Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070220a.jpg" width="353">
The National Activity Index (CFNAI) from the Federal Reserve Bank of Chicago in January reversed all of its upwardly revised December improvement. The decline to -0.74 was to the lowest level since September 2005.
The three-month moving average of the CFNAI also fell sharply to -0.29 and it was the fifth straight month in negative territory.
A zero value of the CFNAI indicates that the economy is expanding at its historical trend rate of growth and during the last twenty years there has been a 68% correlation between the level of the CFNAI and q/q growth in real GDP.
All of the CFNAI components contributed to the January decline including production, employment, consumption and housing.
The CFNAI is a weighted average of 85 indicators of economic activity. The indicators reflect activity in the following categories: production and income, the labor market, personal consumption and housing, manufacturing and trade sales, and inventories &amp; orders.
The complete CFNAI report is available <a href="http://www.chicagofed.org/economic_research_and_data/files/cfnai_Februarry2007.pdf">here</a>.
Michigan Labor Market--Still Awaiting Recovery from the Federal Reserve Bank of Chicago can be found <a href="http://midwest.chicagofedblogs.org/archives/2007/02/michigan_labor_1.html"> here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S503/@S503.HTM">Chicago Fed</a></th>
<th scope="col">January</th>
<th scope="col">December</th>
<th scope="col">January &#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">CFNAI</td>
<td>-0.74</td>
<td>0.36</td>
<td>0.48</td>
<td>0.02</td>
<td>0.25</td>
<td>0.31</td>
</tr>
</tbody>
</table>


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The National Activity Index (CFNAI) from the Federal Reserve Bank of Chicago in January reversed all of its upwardly revised December improvement. The decline to -0.74 was to the lowest level since September 2005. The three-month [...]

Chicago Fed Nat'l Activity Index Quite Negative

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070220a.jpg" width="353">
The National Activity Index (CFNAI) from the Federal Reserve Bank of Chicago in January reversed all of its upwardly revised December improvement. The decline to -0.74 was to the lowest level since September 2005.
The three-month moving average of the CFNAI also fell sharply to -0.29 and it was the fifth straight month in negative territory.
A zero value of the CFNAI indicates that the economy is expanding at its historical trend rate of growth and during the last twenty years there has been a 68% correlation between the level of the CFNAI and q/q growth in real GDP.
All of the CFNAI components contributed to the January decline including production, employment, consumption and housing.
The CFNAI is a weighted average of 85 indicators of economic activity. The indicators reflect activity in the following categories: production and income, the labor market, personal consumption and housing, manufacturing and trade sales, and inventories &amp; orders.
The complete CFNAI report is available <a href="http://www.chicagofed.org/economic_research_and_data/files/cfnai_Februarry2007.pdf">here</a>.
Michigan Labor Market--Still Awaiting Recovery from the Federal Reserve Bank of Chicago can be found <a href="http://midwest.chicagofedblogs.org/archives/2007/02/michigan_labor_1.html"> here</a>.

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<thead>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S503/@S503.HTM">Chicago Fed</a></th>
<th scope="col">January</th>
<th scope="col">December</th>
<th scope="col">January &#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">CFNAI</td>
<td>-0.74</td>
<td>0.36</td>
<td>0.48</td>
<td>0.02</td>
<td>0.25</td>
<td>0.31</td>
</tr>
</tbody>
</table>
French Economic Growth vis-à-vis Germany's  
by <a href="/comment/Curley.html">Louise Curley</a> February 20, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070220b.jpg" width="353">
Details of France&#39;s fourth quarter Gross Domestic Product were released today.The 0.65% increase in GDP for the fourth quarter reported in the flash estimate of a week ago was confirmed. It compares with a 0.87% increase reported for Germany. For the year as a whole, French GDP rose 2.0 and Germany, 2.9%. 2006 marked the first time since 1995, that Germany&#39;s annual growth rate exceeded that of France. The first chart shows the annual growth of both countries&#39; GDPs.
<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070220e.jpg" width="353"> In the second chart we have plotted, for France, the sum of consumption and gross fixed capital formation as a proxy for domestic demand and total gross domestic product. The difference between the two lines is roughly equivalent to France&#39;s net exports of goods and services. Until about mid 2003 France maintained a surplus on trade in goods and services. For a year or so, there was a balance and ever since late 2004, a deficit. It is this shift in the French trade balance that is largely responsible for the deceleration in French economic growth. In contrast to France, Germany has experienced an increasingly favorable balance of trade in goods since 2001, as can be seen in the third chart.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070220c.jpg" width="353"> (In this chart we have used the nominal figures to simplify the calculations necessary for the comparison.Real values of German net exports in billions of euros have to be calculated. The nominal values are available. While French net exports are available in both real and nominal terms, the data are in millions of euros and have to be converted into billions.)

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">GROSS DOMESTIC PRODUCT&nbsp;</th>
<th scope="col">Q4&nbsp; 06</th>
<th scope="col">3Q 06</th>
<th scope="col">2Q 06</th>
<th scope="col">1Q 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">France&nbsp; (% change)</td>
<td>0.65</td>
<td>0.01</td>
<td>1.06</td>
<td>0.50</td>
<td>1.96</td>
<td>1.21</td>
<td>2.03</td>
<td>1.13</td>
</tr>
<tr>
<td class="firstcol">Germany (% change</td>
<td>.087</td>
<td>0.79</td>
<td>1.18</td>
<td>0.84</td>
<td>2.89</td>
<td>1.10</td>
<td>0.77</td>
<td>-0.20</td>
</tr>
<tr class="odd">
<td class="firstcol">NET EXPORT OF GOODS AND SERVICES</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">France (billion euros)</td>
<td>-7.27</td>
<td>-8.58</td>
<td>-8.00</td>
<td>-5.87</td>
<td>-29.72</td>
<td>-16.70</td>
<td>4.30</td>
<td>15.38</td>
</tr>
<tr class="odd">
<td class="firstcol">Germany&nbsp; (billion euros)</td>
<td>n.a.</td>
<td>29.56</td>
<td>25.36</td>
<td>25.42</td>
<td>n.a.</td>
<td>115.47</td>
<td>109.76</td>
<td>85.75</td>
</tr>
</tbody>
</table>


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Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070219a.jpg" width="353">
IG Metall, the powerful metal workers&#39; union in Germany, has announced that it will seek a 6% increase in wages when negotiations begin in next month. Haver&#39;s GERMAN Database contains a number of series that may provide background for appraising labor&#39;s demands. In the Employment, Earning, Productivity and Costs section, among others, there are indexes based on 2000=100 for wages and salaries per worker, per working hour, per unit of output and per unit of turnover. In addition indexes are available for productivity. In the National Accounts section, the shares of labor income and entrepreneurial, investment and property income in National Income are given.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070219b.jpg" width="353">
Wage per hour increases in Germany have been subdued over the past four years. During this time the annual increases in the index of German wages and salaries per hour have been between 1.15% and 1.84%. This has been the longest period of such low growth since the country was reunited in 1991 as can be seen in the first chart.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070219c.jpg" width="353">
At the same time that labor compensation has experienced slow growth, productivity has shown good growth with the result that unit labor costs have declined sharply as can be seen in the second chart. The decline in unit labor costs, in turn, has resulted in a growing share of total national income going to entrepreneurial, investment and property income. The third chart compares the annual gains and losses of the two shares of income. Since the shares add up to 100%, what one gains, the other loses. Labor has lost share in most years with the result that its share has declined to 67.9% in 2005, from 72.9% in 1993, the post unification peak. At the same time, the share of capital income has risen from 27.1% to 32.6%. These trends have continued into 2006 where the average for the first three quarters of the year show a 66.3% share for labor income and a 33.7% share for capital income.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">GERMANY&nbsp;</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
<th scope="col">2001</th>
<th scope="col">2000</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Wages &amp; Salaries per Working Hour (% Chg)</td>
<td>1.15</td>
<td>1.20</td>
<td>1.84</td>
<td>1.44</td>
<td>3.09</td>
<td>3.27</td>
<td>2.91</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Productivity&nbsp; (% Chg)</td>
<td>5.18</td>
<td>4.66</td>
<td>4.70</td>
<td>1.83</td>
<td>2.82</td>
<td>1.23</td>
<td>5.99</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Unit Labor Cost (% Chg)</td>
<td>-3.85</td>
<td>-3.29</td>
<td>-2.76</td>
<td>-0.37</td>
<td>-0.25</td>
<td>2.01</td>
<td>-2.92</td>
</tr>
<tr>
<td class="firstcol">Labor Share in National Income (%)</td>
<td>66.3*</td>
<td>67.4</td>
<td>68.9</td>
<td>40.9</td>
<td>71.6</td>
<td>71.8</td>
<td>72.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Capital Share in National Income (%)</td>
<td>33.7*</td>
<td>32.6</td>
<td>31.1</td>
<td>27.1</td>
<td>28.4</td>
<td>28.2</td>
<td>27.8</td>
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IG Metall, the powerful metal workers' union in Germany, has announced that it will seek a 6% increase in wages when negotiations begin in next month. Haver's GERMAN Database contains a number of series that may provide background for [...]

German Labor Demanding Big Increase in Wages

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/070216c.jpg" width="353">
The producer price index for finished goods fell 0.6% following its 0.9% rise in December. This result was close to consensus forecasts of a 0.5% decline. It was, as anticipated, led by a drop in energy prices; this ran 4.6%. Food prices continued rising, adding 1.1% after December&#39;s 1.5%.
The core finished goods PPI rose 0.2%, the same as in December and also equal to forecasts. Note that the BLS conducted its annual seasonal adjustment revisions on these data, so 2006 figures quoted here may differ from those reported last month.
Energy prices fell sharply in January: gasoline was down 13.0% in the month and 9.7% from January 2006. Fuel oil fell 8.3% from December and 2.3% from a year ago. Natural gas prices were off 1.9% in January, carrying the 12-month change to -15.1%. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070216d.jpg" width="353">
Finished consumer goods prices less food &amp; energy rose 0.2% (1.5% y/y); the seasonal factor revisions shaved 0.1% off the December increase, leaving it at 0.1%. Within that subset, passenger car prices edged down 0.1% (-0.5% y/y) after December&#39;s 0.2% decline.
Capital equipment prices increased 0.2% (2.3% y/y), with December&#39;s rise trimmed to 0.1%. January light truck prices were off 1.4%; these prices have settled down after their whipsaw in October and November, and now, notably, they are just 0.3% above year-earlier readings. 
Intermediate goods prices declined 0.7% in January and were a modest 1.2% above January 2006. The corresponding &quot;core&quot; index was unchanged for a second month in a row and it has slowed to a 3.8% y/y increase compared with 5-6% increases across much of the last three years. The recent slowdown is showing in building materials: lumber, plasterboard and the like, and in metal products. 
The crude materials PPI was down 6.3%, led by the drop in crude petroleum prices of 9.2%; this put the total crude index down 8.0% y/y. Judging by the behavior of spot prices, about half of that drop in oil has since reversed. The core crude materials PPI was up 1.6%, with increases in logs and timber and in iron and steel scrap. In contrast, nonferrous ores and copper scrap are slowing down after their dramatic rises through the middle of last year.

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<colgroup><col><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">Jan 2007</th>
<th scope="col">Dec 2006</th>
<th scope="col">Nov 2006</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>-0.6</td>
<td>0.9%&nbsp;</td>
<td>1.8%</td>
<td>&nbsp; 0.2%&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>0.2%</td>
<td>1.1%</td>
<td>&nbsp;1.7%</td>
<td>1.4%</td>
<td>2.4%</td>
<td>1.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Intermediate Goods</td>
<td>-0.7</td>
<td>0.5%</td>
<td>0.6%</td>
<td>1.2%</td>
<td>6.5%</td>
<td>&nbsp;8.0%</td>
<td>6.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.0</td>
<td>0.0%</td>
<td>-0.4%</td>
<td>3.8%</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>-6.3</td>
<td>&nbsp;2.8%&nbsp;</td>
<td>15.5%</td>
<td>&nbsp;-8.0%</td>
<td>1.7%</td>
<td>14.6%</td>
<td>&nbsp;17.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>1.6</td>
<td>0.5%</td>
<td>0.4%</td>
<td>&nbsp;17.8%</td>
<td>21.0%</td>
<td>4.9%</td>
<td>&nbsp;26.5%</td>
</tr>
</tbody>
</table>
</body>
</html>

The producer price index for finished goods fell 0.6% following its 0.9% rise in December. This result was close to consensus forecasts of a 0.5% decline. It was, as anticipated, led by a drop in energy prices; this ran 4.6%. Food [...]

PPI Eases with Lower Energy; Core Rate Steady

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070216b.jpg" width="353">
Housing starts in January fell 14.3% from December to 1.408 million, the lowest volume since August 1997. They were 37.8% below January 2006. Consensus expectations called for a decrease, but only a modest one, 2.6%, to 1.600 million.
Single-family structures were off 11.2% to 1.108 million, also the lowest since August 1997. This continued the steep downtrend that began in March last year, which has carried construction of these houses down 38.9% from their year-ago value.
Multi-family housing units had jumped in December in what turned out to be one-month spike. For January, they gave up 95,000 units, very close to their December rise of 101,000. This produces a startling 24.1% drop, but the resulting 300,000 level is found in several months of 2006, so there doesn&#39;t seem to be new weakness there.
The pattern of starts was likely exacerbated by weather changes. Data on heating degree days and average temperatures show that December was very warm while January was &quot;only&quot; normal. So construction activity was perhaps accelerated into the mild December and then retreated anew in January.
Building permits are less affected by the vagaries of weather, and while they did decline from December to January, the fall was not nearly so steep. They totaled 1.568 million last month, down from 1.613 million in December. Permits for single-family homes took all the decline, down 4.0% to 1.121 million.Multi-family permits were virtually unchanged in the month.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070216a.jpg" width="353">
So the contraction in home-building has resumed, and what we thought a month ago might have been a stabilizing tendency was only a pause in the broader decline. Mortgage interest rates are modestly higher in February than they were in December and January, and as Tom Moeller noted in these commentaries Wednesday, mortgage application volume has a clear negative relationship with interest rates; extrapolating that to building activity, current financial market conditions seem unlikely to support a turnaround in the housing sector.

<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E9/@E901/@E90101/@E90101.HTM">Housing Starts (000s, AR)</a></th>
<th scope="col">January</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">Total</td>
<td>1,408</td>
<td>1,643</td>
<td>1,565</td>
<td>-37.84%</td>
<td>1,818</td>
<td>2,073</td>
<td>1,950</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Single-family</td>
<td>1,108</td>
<td>1,248</td>
<td>1,271</td>
<td>-38.92%</td>
<td>1,478</td>
<td>1,719</td>
<td>1,604</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Multi-family</td>
<td>300</td>
<td>395</td>
<td>294</td>
<td>-33.48%</td>
<td>340</td>
<td>354</td>
<td>345</td>
</tr>
<tr>
<td class="firstcol">Building Permits</td>
<td>1,568</td>
<td>1,613</td>
<td>1,513</td>
<td>-28.56%</td>
<td>1,835</td>
<td>2,159</td>
<td>2,058</td>
</tr>
</tbody>
</table>
</body>
</html>

Housing starts in January fell 14.3% from December to 1.408 million, the lowest volume since August 1997. They were 37.8% below January 2006. Consensus expectations called for a decrease, but only a modest one, 2.6%, to 1.600 million. [...]

Housing Starts Drop Hard in January, Falling to Lowest in 9-1/2 Years

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070216c.jpg" width="353">
The producer price index for finished goods fell 0.6% following its 0.9% rise in December. This result was close to consensus forecasts of a 0.5% decline. It was, as anticipated, led by a drop in energy prices; this ran 4.6%. Food prices continued rising, adding 1.1% after December&#39;s 1.5%.
The core finished goods PPI rose 0.2%, the same as in December and also equal to forecasts. Note that the BLS conducted its annual seasonal adjustment revisions on these data, so 2006 figures quoted here may differ from those reported last month.
Energy prices fell sharply in January: gasoline was down 13.0% in the month and 9.7% from January 2006. Fuel oil fell 8.3% from December and 2.3% from a year ago. Natural gas prices were off 1.9% in January, carrying the 12-month change to -15.1%. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070216d.jpg" width="353">
Finished consumer goods prices less food &amp; energy rose 0.2% (1.5% y/y); the seasonal factor revisions shaved 0.1% off the December increase, leaving it at 0.1%. Within that subset, passenger car prices edged down 0.1% (-0.5% y/y) after December&#39;s 0.2% decline.
Capital equipment prices increased 0.2% (2.3% y/y), with December&#39;s rise trimmed to 0.1%. January light truck prices were off 1.4%; these prices have settled down after their whipsaw in October and November, and now, notably, they are just 0.3% above year-earlier readings. 
Intermediate goods prices declined 0.7% in January and were a modest 1.2% above January 2006. The corresponding &quot;core&quot; index was unchanged for a second month in a row and it has slowed to a 3.8% y/y increase compared with 5-6% increases across much of the last three years. The recent slowdown is showing in building materials: lumber, plasterboard and the like, and in metal products. 
The crude materials PPI was down 6.3%, led by the drop in crude petroleum prices of 9.2%; this put the total crude index down 8.0% y/y. Judging by the behavior of spot prices, about half of that drop in oil has since reversed. The core crude materials PPI was up 1.6%, with increases in logs and timber and in iron and steel scrap. In contrast, nonferrous ores and copper scrap are slowing down after their dramatic rises through the middle of last year.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E802/@E80201/@E80201.HTM">Producer Price Index</a></th>
<th scope="col">Jan 2007</th>
<th scope="col">Dec 2006</th>
<th scope="col">Nov 2006</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>-0.6</td>
<td>0.9%&nbsp;</td>
<td>1.8%</td>
<td>&nbsp; 0.2%&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>0.2%</td>
<td>1.1%</td>
<td>&nbsp;1.7%</td>
<td>1.4%</td>
<td>2.4%</td>
<td>1.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Intermediate Goods</td>
<td>-0.7</td>
<td>0.5%</td>
<td>0.6%</td>
<td>1.2%</td>
<td>6.5%</td>
<td>&nbsp;8.0%</td>
<td>6.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.0</td>
<td>0.0%</td>
<td>-0.4%</td>
<td>3.8%</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>-6.3</td>
<td>&nbsp;2.8%&nbsp;</td>
<td>15.5%</td>
<td>&nbsp;-8.0%</td>
<td>1.7%</td>
<td>14.6%</td>
<td>&nbsp;17.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>1.6</td>
<td>0.5%</td>
<td>0.4%</td>
<td>&nbsp;17.8%</td>
<td>21.0%</td>
<td>4.9%</td>
<td>&nbsp;26.5%</td>
</tr>
</tbody>
</table>
Housing Starts Drop Hard in January, Falling to Lowest in 9-1/2 Years 
by <a href="/comment/Stone.html">Carol Stone</a> February 16, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070216b.jpg" width="353">
Housing starts in January fell 14.3% from December to 1.408 million, the lowest volume since August 1997. They were 37.8% below January 2006. Consensus expectations called for a decrease, but only a modest one, 2.6%, to 1.600 million.
Single-family structures were off 11.2% to 1.108 million, also the lowest since August 1997. This continued the steep downtrend that began in March last year, which has carried construction of these houses down 38.9% from their year-ago value.
Multi-family housing units had jumped in December in what turned out to be one-month spike. For January, they gave up 95,000 units, very close to their December rise of 101,000. This produces a startling 24.1% drop, but the resulting 300,000 level is found in several months of 2006, so there doesn&#39;t seem to be new weakness there.
The pattern of starts was likely exacerbated by weather changes. Data on heating degree days and average temperatures show that December was very warm while January was &quot;only&quot; normal. So construction activity was perhaps accelerated into the mild December and then retreated anew in January.
Building permits are less affected by the vagaries of weather, and while they did decline from December to January, the fall was not nearly so steep. They totaled 1.568 million last month, down from 1.613 million in December. Permits for single-family homes took all the decline, down 4.0% to 1.121 million.Multi-family permits were virtually unchanged in the month.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070216a.jpg" width="353">
So the contraction in home-building has resumed, and what we thought a month ago might have been a stabilizing tendency was only a pause in the broader decline. Mortgage interest rates are modestly higher in February than they were in December and January, and as Tom Moeller noted in these commentaries Wednesday, mortgage application volume has a clear negative relationship with interest rates; extrapolating that to building activity, current financial market conditions seem unlikely to support a turnaround in the housing sector.

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</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E9/@E901/@E90101/@E90101.HTM">Housing Starts (000s, AR)</a></th>
<th scope="col">January</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">Total</td>
<td>1,408</td>
<td>1,643</td>
<td>1,565</td>
<td>-37.84%</td>
<td>1,818</td>
<td>2,073</td>
<td>1,950</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Single-family</td>
<td>1,108</td>
<td>1,248</td>
<td>1,271</td>
<td>-38.92%</td>
<td>1,478</td>
<td>1,719</td>
<td>1,604</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Multi-family</td>
<td>300</td>
<td>395</td>
<td>294</td>
<td>-33.48%</td>
<td>340</td>
<td>354</td>
<td>345</td>
</tr>
<tr>
<td class="firstcol">Building Permits</td>
<td>1,568</td>
<td>1,613</td>
<td>1,513</td>
<td>-28.56%</td>
<td>1,835</td>
<td>2,159</td>
<td>2,058</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/070215a.jpg" width="353">
Japan&#39;s GDP surged upward 4.84% in Q4 at an annual rate, the Cabinet Office reported early today in Tokyo. Forecasters had looked for 3.8-3.9% growth, according to news service surveys. It was the largest quarterly gain since Q1 2004 at 5.11%.
Domestic final demand was responsible for the strong rise. Consumer spending, which had fallen 4.3% in Q3, rebounded nicely by 4.5% in Q4. Private investment expenditures in plant and equipment grew at a 9.2% rate, following a much more modest 3.4% in Q3. The year&#39;s total nonresidential investment grew 7.3%, the fourth consecutive good gain in real investment outlays and the largest since 2000&#39;s tech boom.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070215b.jpg" width="353">
Other major components slowed: the change in private inventories was &yen;1.15 trillion, less than Q3&#39;s &yen;1.85 trillion. Exports grew at a 4.3% annual rate, easing from the 10.0% pace in Q3. Imports fell by a marginal 0.1% after a 1.8% annualized decline in Q3. The resulting net export figure, &yen;21.84 trillion, was up just &yen;883 billion, well less than half Q3&#39;s &yen;2.20 trillion increase.
This broad-based gain in Q4 GDP growth in Japan has analysts talking in the press today about BoJ interest rate hikes, soon. Possibly, but we can&#39;t help notice interesting downward revisions in the Q3 data. Three months ago here, Louise Curley described the then surprisingly large 2.03% rate of increase in Q3 GDP. Interim revisions put that figure down at 0.84% (still carried in Haver&#39;s OECDNAQ database and several forecast databases) and today&#39;s report has shaved it further to just 0.26%. The same pattern is evident in the household consumption component: an original report of a 2.98% rate of decline in Q3 became -3.80% and now -4.29%. So, yes, the Q4 report looks good now, but we hope it has staying power! The &quot;Second Preliminary&quot; GDP report will be issued by Japan&#39;s Cabinet Office on March 12. Stay tuned. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Japan: SAAR % Chg</th>
<th scope="col">Q4 2006</th>
<th scope="col">Q3 2006</th>
<th scope="col">Q2 2006</th>
<th scope="col">Q1 2006</th>
<th scope="col">Q4 2005</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">Real GDP</td>
<td>4.84</td>
<td>0.26</td>
<td>1.35</td>
<td>2.81</td>
<td>1.65</td>
<td>2.16</td>
<td>1.87</td>
<td>2.72</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Feb 8 OECD*</td>
<td>--</td>
<td>0.84</td>
<td>1.14</td>
<td>2.71</td>
<td>2.06</td>
<td>--</td>
<td>1.88</td>
<td>2.72</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Nov 14*</td>
<td>--</td>
<td>2.03</td>
<td>1.51</td>
<td>3.17</td>
<td>4.09</td>
<td>--</td>
<td>2.69</td>
<td>2.13</td>
</tr>
<tr>
<td class="firstcol">Consumption</td>
<td>4.50</td>
<td>-4.29</td>
<td>2.41</td>
<td>0.27</td>
<td>1.06</td>
<td>0.94</td>
<td>1.49</td>
<td>1.55</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Feb 8 OECD*</td>
<td>--</td>
<td>-3.80</td>
<td>2.11</td>
<td>-0.19</td>
<td>1.88</td>
<td>--</td>
<td>1.51</td>
<td>1.55</td>
</tr>
<tr>
<td class="firstcol">Private Nonresidential Investment</td>
<td>9.22</td>
<td>3.41</td>
<td>13.66</td>
<td>14.03</td>
<td>-2.11</td>
<td>7.32</td>
<td>6.61</td>
<td>5.43</td>
</tr>
<tr class="odd">
<td class="firstcol">Private Inven- tories (Bil.&yen;)</td>
<td>1155.5</td>
<td>1845.5</td>
<td>741.1</td>
<td>1639.1</td>
<td>660.4</td>
<td>1345.3</td>
<td>1033.4</td>
<td>1815.8</td>
</tr>
<tr>
<td class="firstcol">Exports</td>
<td>4.30</td>
<td>10.01</td>
<td>2.77</td>
<td>9.65</td>
<td>15.77</td>
<td>9.72</td>
<td>6.94</td>
<td>13.98</td>
</tr>
<tr class="odd">
<td class="firstcol">Imports</td>
<td>-0.13</td>
<td>-1.79</td>
<td>5.69</td>
<td>8.12</td>
<td>-1.23</td>
<td>4.63</td>
<td>5.85</td>
<td>8.11</td>
</tr>
</tbody>
</table>
</body>
</html>

Japan's GDP surged upward 4.84% in Q4 at an annual rate, the Cabinet Office reported early today in Tokyo. Forecasters had looked for 3.8-3.9% growth, according to news service surveys. It was the largest quarterly gain since Q1 2004 [...]

Japan GDP Gains at 4.8% AR in Q4, Fastest in Almost 3 Years

Inflationary impact of surge in oil prices larger in Europe than in the US

Futures market thinks the price of oil will recede significantly over the next six months

Recent pickup in US defense orders could help support overall growth ahead

Cost of transporting crude oil has soared to series high

Market-based inflation expectations have not yet reflected recent surge in oil prices

Global equity markets are fearing a major economic disruption from soaring oil prices

Is recent drop in sentiment signaling softer growth ahead?

With the Iran conflict, geopolitical risk has soared to alarming levels

Soaring AI-related investment in US underpinning strong contribution of business spending to overall growth

AI-related outperformance of IP in Advanced Asia ex Japan

Resilient US economy pushing up Blue Chip 2026 outlook

US and China big leaders in adoption of AI models

Robust US demand for advanced technology products

China's export growth rotating away from the US

More pronounced upward revisions in countries more exposed to AI investment

Stable job openings and hiring rates point to cautious hiring

Global freight costs are on the rise while supply chain pressures are contained

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

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

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

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Michael J. Moran

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The Conference Board’s index of Consumer Confidence inched higher in April from an upwardly revised reading in March. The combined changes left the measure 1.1% higher than the preliminary tally in March. Despite the improvement, the index remained in the low end of the range for the current expansion. The index in April totaled 92.8, down from an average of 96.1 in 2025 and an annual cyclical high of 105.4 in 2023.

The Improvement in April reflected a pickup in the expectations component, which rose 1.7%. The current conditions component inched 0.2% lower. Overall views on current conditions slipped despite more favorable assessments of the labor market. The so-called measure of the jobs gap (share of respondents indicating that jobs are plentiful less the share saying that jobs are hard to get) rose 1.4 percentage points higher to 7.5%. The pickup reflected a drop in the share indicating that jobs are hard to get (down 1.5 percentage points to 19.8%). The share indicating that jobs are plentiful eased 0.1 percentage point to 27.3%.

Although expectations improved in April, from a long-term perspective they could be viewed as the more important factor restraining the headline measure of confidence. As shown in the left chart below, the expectations component of confidence shows considerably less volatility than the current conditions component does. The contrasting patterns suggest that individuals realize that the economy will undergo possibly sharp cyclical swings, but they expect conditions at some point to return to an underlying norm.

The current conditions index in the current cycle has indeed dropped noticeably, but it is still above the long run average (123.8 in April versus the average of approximately 108 from 1990 to 2025). The expectations component, as usual, has eased less than the current conditions component, but its shift has pushed the measure to the low end of its long-run range (72.2 in April versus an average of approximately 88).

Interestingly, concern about the labor market seems to be a factor affecting expectations. While current views on the labor market are favorable (plentiful less hard to get jobs gap of 7.5%), Individual are concerned about the future. The survey asks respondents if they expect more jobs or fewer jobs six months hence. The share indicating fewer jobs has moved well into the upper end of the historical range. Such observations in the past were typically seen only during recession (chart, below right). An unfavorable view on interest rates also seems to be playing a role in depressing the expectations component. More than 60% of respondents to the current survey expect higher interest rates 12 months from now.

The results from the Conference Board survey of consumers differ markedly from those of the University of Michigan Survey Research Center. The Michigan results show consumer sentiment at a record low, while the Conference Board index is only slightly below its long-run average. The difference most likely reflects the nature of the questions in the surveys. The Conference Board focuses on business and employment conditions, while Michigan emphasizes personal finances. The focus on finances, along with questions on inflation, probably picks up concerns about affordability.

The Consumer Confidence data are available in Haver’s **CBDB** database. The total indexes, which are indexed to 1985=100, appear in **USECON**, and market expectations are in **AS1REPNA**.

260428P.jpg

260428Q.jpg

- Expectations improved slightly in April, but are still subdued relative to norms.
- Moderately favorable view of current conditions.

Consumer Confidence: Modest Change in April

Winnie Tapasanun

260428J35.jpg

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U.S. house prices were essentially unchanged m/m in February after rises of 0.2% in January (+0.1% initially) and 0.3% in December (unrevised), according to the Federal Housing Finance Agency (FHFA) House Price Index. February marked the first flat reading since September following four consecutive m/m increases. The HPI was at 441.43 in February, up 14.8% from its August 2022 low of 384.59. The year-on-year growth rate eased to 1.7% in February—the lowest since March 2012—from 1.8% in January (+4.1% in February 2025), down from a high of 6.9% in February 2024 and well below a peak of 18.5% in February 2022.

By region, February FHFA house prices showed a mixed performance. House prices fell m/m in February (vs. January) in four of the nine census divisions. Declines were led by Mountain (-1.1% vs. +0.4%), followed by Pacific (-0.5% vs. +0.6%), West North Central (-0.4% vs. +0.3%), and Middle Atlantic (-0.1% vs. +0.3%). To the upside, house prices rose m/m in four census divisions in February (vs. January): South Atlantic (+0.6% vs. -0.2%), East South Central (+0.2% vs. +1.2%), New England (+0.2% vs. +0.6%), and West South Central (+0.2% vs. -0.3%). Meanwhile, house prices in East North Central were virtually unchanged m/m for the second successive month in February following seven straight m/m gains.

Year-on-year house prices continued to rise in February in most regions, except Mountain, Pacific, and West South Central. The y/y growth rate accelerated in February (vs. January) in only two of the nine census divisions: East South Central (+4.0% vs. +3.2%) and South Atlantic (+0.9% vs. +0.4%). Meanwhile, house price growth decelerated y/y in February (vs. January) in four regions: New England (+3.1% vs. +3.9%), West North Central (+3.1% vs. +3.6%), East North Central (+3.8% vs. +4.5%), and Middle Atlantic (+4.2% vs. +4.5%). To the downside, Mountain (-0.7% vs. 0.0%), Pacific (-0.4% vs. -0.3%), and West South Central (-0.1% vs. -0.4%) posted y/y declines in February.

The FHFA house price index is a weighted purchase-only index that measures average price changes in repeat sales of the same property. An associated quarterly index includes refinancing the same kind of properties. The indexes are based on transactions involving conforming conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac. Only mortgage transactions on single-family properties are included.

The FHFA data are available in Haver’s **USECON** database.

260428L35.jpg

260428M35.jpg

- February FHFA HPI 0.0% m/m; +1.7% y/y, lowest since Mar. ’12.
- House prices down m/m in four of nine census divisions, led by Mountain (-1.1%); up in four, driven by South Atlantic (+0.6%); flat in East North Central.
- House prices up y/y in six of nine regions, led by Middle Atlantic (+4.2%), but down in Mountain (-0.7%), Pacific (-0.4%), and West South Central (-0.1%).

U.S. FHFA House Prices Flat in February After Four Straight M/M Gains

Robert Brusca

260428E.jpg

Early PPI reports in the monetary union show collective pressures building over the past year, with newly emergent pressures popping up strongly in March.

The sequence of monthly inflation observations for these five early reporters in March shows that inflation pressure has not been clearly building but did jump up suddenly in March. In February, before the Iran war, the median monthly PPI gain was -0.5%. In March, that jumped to +3.9% (median month-to-month gain). Monthly pressure does not show steady gains anywhere except moderately in Germany. Finland shows deceleration in progress (!) even through—especially through—March, as its PPI in March fell by 5.3%. But the whole Finish pattern is somewhat upside down, with prices up month-to-month by 6.2% in January and 2.9% in February. It is not a trend that is easy to understand.

However, the March monthly gains are strong enough to drive sequential inflation higher from 12-months, to 6-months, to 3-months across all early-reporting countries. Even the German ex-energy index shows acceleration on that profile.

On a year-on-year basis, two of the early reporters have PPI inflation below 2%. Finland has 12-month PPI inflation at 2.1%, but Italy and Spain have inflation much higher, up by 3.4% over 12 months in Spain and by 5.6% in Italy.

The PPI has been very well-behaved in the last few years. Looking at 12-month changes for the year ended in March, the median change for this group in 2025 was -0.1%, compared to -4.6% in 2024.

The chart shows the PPI flared sharply in 2021 and 2022, then fell quickly into line in 2023. Clearly, the inflation tune now is being called by oil prices, the same as for that spike prices in 2022 and 2023.

The hope is that the oil price bump up will not be as long-lived, that the war will end soon, with the Strait of Hormuz reopened, and that oil prices—and other inflation pressures—will sink back to prerevision norms relatively quickly. That could happen, but so could other outcomes so markets remain wary. One problem this time is the destruction of oil facilities and the shutting of oil fields that could cause high prices to linger longer.

260428.jpg

**A new dynamic**
However, there is now a new dynamic with the UAE leaving OPEC. OPEC has been a vehicle to harness common behavior to control oil prices mostly to keep them higher. While undermining OPEC (UAE pumps about 13% of OPEC capacity) at a time the U.S. oil prowess has risen, this defection will make it much harder for OPEC to control prices. When countries are not bound together, the incentive is for countries to cheat on their production quota. In a cartel arrangement, when many cheat, the output reduction does not hold, and oil prices fall. A cartel arrangement allows for supply control and reduction which raises prices. But once prices are up, each member has an individual incentive to cheat—to sell more than his quota share of oil at the higher price. But that undermines the cartel. So, this move, this exit of UAE from the cartel, will create instability in the OPEC by moving more production outside the OPEC framework, beyond its control. Unless the Saudis are willing to be the ‘swing man’ and cut back their output to keep prices on target—something the Saudis have been increasingly unwilling to do—OPEC will be in less control.

EMU PPIs Show Instant Pressure

Tian Yong Woon

In this week’s Letter, we cover the latest developments and implications of the Middle East conflict for Asia, while also making space for other important themes, including artificial intelligence (AI). The Middle East conflict remains in a no deal state coming out of the weekend, though some early Monday optimism emerged in Asian markets following Iran’s reported offer to reopen the Strait of Hormuz (chart 1). Nonetheless, as the Strait closure drags on, so too do the fiscal costs of domestic fossil fuel subsidies across Asia, which have been shown to move closely with crude oil prices (chart 2). While such measures offer direct relief by cushioning household energy costs, they remain difficult to sustain over the long haul.

Over the week, we also saw a further fraying in regional monetary policy trends, with the Philippines hiking its policy rate for the first time in about two years amid inflation concerns, while Indonesia stood pat on rates (chart 3). Investor attention is likely to remain fixed on monetary policy this week, with the Bank of Japan due to decide on policy. Expectations for an April hike have faded amid the persistent Middle East conflict, though yen weakness continues to present a source of concern (chart 4). The week also brings China’s latest PMI readings (chart 5), adding to the recent run of hard data accompanying the Q1 GDP release.

Beyond the Middle East conflict, the evolution of AI continues to demand close attention. Before geopolitical tensions took centre stage, AI was the dominant market narrative — and that enthusiasm has hardly faded. If anything, recent developments suggest the story is broadening: use cases are expanding, scalability is improving, and access is widening beyond large corporates to the mass market — increasingly spilling into the realm of physical AI. It may well be this persistent wave of optimism that is helping to underpin equity valuations, even as the geopolitical backdrop darkens (chart 6).

**The Middle East conflict**
About two months in, we remain stuck in the limbo of the US-Iran conflict, which has left the Strait of Hormuz largely closed and much of the world starved of the critical oil flows needed to power the global economy. The back and forth between the US and Iran has persisted in recent weeks, with both sides again failing to reach a peace deal over the weekend, though Monday’s news of Iran offering to reopen the Strait has revived some hope in markets. In truth, commodity and market valuations do not hinge so much on a peace deal itself, but rather on the resumption of oil flows through the Strait, something that could materialise even in the absence of a formal deal, though any agreement that includes and credibly delivers such a reopening would likely be warmly received by markets. Until then, market gyrations are likely to persist, with prices fluctuating in response to each new snippet of news. And until then, the world will continue both to be starved of, while gradually adapting to, the drip feed of oil flows emerging from the Strait.

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**The fiscal costs of the Middle East conflict**
As the Middle East conflict drags on, so too does the strain on fiscal resources across parts of Asia, as the costs of energy-related subsidy programmes continue to mount. While such programmes have an immediate, direct, and tangible impact in shielding households from surging energy costs, they are far from sustainable, particularly if oil prices remain well above targeted levels or stay elevated for an extended period. As chart 2 illustrates, the costs of these explicit subsidy programmes tend to rise closely with crude oil prices, as seen in India and Indonesia. Other measures adopted elsewhere, such as drawing down oil reserves, may be less fiscally costly, but are similarly difficult to sustain indefinitely. In both respects, the clock is ticking, and the world continues to hold its breath as the conflict drags on.

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**The latest central bank responses to the conflict**
Over the past week, Asia saw two central bank decisions. The Philippines’ (BSP) opted to deliver its first rate hike in about two years, while Indonesia’s (BI) chose to stand pat on policy rates and instead committed to stepped up FX intervention (chart 3). This latest round of decisions points to a further fraying of what had been a broad regional monetary policy consensus, namely that central banks would delay additional easing while maintaining a high bar for outright tightening. Domestic considerations, however, remain paramount. In the Philippines’ case, the central bank has moved to rein in inflation, which is already showing notable signs of price pass through stemming from disruptions linked to the Strait of Hormuz. That said, BSP is not the first in the region to buck the reluctance to tighten. Singapore’s central bank had already tightened policy in mid-April, albeit through its own distinct framework, given its use of the exchange rate rather than policy rates as the primary channel for monetary policy.

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**The week ahead**
Looking to the week ahead, a major central bank decision looms in Japan. Market expectations for the Bank of Japan to deliver a rate hike at its April meeting have ebbed amid the persistence of the Middle East conflict, to which Japan remains particularly vulnerable given its reliance on oil imports flowing through the Strait of Hormuz. At the same time, inflation in Japan has yet to become a major concern, with recent readings having picked up but not yet entering troubling territory. One potential source of concern, however, lies with the Japanese yen, which has remained on a weakening trend since early last year (chart 4). That depreciation has been one of the key arguments underpinning calls for further rate hikes.

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The week also brings China’s latest PMIs into focus. March saw a divergence between China’s official PMI readings, which improved, and the unofficial readings from RatingDog, which instead pulled back. Nonetheless, both official and unofficial gauges remained in expansionary territory (chart 5), with investors now watching closely to see whether that resilience can be sustained amid ongoing stresses from the Middle East, or whether offsetting drivers can continue to keep Chinese business sentiment and prospects buoyant.

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**Beyond the strait**
Moving beyond the Middle East conflict, a whole host of developments continue to unfold globally, many of which have in fact helped offset some of the pessimism wrought by the Strait’s chokehold. One such development is artificial intelligence (AI), which had dominated headlines before the outbreak of the conflict and continues to advance at breakneck pace. AI capabilities are still rapidly evolving, while practical applications, such as physical AI embodied in humanoid robots, are beginning to show broader and stronger use cases. Production of such robots is also becoming increasingly scalable and within reach not just for industrial complexes and healthcare, but for the mass market as well. It is perhaps growing optimism around these prospects that has helped keep equity valuations buoyant, even in the face of the festering conflict in the Middle East. Moreover, while concerns over AI-driven job displacement persist, new opportunities are emerging as well, particularly for AI adopters, with a growing share of job postings in Western economies increasingly referencing AI-related skills, as shown in chart 6.

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Asia

Economic Letter from Asia: Not Just About the Strait

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**The Distributive Trades Survey**

The U.K. Distributive Trades Survey for April 2026 and the look-ahead expectation readings for May paint an extremely soured outlook for the U.K. economy.

**Retail ranking**: Surveys for retail sales compared to a year ago, orders compared to a year ago, and sales evaluated for the time of year all have rankings near zero, which is the worst result on this timeline. This zero distinction applies to retail sales compared to a year ago. The best ranking is 11.6%; that is for sales evaluated for the time of year. Orders compared to a year ago have a 4.2 percentile standing. The stock-to-sales ratio—which is a completely different concept—shows that the inventory-to-sales ratio has a 29.9 percentile standing.

**Retail diffusion**: The raw April diffusion readings (up minus down diffusion) show that sales compared to a year ago slipped to a reading of -68 in April from -52 in March. Orders fell to -46 in April from -26 in March. Sales evaluated for the time of year fell to -32 April from -23 in March. All three measures weakened, and all three weakened decisively, resulting in extremely weak rankings. All of the rankings are executed on data back to 2002.

**Expectations for retailing**: The expectations readings for May show slippage again across all three metrics: expected sales compared to a year ago, expected orders compared to a year ago, and expected sales for the time of year. Expected sales compared to a year ago fell to -60 in May from -49 in April. Orders compared to a year ago declined to -45 in May from -30 in April, and sales for the time of year slipped to -43 from -19. In May, these readings have rankings in a 0.4 percentile standing for sales compared to a year ago, a 1.8 percentile standing for sales evaluated relative to the time of year, and a 4.6 percentile standing for orders compared to a year ago. These two panels on current and expected retail sales volumes are just simply terrible: weak monthly, weak in ranking terms, and showing slipping momentum.

The distributor trade series also provides data on the wholesale sector. While the wholesale sector is not quite as beat up as the retail sector, it's still extremely weak. There is no cause for any kind of hope that things are getting better based on wholesaling trends.

**Wholesaling**: The wholesale survey for sales compared to a year ago edged lower to -32 in April from -31 in March. Orders compared to a year ago remained at a reading of -41 in April. Sales evaluated for the time of year improved to a reading of -20 in April from -39 in March—a significant step up, but still very weak. The percentile standings for these three categories show sales compared to a year ago at the 8.8 percentile, orders compared to a year ago at the 5.6 percentile, and sales evaluated for the time of year at the 14.8 percentile.

**Wholesale Expectations**: The look-ahead observations, which provide expectations for wholesaling in May, show a similar constellation of readings, with sales compared to a year ago falling to -37 in May from -27 in April and orders compared to a year ago falling to -42 from -38, while sales evaluated for the time of year improved to  16 from  37. That category for wholesale sales improved both in April in real time and in May for expectations; however, it continues to have a very weak percentile standing, at the 17.9 percentile in May, while sales for a year ago have a 6.7 percentile standing and orders for a year ago have a 6.0 percentile standing.

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While some of the global PMI data have improved, these survey data for the U.K. are particularly dour. The war in Ukraine drags on, and there's a new conflict in Iran that has shut the Strait of Hormuz, creating energy problems for much of Europe. More broadly, supply chains have been harmed. In addition, the U.K. is undergoing a bout of political instability, as its Prime Minister is under pressure and a good deal of political uncertainty is being worsened by deteriorating economic performance.

Both the U.K. and the European Monetary Union had been showing some progress on inflation until the Iran war hit. Now, as the oil prices are up so sharply, headline inflation is going to be worse everywhere and there will probably be a bit more attention directed to the core inflation rate. However, the U.K. has had inflation too hot for a while, and it has failed to settle down. At its last meeting, the Bank of England’s Monetary Policy Committee warned that if the war was still ongoing at the next meeting, there would be a risk of a rate hike. So, it would seem that a rate hike is going to be in play unless the economy falls off a cliff first, which, based on the distributive trades data, is also something that could happen. The U.K. economy appears to be on very unsound footing, and what happens next is just about anybody's guess.

Economy in Brief

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