Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070103i.jpg" width="353">
The total number of mortgage applications ticked up 3.6% last week after two weeks of sharp decline which left the average level of applications in December up 1.1% versus the prior month, according to the Mortgage Bankers Association.
Purchase applications rose 4.3% following two weeks of sharp decline but increased 4.7% during the month from the November average which rose 6.4% from the October level.
During the last ten years there has been a 58% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales.
Applications to refinance also ticked up 2.2% after two weeks of double digit decline which gave back more than all some earlier increases. In December applications to refinance were unchanged on average from November.
The effective interest rate on a conventional 30-year mortgage increased again w/w to 6.40%, the highest level since early November. Nevertheless rates averaged 6.28% in December, down versus 6.36% during November. The peak for 30 year financing was 7.08% late in June. Rates for 15-year financing also increased to 6.18% and averaged 6.05% last month versus 6.13% during November. Interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities.
During the last ten years there has been a (negative) 79% correlation between the level of applications for purchase and the effective interest rate on a 30-year mortgage.
The Mortgage Bankers Association surveys between 20 to 35 of the top lenders in the U.S. housing industry to derive its refinance, purchase and market indexes. The weekly survey covers roughly 50% of all U.S. residential mortgage applications processed each week by mortgage banks, commercial banks and thrifts. Visit the Mortgage Bankers Association site <a href="http://www.mbaa.org">here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">12/29/06</th>
<th scope="col">12/22/06</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">Total Market Index</td>
<td>575.6</td>
<td>555.8</td>
<td>5.4%</td>
<td>584.2</td>
<td>708.6</td>
<td>735.1</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>406.9</td>
<td>390.2</td>
<td>-2.7%</td>
<td>406.9</td>
<td>470.9</td>
<td>454.5</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,640.4</td>
<td>1,604.6</td>
<td>20.3%</td>
<td>1,634.0</td>
<td>2,092.3</td>
<td>2,366.8</td>
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</tbody>
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The total number of mortgage applications ticked up 3.6% last week after two weeks of sharp decline which left the average level of applications in December up 1.1% versus the prior month, according to the Mortgage Bankers [...]

Mortgage Applications Ticked Up

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070103d.jpg" width="353">
The value of construction put in place in November fell 0,2% though the prior month&#39;s sharp drop was revised to more mild 0.3% dip. Nevertheless, it was the sixth decline in the last seven months. Consensus expectations had been for a 0.5% November decline.
Residential building again fell sharply. The 1.6% decline was the eighth consecutive monthly decline and it lowered the level of residential construction activity 11.3% below last December&#39;s peak. New single family building dropped 3.1% after a 3.8% slip during October and it lowered activity 20.8% below the peak this past February. Spending on improvements again made up for some that lost work and rose 0.6% (6.7% y/y).
During the last twenty years there has been an 84% correlation between the q/q change in the value of residential building and its contribution to growth in real GDP.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070103e.jpg" width="353">
Housing: Boom or Bubble? from the Federal Reserve Bank of Philadelphia is available <a href="http://www.philadelphiafed.org/files/br/br_q4-2006-2_boom_bubble.pdf"> here</a>.
Nonresidential building rose 1.4% after an upwardly revised 0.5% October uptick. Lodging construction surged 3.9% (71.4% y/y) after a 7.8% October spike and office construction rose a solid 1.0% (30.9% y/y) after an upwardly revised October gain. Multi-retail building eased 0.6% (28.3% y/y) and gave back half of October&#39;s increase.
Public construction spending increased 1.0% after an upwardly revised 1.9% October surge. Spending on highways &amp; streets, nearly one third of the value of public construction spending, ticked up 0.4% (13.7% y/y) but October&#39;s gain was revised up to 2.5%.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070103f.jpg" width="353">
These more detailed categories represent the Census Bureau&#146;s reclassification of construction activity into end-use groups. Finer detail is available for many of the categories; for instance, commercial construction is shown for Automotive sales and parking facilities, drugstores, building supply stores, and both commercial warehouses and mini-storage facilities. Note that start dates vary for some seasonally adjusted line items in 2000 and 2002 and that constant-dollar data are no longer computed.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E9/@E907/@E90701/@E90701.HTM">Construction Put-in-place</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>
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</thead>
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<td class="firstcol">Total</td>
<td>-0.2%</td>
<td>-0.3%</td>
<td>0.1%</td>
<td>10.7%</td>
<td>11.5%</td>
<td>5.6%</td>
</tr>
<tr>
<td class="firstcol">Private</td>
<td>-0.6%</td>
<td>-1.0%</td>
<td>-2.7%</td>
<td>12.0%</td>
<td>14.3%</td>
<td>6.4%</td>
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<td class="firstcol">&nbsp; Residential</td>
<td>-1.6%</td>
<td>-1.7%</td>
<td>-11.1%</td>
<td>13.9%</td>
<td>18.6%</td>
<td>12.8%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Nonresidential</td>
<td>1.4%</td>
<td>0.5%</td>
<td>18.0%</td>
<td>7.4%</td>
<td>5.3%</td>
<td>-4.8%</td>
</tr>
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<td class="firstcol">Public</td>
<td>1.0%</td>
<td>1.9%</td>
<td>10.6%</td>
<td>6.2%</td>
<td>2.8%</td>
<td>2.9%</td>
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The value of construction put in place in November fell 0,2% though the prior month's sharp drop was revised to more mild 0.3% dip. Nevertheless, it was the sixth decline in the last seven months. Consensus expectations had been for a [...]

U.S. Construction Spending Off Again

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070103c.jpg" width="353">
The ADP Nat&#39;l Employment Report, reported by the payroll processor, indicated that private nonfarm payrolls declined 40,000 last month. It was the first decline since April 2003. The U.S. Bureau of Labor Statistics employment figure will be published this Friday.
Last month, ADP&#39;s measure of private nonfarm payrolls for November indicated a 158,000 rise in jobs that was followed by a BLS report that private nonfarm payrolls rose 114,000.
ADP compiled the estimate from its database of individual companies&#39; payroll information. Macroeconomic Advisers, LLC, the St. Louis economic consulting firm, developed the methodology for transforming the raw data into an economic indicator.
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 National Employment Report data is maintained in Haver&#39;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/NER_December_Release_FINAL.pdf">here</a>, and the ADP methodology is explained <a href="http://www.adpemploymentreport.com/PDF/ADPNERMethodology.pdf">here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EB/@EB25/@EB25.HTM">LAXEPA@USECON</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>
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<td class="firstcol">Nonfarm Private Payroll Employment (Chg.)</td>
<td>-40,000</td>
<td>158,000</td>
<td>1.6%</td>
<td>1.8%</td>
<td>1.7%</td>
<td>1.3%</td>
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The ADP Nat'l Employment Report, reported by the payroll processor, indicated that private nonfarm payrolls declined 40,000 last month. It was the first decline since April 2003. The U.S. Bureau of Labor Statistics employment figure [...]

ADP Report: Private Payrolls Declined

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070103b.jpg" width="353">
The composite index of manufacturing activity from the Institute for Supply Management recovered in December to 51.4 from 49.5 the prior month. Consensus expectations had been for less of an improvement to 50.0.
During the last ten years there has been a 67% correlation between the level of the ISM index and three month growth in factory sector industrial production.
All of the component series improved m/m with the exception of inventories. The new orders component rose to 52.1 with a 3.4 point increase that just recouped the November decline. Production also recovered its November drop and rose to 51.8 but the new export orders index fell 54.3, its lowest level since July. The series peak was in early 2004 near 60. During the last ten years there has been a 69% correlation between the level of the export order index and the q/q growth in goods exports from the GDP accounts. The imports index also fell moderately.
What Will the Next Export Boom Look Like? Some Lessons from the Late 1980s from the Federal Reserve Bank of Philadelphia can be found <a href="http://www.philadelphiafed.org/files/br/br_q4-2006-3_export_boom.pdf"> here</a>.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070103a.jpg" width="353">
Employment also improved modestly to 49.7, the third month in the last four below the break even level of 50. During the last ten years there has been a 77% correlation between the level of the ISM employment Index and the three month growth in factory sector employment.
The price index, which is not included in the composite, gave back about all of its November rise and fell to the second lowest level since 2002.
During the last ten years there has been an 89% correlation between the level of the price index and the three month change in the PPI for intermediate goods less food &amp; energy.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF02/@EF02.HTM">ISM Manufacturing Survey</a></th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">Dec. &#39;06</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
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</thead>
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<td class="firstcol">Composite Index</td>
<td>51.4</td>
<td>49.5</td>
<td>55.6</td>
<td>53.9</td>
<td>55.5</td>
<td>60.5</td>
</tr>
<tr>
<td class="firstcol">Prices Index (NSA)</td>
<td>47.5</td>
<td>53.5</td>
<td>63.0</td>
<td>65.0</td>
<td>66.4</td>
<td>79.8</td>
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The composite index of manufacturing activity from the Institute for Supply Management recovered in December to 51.4 from 49.5 the prior month. Consensus expectations had been for less of an improvement to 50.0. During the last ten [...]

ISM Composite Index Recovered A Bit

Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070102a.jpg" width="353">
In Europe and the Pacific Rim, increases in consumer spending have lagged behind increases in investment spending and net exports. The news, today, from Hong Kong in the Far East and Denmark in Europe is encouraging. In volume terms retail sales in November in Hong Kong were slightly, 0.19%, below October but were 7.72% above November, 2005. In Denmark retail sales rose 0.72% in October and were 4.03% above November, 2005. For the eleven months of this year retail sales in Hong Kong are up 6.8% in value terms and 5.2% in volume. Comparable figures for Denmark are 3.9% and 3.4%. The first chart compares the trend in the volume of retail sales in Hong Kong and Denmark, while the second chart compares the trends in the value of retail sales.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070102b.jpg" width="353">
The greater difference between the value indexes and the volume indexes is the largely the result of the different price trends in Hong Kong and Denmark. From late 1998 until mid 2004, Hong Kong experienced deflation, while Denmark experienced annual prices increases of about 2.5%. (See the third chart.)<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070102c.jpg" width="353">
The city state of Hong Kong and the country of Denmark are too small to be used as projectors of trends in broader areas--the Pacific Rim and European Union, but the news today is at least affirmative. Hong Kong has a population of 7.0 million and Denmark one of 5.4 million. In Euro terms Gross Domestic Product in Denmark is currently 56 billion euros while that of Hong Kong is 37 billion Euros.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col><col></colgroup>
<thead>
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<th scope="col" class="firstcol">RETAIL SALES&nbsp;</th>
<th scope="col">Nov&nbsp; 06</th>
<th scope="col">Oct 06</th>
<th scope="col">Nov 05</th>
<th scope="col">M/M&nbsp;&nbsp; %</th>
<th scope="col">Y/Y&nbsp;&nbsp; %</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">Jan-Nov06/ Jan-Nov05</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Hong Kong Value (2000=100)</td>
<td>110.2</td>
<td>109.3</td>
<td>102.3</td>
<td>0.82</td>
<td>7.72</td>
<td>101.3</td>
<td>94.9</td>
<td>85.6</td>
<td>6.8</td>
</tr>
<tr>
<td class="firstcol">Denmark Value&nbsp; (2000=100)</td>
<td>129.2</td>
<td>128.0</td>
<td>124.2</td>
<td>0.94</td>
<td>4.03</td>
<td>122.9</td>
<td>116.4</td>
<td>112.3</td>
<td>3.9</td>
</tr>
<tr class="odd">
<td class="firstcol">Hong Kong Volume (2000=100)</td>
<td>107.2</td>
<td>107.4</td>
<td>102.2</td>
<td>-0.19</td>
<td>4.89</td>
<td>101.5</td>
<td>95.4</td>
<td>87.5</td>
<td>5.2</td>
</tr>
<tr>
<td class="firstcol">Denmark Volume (2000=100)</td>
<td>125.5</td>
<td>124.6</td>
<td>122.2</td>
<td>0.72</td>
<td>2.70</td>
<td>120.5</td>
<td>113.6</td>
<td>107.9</td>
<td>3.4</td>
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</tbody>
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In Europe and the Pacific Rim, increases in consumer spending have lagged behind increases in investment spending and net exports. The news, today, from Hong Kong in the Far East and Denmark in Europe is encouraging. In volume terms [...]

Encouraging Trends in Retail Sales in Hong Kong and Denmark

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/061229a.jpg" width="353">
Industrial activity generally improved in December, according to local Purchasing Managers&#39; surveys released December 28 and 29. In New York, a broad index covering both manufacturing and services edged higher after a strong rise in November. Chicago&#39;s index managed to climb back above 50% after a surprising dip in November. In Cincinnati, there was a marginally positive reading indicating less growth than in recent months. Finally, in Milwaukee, conditions show fairly steady growth with the December index equal to the averages for 2005 and 2006.
In New York, the business conditions index gained 0.4% in December, following 3.8% in November. It stands 25.2% ahead of a year ago. This index is a linked version of the &quot;current conditions index&quot;, which slowed in the month from 82.5% to 53.6%. The survey also indicates some retreat in the outlook measure for six months out; it was 62.5%, down from 70% in November. However, this still compares favorably with readings over the last couple of years.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061229b.jpg" width="353">
Chicago&#39;s survey recovered most of its November decline, and importantly got back above the 50% breakeven level, reaching 52.5. This remains low, though, compared with all but one other month since the spring of 2003. Several components also remain below 50%, notably order backlogs, employment and delivery speeds. So despite a gain in new orders, the Chicago survey indicates some uncertainty about the overall strength of demand.
Two other cities in the industrial midwest show uneven performances. In Cincinnati, whose results are not seasonally adjusted, the general business production index eased to +6 in December from +15 the month before and +11 in the year-ago month. For the year as a whole, this index began strong at +47. but has ratcheted lower since then. New orders also seem to be tapering down, with December&#39;s -12 the weakest value since the middle of 2002. The price situation in Cincinnati looks better, however, with price increases for commodities, services and equipment all slowing noticeably during Q4.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061229c.jpg" width="353">
In Milwaukee, growth looks steadier, if not faster. The general business index for December is 58, up from 56 the previous month and holding in the range of about 54 to 65 that has prevailed since the recovery from the last recession. However, some uncertainty appears here too, as order backlogs and supplier lead-times have both dropped below 50%.
So manufacturing conditions in the industrial heartland look favorable, but they are not on a firm base. We&#39;d surmise that last summer&#39;s expensive energy and surging commodity prices, along with, until lately, expectations of further interest rate increases imposed considerable caution into managers&#39; strategies. Recent easing of these price advances may allow planners to be less defensive early in the New Year.
Note that the Chicago PMI data are contained in the USECON database. The other cities are included in Haver&#39;s SURVEYS database.

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<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
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<th scope="col" class="firstcol">Purchasing Manager Surveys</th>
<th scope="col">Dec 2006</th>
<th scope="col">Nov 2006</th>
<th scope="col">Oct 2006</th>
<th scope="col">Dec 2005</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
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</thead>
<tbody>
<tr class="odd">
<td class="firstcol">New York Index, SA, 1996=100</td>
<td>443.4</td>
<td>441.6</td>
<td>425.3</td>
<td>354.2</td>
<td>402.7</td>
<td>340.1</td>
<td>294.3</td>
</tr>
<tr>
<td class="firstcol">Current Conditions, 50%+=Growth</td>
<td>53.6</td>
<td>82.5</td>
<td>58.6</td>
<td>53.6</td>
<td>64.9</td>
<td>57.5</td>
<td>61.6</td>
</tr>
<tr class="odd">
<td class="firstcol">Chicago, SA, 50%+=Growth</td>
<td>52.4</td>
<td>49.9</td>
<td>53.5</td>
<td>60.8</td>
<td>56.8</td>
<td>60.4</td>
<td>62.8</td>
</tr>
<tr>
<td class="firstcol">Cincinnati, NSA, Net Balance</td>
<td>6</td>
<td>15</td>
<td>28</td>
<td>11</td>
<td>26</td>
<td>23</td>
<td>36</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; New Orders</td>
<td>-12</td>
<td>20</td>
<td>20</td>
<td>0</td>
<td>24</td>
<td>18</td>
<td>32</td>
</tr>
<tr>
<td class="firstcol">Milwaukee, SA, 50%+=Growth</td>
<td>58</td>
<td>56</td>
<td>64</td>
<td>66</td>
<td>58</td>
<td>58</td>
<td>60</td>
</tr>
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Industrial activity generally improved in December, according to local Purchasing Managers' surveys released December 28 and 29. In New York, a broad index covering both manufacturing and services edged higher after a strong rise in [...]

Local NAPM Reports Show Gains in December, but Include Weak Components

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.

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**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.

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**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.

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**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.

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**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.

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**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.

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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

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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.

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**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

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**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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Local NAPM Reports Show Gains in December, but Include Weak Components