**&nbsp; </td>
<td>74.9</td>
<td>60.4</td>
<td>88.5</td>
<td>70.3</td>
<td>55.7</td>
<td>81.6</td>
<td>59.8</td>
</tr>
</tbody>
</table>
</body>
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The producer price index for finished goods gained another 0.9% last month after the 2.0% surge during November. Led by a 2.5% rise in energy prices and a 1.7% increase in food prices, the gain nearly doubled Consensus expectations [...]

PPI Still Quite Firm in December

Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070116c.jpg" width="353">
The UK inflation rate, based on the Harmonized Consumer Price Index (HCPI) rose to 3.0% in December from 2.7% in November. The rise was no surprise since the principal reason given for the Bank of England&#39;s increase in the base rate by 25 percentage points to 5.25% on January 11 was that the Bank had seen the December figure before its release to the public. The uncertainty since then lay in whether the December rise would be more than 1 percentage point above the inflation target of 2%. If that were the case, the Governor of the Bank of England would have had to write an open letter to the Chancellor of the Exchequer explaining why the inflation rate had risen by more than one percentage point above the 2% inflation target. Since the inflation rate was just short of the one percentage point, no letter will be required. Nevertheless, the increase in the inflation rate is a big one.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070116d.jpg" width="353">
The HCPI was adopted on December 10, 2003 to insure comparability with other members of the European Union. In the UK it is known as the CPI. Prior to that time, the measure of inflation in the UK was based on the Retail Price Index (RPI) or the Retail Price Index excluding mortgage interest payments (RPIX). Inflation measures based on the CPI and on the RPI are shown in the first chart. Since the middle of 2002, inflation based on the RPI has been greater than that based on the CPI except for early 2005 when they were almost equal. The office of National Statistics publishes data explaining the difference between the CPI and the RPI. In December, of the -1.46 difference between the CPI and the PRI, -0.91 was due to the exclusion of mortgage interest payment and other housing components from the CPI, +.23 due to other differences of coverage, -0.56 due to differences in the formulas used to calculate the totals and -0.22 due to other differences including weights.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070116e.jpg" width="353">
Among the factors contributing to the December rise in the CPI were the 11.38% increase in the prices of the Housing, Water, Electricity, Gas and Other Fuels component of the index and the 4.67% increase in the price of Food and Nonalcoholic Beverages component. The inflation in both of these rose sharply in the latter part of 2006, as can be seen in the second chart. Declines in the prices of Clothing and Footwear and Recreation and Culture components, shown in the third chart, helped to mitigate the overall rise in the index. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">INFLATION IN THE UNITED KINGDOM (%)</th>
<th scope="col">Dec&nbsp; 06</th>
<th scope="col">Nov 06</th>
<th scope="col">Oct 06</th>
<th scope="col">Sep 06</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">HCPI&nbsp;&nbsp;</td>
<td>2.97</td>
<td>2.68</td>
<td>2.48</td>
<td>2.39</td>
<td>2.33</td>
<td>2.05</td>
<td>1.34</td>
<td>1.36</td>
</tr>
<tr>
<td class="firstcol">RPI</td>
<td>4.43</td>
<td>3.87</td>
<td>3.67</td>
<td>3.63</td>
<td>3.19</td>
<td>2.83</td>
<td>2.96</td>
<td>2.91</td>
</tr>
<tr class="odd">
<td class="firstcol">RPIX</td>
<td>3.79</td>
<td>3.43</td>
<td>3.17</td>
<td>3.17</td>
<td>2.93</td>
<td>2.27</td>
<td>2.21</td>
<td>2.81</td>
</tr>
<tr>
<td class="firstcol"> Housing, water, elec, gas, etc </td>
<td>11.38</td>
<td>11.14</td>
<td>10.82</td>
<td>10.72</td>
<td>8.25</td>
<td>6.31</td>
<td>3.65</td>
<td>1.95</td>
</tr>
<tr class="odd">
<td class="firstcol">Food, non alcoholic beverages</td>
<td>4.67</td>
<td>5.00</td>
<td>4.72</td>
<td>3.81</td>
<td>2.50</td>
<td>1.51</td>
<td>0.66</td>
<td>1.18</td>
</tr>
<tr>
<td class="firstcol">Recreation and Culture</td>
<td>-0.30</td>
<td>-0.80</td>
<td>-1.10</td>
<td>-1.00</td>
<td>-1.20</td>
<td>-1.16</td>
<td>-1.56</td>
<td>-0.60</td>
</tr>
<tr class="odd">
<td class="firstcol">Clothing and footwear</td>
<td>-4.10</td>
<td>-3.28</td>
<td>-3.30</td>
<td>-3.50</td>
<td>-4.04</td>
<td>-2.0</td>
<td>-4.76</td>
<td>-3.82</td>
</tr>
</tbody>
</table>
</body>
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The UK inflation rate, based on the Harmonized Consumer Price Index (HCPI) rose to 3.0% in December from 2.7% in November. The rise was no surprise since the principal reason given for the Bank of England's increase in the base rate [...]

UK December Inflation--3%: The Cause of the BOE Rise in the Base Rate to 5.25%

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070116a.jpg" width="353">
The January index of manufacturing activity in New York State softened considerably. The Index of General Business Conditions fell 13.06 points, the second down month, to 9.13. That was the lowest level since June 2003. Consensus expectations for the Empire State index had been for a more moderate decline to 19.5. The figures are reported by the Federal Reserve Bank of New York.
Since the series&#39; inception in 2001 there has been a 75% correlation between the index level and the three month change in U.S. factory sector industrial production.
The indexes for new orders halved to 10.26, the lowest level since 2003, while the indexes for employment and shipments also fell considerably. The indexes for inventories and delivery times also fell sharply.
Like the Philadelphia Fed Index of General Business Conditions, the Empire State Business Conditions Index reflects answers to an independent survey question; it is not a weighted combination of the components.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070116b.jpg" width="353">
Pricing pressure improved moderately to the highest level since last September. The 7.02 rise in the prices paid index recovered all of the prior month&#39;s decline. Since 2001 there has been an 88% correlation between the index of prices paid and the three month change in the core intermediate materials PPI.
The Empire State index of expected business conditions in six months also fell sharply to the lowest level since last May. The index of expected new orders collapsed to the lowest since March 2006.
The Empire State Manufacturing Survey is a monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York. Participants from across the state in a variety of industries respond to a questionnaire and report the change in a variety of indicators from the previous month. Respondents also state the likely direction of these same indicators six months ahead. April 2002 is the first report, although survey data date back to July 2001.
For more on the Empire State Manufacturing Survey, including methodologies and the latest report, click <a href="http://www.newyorkfed.org/research/regional_economy/mfg_survey/1_2007.pdf">here</a>.

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<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S511/@S511.HTM">Empire State Manufacturing Survey</a> </th>
<th scope="col">January</th>
<th scope="col">December</th>
<th scope="col">Jan. &#39;06 </th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Business Conditions (diffusion index)</td>
<td>9.13</td>
<td>22.19</td>
<td>20.28</td>
<td>20.33</td>
<td>15.62</td>
<td>28.70</td>
</tr>
</tbody>
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The January index of manufacturing activity in New York State softened considerably. The Index of General Business Conditions fell 13.06 points, the second down month, to 9.13. That was the lowest level since June 2003. Consensus [...]

Empire State Index Dropped Sharply

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070116a.jpg" width="353">
The January index of manufacturing activity in New York State softened considerably. The Index of General Business Conditions fell 13.06 points, the second down month, to 9.13. That was the lowest level since June 2003. Consensus expectations for the Empire State index had been for a more moderate decline to 19.5. The figures are reported by the Federal Reserve Bank of New York.
Since the series&#39; inception in 2001 there has been a 75% correlation between the index level and the three month change in U.S. factory sector industrial production.
The indexes for new orders halved to 10.26, the lowest level since 2003, while the indexes for employment and shipments also fell considerably. The indexes for inventories and delivery times also fell sharply.
Like the Philadelphia Fed Index of General Business Conditions, the Empire State Business Conditions Index reflects answers to an independent survey question; it is not a weighted combination of the components.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070116b.jpg" width="353">
Pricing pressure improved moderately to the highest level since last September. The 7.02 rise in the prices paid index recovered all of the prior month&#39;s decline. Since 2001 there has been an 88% correlation between the index of prices paid and the three month change in the core intermediate materials PPI.
The Empire State index of expected business conditions in six months also fell sharply to the lowest level since last May. The index of expected new orders collapsed to the lowest since March 2006.
The Empire State Manufacturing Survey is a monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York. Participants from across the state in a variety of industries respond to a questionnaire and report the change in a variety of indicators from the previous month. Respondents also state the likely direction of these same indicators six months ahead. April 2002 is the first report, although survey data date back to July 2001.
For more on the Empire State Manufacturing Survey, including methodologies and the latest report, click <a href="http://www.newyorkfed.org/research/regional_economy/mfg_survey/1_2007.pdf">here</a>.

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</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S511/@S511.HTM">Empire State Manufacturing Survey</a> </th>
<th scope="col">January</th>
<th scope="col">December</th>
<th scope="col">Jan. &#39;06 </th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Business Conditions (diffusion index)</td>
<td>9.13</td>
<td>22.19</td>
<td>20.28</td>
<td>20.33</td>
<td>15.62</td>
<td>28.70</td>
</tr>
</tbody>
</table>
UK December Inflation--3%:  The Cause of the BOE Rise in the Base Rate to 5.25% 
by <a href="/comment/Curley.html">Louise Curley</a> January 16, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070116c.jpg" width="353">
The UK inflation rate, based on the Harmonized Consumer Price Index (HCPI) rose to 3.0% in December from 2.7% in November. The rise was no surprise since the principal reason given for the Bank of England&#39;s increase in the base rate by 25 percentage points to 5.25% on January 11 was that the Bank had seen the December figure before its release to the public. The uncertainty since then lay in whether the December rise would be more than 1 percentage point above the inflation target of 2%. If that were the case, the Governor of the Bank of England would have had to write an open letter to the Chancellor of the Exchequer explaining why the inflation rate had risen by more than one percentage point above the 2% inflation target. Since the inflation rate was just short of the one percentage point, no letter will be required. Nevertheless, the increase in the inflation rate is a big one.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070116d.jpg" width="353">
The HCPI was adopted on December 10, 2003 to insure comparability with other members of the European Union. In the UK it is known as the CPI. Prior to that time, the measure of inflation in the UK was based on the Retail Price Index (RPI) or the Retail Price Index excluding mortgage interest payments (RPIX). Inflation measures based on the CPI and on the RPI are shown in the first chart. Since the middle of 2002, inflation based on the RPI has been greater than that based on the CPI except for early 2005 when they were almost equal. The office of National Statistics publishes data explaining the difference between the CPI and the RPI. In December, of the -1.46 difference between the CPI and the PRI, -0.91 was due to the exclusion of mortgage interest payment and other housing components from the CPI, +.23 due to other differences of coverage, -0.56 due to differences in the formulas used to calculate the totals and -0.22 due to other differences including weights.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070116e.jpg" width="353">
Among the factors contributing to the December rise in the CPI were the 11.38% increase in the prices of the Housing, Water, Electricity, Gas and Other Fuels component of the index and the 4.67% increase in the price of Food and Nonalcoholic Beverages component. The inflation in both of these rose sharply in the latter part of 2006, as can be seen in the second chart. Declines in the prices of Clothing and Footwear and Recreation and Culture components, shown in the third chart, helped to mitigate the overall rise in the index. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">INFLATION IN THE UNITED KINGDOM (%)</th>
<th scope="col">Dec&nbsp; 06</th>
<th scope="col">Nov 06</th>
<th scope="col">Oct 06</th>
<th scope="col">Sep 06</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">HCPI&nbsp;&nbsp;</td>
<td>2.97</td>
<td>2.68</td>
<td>2.48</td>
<td>2.39</td>
<td>2.33</td>
<td>2.05</td>
<td>1.34</td>
<td>1.36</td>
</tr>
<tr>
<td class="firstcol">RPI</td>
<td>4.43</td>
<td>3.87</td>
<td>3.67</td>
<td>3.63</td>
<td>3.19</td>
<td>2.83</td>
<td>2.96</td>
<td>2.91</td>
</tr>
<tr class="odd">
<td class="firstcol">RPIX</td>
<td>3.79</td>
<td>3.43</td>
<td>3.17</td>
<td>3.17</td>
<td>2.93</td>
<td>2.27</td>
<td>2.21</td>
<td>2.81</td>
</tr>
<tr>
<td class="firstcol"> Housing, water, elec, gas, etc </td>
<td>11.38</td>
<td>11.14</td>
<td>10.82</td>
<td>10.72</td>
<td>8.25</td>
<td>6.31</td>
<td>3.65</td>
<td>1.95</td>
</tr>
<tr class="odd">
<td class="firstcol">Food, non alcoholic beverages</td>
<td>4.67</td>
<td>5.00</td>
<td>4.72</td>
<td>3.81</td>
<td>2.50</td>
<td>1.51</td>
<td>0.66</td>
<td>1.18</td>
</tr>
<tr>
<td class="firstcol">Recreation and Culture</td>
<td>-0.30</td>
<td>-0.80</td>
<td>-1.10</td>
<td>-1.00</td>
<td>-1.20</td>
<td>-1.16</td>
<td>-1.56</td>
<td>-0.60</td>
</tr>
<tr class="odd">
<td class="firstcol">Clothing and footwear</td>
<td>-4.10</td>
<td>-3.28</td>
<td>-3.30</td>
<td>-3.50</td>
<td>-4.04</td>
<td>-2.0</td>
<td>-4.76</td>
<td>-3.82</td>
</tr>
</tbody>
</table>
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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070115d.jpg" width="353">
The Economic and Social Research Institute (ESRI) of the Cabinet Office in Japan announced today that new orders for machinery were well above expectations. On a seasonally unadjusted basis new orders were 19.3% above November, 2005 and on a seasonally adjusted basis were 14.22% above October.
Orders are reported in total in the month they are received even if they are very large and will not be completed for several months; as a result, the series tends to be extremely volatile. ESRI publishes a &quot;Headline&quot; series which excludes two of the most erratic components--ships and electric power. The seasonally unadjusted series for total orders and the seasonally unadjusted Headline Series are shown in the first chart. On a seasonally unadjusted basis the Headline series was 0.7% above November, 2005 and the seasonally adjusted series was 3.8% above October.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070115e.jpg" width="353">
With data through November, we have a good idea of how the current year is fairing vis-&agrave;-vis 2005. Total orders for the period January through November, 2006 were 27,963.3 billion yen or 12.6% above the 24,841.8 billion yen in the comparable period in 2005. This represents a substantial increase over the 4.35% increase in 2005 over 2004. The Headline Series shows a different picture. The eleven month total of Headline orders was 11,721.5 billion yen in the current year or only 4.77% above the 11.188.1 billion yen recorded in the January to November period of 2005. Moreover, the indicated increase for 2006 is well below the actual increase of 7.11% in 2005. It would appear that ships and electric power have provided much of the growth in total orders this year. However, the difference between total new orders and the Headline series includes foreign and government orders as well as ships and electric power.
In the second chart showing seasonally adjusted foreign and government orders, it is clear that foreign orders have been an important part of the growth in total orders while government orders have played a slightly negative role.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">JAPAN NEW ORDERS &nbsp; (Bil Yen, ex where noted)</th>
<th scope="col">Nov06</th>
<th scope="col">Oct 06</th>
<th scope="col">Sep 06</th>
<th scope="col">J-N 06</th>
<th scope="col">J-N 05</th>
<th scope="col">J-N 06/ J-N 05%</th>
<th scope="col">2005 %</th>
<th scope="col">2004 %</th>
<th scope="col">2003 %</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total New Orders NAS</td>
<td>2,482.7</td>
<td>2,081.5</td>
<td>3,069.2</td>
<td>27,963.3</td>
<td>24,841.8</td>
<td>12.6</td>
<td>4.35</td>
<td>4.24</td>
<td>15.05</td>
</tr>
<tr>
<td class="firstcol">Y/Y percent change</td>
<td>19.27</td>
<td>-32.18</td>
<td>39.20</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">Total New Orders SA</td>
<td>2,804.6</td>
<td>2,455.6</td>
<td>2,319.4</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol"> M/M percent change </td>
<td>14.22</td>
<td>5.87</td>
<td>-12.95</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">Headline Series NAS</td>
<td>994.7</td>
<td>861.5</td>
<td>1,305.3</td>
<td>11,721.5</td>
<td>11,188.1</td>
<td>4.77</td>
<td>7.11</td>
<td>4.43</td>
<td>10.68</td>
</tr>
<tr>
<td class="firstcol">Y/Y percent change</td>
<td>0.70</td>
<td>-1.18</td>
<td>-14.7</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">Headline Series SA</td>
<td>1,064.2</td>
<td>1,025.4</td>
<td>997.5</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol"> M/M percent change </td>
<td>3.78</td>
<td>2.80</td>
<td>-7.26</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol"> Foreign New Orders </td>
<td>1,302.5</td>
<td>1,088.4</td>
<td>795.8</td>
<td>11,382.1</td>
<td>9024.7</td>
<td>26.23</td>
<td>6.85</td>
<td>9.43</td>
<td>37.08</td>
</tr>
<tr>
<td class="firstcol"> Public New Orders </td>
<td>229.5</td>
<td>209.0</td>
<td>223.4</td>
<td>2,625.2</td>
<td>2,674.9</td>
<td>-1.82</td>
<td>9.80</td>
<td>-6.44</td>
<td>-5.13</td>
</tr>
</tbody>
</table>
</body>
</html>

The Economic and Social Research Institute (ESRI) of the Cabinet Office in Japan announced today that new orders for machinery were well above expectations. On a seasonally unadjusted basis new orders were 19.3% above November, 2005 [...]

Growth in New Orders for Ships and Electric Power and for Export Exceed Growth in Japanese Headline Series for New [...]

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070115a.jpg" width="353">
The Leading Index of the major 7 OECD economies rose 0.2% after a like gain during October but earlier month&#39;s increases were revised lower. The index&#39;s six month growth rate dropped to 1.1% from 1.6% as a result of the revisions.
During the last ten years there has been a 64% correlation between the change in the leading index and the q/q change in the GDP Volume Index for the Big Seven OECD countries.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070115b.jpg" width="353">
The U.S. leading indicators increased 0.2% for the second month but September&#39;s gain was revised down sharply to a slight decline. The index&#39;s six month growth rate as a result was halved to 1.0%, down from growth rates above 4% at the beginning of 2006. The correlation between the leaders&#39; growth rate and U.S. real GDP growth has been a high 73% during the last ten years.
The leading index for the European Union (15 countries) rose 0.1% for the third month in the last four. The modest gains dropped the index&#39;s six month growth rate to 2.0%, half the growth of earlier in the year. During the last ten years there has been a 59% correlation between the change in the leading index and the quarterly change in the European Union GDP volume index.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070115c.jpg" width="353">
The German leading index rose a firm 0.5% increase in November but the 0.5% increase first reported for October was revised to 0.2%. That pulled the leaders&#39; growth to 3.5%, less than half its earlier growth. During the last ten years there has been a 32% correlation between the change in the German leading index and the quarterly change in GDP volume.
The Italian leading index fell for the fourth month in the last five and lowered the series&#39; six month growth rate to -2.1%.
A French leaders also dipped 0.1% but six month growth in leaders held steady at a moderate 2.3%. During the last ten years there has been a 54% correlation between the leaders&#39; growth rate and growth in France&#39;s real GDP.
The leading index in Japan rose 0.1% for the third consecutive month. Nevertheless the index&#39;s six month growth rate remained negative at -0.9%. The leaders&#39; correlation with Japan&#39;s real economic growth has been a meaningful 41% during the last ten years.
The Canadian leaders surged 1.5% after October&#39;s 0.9% jump. The leaders&#39; six month growth rate consequently surged to 6.9%, its best since 2002, due to higher share prices in Toronto. The correlation of the leaders&#39; growth with Canadian real GDP has been 49% during the last ten years.
The UK leaders rose a modest 0.2% for the second month and the six month growth rate increased to a low 1.4%. During the last ten years there has been a 36% correlation between the leaders&#39; growth rate and U.K. real GDP growth.
The latest OECD Leading Indicator report can be found <a href="http://www.oecd.org/dataoecd/5/21/37913250.pdf">here</a>.
OECD Warns Climate Change Is Threatening Europe&#39;s Skiing Trade is available <a href="http://www.oecd.org/document/22/0,2340,en_2649_201185_37825494_1_1_1_1,00.html"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/OECDMEI/OECDMEI.HTM">OECD</a></th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Composite Leading Index&nbsp;</td>
<td>105.45</td>
<td>105.23</td>
<td>1.5%</td>
<td>102.79</td>
<td>102.30</td>
<td>97.80</td>
</tr>
<tr>
<td class="firstcol">&nbsp;6 Month Growth Rate</td>
<td>1.1%</td>
<td>1.0%</td>
<td>--</td>
<td>0.7%</td>
<td>3.5%</td>
<td>2.6%</td>
</tr>
</tbody>
</table>
</body>
</html>

The Leading Index of the major 7 OECD economies rose 0.2% after a like gain during October but earlier month's increases were revised lower. The index's six month growth rate dropped to 1.1% from 1.6% as a result of the revisions. [...]

OECD Leaders Rose

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070115a.jpg" width="353">
The Leading Index of the major 7 OECD economies rose 0.2% after a like gain during October but earlier month&#39;s increases were revised lower. The index&#39;s six month growth rate dropped to 1.1% from 1.6% as a result of the revisions.
During the last ten years there has been a 64% correlation between the change in the leading index and the q/q change in the GDP Volume Index for the Big Seven OECD countries.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070115b.jpg" width="353">
The U.S. leading indicators increased 0.2% for the second month but September&#39;s gain was revised down sharply to a slight decline. The index&#39;s six month growth rate as a result was halved to 1.0%, down from growth rates above 4% at the beginning of 2006. The correlation between the leaders&#39; growth rate and U.S. real GDP growth has been a high 73% during the last ten years.
The leading index for the European Union (15 countries) rose 0.1% for the third month in the last four. The modest gains dropped the index&#39;s six month growth rate to 2.0%, half the growth of earlier in the year. During the last ten years there has been a 59% correlation between the change in the leading index and the quarterly change in the European Union GDP volume index.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070115c.jpg" width="353">
The German leading index rose a firm 0.5% increase in November but the 0.5% increase first reported for October was revised to 0.2%. That pulled the leaders&#39; growth to 3.5%, less than half its earlier growth. During the last ten years there has been a 32% correlation between the change in the German leading index and the quarterly change in GDP volume.
The Italian leading index fell for the fourth month in the last five and lowered the series&#39; six month growth rate to -2.1%.
A French leaders also dipped 0.1% but six month growth in leaders held steady at a moderate 2.3%. During the last ten years there has been a 54% correlation between the leaders&#39; growth rate and growth in France&#39;s real GDP.
The leading index in Japan rose 0.1% for the third consecutive month. Nevertheless the index&#39;s six month growth rate remained negative at -0.9%. The leaders&#39; correlation with Japan&#39;s real economic growth has been a meaningful 41% during the last ten years.
The Canadian leaders surged 1.5% after October&#39;s 0.9% jump. The leaders&#39; six month growth rate consequently surged to 6.9%, its best since 2002, due to higher share prices in Toronto. The correlation of the leaders&#39; growth with Canadian real GDP has been 49% during the last ten years.
The UK leaders rose a modest 0.2% for the second month and the six month growth rate increased to a low 1.4%. During the last ten years there has been a 36% correlation between the leaders&#39; growth rate and U.K. real GDP growth.
The latest OECD Leading Indicator report can be found <a href="http://www.oecd.org/dataoecd/5/21/37913250.pdf">here</a>.
OECD Warns Climate Change Is Threatening Europe&#39;s Skiing Trade is available <a href="http://www.oecd.org/document/22/0,2340,en_2649_201185_37825494_1_1_1_1,00.html"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/OECDMEI/OECDMEI.HTM">OECD</a></th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Composite Leading Index&nbsp;</td>
<td>105.45</td>
<td>105.23</td>
<td>1.5%</td>
<td>102.79</td>
<td>102.30</td>
<td>97.80</td>
</tr>
<tr>
<td class="firstcol">&nbsp;6 Month Growth Rate</td>
<td>1.1%</td>
<td>1.0%</td>
<td>--</td>
<td>0.7%</td>
<td>3.5%</td>
<td>2.6%</td>
</tr>
</tbody>
</table>
Growth in New Orders for Ships and Electric Power and for Export Exceed Growth in  Japanese Headline Series for New Orders  
by <a href="/comment/Curley.html">Louise Curley</a> January 15, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070115d.jpg" width="353">
The Economic and Social Research Institute (ESRI) of the Cabinet Office in Japan announced today that new orders for machinery were well above expectations. On a seasonally unadjusted basis new orders were 19.3% above November, 2005 and on a seasonally adjusted basis were 14.22% above October.
Orders are reported in total in the month they are received even if they are very large and will not be completed for several months; as a result, the series tends to be extremely volatile. ESRI publishes a &quot;Headline&quot; series which excludes two of the most erratic components--ships and electric power. The seasonally unadjusted series for total orders and the seasonally unadjusted Headline Series are shown in the first chart. On a seasonally unadjusted basis the Headline series was 0.7% above November, 2005 and the seasonally adjusted series was 3.8% above October.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070115e.jpg" width="353">
With data through November, we have a good idea of how the current year is fairing vis-&agrave;-vis 2005. Total orders for the period January through November, 2006 were 27,963.3 billion yen or 12.6% above the 24,841.8 billion yen in the comparable period in 2005. This represents a substantial increase over the 4.35% increase in 2005 over 2004. The Headline Series shows a different picture. The eleven month total of Headline orders was 11,721.5 billion yen in the current year or only 4.77% above the 11.188.1 billion yen recorded in the January to November period of 2005. Moreover, the indicated increase for 2006 is well below the actual increase of 7.11% in 2005. It would appear that ships and electric power have provided much of the growth in total orders this year. However, the difference between total new orders and the Headline series includes foreign and government orders as well as ships and electric power.
In the second chart showing seasonally adjusted foreign and government orders, it is clear that foreign orders have been an important part of the growth in total orders while government orders have played a slightly negative role.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">JAPAN NEW ORDERS &nbsp; (Bil Yen, ex where noted)</th>
<th scope="col">Nov06</th>
<th scope="col">Oct 06</th>
<th scope="col">Sep 06</th>
<th scope="col">J-N 06</th>
<th scope="col">J-N 05</th>
<th scope="col">J-N 06/ J-N 05%</th>
<th scope="col">2005 %</th>
<th scope="col">2004 %</th>
<th scope="col">2003 %</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total New Orders NAS</td>
<td>2,482.7</td>
<td>2,081.5</td>
<td>3,069.2</td>
<td>27,963.3</td>
<td>24,841.8</td>
<td>12.6</td>
<td>4.35</td>
<td>4.24</td>
<td>15.05</td>
</tr>
<tr>
<td class="firstcol">Y/Y percent change</td>
<td>19.27</td>
<td>-32.18</td>
<td>39.20</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">Total New Orders SA</td>
<td>2,804.6</td>
<td>2,455.6</td>
<td>2,319.4</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol"> M/M percent change </td>
<td>14.22</td>
<td>5.87</td>
<td>-12.95</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">Headline Series NAS</td>
<td>994.7</td>
<td>861.5</td>
<td>1,305.3</td>
<td>11,721.5</td>
<td>11,188.1</td>
<td>4.77</td>
<td>7.11</td>
<td>4.43</td>
<td>10.68</td>
</tr>
<tr>
<td class="firstcol">Y/Y percent change</td>
<td>0.70</td>
<td>-1.18</td>
<td>-14.7</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">Headline Series SA</td>
<td>1,064.2</td>
<td>1,025.4</td>
<td>997.5</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol"> M/M percent change </td>
<td>3.78</td>
<td>2.80</td>
<td>-7.26</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol"> Foreign New Orders </td>
<td>1,302.5</td>
<td>1,088.4</td>
<td>795.8</td>
<td>11,382.1</td>
<td>9024.7</td>
<td>26.23</td>
<td>6.85</td>
<td>9.43</td>
<td>37.08</td>
</tr>
<tr>
<td class="firstcol"> Public New Orders </td>
<td>229.5</td>
<td>209.0</td>
<td>223.4</td>
<td>2,625.2</td>
<td>2,674.9</td>
<td>-1.82</td>
<td>9.80</td>
<td>-6.44</td>
<td>-5.13</td>
</tr>
</tbody>
</table>
</body>
</html>

Carol Stone, CBE

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070112f.jpg" width="353">
Industrial production in India was strong again in November, extending a long but irregular uptrend in the industrial sector of that rapidly emerging economy. According to the Central Statistical Organization, IP was up 5.5% in the month and 14.4% on the year. The CSO data are not seasonally adjusted. The month-to-month comparison quoted here is taken from seasonal adjustment performed by Haver Analytics. Because the month-to-month movements are very erratic, our discussion below covers yearly growth trends both in the latest month and over a longer period.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070112g.jpg" width="353">
Marked acceleration of even heavy industry is evident in the categorical breakdown. Basic metals and alloys surged by 25.4% over November 2005, a third consecutive month of 20%-plus yearly gains. Machinery excluding transport equipment expanded 17.3% in November and the last six months have run 14.9% ahead of the comparable year-ago period. Nonmetallic mineral products have a similar pattern, with November up 17.7% and the last six months up 13.8% on the year-ago period.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070112h.jpg" width="353">
Among &quot;softer&quot; products, rubber, plastics and petroleum expanded 23.2% in November and 13.1% in the six-month period. This follows a particularly weak performance over the prior five years. Cotton textiles, the kind of manufacturing often associated with India, had experienced a long period of little or no growth, but has lately staged a comeback. By November 2006, production here was up 18.3% from November 2005 and the six months are up 13.5% from the same time in 2005.
The service sector in India remains far larger than manufacturing, measured by gross value added. But these gains in industrial production show a significant diversification of the Indian economy. While every nation need not be a major player in world metals markets or motor vehicles, the breadth of recent gains -- especially the return of strength in textiles -- gives a firmer foundation for further development.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">India (NSA, yr/yr % changes)</th>
<th scope="col">Nov 2006</th>
<th scope="col">Oct 2006</th>
<th scope="col">Sept 2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">General Industrial Production &nbsp; (SA, FY93=100)</td>
<td>250.9</td>
<td>237.9</td>
<td>245.5</td>
<td>216.7</td>
<td>200.8</td>
<td>185.2</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Mo/Mo % Chg, SA</td>
<td>5.5</td>
<td>-3.1</td>
<td>1.9</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Yr/Yr % Chg, NSA</td>
<td>14.4</td>
<td>4.4</td>
<td>11.4</td>
<td>7.9</td>
<td>8.5</td>
<td>6.6</td>
</tr>
<tr>
<td class="firstcol">Manufacturing</td>
<td>15.7</td>
<td>3.8</td>
<td>12.0</td>
<td>9.0</td>
<td>8.9</td>
<td>7.1</td>
</tr>
<tr class="odd">
<td class="firstcol">Cotton Textiles</td>
<td>18.3</td>
<td>9.7</td>
<td>14.7</td>
<td>9.1</td>
<td>7.4</td>
<td>-5.3</td>
</tr>
<tr>
<td class="firstcol">Rubber, Plastic, Petroleum</td>
<td>23.2</td>
<td>7.7</td>
<td>15.7</td>
<td>3.9</td>
<td>1.2</td>
<td>7.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Basic Metals &amp; Alloys</td>
<td>25.4</td>
<td>20.9</td>
<td>20.0</td>
<td>13.8</td>
<td>4.3</td>
<td>10.9</td>
</tr>
<tr>
<td class="firstcol">Machinery ex Transport</td>
<td>17.3</td>
<td>2.1</td>
<td>14.2</td>
<td>11.5</td>
<td>24.3</td>
<td>8.3</td>
</tr>
</tbody>
</table>
</body>
</html>

Industrial production in India was strong again in November, extending a long but irregular uptrend in the industrial sector of that rapidly emerging economy. According to the Central Statistical Organization, IP was up 5.5% in the [...]

Broad Industrial Production Advance in India

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

Tighter US immigration enforcement adversely impacting labor force

Economic policy uncertainty, while still elevated, is declining

Gradual disinflation and easier monetary policies across advanced economies

Largest October layoffs since 2003, led by technology

Subdued global shipping costs not yet pointing to supply chain problems

PMIs show still-elevated but slowing US inflation

AI boosting US investment in data centers

US productivity growth has been significantly faster than in other major economies

Consumers' short-term US inflation expectations still elevated while longer-term expectations of financial markets are steady

US financial markets have gotten used to elevated policy uncertainty

FOMC now expects more rate cuts going forward than in June

China gaining ASEAN exports while US exports slump

Job openings less than the number unemployed in July for first time since 2021

Reaccelerating goods price inflation along with sticky services inflation clouds the outlook

Falling oil prices aren't pulling down inflation expectations, pointing to a boost from increased tariffs

Equity market exuberance outpacing macroeconomic data

Apart from Japan, Blue Chip forecasters expect further sizable monetary easing

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Andrew Cates

**The Global Monetary Policy Consensus**
The latest Blue Chip Financial Forecasts survey points to a notably more balanced global monetary policy outlook over the coming year. In contrast to the pronounced easing bias that dominated much of the past two years, expectations are now more symmetric, with a similar number of central banks projected to raise rates as to ease policy. Japan is seen delivering further tightening, while Canada is expected to initiate an interest rate hike in coming months. In Australia’s case, this tightening guidance was reinforced this week, with the Reserve Bank lifting its policy rate by 25 basis points. Elsewhere, and in contrast, the euro area, UK and US are expected to move in the opposite direction.

260205Z1.jpg

**US manufacturing activity**
The second chart underscores the recent improvement in US economic momentum, highlighted by an unexpected surge in the January ISM manufacturing PMI. After spending much of the past year hovering below the 50 threshold consistent with stagnation, the index jumped sharply back into expansionary territory, signalling a renewed pickup in industrial activity. This rebound has coincided with a broader run of stronger-than-anticipated US economic data, as reflected in the upswing in the Citigroup Economic Surprise Index. Together, these developments point to a US economy that continues to display notable resilience, complicating expectations of monetary easing in the near term.

260205Z2.jpg

**US Bank Lending Standards and Financial Stress** 
The next chart turns to US financial conditions, highlighting the latest readings from the Senior Loan Officer Opinion Survey. The net proportion of banks tightening lending standards on corporate loans and mortgages is now more modest by historical standards, and well below the extremes seen during past episodes of financial stress. Some easing in credit headwinds has occurred alongside relatively subdued readings on the OFR Financial Stress Index, which continues to hover below its long-run average. Together, these indicators suggest that the US financial system has continued to avoid the kind of acute stress typically associated with sharp slowdowns in credit availability—helping to underpin the recent resilience in economic activity.

260205Z3.jpg

**Semiconductor Sales**
The fourth chart highlights the renewed surge in global semiconductor sales, with momentum strengthening sharply over recent months across the Americas, China and the broader Asia-Pacific region. After the cyclical downturn in 2022–23, sales have rebounded to fresh highs, reflecting a powerful revival in demand for advanced chips and related technologies. This upswing has taken place amid intense investor preoccupation with artificial intelligence, with expectations that AI adoption will drive a sustained wave of capital spending on data centres, cloud infrastructure and high-performance computing. In contrast, semiconductor sales in Europe remain comparatively subdued, reflecting the region’s smaller footprint in high-end chip manufacturing, weaker industrial demand, and the ongoing impact of slower economic growth. While semiconductors are inherently cyclical, markets have increasingly interpreted the current rebound elsewhere as structural rather than purely cyclical—underpinned by the belief that AI represents a transformative and durable source of demand growth.

260205Z4.jpg

**Large-Scale AI Models**
The next chart illustrates the rapid proliferation of large-scale AI models globally, with newly updated data for 2025 pointing to a further sharp acceleration in development activity. The United States continues to lead by a wide margin, while China has also seen a steep rise in model deployment in recent years, underscoring the intensifying technological competition between the two economies. Growth in the UK and other regions has been more modest by comparison, highlighting the increasingly concentrated nature of AI innovation. Taken together with the surge in semiconductor sales, these trends help explain the market’s strong preoccupation with AI as a potential driver of future productivity and investment cycles—although the geographic concentration of activity also raises questions about the uneven distribution of any resulting economic gains.

260205Z5.jpg

**An AI Bubble?** 
The final chart draws on the latest Blue Chip Financial Forecasts special questions, highlighting market participants’ perceptions of the economic gains likely to be delivered by artificial intelligence. While a sizeable share of respondents still believe that financial markets may be overestimating AI’s potential benefits, an increasing proportion now judge current expectations to be broadly accurate, with only a small minority viewing the gains as underestimated. Notably, this represents a softening in scepticism compared with the survey results from last month, when concerns about excessive market optimism were more pronounced. The shift suggests a growing acceptance that AI-related investment and innovation could translate into meaningful economic impacts—though uncertainty remains high around the scale, timing and distribution of these gains.

260205Z6.jpg

Financial markets have experienced renewed gyrations in recent weeks, as shifting geopolitical risks, questions around Federal Reserve independence, renewed talk of US dollar “debasement,” and ongoing enthusiasm surrounding artificial intelligence have combined to drive volatility across asset classes. These cross-currents have also contributed to a degree of rotation away from high-flying technology stocks, as investors reassess valuations and the timing of anticipated AI-driven gains. Against this backdrop, the charts in this week’s COTW highlight several important themes. Policy rate expectations now appear more balanced globally, marking a clear shift away from the one-sided easing bias of the past two years (chart 1), even as resilient US data—underscored by the unexpected jump in the January ISM index and a run of positive economic surprises—continues to complicate the outlook for monetary easing (chart 2). At the same time, US financial conditions remain relatively benign, with limited evidence of widespread credit stress or aggressive tightening in lending standards (chart 3). Meanwhile, the sharp rebound in semiconductor sales and the accelerating rollout of large-scale AI models underscore why investors remain so focused on the AI narrative, even as Europe lags behind due to weaker industrial momentum and a smaller footprint in advanced chip production (charts 4 and 5). Finally, while some scepticism about AI’s ultimate economic impact persists, the latest survey results suggest a moderation in concerns that markets are materially overestimating its gains (chart 6). Taken together, these developments paint a picture of a US economy that remains more resilient than many had anticipated, set against a financial landscape increasingly shaped by powerful—if sometimes competing—narratives around geopolitics, policy, and technological transformation.

Charts of the Week: Balanced Policy, Resilient Data and AI Narratives

Robert Brusca

260206E.jpg

With the December report, Germany’s production and some of the early European industrial production data reveal a good deal of chaos in terms of the embedded trends. On the month, German industrial production fell by 1.9%, with consumer goods output up by 0.5%, capital goods output falling by 5.3%, and intermediate goods output falling by 1.2%. Among the early reporters in the monetary union—France, Spain, and Portugal—only Spain showed an increase in manufacturing IP in December; however, Spanish industrial production is notoriously volatile.

**Broader IP trends in Germany and elsewhere in Europe**
As for other early industrial production reporters, both Sweden and Norway showed strong-to-solid gains in December and each of them showed two-months of gains in a row. Beyond that, sequential growth rates from 12-months to six-months to three-months show accelerating growth in German consumer goods output against decelerating growth for intermediate goods. Real manufacturing output and real sales show mixed results- no clear trends; however, real manufacturing orders in Germany are off the map strong. 

**German manufacturing/industrial Surveys**
German industrial surveys from the IFO for manufacturing shows persistent weakening as well as for IFO manufacturing expectations, and in the EU Commission industrial index in the last three months. More broadly, Germany shows some modest but ongoing step up all of these based on average levels from 12-months to six-months to three-months for IFO expectations and the EU Commission industrial readings with mixed results for other survey readings.

**IP trends in Europe**
For the early reporting EMU members France, Spain, and Portugal, who report industrial production trends, each show mixed monthly trends against ongoing decelerations for manufacturing output over the broader sequential periods (12-month, to 6-month, to 3-month). However, for other Europe, Sweden and Norway, manufacturing trends are steadily accelerating on this broader timeline.

**A feeling of ‘Deja- What?’**
These combinations of opposed trends mixed with a lack of trends leave us with this sense of confusion about what's going on in manufacturing. For Germany, the extreme strength in orders is reassuring since orders should be forward-looking rather than backward-looking or even contemporaneous. But orders can also be a fickle series and so we'll have to watch it to see if the trends for German orders hold up.

**Current quarter-What’s been happening now**
In addition, current quarter growth for Germany actually looks quite good with industrial production up 3.7% at an annual rate in the current quarter, led by output increases in manufacturing against a decline in the intermediate goods output. Real orders in the quarter are surging at a 44% growth rate, while real sales in manufacturing only had a 0.1% uptick at an annual rate. The industrial indicators for Germany in the quarter show weakness or flatness with the only exception being IFO manufacturing expectations that advanced by a small amount. The three EMU members who report industrial production data show positive growth in the just-completed quarter except for Portugal where industrial production is falling at a 2.9% rate in the fourth quarter. Sweden and Norway, European countries but not monetary union members, show a strong 22% annual rate gain in Sweden against the 3% annual rate decline in Norway.

260206.jpg

**Rankings**
**How growth rates stack up…**
Moving away from short-term trends, the rankings of growth rates of these various metrics using 12-month growth rates on data back to 2006, show below-median growth rates for German industrial production and all three of its major sectors. All of them have rankings below the 50% mark where the median resides. Germany’s manufacturing output growth rate is below its median as is the growth of real sales; and once again real manufacturing orders break out and show a stunning 90th percentile standing, extremely strong compared to other growth rates on this period.

**Indicator rankings are poor**
However, the survey based industrial indicators for Germany, ranked based on their index levels, are all extremely weak and much weaker than German sector or other German metrics. The strongest indicator reading is the 29th percentile standing for IFO manufacturing expectations while the current ZEW index, IFO manufacturing index, and the EU Commission industrial readings, all reside below their 15th percentile. The survey rankings suggest that industrial sentiment is in much worse shape than activity and growth.

**IP elsewhere in Europe**
However, the growth ranking of manufacturing industrial production for the reporting EMU members and other European members are all quite solid, with percentile standings ranging from the 66th up to the 93rd percentile.

**Summing up**
From these data, Germany emerges as the weak economy compared with historic norms based on industrial production growth and indicator readings. However, there's a glimpse of positivity from the growth of real orders, and at the same time, some concern about ongoing sentiment for manufacturing in Germany as distinct from actual performance.

Germany

German IP Reveals Chaotic Trends

Winnie Tapasanun

260205X15.jpg

260205Y15.jpg

**Total job openings** fell 5.6% m/m (-12.9% y/y) to 6.542 million in December after a downwardly revised 7.0% decline to 6.928 million in November (previously -4.1% m/m; 7.146 million), according to the Job Openings and Labor Turnover Survey. December marked the third consecutive m/m fall and the lowest level since September 2020. The job openings rate declined to 3.9% in December, the lowest since April 2020, from 4.2% in November, remaining below a record-high 7.4% in March 2022. This rate is calculated as the ratio of job openings to total nonfarm employment plus openings. Significantly, the drop in job openings also lowered the **ratio of job openings to unemployed individuals** to 0.872 in December—the lowest since March 2021—from 0.890 in November, down from 1.085 in December 2024 and a pre-pandemic 1.211 in February 2020. A reading of 0.872 implies there were about 0.87 open jobs per unemployed person—indicating fewer openings than unemployed workers. December was the fifth time in six months that this ratio remained below 1.0.

**Private sector job openings** fell 6.8% (-12.5% y/y) to 5.804 million in December after a 6.6% fall to 6.227 million in November, registering the third successive m/m decline and the lowest level since September 2020. The private sector job openings rate fell to 4.1% in December, the lowest since April 2020, from 4.4% in November. The December m/m decline in private sector openings reflected drops of 27.7% (-36.9% y/y) in financial activities, 20.2% (-25.5% y/y) in professional & business services, 14.4% (-5.1% y/y) in trade, transportation & utilities, and 5.2% (-12.4% y/y) in private educational & health services. To the upside, private sector openings in the following categories rose m/m in December: other services (21.1%; 11.0% y/y), mining & lodging (17.6%; 0.0% y/y), information (13.5%; -4.7% y/y), manufacturing (8.5%; 0.5% y/y), leisure & hospitality (7.5%; -17.2% y/y), and construction (2.8%; 42.4% y/y). Meanwhile, government job openings rose 5.3% (-15.6% y/y) in December, the first m/m rise in three months, after a 10.6% drop in November.

**Total hiring** rebounded 3.4% (-1.5% y/y) to 5.293 million in December, the first m/m increase since September, following a 4.6% decrease to 5.121 million in November. The hiring rate edged up to 3.3% in December from 3.2% in November, though it remained below pre-pandemic levels. **Private sector hiring** rose 3.1% (-0.4% y/y) to 4.978 million in December, the third m/m rise in four months, after a 4.0% decline to 4.826 million in November. The private sector hiring rate rose to 3.7% in December from 3.5% in November, the same as in October and September. The December m/m increase in private sector hiring was led by a 32.1% jump (42.3% y/y) in information, followed by gains of 24.0% (-4.6% y/y) in financial activities, 23.5% (0.0% y/y) in mining & lodging, 6.5% (-4.8% y/y) in private educational & health services, 4.2% (-4.9% y/y) in trade, transportation & utilities, 3.6% (6.1% y/y) in construction, 3.4% (7.9% y/y) in leisure & hospitality, and 1.8% (-4.3% y/y) in manufacturing. To the downside, private sector hiring in professional & business services (-5.2%; +0.5% y/y) and other services (-4.3%; -16.5% y/y) declined m/m in December. Meanwhile, government hiring rebounded 6.4% (-16.3% y/y) in December, the first m/m rise since September, following a 13.5% drop in November.

**Total separations** rose 2.1% (3.3% y/y) to 5.251 million in December after a 1.5% rise to 5.144 million in November, marking the third m/m increase in four months and the highest level since September. The total separations rate edged up to 3.3% after holding at 3.2% in November and October. Private sector separations rose 1.6% (4.2% y/y) to 4.932 million in December, the highest level since June, while government sector separations jumped 10.4% (-9.1% y/y) to 319,000 following two consecutive m/m declines. **Total quits** (voluntary separations initiated by the employee) increased 0.3% (3.5% y/y) to 3.204 million in December, the third m/m rise in four months and the highest level since June, after a 7.4% rebound in November. The quits rate (a measure of workers’ willingness or ability to leave jobs) held at 2.0% in December and November, slightly below 2.3% in February 2020. Private sector quits eased 0.2% (+4.5% y/y) following an 8.4% November rebound. **Layoffs and discharges** (involuntary separations initiated by the employer) increased 3.6% (5.6% y/y) to 1.762 million in December, up for the third time in four months, after an 8.1% drop in November. The layoffs & discharges rate remained at 1.1% in December and November, marginally below 1.3% in February 2020. Private sector layoffs grew 4.3% (7.8% y/y) following a 7.3% November decrease.

The Job Openings and Labor Turnover Survey (JOLTS) data are available in Haver’s **USECON** database.

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- Job openings down 5.6% (-12.9% y/y) to 6.542 mil., third straight m/m decline.
- Hiring up 3.4% (-1.5% y/y) to 5.293 mil., first m/m increase since September.
- Separations rise to a three-month high; quits reach a six-month high; layoffs rebound.

U.S. JOLTS: Openings Drop to Lowest Level Since Sept. ’20; Hiring Rebounds in December

Sandy Batten

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Initial claims for unemployment insurance jumped 22,000 to 231,000 in the week ended January 31 following an unrevised 209,000 in the prior week. The four-week average rose to 212,250 from 206,250. The Action Economics Forecast Survey looked for 213,000 claims to have been filed. Winter Storm Fern and the accompanying very cold temperatures could have provided a temporary boost. Historically speaking, claims remain at low levels.

The total number of unemployment insurance beneficiaries—also known as “continuing claims”—increased by 25,000 to 1.844 million in the week ending January 24, from a downwardly revised 1.819 million in the prior week (previously 1.827 million). The insured unemployment rate remained at 1.2% in the week of January 24, unchanged from the previous eight weeks.

The insured unemployment rate varied greatly across individual states and territories. In the week ending January 17, the highest unemployment rates were in Rhode Island (2.83%), New Jersey (2.77%), Massachusetts (2.67%), Washington (2.54%), and Minnesota (2.45%). The lowest rates were in Florida (0.30%), North Carolina (0.42%), Louisiana (0.43%), Alabama (0.46%), and Arkansas (0.47). Rates in other notable states include Illinois (2.15%), California, (2.08%), New York (2.02%), Pennsylvania (1.91%), and Texas (1.09%). These state data are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor itself, not the Bureau of Labor Statistics. They begin in 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in **USECON**. Data for individual states are in **REGIONW** back to December 1986.

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- New claims jumped 22,000 to 231,000, the highest level since December 6.
- Continuing claims rose to 1.844 million from 1.819 million.

U.S. Initial Unemployment Claims Surged in Latest Week

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German real orders in December adjusted for inflation rose strongly again, gaining 7.8% month-to-month after rising 5.7% month-to-month in November. Foreign orders were up by 5.6% in December compared to 5.2% in November. Domestic orders surged by 10.7% in December after rising 6.4% in November and 10% in October.

**Real sales**
Real sales were mixed in December with overall sales falling 1.4% month-to-month mostly on weakness in capital goods sales.

**Broad categorical acceleration**
Many flows are accelerating this month. Sequential growth rates show acceleration. Total real orders accelerate from a year ago, to the current year, to six-months, and to three-months. Sales growth rates for consumer goods, consumer nondurables, and intermediate goods all show accelerations in gear. The exceptions are foreign orders that are not as strong over six months compared to their 12-month growth. And on the sales side, consumer durables sales and capital goods sales are weak.

**Quarter-to-quarter**
Quarterly annualized growth is complete for Q4 with this report. Foreign orders are the ‘weak flow’ expanding at a 13.6% annual rate – certainly not a weak growth rate. But domestic real orders are up at an astounding 101.9% annual rate. The net impact on the total real orders growth is to lift it to a pace of 44.1%. 

**Order ranking is very strong**
The table provides two rankings: one based on the level of variables and the other based on its year-on-year growth. The rankings this month for real orders overall, foreign, and domestic orders all reside in their top 80th to 90th percentiles- extremely strong based on level or growth. Sales do not follow suit. This gives us some reason to suspect that there is some lumpiness involved in the manufacturing data as distinct from strength. That will be something to watch. Overall mining and manufacturing sales growth is essentially at its historic median at a rank of 49.8. However, capital goods, intermediate goods and manufacturing sales all have rankings at or above their medians - as high as a 61-percentile standing for capital goods.

**Industrial confidence**
Industrial confidence for Germany, France, Italy and Spain (the EU’s big-four economies) show rankings based on these survey levels that are much lower at the 11th percentile for Germany, the 42nd and 36th percentiles, for France and Italy, respectively. Spain scores better with a 61.8 percentile standing on its industrial confidence measure. 

On balance, there is now an accelerating profile that is broad in sales trends and especially strong order trends. Perhaps Europe, under the pressure to stimulate its miliary capabilities, has a core of demand to help drive output ahead more consistently. This is something to watch in the coming months.

Economy in Brief

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