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/060519d.jpg" width="353">
Japan&#39;s GDP surprised on the upside for Q1, in data reported today by the Japanese Cabinet Office. It expanded at a 1.9% annual rate. While this was less than Q4&#39;s 4.3%, it well exceeded forecasters&#39; views that anticipated about 1.2%. The yen gained briefly on the report.
Notably, the driving force in the growth was private domestic demand, led by business investment. This component had fallen in Q4 and rebounded sharply in Q1, at a 5.8% annual rate. That put it 4.6% ahead of a year ago. Household consumption moderated from Q4, increasing at a 1.6% annual pace relative to 2.6% in Q4. Together, private domestic demand grew 3.2% on the quarter (annualized) and was also up 3.2% from a year ago.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060519e.jpg" width="353">
Also of significance, growth of exports slowed from Q4&#39;s large 16.2% to &quot;just&quot; 11.3%. At the same time, imports switched from a modest decline in Q4 to a 12.6% rate of increase. Exports are substantially larger than imports, so these adverse moves did not keep the net export surplus from increasing, although the rise was very modest: only &yen;308 million on a base of &yen;18.1 billion.
Markets were encouraged that the domestic economy appears to be picking up steam. The price deflator is still falling, however, although this may be due in the most recent period by the surge in imported energy costs. The deflator for domestic demand is holding just about even with year-earlier levels. With these price signals still mixed, Bank of Japan officials remain skittish about whether the economy could stand higher borrowing costs; when they issued a statement to this effect later today, FX traders pushed the yen back down once again.

<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/JAPAN/@J2/@J2.HTM">Chain GDP % Chg,</a> &nbsp;Annual Rates*</th>
<th scope="col">Q1 2006</th>
<th scope="col">Q4 2005</th>
<th scope="col">Q3 2005</th>
<th scope="col">Year/ Year</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">GDP</td>
<td>1.9</td>
<td>4.3</td>
<td>0.6</td>
<td>3.1</td>
<td>2.6</td>
<td>2.3</td>
<td>1.8</td>
</tr>
<tr>
<td class="firstcol">Household Consumption</td>
<td>1.6</td>
<td>2.6</td>
<td>1.8</td>
<td>1.2</td>
<td>1.7</td>
<td>0.6</td>
<td>1.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Government Consumption</td>
<td>0.6</td>
<td>0.4</td>
<td>2.0</td>
<td>0.8</td>
<td>1.7</td>
<td>2.0</td>
<td>2.3</td>
</tr>
<tr>
<td class="firstcol">Private Plant &amp; Equipment</td>
<td>5.8</td>
<td>-0.9</td>
<td>5.2</td>
<td>4.6</td>
<td>7.7</td>
<td>4.9</td>
<td>5.9</td>
</tr>
<tr class="odd">
<td class="firstcol">Exports</td>
<td>11.3</td>
<td>16.2</td>
<td>12.9</td>
<td>13.7</td>
<td>7.0</td>
<td>13.9</td>
<td>9.0</td>
</tr>
<tr>
<td class="firstcol">Imports</td>
<td>12.6</td>
<td>-2.5</td>
<td>13.3</td>
<td>8.0</td>
<td>6.3</td>
<td>8.5</td>
<td>3.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Private Domestic Demand</td>
<td>3.2</td>
<td>3.0</td>
<td>-0.0</td>
<td>3.2</td>
<td>3.2</td>
<td>2.2</td>
<td>1.9</td>
</tr>
</tbody>
</table>
</body>
</html>

Japan's GDP surprised on the upside for Q1, in data reported today by the Japanese Cabinet Office. It expanded at a 1.9% annual rate. While this was less than Q4's 4.3%, it well exceeded forecasters' views that anticipated about 1.2%. [...]

Japan's Growth Gains Footing on Rise in Domestic Demand

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060519c.jpg" width="353">
The National Activity Index (CFNAI) from the Federal Reserve Bank of Chicago improved during April on the prior month&#39;s recovery. It rose to 0.38 from 0.35 and a 1Q average of 0.24.
The three-month moving average of the CFNAI rose to 0.25 from 0.24 the prior month.
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.
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 latest CFNAI report is available <a href="http://www.chicagofed.org/economic_research_and_data/files/cfnai_May2006.pdf">here</a>.
The Evolving Nature of the Financial System: Financial Crises and the Role of the Central Bank, yesterday&#39;s speech from the newly designated Vice Chairman of the Federal Reserve Board Donald L. Kohn, is available <a href="http://www.federalreserve.gov/boarddocs/speeches/2006/200605182/default.htm"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S503/@S503.HTM">Chicago Fed</a></th>
<th scope="col">April</th>
<th scope="col">Mar</th>
<th scope="col">April &#39;05</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">CFNAI</td>
<td>0.38</td>
<td>0.35</td>
<td>0.06</td>
<td>0.20</td>
<td>0.37</td>
<td>-0.11</td>
</tr>
</tbody>
</table>
</body>
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The National Activity Index (CFNAI) from the Federal Reserve Bank of Chicago improved during April on the prior month's recovery. It rose to 0.38 from 0.35 and a 1Q average of 0.24. The three-month moving average of the CFNAI rose to [...]

Chicago Fed Nat'l Activity Index Improved

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060519a.jpg" width="353">
The May Index of General Business Conditions in the manufacturing sector from the Philadelphia Fed rose modestly, for the second month, to 14.4 from an unrevised 13.2 last month. The gain surpassed Consensus expectations for a decline to 12.5.
During the last ten years there has been a 65% correlation between the level of the Philadelphia Fed Business Conditions Index and three month growth in factory sector industrial production. There has been a 49% correlation with q/q growth in real GDP.
The index reflected improvement in delivery times and inventories. However, declines in other sub indexes were broad based; new orders, shipments and employment each fell to the lowest levels since last Summer. During the last ten years there has been a 75% correlation between the employment index and the three month growth in factory payrolls.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060519b.jpg" width="353">
The business conditions index reflects a separate survey question, not the sub indexes.
The prices paid index surged to the highest level since last September. During the last ten years there has been a 76% correlation between the prices paid index and the three month growth in the intermediate goods PPI. There has been an 85% correlation with the change in core intermediate goods prices.
The separate index of expected business conditions in six months fell and reversed roughly half of the improvement in April. Expectations for employment fell sharply to the lowest level since August 2002..
The latest Business Outlook survey from the Philadelphia Federal Reserve Bank can be found <a href="http://www.phil.frb.org/files/bos/bos0506.html">here</a>.
The rise in the Philly Fed index ran counter to the m/m improvement, reported Monday, in the May Empire State Manufacturing index of general business conditions. The Richmond Fed will report its May Mfg. Survey index next week. The reading will follow two months of sharp improvement, notably in orders, shipments and jobs and the figures will be available in the Haver SURVEYS database.
During the last ten years there has been a 57% correlation between the Richmond survey index level and the change in factory sector industrial production, nationally. The latest Richmond Fed Mfg. Survey is available <a href="http://www.richmondfed.org/research/regional_conditions/manufacturing_conditions/index.cfm"> here</a>.
The Richmond Fed also publishes indexes of conditions in the Service Sector and the latest release is available <a href="http://www.richmondfed.org/research/regional_conditions/service_sector/index.cfm"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S504/@S504.HTM">Philadelphia Fed Business Outlook</a></th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">May &#39;05</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Activity Index</td>
<td>14.4</td>
<td>13.2</td>
<td>10.3</td>
<td>12.4</td>
<td>28.0</td>
<td>10.5</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index</td>
<td>55.3</td>
<td>29.0</td>
<td>32.0</td>
<td>43.5</td>
<td>51.2</td>
<td>16.8</td>
</tr>
</tbody>
</table>
</body>
</html>

The May Index of General Business Conditions in the manufacturing sector from the Philadelphia Fed rose modestly, for the second month, to 14.4 from an unrevised 13.2 last month. The gain surpassed Consensus expectations for a decline [...]

Philadelphia Fed Business Activity Up

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060519a.jpg" width="353">
The May Index of General Business Conditions in the manufacturing sector from the Philadelphia Fed rose modestly, for the second month, to 14.4 from an unrevised 13.2 last month. The gain surpassed Consensus expectations for a decline to 12.5.
During the last ten years there has been a 65% correlation between the level of the Philadelphia Fed Business Conditions Index and three month growth in factory sector industrial production. There has been a 49% correlation with q/q growth in real GDP.
The index reflected improvement in delivery times and inventories. However, declines in other sub indexes were broad based; new orders, shipments and employment each fell to the lowest levels since last Summer. During the last ten years there has been a 75% correlation between the employment index and the three month growth in factory payrolls.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060519b.jpg" width="353">
The business conditions index reflects a separate survey question, not the sub indexes.
The prices paid index surged to the highest level since last September. During the last ten years there has been a 76% correlation between the prices paid index and the three month growth in the intermediate goods PPI. There has been an 85% correlation with the change in core intermediate goods prices.
The separate index of expected business conditions in six months fell and reversed roughly half of the improvement in April. Expectations for employment fell sharply to the lowest level since August 2002..
The latest Business Outlook survey from the Philadelphia Federal Reserve Bank can be found <a href="http://www.phil.frb.org/files/bos/bos0506.html">here</a>.
The rise in the Philly Fed index ran counter to the m/m improvement, reported Monday, in the May Empire State Manufacturing index of general business conditions. The Richmond Fed will report its May Mfg. Survey index next week. The reading will follow two months of sharp improvement, notably in orders, shipments and jobs and the figures will be available in the Haver SURVEYS database.
During the last ten years there has been a 57% correlation between the Richmond survey index level and the change in factory sector industrial production, nationally. The latest Richmond Fed Mfg. Survey is available <a href="http://www.richmondfed.org/research/regional_conditions/manufacturing_conditions/index.cfm"> here</a>.
The Richmond Fed also publishes indexes of conditions in the Service Sector and the latest release is available <a href="http://www.richmondfed.org/research/regional_conditions/service_sector/index.cfm"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S504/@S504.HTM">Philadelphia Fed Business Outlook</a></th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">May &#39;05</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Activity Index</td>
<td>14.4</td>
<td>13.2</td>
<td>10.3</td>
<td>12.4</td>
<td>28.0</td>
<td>10.5</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index</td>
<td>55.3</td>
<td>29.0</td>
<td>32.0</td>
<td>43.5</td>
<td>51.2</td>
<td>16.8</td>
</tr>
</tbody>
</table>
Chicago Fed Nat'l Activity Index Improved 
by <a href="/comment/Moeller.html">Tom Moeller</a> May 19, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060519c.jpg" width="353">
The National Activity Index (CFNAI) from the Federal Reserve Bank of Chicago improved during April on the prior month&#39;s recovery. It rose to 0.38 from 0.35 and a 1Q average of 0.24.
The three-month moving average of the CFNAI rose to 0.25 from 0.24 the prior month.
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.
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 latest CFNAI report is available <a href="http://www.chicagofed.org/economic_research_and_data/files/cfnai_May2006.pdf">here</a>.
The Evolving Nature of the Financial System: Financial Crises and the Role of the Central Bank, yesterday&#39;s speech from the newly designated Vice Chairman of the Federal Reserve Board Donald L. Kohn, is available <a href="http://www.federalreserve.gov/boarddocs/speeches/2006/200605182/default.htm"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S503/@S503.HTM">Chicago Fed</a></th>
<th scope="col">April</th>
<th scope="col">Mar</th>
<th scope="col">April &#39;05</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">CFNAI</td>
<td>0.38</td>
<td>0.35</td>
<td>0.06</td>
<td>0.20</td>
<td>0.37</td>
<td>-0.11</td>
</tr>
</tbody>
</table>
Japan's Growth Gains Footing on Rise in Domestic Demand 
by <a href="/comment/Stone.html">Carol Stone</a> May 19, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060519d.jpg" width="353">
Japan&#39;s GDP surprised on the upside for Q1, in data reported today by the Japanese Cabinet Office. It expanded at a 1.9% annual rate. While this was less than Q4&#39;s 4.3%, it well exceeded forecasters&#39; views that anticipated about 1.2%. The yen gained briefly on the report.
Notably, the driving force in the growth was private domestic demand, led by business investment. This component had fallen in Q4 and rebounded sharply in Q1, at a 5.8% annual rate. That put it 4.6% ahead of a year ago. Household consumption moderated from Q4, increasing at a 1.6% annual pace relative to 2.6% in Q4. Together, private domestic demand grew 3.2% on the quarter (annualized) and was also up 3.2% from a year ago.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060519e.jpg" width="353">
Also of significance, growth of exports slowed from Q4&#39;s large 16.2% to &quot;just&quot; 11.3%. At the same time, imports switched from a modest decline in Q4 to a 12.6% rate of increase. Exports are substantially larger than imports, so these adverse moves did not keep the net export surplus from increasing, although the rise was very modest: only &yen;308 million on a base of &yen;18.1 billion.
Markets were encouraged that the domestic economy appears to be picking up steam. The price deflator is still falling, however, although this may be due in the most recent period by the surge in imported energy costs. The deflator for domestic demand is holding just about even with year-earlier levels. With these price signals still mixed, Bank of Japan officials remain skittish about whether the economy could stand higher borrowing costs; when they issued a statement to this effect later today, FX traders pushed the yen back down once again.

<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/JAPAN/@J2/@J2.HTM">Chain GDP % Chg,</a> &nbsp;Annual Rates*</th>
<th scope="col">Q1 2006</th>
<th scope="col">Q4 2005</th>
<th scope="col">Q3 2005</th>
<th scope="col">Year/ Year</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">GDP</td>
<td>1.9</td>
<td>4.3</td>
<td>0.6</td>
<td>3.1</td>
<td>2.6</td>
<td>2.3</td>
<td>1.8</td>
</tr>
<tr>
<td class="firstcol">Household Consumption</td>
<td>1.6</td>
<td>2.6</td>
<td>1.8</td>
<td>1.2</td>
<td>1.7</td>
<td>0.6</td>
<td>1.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Government Consumption</td>
<td>0.6</td>
<td>0.4</td>
<td>2.0</td>
<td>0.8</td>
<td>1.7</td>
<td>2.0</td>
<td>2.3</td>
</tr>
<tr>
<td class="firstcol">Private Plant &amp; Equipment</td>
<td>5.8</td>
<td>-0.9</td>
<td>5.2</td>
<td>4.6</td>
<td>7.7</td>
<td>4.9</td>
<td>5.9</td>
</tr>
<tr class="odd">
<td class="firstcol">Exports</td>
<td>11.3</td>
<td>16.2</td>
<td>12.9</td>
<td>13.7</td>
<td>7.0</td>
<td>13.9</td>
<td>9.0</td>
</tr>
<tr>
<td class="firstcol">Imports</td>
<td>12.6</td>
<td>-2.5</td>
<td>13.3</td>
<td>8.0</td>
<td>6.3</td>
<td>8.5</td>
<td>3.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Private Domestic Demand</td>
<td>3.2</td>
<td>3.0</td>
<td>-0.0</td>
<td>3.2</td>
<td>3.2</td>
<td>2.2</td>
<td>1.9</td>
</tr>
</tbody>
</table>
</body>
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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060518d.jpg" width="353">
Yesterday, the report of US CPI for April set off a firestorm in financial markets as participants were hit with a bad case of inflation-itis. Today&#39;s Canadian CPI contained some of the same ingredients, but unlike the US&#39;s, Canada&#39;s &quot;core&quot; rate was actually weaker than expected. The total index was up just under 0.5% for the month, with the yearly rate ahead 2.4%, somewhat more than March&#39;s 2.2%. Dramatically, however, its &quot;core&quot; index was unchanged for the month and actually slowed on the year from 1.7% in March to 1.6%.
Canada&#39;s &quot;core&quot; inflation is defined by the Bank of Canada and is used directly as a monetary policy target. It excludes eight of the most volatile items, such as fresh fruits and vegetables, gasoline and mortgage interest rates. See the footnote beneath the table for the complete list.
Within the total index, energy prices played a major role in the monthly gain: all energy was up 6.9% (not seasonally adjusted), and separate data on actual retail gasoline prices show an increase of 13.7% to C$1.0675/liter, only the fourth month ever that the price has exceeded C$1.00/liter (the other three instances were just last year: August, September and October).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060518e.jpg" width="353">
In discussing the surprising softness of the core measure, some press reports indicated a role for the Canadian dollar. It has strengthened noticeably against the US dollar, not just recently, but basically since the middle of 2002. It also moved up versus the euro from the middle of 2004 through the end of last year. So indeed, the strong currency could be helping Canadian inflation. We look at two components where imports have a significant influence, clothing and recreation. Clothing prices have been falling consistently and in April were 3% below a year earlier. By contrast in the US, the apparel category has declined much less over the last two years. Recreation is another Canadian sector with a trade component, as its residents travel south to Florida and other such destinations and residents of other areas come to Canada. The related prices in Canada are falling slowly, but their pattern changed distinctly soon after the the Canadian dollar turned upward. The chart shows &quot;traveler accommodation&quot; together with the US$ exchange rate; the two series have a remarkable 60% correlation since 1995.
All of Haver&#39;s Canadian monthly data are in CANSIM, an extensive collection of Statistics Canada&#39;s copyrighted series. Exchange rates can be found in USECON, DAILY, INTDAILY and the weekly counterparts of the latter two, as well as in CANSIM.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Canada CPI, % Changes*</th>
<th scope="col">Apr 2006</th>
<th scope="col">Mar 2006</th>
<th scope="col">Feb 2006</th>
<th scope="col">Year/ Year</th>
December/December
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2005</td>
<td>2004</td>
<td>2003</td>
</tr>
<tr>
<td class="firstcol">All Items</td>
<td>0.46</td>
<td>0.31</td>
<td>-0.23</td>
<td>2.44</td>
<td>2.15</td>
<td>2.12</td>
<td>1.99</td>
</tr>
<tr class="odd">
<td class="firstcol">All Items less 8 Volatiles**</td>
<td>0.00</td>
<td>0.23</td>
<td>0.16</td>
<td>1.58</td>
<td>1.59</td>
<td>1.70</td>
<td>2.15</td>
</tr>
<tr>
<td class="firstcol">Clothing</td>
<td>-0.50</td>
<td>-0.70</td>
<td>-0.69</td>
<td>-3.02</td>
<td>-0.93</td>
<td>-3.10</td>
<td>0.20</td>
</tr>
<tr class="odd">
<td class="firstcol">Recreation, etc.</td>
<td>0.00</td>
<td>0.00</td>
<td>-0.16</td>
<td>-0.16</td>
<td>-0.24</td>
<td>0.32</td>
<td>0.40</td>
</tr>
<tr>
<td class="firstcol">Memo: Can$/US$ Month Avg</td>
<td>1.1438</td>
<td>1.1574</td>
<td>1.1489</td>
<td>1.2397 (2/2005)</td>
<td colspan="3">December</td>
</tr>
<tr class="odd">
<td class="firstcol">1.1610</td>
<td>1.2191</td>
<td>1.3128</td>
</tr>
</tbody>
</table>
</body>
</html>

Yesterday, the report of US CPI for April set off a firestorm in financial markets as participants were hit with a bad case of inflation-itis. Today's Canadian CPI contained some of the same ingredients, but unlike the US's, Canada's [...]

Canada CPI: Up with Energy, But Restrained by Strong Currency

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060518b.jpg" width="353">
For April, the Conference Board&#39;s Composite Index of Leading Economic Indicators dipped 0.1% following a 0.4% March rise, initially reported as a 0.1% decline. Consensus expectations had been for a 0.1% April up tick.
Six month growth in the leaders fell to 2.9% from an upwardly revised 4.8% the prior month. During the last ten years there has been a 43% correlation between the six-month change in the leading indicators and quarterly growth in real GDP.
The breadth of one month gain amongst the 10 components of the leading index halved to 35% in April. Over a six month span 80% of the index components have risen. A large positive contribution from vendor performance was offset by lower building permits, lower consumer sentiment and a lower real money supply.Most of the remaining index components had little m/m impact on the change in the leaders.
The spread between yields on the 10 year Treasury Note and Fed funds made a minimal 0.02 percentage point positive contribution to the leaders. The method of calculating the contribution to the index from the interest rate yield spread has been revised. A negative contribution will now occur only when the spread inverts rather than when declining as in the past. More details can be found <a href="http://www.conference-board.org/pdf_free/economics/bci/lei0705.pdf">here</a>.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060518c.jpg" width="353">
The leading index is based on eight previously reported economic data series. Two series, orders for consumer goods and orders for capital goods, are estimated.
The coincident indicators rose 0.2% for the third consecutive month. All of the four component series rose last month and during the last six months. During the last ten years there has been a 64% correlation between the change in the coincident indicators and real GDP growth.
The lagging indicators increased 0.3% following a revised 0.1% March increase. Last month, 78.6% of the series&#39; components rose while the ratio of coincident to lagging indicators, a measure of actual economic performance versus excess, fell slightly.
Visit the Conference Board&#39;s <a href="http://www.conference-board.org">site</a> for coverage of leading indicator series from around the world.
Today&#39;s speech titled Basel II: Its Promise and Its Challenges by Federal reserve Board Chairman Ben S. Bernanke is available <a href="http://www.federalreserve.gov/boarddocs/speeches/2006/20060518/default.htm"> here</a>

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/BCI/BCI.HTM">Business Cycle Indicators</a></th>
<th scope="col">April</th>
<th scope="col">Mar</th>
<th scope="col">6 Month Chg., AR</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">Leading</td>
<td>-0.1%</td>
<td>0.4%</td>
<td>2.9%</td>
<td>2.3%</td>
<td>7.4%</td>
<td>5.0%</td>
</tr>
<tr>
<td class="firstcol">Coincident</td>
<td>0.2%</td>
<td>0.2%</td>
<td>3.5%</td>
<td>2.2%</td>
<td>2.5%</td>
<td>0.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">Lagging</td>
<td>0.3%</td>
<td>0.1%</td>
<td>1.6%</td>
<td>3.5%</td>
<td>0.0%</td>
<td>-0.0%</td>
</tr>
</tbody>
</table>
</body>
</html>

For April, the Conference Board's Composite Index of Leading Economic Indicators dipped 0.1% following a 0.4% March rise, initially reported as a 0.1% decline. Consensus expectations had been for a 0.1% April up tick. Six month growth [...]

Leading Economic Indicators Dip, March Revised Up

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060518a.jpg" width="353">
Initial unemployment insurance claims surged 42,000 last week to 367,000 due to a partial government shutdown in Puerto Rico. The shutdown added 46,000 claims and has been resolved. Consensus expectations had been for 316,000 claims.
The Labor Department indicated that excluding claims related to the government shutdown in Puerto Rico seasonally adjusted initial claims would have been closer to 312,000.
The latest figure is for the survey period for May nonfarm payrolls and claims rose 63,000 (20.7%) from the April period. The payroll survey counts persons who were paid during the week which contains the 12th of the month as employed. During the last ten years there has been a (negative) 77% correlation between the level of initial claims and the m/m change in nonfarm payrolls.
Excluding strikers, claims rose 8,000 (2.6%) from the April survey period for nonfarm payrolls.
The four week moving average of initial claims rose to 333,250 (-0.1% y/y).
Continuing claims for unemployment insurance rose 8,000 following a revised 60,000 decline during the prior week.
The insured rate of unemployment remained at 1.8%.
Job Matching: Evidence from the Beveridge Curve from the Federal Reserve Bank of San Francisco is available <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-08.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">05/13/06</th>
<th scope="col">05/06/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>367</td>
<td>325</td>
<td>11.6%</td>
<td>332</td>
<td>343</td>
<td>403</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,389</td>
<td>-8.7%</td>
<td>2,663</td>
<td>2,923</td>
<td>3,530</td>
</tr>
</tbody>
</table>
</body>
</html>

Initial unemployment insurance claims surged 42,000 last week to 367,000 due to a partial government shutdown in Puerto Rico. The shutdown added 46,000 claims and has been resolved. Consensus expectations had been for 316,000 claims. [...]

Initial Jobless Insurance Claims Surge

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060518a.jpg" width="353">
Initial unemployment insurance claims surged 42,000 last week to 367,000 due to a partial government shutdown in Puerto Rico. The shutdown added 46,000 claims and has been resolved. Consensus expectations had been for 316,000 claims.
The Labor Department indicated that excluding claims related to the government shutdown in Puerto Rico seasonally adjusted initial claims would have been closer to 312,000.
The latest figure is for the survey period for May nonfarm payrolls and claims rose 63,000 (20.7%) from the April period. The payroll survey counts persons who were paid during the week which contains the 12th of the month as employed. During the last ten years there has been a (negative) 77% correlation between the level of initial claims and the m/m change in nonfarm payrolls.
Excluding strikers, claims rose 8,000 (2.6%) from the April survey period for nonfarm payrolls.
The four week moving average of initial claims rose to 333,250 (-0.1% y/y).
Continuing claims for unemployment insurance rose 8,000 following a revised 60,000 decline during the prior week.
The insured rate of unemployment remained at 1.8%.
Job Matching: Evidence from the Beveridge Curve from the Federal Reserve Bank of San Francisco is available <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-08.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">05/13/06</th>
<th scope="col">05/06/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>367</td>
<td>325</td>
<td>11.6%</td>
<td>332</td>
<td>343</td>
<td>403</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,389</td>
<td>-8.7%</td>
<td>2,663</td>
<td>2,923</td>
<td>3,530</td>
</tr>
</tbody>
</table>
Leading Economic Indicators Dip, March Revised Up 
by <a href="/comment/Moeller.html">Tom Moeller</a> May 18, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060518b.jpg" width="353">
For April, the Conference Board&#39;s Composite Index of Leading Economic Indicators dipped 0.1% following a 0.4% March rise, initially reported as a 0.1% decline. Consensus expectations had been for a 0.1% April up tick.
Six month growth in the leaders fell to 2.9% from an upwardly revised 4.8% the prior month. During the last ten years there has been a 43% correlation between the six-month change in the leading indicators and quarterly growth in real GDP.
The breadth of one month gain amongst the 10 components of the leading index halved to 35% in April. Over a six month span 80% of the index components have risen. A large positive contribution from vendor performance was offset by lower building permits, lower consumer sentiment and a lower real money supply.Most of the remaining index components had little m/m impact on the change in the leaders.
The spread between yields on the 10 year Treasury Note and Fed funds made a minimal 0.02 percentage point positive contribution to the leaders. The method of calculating the contribution to the index from the interest rate yield spread has been revised. A negative contribution will now occur only when the spread inverts rather than when declining as in the past. More details can be found <a href="http://www.conference-board.org/pdf_free/economics/bci/lei0705.pdf">here</a>.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060518c.jpg" width="353">
The leading index is based on eight previously reported economic data series. Two series, orders for consumer goods and orders for capital goods, are estimated.
The coincident indicators rose 0.2% for the third consecutive month. All of the four component series rose last month and during the last six months. During the last ten years there has been a 64% correlation between the change in the coincident indicators and real GDP growth.
The lagging indicators increased 0.3% following a revised 0.1% March increase. Last month, 78.6% of the series&#39; components rose while the ratio of coincident to lagging indicators, a measure of actual economic performance versus excess, fell slightly.
Visit the Conference Board&#39;s <a href="http://www.conference-board.org">site</a> for coverage of leading indicator series from around the world.
Today&#39;s speech titled Basel II: Its Promise and Its Challenges by Federal reserve Board Chairman Ben S. Bernanke is available <a href="http://www.federalreserve.gov/boarddocs/speeches/2006/20060518/default.htm"> here</a>

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/BCI/BCI.HTM">Business Cycle Indicators</a></th>
<th scope="col">April</th>
<th scope="col">Mar</th>
<th scope="col">6 Month Chg., AR</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">Leading</td>
<td>-0.1%</td>
<td>0.4%</td>
<td>2.9%</td>
<td>2.3%</td>
<td>7.4%</td>
<td>5.0%</td>
</tr>
<tr>
<td class="firstcol">Coincident</td>
<td>0.2%</td>
<td>0.2%</td>
<td>3.5%</td>
<td>2.2%</td>
<td>2.5%</td>
<td>0.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">Lagging</td>
<td>0.3%</td>
<td>0.1%</td>
<td>1.6%</td>
<td>3.5%</td>
<td>0.0%</td>
<td>-0.0%</td>
</tr>
</tbody>
</table>
Canada CPI: Up with Energy, But Restrained by Strong Currency 
by <a href="/comment/Stone.html">Carol Stone</a> May 18, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060518d.jpg" width="353">
Yesterday, the report of US CPI for April set off a firestorm in financial markets as participants were hit with a bad case of inflation-itis. Today&#39;s Canadian CPI contained some of the same ingredients, but unlike the US&#39;s, Canada&#39;s &quot;core&quot; rate was actually weaker than expected. The total index was up just under 0.5% for the month, with the yearly rate ahead 2.4%, somewhat more than March&#39;s 2.2%. Dramatically, however, its &quot;core&quot; index was unchanged for the month and actually slowed on the year from 1.7% in March to 1.6%.
Canada&#39;s &quot;core&quot; inflation is defined by the Bank of Canada and is used directly as a monetary policy target. It excludes eight of the most volatile items, such as fresh fruits and vegetables, gasoline and mortgage interest rates. See the footnote beneath the table for the complete list.
Within the total index, energy prices played a major role in the monthly gain: all energy was up 6.9% (not seasonally adjusted), and separate data on actual retail gasoline prices show an increase of 13.7% to C$1.0675/liter, only the fourth month ever that the price has exceeded C$1.00/liter (the other three instances were just last year: August, September and October).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060518e.jpg" width="353">
In discussing the surprising softness of the core measure, some press reports indicated a role for the Canadian dollar. It has strengthened noticeably against the US dollar, not just recently, but basically since the middle of 2002. It also moved up versus the euro from the middle of 2004 through the end of last year. So indeed, the strong currency could be helping Canadian inflation. We look at two components where imports have a significant influence, clothing and recreation. Clothing prices have been falling consistently and in April were 3% below a year earlier. By contrast in the US, the apparel category has declined much less over the last two years. Recreation is another Canadian sector with a trade component, as its residents travel south to Florida and other such destinations and residents of other areas come to Canada. The related prices in Canada are falling slowly, but their pattern changed distinctly soon after the the Canadian dollar turned upward. The chart shows &quot;traveler accommodation&quot; together with the US$ exchange rate; the two series have a remarkable 60% correlation since 1995.
All of Haver&#39;s Canadian monthly data are in CANSIM, an extensive collection of Statistics Canada&#39;s copyrighted series. Exchange rates can be found in USECON, DAILY, INTDAILY and the weekly counterparts of the latter two, as well as in CANSIM.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Canada CPI, % Changes*</th>
<th scope="col">Apr 2006</th>
<th scope="col">Mar 2006</th>
<th scope="col">Feb 2006</th>
<th scope="col">Year/ Year</th>
December/December
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2005</td>
<td>2004</td>
<td>2003</td>
</tr>
<tr>
<td class="firstcol">All Items</td>
<td>0.46</td>
<td>0.31</td>
<td>-0.23</td>
<td>2.44</td>
<td>2.15</td>
<td>2.12</td>
<td>1.99</td>
</tr>
<tr class="odd">
<td class="firstcol">All Items less 8 Volatiles**</td>
<td>0.00</td>
<td>0.23</td>
<td>0.16</td>
<td>1.58</td>
<td>1.59</td>
<td>1.70</td>
<td>2.15</td>
</tr>
<tr>
<td class="firstcol">Clothing</td>
<td>-0.50</td>
<td>-0.70</td>
<td>-0.69</td>
<td>-3.02</td>
<td>-0.93</td>
<td>-3.10</td>
<td>0.20</td>
</tr>
<tr class="odd">
<td class="firstcol">Recreation, etc.</td>
<td>0.00</td>
<td>0.00</td>
<td>-0.16</td>
<td>-0.16</td>
<td>-0.24</td>
<td>0.32</td>
<td>0.40</td>
</tr>
<tr>
<td class="firstcol">Memo: Can$/US$ Month Avg</td>
<td>1.1438</td>
<td>1.1574</td>
<td>1.1489</td>
<td>1.2397 (2/2005)</td>
<td colspan="3">December</td>
</tr>
<tr class="odd">
<td class="firstcol">1.1610</td>
<td>1.2191</td>
<td>1.3128</td>
</tr>
</tbody>
</table>
</body>
</html>

USD/EUR exchange rate uncoupling from interest rate differential

Widespread downgrading of 2025 GDP outlook

Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

Wage growth slowing in the US and Euro area; elevated and sticky in the UK

Stagflation-lite: Blue Chip forecasts below-trend growth and elevated inflation

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

US and Japan ended 2024 on solid ground in contrast to Europe

US economy expected to outperform other major economies in 2025

Only modest evidence of AI-related surge in US productivity growth

Previous Trump tariffs fading. A boost from new tariffs ahead?

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

Economic activity is picking up in the US but remains lackluster abroad

Policy uncertainty has surged since the US national elections.

Recent turnaround in US economic surprises leading to increases in rate-cut expectations

The outlook has brightened in the US, while it has dimmed for other major economies

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

Blue Chip forecasters look for further significant monetary easing apart from Japan

Recent rise in global supply chain pressures could augur a pickup in global inflation pressures

Underperforming German economy generating increased policy uncertainty relative to Europe and the US

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Nonfarm payrolls increased 177,000 (1.2% y/y) during April after rising 185,000 in March, revised from 228,000, and 102,000 in February, revised from 117,000. Expectations had been for a 130,000 rise in the Action Economics Forecast Survey. The latest figure left the three-month average change at 155,000 in April, down from 232,000 in January.

Average hourly earnings rose 0.2% during April after unrevised increases of 0.3% in March and 0.2% in February. Earnings growth of 3.8% y/y was below the 5.9% high in March 2022.

The unemployment rate, measured in the household survey, held m/m at an expected 4.2% in April, and compared to 4.1% in February and 4.0% in January. It reached a low of 3.4% in April 2023. The unemployment rate, including employees working part-time for economic reasons plus all marginally-attached workers, eased to 7.8% in April from 7.9% in March.

In the **establishment survey**, private-sector employment rose 167,000 (1.2% y/y) after a 170,000 March increase. Factory sector jobs edged 1,000 lower (-0.7% y/y) following a 3,000 gain. Construction sector employment increased 11,000 (1.7% y/y), after rising 7,000 in March.

Private service-producing sector employment increased 156,000 (1.4% y/y) in April after improving 161,000 in March. Increases varied greatly amongst service sector categories. Private education & health sector employment rose 70,000 (3.4% y/y) last month following a 74,000 March increase. Leisure & hospitality employment rose 24,000 (1.3% y/y) after a 38,000 gain. Trade, transportation & utilities rose 32,000 (0.9% y/y) in April following a 25,000 March increase. Professional & business services employment rose 17,000 (-0.1% y/y) following a 3,000 rise while temporary help employment rose 3,600 (-3.9% y/y) following a 2,700 decline. Financial activities employment improved 14,000 (1.2% y/y) after a 6,000 gain. The number of information sector jobs held steady (-0.4% y/y) last month after falling 2,000 in March.

Government sector payrolls rose 10,000 (1.3% y/y) last month after increasing 15,000 in March. The number of local government jobs increased 13,000 (1.4% y/y) following a 17,000 gain. State government employment rose 6,000 (1.8% y/y) following a 2,000 March increase but federal government payrolls fell 9,000 (-0.3% y/y), the third consecutive monthly decline.

Private-sector average hourly earnings rose 0.2% (3.8% y/y) in April after increasing 0.3% in March. Earnings in the goods-producing sector eased 0.1% (+4.0% y/y) following a 0.6% gain. Earnings in construction rose 0.3% (3.6% y/y), after a 0.2% rise but factory sector earnings declined 0.3% (+4.3% y/y) after surging 0.8% in March. In the private services-sector, earnings rose 0.2% (3.7% y/y) in April for the third straight month. Information sector pay increased 1.0% (5.2% y/y) last month after easing 0.1%, and financial activities earnings rose 0.5% (4.3% y/y) for the second straight month. Trade, transportation & utilities sector pay increased 0.4% (3.4% y/y) after 0.6%. Professional & business sector earnings increased 0.1% (4.4% y/y) after 0.2% in March. Leisure & hospitality earnings held steady (+3.8% y/y) following a 0.6% March increase.

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The length of the average workweek held steady at 34.3 hours in April. The workweek in the goods-producing sector eased to 39.8 hours from 40.0 hours. The construction sector average workweek eased to 39.0 hours from 39.3 hours while the factory sector workweek moved lower to 40.0 hours from 40.2. The average workweek in the private service sector held at 33.2 hours. Professional & business service hours fell to 36.3 hours from 36.4 while trade, transportation & utilities hours improved to 34.3 from 34.0 hours. Private education hours rose slightly to 32.8, but leisure & hospitality held steady at 25.5 hours.

In the **household survey**, the unemployment rate held at 4.2% in April as employment rose 436,000 and the size of the labor force increased 518,000. The labor force participation rate edged up to 62.6% last month from 62.5% in March. It remained below the high of 63.3% early in 2020. The rate for teenagers declined to 36.9%. For workers aged 20-24, the rate held steady at 72.1%, up from 71.8% six months earlier. For workers aged 25-54 the rate rose to 83.6%, a five-month high. For individuals 55 and over, the rate improved to 38.4% in April.

The employment/population ratio for all workers in April rose to 60.0%. It remained below the peak reading of 61.1% in February, 2020 just prior to the pandemic.

The employment and earnings data are collected from surveys taken each month during the week containing the 12th day of the month. The labor market data are contained in Haver's **USECON** database. Detailed figures are in the **EMPL** and **LABOR** databases. The expectations figures are in the **AS1REPNA** database.

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- Job growth spreads across most sectors.
- Earnings growth trend decelerates.
- Jobless rate holds steady.

U.S. Job Growth Is Firm in April but March Gain Is Lessened

Winnie Tapasanun

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Total factory orders rose a slightly less-than-expected 4.3% m/m in March after rises of 0.5% in February and 1.8% in January, data from the U.S. Census Bureau showed. A 4.5% m/m March increase had been expected in the Action Economics Forecast Survey. The March reading was the third successive monthly rise and the largest since July 2024. The year-on-year rate accelerated to 6.0% in March, the highest since November 2022, from 2.3% in February. Notably, orders for nondefense aircraft & parts soared 139.0% in March following a 7.4% drop in February and a 92.9% surge in January. Factory orders excluding defense rose 4.8% (5.9% y/y), the largest of three straight m/m/ rises, after a 0.4% February increase. Factory orders excluding the transportation sector fell 0.2% (+1.1% y/y), the first m/m fall since August, after rising 0.3% in February, January and December.

Durable goods orders jumped 9.2% (11.9% y/y) in March, the third consecutive m/m gain and the biggest since July 2024, on top of a 0.8% increase in February (matching +9.2% m/m in the advance report on April 24). The March jump reflected m/m orders increases of 27.1% (the largest m/m surge since July 2024; 31.2% y/y) in transportation equipment, 1.1% (4.9% y/y) in primary metals, 0.5% (-0.4% y/y) in furniture & related products, 0.1% (2.5% y/y) in fabricated metal products, and 0.1% (0.9% y/y) in machinery. To the downside, durable goods orders for computers & electronic products (-1.3%; +2.7% y/y) and electrical equipment, appliances & components (-1.0%; +4.2% y/y) declined m/m in March.

Nondurable goods orders, which equal nondurable goods shipments, fell 0.3% (+0.4% y/y) in March, the first m/m fall since September, after a 0.1% uptick in February. The March fall reflected m/m drops of 2.4% (-9.3% y/y) in petroleum & coal products and 0.9% (-1.2% y/y) in apparel. To the upside, the following nondurable goods shipments rose m/m in March: leather & allied products (1.5%; 8.6% y/y), beverage & tobacco products (0.7%; 5.8% y/y), paper products (0.6%; 2.3% y/y), printing (0.3%; 3.8% y/y), textile mills (0.3%; 0.8% y/y), chemical products (0.2%; 5.4% y/y), plastics & rubber products (0.2%; 0.4% y/y), food products (0.1%; 1.8% y/y), and textile products (0.1%; 2.1% y/y).

Total shipments slipped 0.1% (+2.0% y/y) in March, the first m/m easing since October, after a 0.7% increase in February. Excluding transportation, shipments were virtually unchanged m/m (+1.1% y/y) in March following six straight m/m gains. Shipments of durable goods industries inched up 0.1% (3.8% y/y) in March, the smallest of four consecutive m/m increases, after a 1.3% advance in February. This reflected m/m durable goods shipments rises of 1.2% (5.6% y/y) in primary metals, 0.9% (0.1% y/y) in furniture & related products, 0.8% (-0.2% y/y) in nonmetallic mineral products, 0.4% (0.0% y/y) in machinery, 0.3% (1.8% y/y) in fabricated metal products, 0.2% (4.5% y/y) in computers & electronic products, 0.2% (-2.1% y/y) in wood products, and 0.1% (3.0% y/y) in electrical equipment, appliances & components. In contrast, durable goods shipments for transportation equipment (-0.5%; +7.3% y/y) and miscellaneous durable goods (-0.1%; +2.9% y/y) fell m/m in March following three successive m/m increases.

Unfilled orders rose 2.0% (2.3% y/y) in March, up for the eighth month in nine, after a 0.1% uptick in February. Excluding transportation, unfilled orders dipped 0.1% (+0.7% y/y) in March, the first m/m easing since May 2024, after holding steady in February. Backlogs of durable goods rose 2.0% (2.3% y/y) in March, reflecting m/m rises of 3.1% (3.1% y/y) in transportation equipment and 0.2% (2.4% y/y) in electrical equipment, appliances & components.

Inventories edged up 0.1% (0.9% y/y) in March, the fifth straight m/m increase, after rising at the same pace in the prior two months. Excluding transportation, inventories were up 0.1% (0.5% y/y) in March, the fifth consecutive m/m rise. Durable goods inventories ticked up 0.1% (1.0% y/y) in March after holding steady in February and January; nondurable goods inventories edged up 0.1% (0.8% y/y), the fifth successive m/m increase.

The factory sector data are available in Haver’s **USECON** database. The Action Economics Forecast Survey is in the **AS1REPNA** database.

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- March manufacturers’ new orders +4.3% m/m; +6.0% y/y, highest since Nov. ’22.
- Durable goods orders (+9.2%) jump m/m, while nondurable goods orders (-0.3%) and shipments (-0.1%) decline m/m.
- Transportation equipt. orders +27.1% m/m, w/ a 139.0% m/m surge in nondefense aircraft & parts orders.
- Unfilled orders +2.0%, the eighth m/m rise in nine months.
- Inventories +0.1%, the fifth consecutive m/m increase.

U.S. Factory Orders Increase for the Third Straight Month in March

Andrew Cates

**China-US shipping activity** 
The economic fallout from escalating US-China trade tensions is becoming increasingly visible in the data. A clear example is the chart below, which highlights a sharp drop in vessel arrivals at the ports of Los Angeles and Long Beach, along with a notable decline in ships waiting offshore. These trends point to a tangible weakening in bilateral trade flows, as the effects of tit-for-tat tariffs imposed by both countries begin to bite. Given the outsized role the US and China play in global commerce, this slowdown is likely to reverberate through global supply chains, weighing on trade volumes, dampening demand, and curbing economic growth worldwide.

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**GDP growth in Q1**
Data this week showed that the US economy contracted, albeit modestly, in Q1 even as the euro area recorded a modest expansion—an unusual divergence. The contraction in US GDP can be largely attributed to a sharp increase in imports, as firms rushed to front-load purchases ahead of anticipated tariff hikes. In addition, domestic demand was subdued, with weaker contributions from both consumer spending and government consumption. This decoupling between the US and euro area economies is particularly striking given the current global focus on the US dollar. While the euro area has shown unexpected signs of resilience, the US downturn raises important questions about its underlying momentum, especially as trade dynamics and policy uncertainty continue to cloud the outlook.

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**The US dollar versus yield differentials**
Chart 3 below illustrates a sharp breakdown in the correlation between the US-Germany 10-year yield differential and the EUR/USD exchange rate. Historically, the dollar has moved closely with interest rate spreads, as yield-seeking capital flowed into US assets. But since early 2025—and more acutely following the April tariff actions—the dollar has weakened markedly even as the yield spread has narrowed only modestly. This decoupling underscores a critical shift: capital markets are reacting not just to monetary policy, but to rising trade and geopolitical uncertainty. In other words, the exchange rate is now being driven as much by risk sentiment as by interest rate arbitrage.

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**The US economy’s structural outperformance and the dollar**
A second dynamic, captured in the next chart, reveals a tight correlation between the US real effective exchange rate and the potential GDP growth differential between the US and euro area over the past 50-60 years. This raises the question: has dollar strength (until recently) merely been a reflection of US growth leadership—or are capital inflows themselves helping to sustain this growth outperformance? In effect, the tail may be wagging the dog. Global investors have long allocated capital to the US, attracted by its macroeconomic resilience, technological leadership, and deep, liquid financial markets. The danger now is that the US trade war may disrupt this equilibrium. A sharp or sustained reduction in capital inflows could undermine growth, weaken the dollar, and trigger broader financial instability. Moreover, reversing this dynamic is not straightforward—barring a credible structural resurgence in European (or Asian) growth, the global investment landscape remains tilted toward the US.

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**US competitiveness versus Europe, China and Japan** 
The next chart below examines relative unit labour costs across major economies since 2011. The US and China have seen a broadly similar trajectory, with steady increases in relative cost structures, while the euro area has remained flat and Japan has seen dramatic improvement. This suggests that, from a cost competitiveness standpoint, the US is not uniquely disadvantaged vis-à-vis China. However, as we discuss further below, this parallel erosion of cost competitiveness is occurring at much higher nominal wage levels in the US, which blunts its ability to regain export share through tariff-related shifts alone. The trade war strategy—absent a corresponding improvement in productivity or structural reforms—risks imposing costs without delivering material competitiveness gains.

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**Average wages in selected developed and developing economies**
This point is reinforced by the final chart, which shows estimates for average monthly wages across countries in 2024. US labour remains much more expensive than in peer or emerging economies. So even if China’s costs rise in tandem with the US, the global supply chain has ample alternatives. 'China plus one' strategies are accelerating, and the US remains structurally misaligned with low-cost production hubs. Tariffs aimed at reshoring supply chains are unlikely to deliver sustained gains unless accompanied by deep supply-side reforms, and risk further disincentivizing foreign direct investment if global firms perceive US trade policy as erratic or punitive.

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Financial markets found a measure of calm this week, buoyed by some subtle shifts in tone from US policymakers. A softening in the administration’s rhetoric around trade tariffs coupled with a less confrontational stance toward Federal Reserve Chair Jerome Powell, helped ease tensions that had roiled markets earlier in the month. Equities rebounded modestly, and volatility indicators edged lower, reflecting cautious optimism that the worst of the policy shocks may be behind us. But beneath the surface, significant downside risks persist. New shipping data point to a pronounced slowdown in US-China trade flows (chart 1), suggesting the damage from recent tariff escalations is already rippling through global supply chains. Meanwhile, incoming data for the US revealed an unexpected contraction in the economy in Q1 and further signs of weakness in the labour market (chart 2). The US dollar, in the meantime, while long supported by superior growth and yield differentials, has begun to decouple from traditional drivers (charts 3 and 4) suggesting growing pressure on capital flows. At the same time, structural imbalances are drawing renewed scrutiny: unit labour cost comparisons show the US steadily losing competitiveness (chart 5), while nominal wage disparities remain stark versus China and other Asian economies, further complicating any effort to restore trade balance without broader reforms (chart 6). In short, while markets may be drawing temporary comfort from a pause in tariff brinkmanship, the deeper economic and financial vulnerabilities exposed this month remain unresolved—and increasingly central to the global macro narrative.

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Charts of the Week: Tariff Truce, Tenuous Trust

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U.S. light vehicle sales dropped 2.9% (+6.5% y/y) to 17.31 million units (SAAR) in April after surging 10.8% to 17.82 million units in March. The retreat in April vehicle sales accompanied a 1.7% y/y rise in real disposable income through March, which compared to 2.0% growth last year.

Sales declines were broad-based last month. Light truck sales fell 1.3% (+9.9% y/y) during April to 14.34 million units (SAAR), after rising 12.4% in March. Purchases of domestically-made light trucks declined 1.2% (+11.9% y/y) to 11.02 million units, after jumping 12.5% in March. Sales of imported light trucks fell 1.8% (+4.4% y/y) to 3.32 million units, following an 11.6% March surge.

Trucks’ record 82.8% share of the light vehicle market last month compared to 81.5% in March and 80.3% in April of last year. The share averaged 80.3% during all of 2024 versus 53.3% ten years earlier.

Auto sales also declined last month, down 9.5% (-7.5%) to 2.97 million units (SAAR) following a 3.5% March rise. The decline reversed all of the increase over the prior two months. Purchases of domestically-produced cars fell 9.8% (-4.3% y/y) last month to 2.22 million units, after rising 3.8% in March. Sales of imported autos declined 9.6% (-15.7% y/y) to 0.75 million units, following a 2.5% March increase.

Imports' 23.5% share of the U.S. light vehicle market was little changed from 23.6% in March and compared to a May 2023 low of 22.9% and a high of 26.3% in November of 2023. Imports' share of the passenger car market held steady at 25.3% last month and compared to 27.7% in April of last year. It reached a high of 38.7% in September 2021. Imports' share of the light truck market eased to 23.2% last month after falling to 23.3% in March.

U.S. vehicle sales figures can be found in Haver's **USECON** database. Additional detail by manufacturer is in the I**NDUSTRY** database.

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- Light truck sales pull back, while auto sales tumble.
- Both domestic and imported sales decline.
- Imports' market share slips further.

U.S. Light Vehicle Sales Fall in April

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The ISM Purchasing Managers Index of activity in the manufacturing sector slipped to 48.7 in April from 49.0 during March and 50.3 in February. It remained up from a low of 46.9 in October of last year. A level of 50 is the break-even point between a rising and falling level of activity. The Action Economics Forecast Survey expected a reading of 47.8 for April. The series reached a monthly high of 63.8 in March 2021.

Two of the five component indexes weakened last month. The April production index fell to 44.0 after declining to 48.3 in March. It was the lowest level since May 2020. A lessened 19.8% (NSA) of respondents reported higher production while an increased 24.2% reported lower output. The inventories index declined to 50.8 last month from 53.4 in March. The index remained up from a low of 43.2 in October of last year.

Moving higher, the new orders index rose to 47.2 last month from 45.2 in March. The index remained below a January high of 55.1. Twenty-eight percent (NSA) of respondents reported higher new orders while 26.7% reported a decline. The employment index rose to 46.5 from 44.7 in March. It was below a high of 50.3 in January. A greater 13.1% (NSA) of respondents reported more hiring while a fewer 16.2% indicated less. The supplier delivery index rose to 55.2 from 53.5 in March. A higher 16.6% (NSA) of respondents reported slower delivery speeds while a fairly steady 6.2% reported a quickening.

The prices index, which is not part of the composite series, edged up to 69.8 (NSA) in April after increasing to 69.4 in March. It was the highest level since June 2022, up from a December 2022 low of 39.4. An increased 49.2% of respondents reported higher prices last month, up from 12.2% in November, while a higher 9.7% reported lower prices.

In other series, the export orders index plummeted to 43.1 in April from 49.6 during March. It was down from the high of 52.4 in January. The imports index fell sharply to 47.1 from 50.1 in March. It was the lowest reading since December 2023. The order backlog index dropped to 43.7 (NSA) last month from 44.5 in March. It was the lowest level in five months.

The ISM figures are based on responses from over 400 purchasing executives from 18 industries, which are weighted according to each industry’s contribution to GDP. These indexes are diffusion indexes where a reading above 50 indicates expansion and a reading below 50 points to contraction. The figures from the Institute for Supply Management can be found in Haver’s **USECON** database; further detail is found in the **SURVEYS** database. The expectations number is available in Haver’s **AS1REPNA** database.

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- Declines in last three months follow earlier improvement.
- Production & inventories account for m/m shortfall.
- Prices index edges up to another three-year high.

Economy in Brief

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