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/070118e.jpg" width="353">
December housing starts appeared to gain some forward momentum, with a 4.5% advance. The resulting 1.642M was considerably better than Consensus expectations for renewed decline to 1.563M starts.
For all of 2006 starts of 1.819M was 12.3% below the 2005 total.
However, the December increase was all in multi-family structures. These jumped 42.1% in the month to 412,000, the largest since January. Multi-family building starts have been running just below 350,000 yearly for about the last ten years.
Disappointingly, single-family starts in December turned back down again, losing 4.1% to 1.23M. For the year as a whole, they totaled 1.478M, actually an annual rate not seen since June. This is 14.0% below 2005&#39;s total; as seen in the table below, the month of December was almost 25% below December 2005..<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070118f.jpg" width="353">
By region, single-family housing starts in the South lost 5.7% in December (-26.3% y/y); at 642,000, this is 8.6% above October&#39;s low. Single-family starts in the Northeast were off 3.5% (-14.0% y/y). Starts in the Midwest fell 4.7% (-26.4% y/y) and out West, they managed to hold steady at 293,000 for a third consecutive month, down 23.5% December/December.
Building permits gained 5.5% in the month, but here too, the increase was mainly in the volatile multi-family sector. These permits rose 69,000 to 432,000, the best volume since August. Permits to start single-family homes edged up 1.2%, their first increase since January. For the year as a whole, these permits totaled 1.38M, down 18.0% from 2005. Total building permits for the 1.834M, down 15.1% from 2005.
New Federal Reserve Board Governor Frederic Mishkin gave his first speech as a Board Member yesterday in New York. It is titled, appropriately enough, The Role of House Prices in Formulating Monetary Policy and can be found <a href="http://www.federalreserve.gov/boarddocs/speeches/2007/20070117/default.htm">here</a>. Chairman Bernanke testified this morning before the Senate Budget Committee; his prepared statement, Long-term fiscal challenges facing the United States, can be found <a href="http://www.federalreserve.gov/boarddocs/testimony/2007/20070118/default.htm">here</a>.

<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">December</th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>1,642</td>
<td>1,572</td>
<td>1,478</td>
<td>-18.0%</td>
<td>1,819</td>
<td>2,073</td>
<td>1,950</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Single-family</td>
<td>1,230</td>
<td>1,282</td>
<td>1,187</td>
<td>-24.7%</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>412</td>
<td>290</td>
<td>291</td>
<td>11.7%</td>
<td>341</td>
<td>354</td>
<td>345</td>
</tr>
<tr>
<td class="firstcol">Building Permits</td>
<td>1,596</td>
<td>1,513</td>
<td>1,553</td>
<td>-24.3%</td>
<td>1,834</td>
<td>2,159</td>
<td>2,058</td>
</tr>
</tbody>
</table>
CPI Rises 0.5% with Pick-Up in Energy 
by <a href="/comment/Stone.html">Carol Stone</a> January 18, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070118c.jpg" width="353">
The December consumer price index (CPI-U) rose 0.5% after November&#39;s flat reading. In fact, this was the first increase since August. The monthly change was in line with consensus expectations at a 0.5% rise. The 12-month inflation was 2.6%, less than 3.4% in 2005.
Prices less food &amp; energy were up 0.2%; they had been unchanged in November. This too matched consensus expectations, at a 0.2% increase. The December-on-December rate was 2.6%, the same as the total.
Core goods prices were unchanged in December, following three consecutive declines; the year-on-year pace was +0.2%. The December mix included gains in apparel (0.6%), tobacco (1.5%) and personal care products (1.9%). Declines included new &amp; used motor vehicles (-0.3%), medical care commodities (0.2%) and audio/video equipment (0.7%). Computer prices were unchanged. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070118d.jpg" width="353">
Core services prices repeated their November 0.2% increase. In fact, carried to a second decimal place, December, at 0.20%, had the smallest increase since last January, 0.17%. Shelter slowed back to a 0.3% rise from 0.4% in November; public transportation continued to fall, but just 0.2% in December after 1.9% in November. Information technology and services were down 1.8%, but this was the smallest decline in recent months, following, for instance, 4.2% in November. Medical services were up just 0.2% and education increased 0.5%. Despite the huge rise in personal care products, personal care services inched up only 0.1%.
Energy prices rebounded sharply, up 4.6% on the month. This put them up 3.1% from December 2005. Gasoline prices surged 8.0% in December, heating oil rose 3.2% and piped gas and electricity were up 1.2%.
Food &amp; beverage prices were unchanged in December. Fruits and vegetables prices dropped 1.5%, their second consecutive sizable decline. Cold weather in the South this month, though, may make such declines short-lived. Nonalcoholic beverages, alcoholic beverages and cooking fats and oils also declined. Dairy product prices steadied with a 0.1% rise after their November fall of 0.6%, and prices for meats, poultry, fish &amp; eggs also rose 0.1%, a bit slower than November&#39;s 0.2%. Cereals were up 0.4%, the same as in November.
The chained CPI, which adjusts for shifts in the mix of consumer purchases, was up just 0.1% in December and the chained &quot;core&quot; fell 0.2%.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80101/@E80101.HTM">Consumer Price Index</a> </th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total&nbsp;</td>
<td>0.5%</td>
<td>0.0%</td>
<td>2.6%</td>
<td>3.2%</td>
<td>3.4%</td>
<td>2.7%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>0.2%</td>
<td>0.0%</td>
<td>2.6%</td>
<td>2.5%</td>
<td>2.2%</td>
<td>1.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Goods less Food &amp; Energy</td>
<td>0.0%</td>
<td>-0.4%</td>
<td>-0.1%</td>
<td>0.2%</td>
<td>0.5%</td>
<td>-0.9%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Services less Energy</td>
<td>0.2%</td>
<td>0.2%</td>
<td>3.7%</td>
<td>3.4%</td>
<td>2.8%</td>
<td>2.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Energy</td>
<td>4.6%</td>
<td>-0.2%</td>
<td>3.1%</td>
<td>11.1%</td>
<td>16.9%</td>
<td>10.8%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Food &amp; Beverages</td>
<td>0.0%</td>
<td>-0.1%</td>
<td>2.2%</td>
<td>2.3%</td>
<td>2.4%</td>
<td>3.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80113/@E80113.HTM">Chained CPI: Total (NSA)</a> </td>
<td>0.1%</td>
<td>-0.2%</td>
<td>2.4%</td>
<td>2.9%</td>
<td>2.9%</td>
<td>2.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>-0.2%</td>
<td>-0.2%</td>
<td>2.3%</td>
<td>2.3%</td>
<td>1.9%</td>
<td>1.7%</td>
</tr>
</tbody>
</table>
Initial Unemployment Insurance Claims Fall Again; Low Since Feb 2006 
by <a href="/comment/Stone.html">Carol Stone</a> January 18, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070111a.jpg" width="353">
Initial unemployment insurance claims continued to fall last week, decreasing 8,000 to 290,000, now the lowest level since last February. Consensus expectations had been for 310,000, which would have meant some reversal of the previous week&#39;s decline.
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 payroll employment.
The four-week moving average of initial claims also fell, reaching to 308,000 (+3.7% y/y). <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070111b.jpg" width="353">
In contrast, continuing claims for unemployment insurance rebounded in the January 6 week, with a rise of 120,000 to 2,530,000, almost exactly reversing the prior two weeks&#39; combined 112,000 drop.
The insured rate of unemployment returned to 1.9% after a dip to a downward revised 1.8% in the December 30 week. At the very beginning of 2006, the rate was 2.0%, but since February it has hovered at 1.9%, with the occasional 1.8%.

<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/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">01/13/07</th>
<th scope="col">01/06/07</th>
<th scope="col">12/30/07</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Initial Claims</td>
<td>290</td>
<td>298</td>
<td>325</td>
<td>3.2%</td>
<td>313</td>
<td>332</td>
<td>343</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,530</td>
<td>2,410</td>
<td>-0.8%</td>
<td>2,459</td>
<td>2,662</td>
<td>2,924</td>
</tr>
</tbody>
</table>
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December housing starts appeared to gain some forward momentum, with a 4.5% advance. The resulting 1.642M was considerably better than Consensus expectations for renewed decline to 1.563M starts. For all of 2006 starts of 1.819M was [...]

Total Housing Starts Rise, But Single-Family Units Fall Anew

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070117f.jpg" width="353">
The US Treasury&#39;s monthly compilation of capital flows shows sizable foreign investment in US securities in November, amounting to $107.4 billion, purchases net of sales. This is modestly more than October&#39;s $104.2 billion and $107.0 billion in November 2005.
Press reports highlight another net figure, foreign investment in US securities less US residents&#39; purchases of foreign securities. These were $39.1 billion in November, putting &quot;net long term securities transactions&quot; at $68.4 billion, down noticeably from October&#39;s $85.3 billion. Since, as we see, foreign purchases were nearly the same, the big difference in the month was the sharp increase in US investor purchases of foreign instruments, which had been $18.9 billion in October, less than half of the November amount. Even more interesting, the major part of that increase came in equities. US investors bought a significant $21.2 billion, $3.8 billion more than last November, which was the previous record amount. Net purchases of foreign bonds were $17.8 billion, which, while less than the equity purchases, was still the third largest month for that market segment.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070117g.jpg" width="353">
The foreign investments themselves took new paths. Usually months when Treasury refunding operations occur, as in November, contain outsized amounts of foreign purchases of that debt. This was moderately large, at $27 billion, but well down from the year-ago $51.8 billion.
The big difference this month was in corporate bonds. Foreign investors accumulated $63.9 billion in November. The previous record was $58.7 billion in September. The only other month above $50 billion is June 2005, at $50.5 billion. Investors in the UK seem to be the biggest net buyers, although the &quot;clearinghouse&quot; nature of the London markets means that the ultimate purchasers could be anywhere, not just in Britain.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070117e.jpg" width="353">
Speaking of countries, the ones show the biggest numbers this month are not who you think. While China has made sizable purchases all year long, they added only $3.1 billion in November, the smallest amount in 19 months. Japan has also not made outsized purchases lately, and some oil exporters [not much data on this sector is available] have actually been net sellers. The biggest gains recently have come from France and offshore Caribbean centers. UK investors have bought considerable volumes this year, but their purchases of US securities were much larger a year ago.
These variations and where they come from are another cautionary signal to us not to put much store in the notion that capital flows only serve to cover the trade deficit. If that were the case, the investments would match the trade partners and they would not likely be in equities or long-term bonds, but in trade financing vehicles, like loans. Global investors look for rate of return opportunities and those may be related to trade flows positively, negatively or not consistently at all. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Net Foreign Purchases from US Residents, Bil $</th>
<th scope="col">Nov 2006</th>
<th scope="col">Oct 2006</th>
<th scope="col">Nov 2005</th>
Monthly Averages
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Last 12 Months</td>
<td>2005</td>
<td>2004</td>
<td>2003</td>
</tr>
<tr>
<td class="firstcol">1. Domestic Securities</td>
<td>107.4</td>
<td>104.2</td>
<td>107.0</td>
<td>92.4</td>
<td>84.3</td>
<td>76.4</td>
<td>60.0</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Treasuries</td>
<td>27.1</td>
<td>26.3</td>
<td>51.8</td>
<td>15.5</td>
<td>28.2</td>
<td>29.3</td>
<td>22.0</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Agencies</td>
<td>14.7</td>
<td>15.2</td>
<td>11.1</td>
<td>22.2</td>
<td>18.3</td>
<td>18.9</td>
<td>13.0</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Corporate Bonds</td>
<td>63.9</td>
<td>39.5</td>
<td>38.3</td>
<td>40.8</td>
<td>31.0</td>
<td>25.8</td>
<td>22.1</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Equities</td>
<td>1.8</td>
<td>23.2</td>
<td>5.7</td>
<td>12.3</td>
<td>6.8</td>
<td>2.4</td>
<td>2.9</td>
</tr>
<tr class="odd">
<td class="firstcol">2. Foreign Securities&nbsp;</td>
<td>-39.1</td>
<td>-18.9</td>
<td>-17.7</td>
<td>-19.3</td>
<td>-14.4</td>
<td>-12.7</td>
<td>-4.7</td>
</tr>
<tr>
<td class="firstcol">3. &quot;Other Acquisition&quot;*</td>
<td>-10.4</td>
<td>-10.4</td>
<td>-11.1</td>
<td>-11.8</td>
<td>-11.7</td>
<td>-3.2</td>
<td>-11.6</td>
</tr>
<tr class="odd">
<td class="firstcol">4. Net Foreign Acquisition (1+2+3)</td>
<td>58.0</td>
<td>74.9</td>
<td>78.1</td>
<td>59.7</td>
<td>58.3</td>
<td>60.4</td>
<td>43.7</td>
</tr>
<tr>
<td class="firstcol">5. Short-Term Liabilities</td>
<td>15.6</td>
<td>0.5</td>
<td>2.5</td>
<td>9.4</td>
<td>-4.0</td>
<td>15.8</td>
<td>1.3</td>
</tr>
<tr class="odd">
<td class="firstcol">6. Total TIC Flows**&nbsp; </td>
<td>74.9</td>
<td>60.4</td>
<td>88.5</td>
<td>70.3</td>
<td>55.7</td>
<td>81.6</td>
<td>59.8</td>
</tr>
</tbody>
</table>
</body>
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The US Treasury's monthly compilation of capital flows shows sizable foreign investment in US securities in November, amounting to $107.4 billion, purchases net of sales. This is modestly more than October's $104.2 billion and $107.0 [...]

Treasury TIC Data Show Sizable Foreign Investment in November, but Also Record US Investment Abroad

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070117c.jpg" width="353">
Total U.S. industrial production rose 0.4% last month but revisions generally had the effect of lowering the gains in output during the prior two months. Consensus expectations had been for a 0.1% December rise.
Factory sector output rose 0.7% but a November&#39;s 0.3% increase was revised to zero. Even so, the strong December brought manufacturing back to within a hairbreadth of its August high.
With a 1.5% (0.1% y/y) increase, production of durable consumer goods added to a slightly revised 1.6% gain in November, recovering further from its October plunge, which was revised lower still to a 2.3% fall. Both automotive products and home electronics had December increases of around 2%.
Nondurable consumer goods output slipped 0.2% (0.8% y/y) a second consecutive monthly decline. November was revised from a 0.1% decrease to -0.4%. Food and energy goods both fell, the former by 0.3% and the latter, 0.8%. Clothing had a nice rebound of 1.4% to partially offset.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070117d.jpg" width="353">
Business equipment production jumped 1.6% but both November and October were reduced, November to 0.9% from 1.2% reported before and October, registered a month ago at +0.2%, was trimmed to 0.1%. Output of all major types of equipment -- transit, information processing and industrial -- showed sizable December gains, but the downward revisions, which were the second in a row, leave us a bit cautious about characterizing the overall trend as a vigorous one.
Total industry capacity utilization increased to 81.8% in December from 81.6% in November. This latter period was, however, revised from an initial 81.8% reported last month. Factory sector utilization increased to 80.2% from downwardly revised 79.8% in November and 79.9% in October, both somewhat lower than reported a month ago. Factory sector capacity again rose 0.2%; November&#39;s 2.8% y/y gain represents a slight upward revision, but December&#39;s yearly increase in capacity eased to 2.7%.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/output.htm">Production &amp; Capacity</a></th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Industrial Production</td>
<td>0.4%</td>
<td>-0.1%</td>
<td>3.0%</td>
<td>4.1%</td>
<td>3.2%</td>
<td>2.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Manufacturing (NAICS)</td>
<td>0.7%</td>
<td>0.0%</td>
<td>3.5%</td>
<td>5.0%</td>
<td>4.0%</td>
<td>3.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Consumer Goods</td>
<td>0.2%</td>
<td>0.1%</td>
<td>0.6%</td>
<td>1.3%</td>
<td>2.8%</td>
<td>1.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Business Equipment</td>
<td>1.6%</td>
<td>0.9%</td>
<td>10.4%</td>
<td>11.7%</td>
<td>7.9%</td>
<td>4.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Capacity Utilization</td>
<td>81.8%</td>
<td>81.6%</td>
<td>81.3% (12/05)</td>
<td>81.8</td>
<td>80.2%</td>
<td>78.1%</td>
</tr>
</tbody>
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</html>

Total U.S. industrial production rose 0.4% last month but revisions generally had the effect of lowering the gains in output during the prior two months. Consensus expectations had been for a 0.1% December rise. Factory sector output [...]

December Industrial Output Gained, But Vigor Questionable with Downward Revisions

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070117a.jpg" width="353">
The producer price index for finished goods gained another 0.9% last month after the 2.0% surge during November. Led by a 2.5% rise in energy prices and a 1.7% increase in food prices, the gain nearly doubled Consensus expectations for a 0.5% rise.
The 0.2% core PPI rise calmed down after November&#39;s surprise 1.3% surge though that was double Consensus expectations for a 0.1% uptick.
The strength in finished energy goods prices was led by a 7.1% (1.8% y/y) surge in gasoline prices and a 4.0% (6.5% y/y) increase in fuel oil prices. Natural gas prices also increased 0.7% (-11.4% y/y). <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070117b.jpg" width="353">
Finished consumer goods prices less food &amp; energy rose 0.2% (2.0% y/y) after the 1.3% November surge. Passenger car prices fell 0.2% (-0.5% y/y) but furniture prices rose 0.1% (2.1% y/y).
Capital equipment prices increased 0.2% (2.3% y/y) as light truck prices rose 0.7% (2.2% y/y) after the 13.7% November spike. 
Intermediate goods prices increased another 0.5% but prices less food &amp; energy fell again with a 0.1% downtick which reflected another decline (-0.4%, +11.6% y/y) in steel mill product prices. 
The crude materials PPI surged again by 2.9% led by a strength in crude petroleum prices which has since reversed. The core crude materials PPI also was firm led by a 12.4% rebound in iron &amp; steel scrap prices (2.8% y/y).

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E802/@E80201/@E80201.HTM">Producer Price Index</a></th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Finished Goods</td>
<td>0.9%&nbsp;</td>
<td>2.0%</td>
<td>&nbsp; 1.2%&nbsp;</td>
<td>2.9%</td>
<td>&nbsp;4.9%&nbsp;</td>
<td>3.6%&nbsp;</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.2%</td>
<td>1.3%</td>
<td>&nbsp;2.0%</td>
<td>1.4%</td>
<td>2.4%</td>
<td>1.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Intermediate Goods</td>
<td>0.5%</td>
<td>0.7%</td>
<td>2.8%</td>
<td>6.5%</td>
<td>&nbsp;8.0%</td>
<td>6.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>-0.1%</td>
<td>-0.3%</td>
<td>4.7%</td>
<td>6.1%</td>
<td>&nbsp;5.5%</td>
<td>5.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Crude Goods</td>
<td>&nbsp;2.9%&nbsp;</td>
<td>15.7%</td>
<td>&nbsp;-2.4%</td>
<td>1.8%</td>
<td>14.6%</td>
<td>&nbsp;17.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>1.0%</td>
<td>0.5%</td>
<td>&nbsp;16.8%</td>
<td>20.9%</td>
<td>4.8%</td>
<td>&nbsp;26.5%</td>
</tr>
</tbody>
</table>
</body>
</html>

The producer price index for finished goods gained another 0.9% last month after the 2.0% surge during November. Led by a 2.5% rise in energy prices and a 1.7% increase in food prices, the gain nearly doubled Consensus expectations [...]

PPI Still Quite Firm in December

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

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

The UK inflation rate, based on the Harmonized Consumer Price Index (HCPI) rose to 3.0% in December from 2.7% in November. The rise was no surprise since the principal reason given for the Bank of England's increase in the base rate [...]

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

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070116a.jpg" width="353">
The January index of manufacturing activity in New York State softened considerably. The Index of General Business Conditions fell 13.06 points, the second down month, to 9.13. That was the lowest level since June 2003. Consensus expectations for the Empire State index had been for a more moderate decline to 19.5. The figures are reported by the Federal Reserve Bank of New York.
Since the series&#39; inception in 2001 there has been a 75% correlation between the index level and the three month change in U.S. factory sector industrial production.
The indexes for new orders halved to 10.26, the lowest level since 2003, while the indexes for employment and shipments also fell considerably. The indexes for inventories and delivery times also fell sharply.
Like the Philadelphia Fed Index of General Business Conditions, the Empire State Business Conditions Index reflects answers to an independent survey question; it is not a weighted combination of the components.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070116b.jpg" width="353">
Pricing pressure improved moderately to the highest level since last September. The 7.02 rise in the prices paid index recovered all of the prior month&#39;s decline. Since 2001 there has been an 88% correlation between the index of prices paid and the three month change in the core intermediate materials PPI.
The Empire State index of expected business conditions in six months also fell sharply to the lowest level since last May. The index of expected new orders collapsed to the lowest since March 2006.
The Empire State Manufacturing Survey is a monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York. Participants from across the state in a variety of industries respond to a questionnaire and report the change in a variety of indicators from the previous month. Respondents also state the likely direction of these same indicators six months ahead. April 2002 is the first report, although survey data date back to July 2001.
For more on the Empire State Manufacturing Survey, including methodologies and the latest report, click <a href="http://www.newyorkfed.org/research/regional_economy/mfg_survey/1_2007.pdf">here</a>.

<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S511/@S511.HTM">Empire State Manufacturing Survey</a> </th>
<th scope="col">January</th>
<th scope="col">December</th>
<th scope="col">Jan. &#39;06 </th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Business Conditions (diffusion index)</td>
<td>9.13</td>
<td>22.19</td>
<td>20.28</td>
<td>20.33</td>
<td>15.62</td>
<td>28.70</td>
</tr>
</tbody>
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</body>
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The January index of manufacturing activity in New York State softened considerably. The Index of General Business Conditions fell 13.06 points, the second down month, to 9.13. That was the lowest level since June 2003. Consensus [...]

Empire State Index Dropped Sharply

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070116a.jpg" width="353">
The January index of manufacturing activity in New York State softened considerably. The Index of General Business Conditions fell 13.06 points, the second down month, to 9.13. That was the lowest level since June 2003. Consensus expectations for the Empire State index had been for a more moderate decline to 19.5. The figures are reported by the Federal Reserve Bank of New York.
Since the series&#39; inception in 2001 there has been a 75% correlation between the index level and the three month change in U.S. factory sector industrial production.
The indexes for new orders halved to 10.26, the lowest level since 2003, while the indexes for employment and shipments also fell considerably. The indexes for inventories and delivery times also fell sharply.
Like the Philadelphia Fed Index of General Business Conditions, the Empire State Business Conditions Index reflects answers to an independent survey question; it is not a weighted combination of the components.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070116b.jpg" width="353">
Pricing pressure improved moderately to the highest level since last September. The 7.02 rise in the prices paid index recovered all of the prior month&#39;s decline. Since 2001 there has been an 88% correlation between the index of prices paid and the three month change in the core intermediate materials PPI.
The Empire State index of expected business conditions in six months also fell sharply to the lowest level since last May. The index of expected new orders collapsed to the lowest since March 2006.
The Empire State Manufacturing Survey is a monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York. Participants from across the state in a variety of industries respond to a questionnaire and report the change in a variety of indicators from the previous month. Respondents also state the likely direction of these same indicators six months ahead. April 2002 is the first report, although survey data date back to July 2001.
For more on the Empire State Manufacturing Survey, including methodologies and the latest report, click <a href="http://www.newyorkfed.org/research/regional_economy/mfg_survey/1_2007.pdf">here</a>.

<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S511/@S511.HTM">Empire State Manufacturing Survey</a> </th>
<th scope="col">January</th>
<th scope="col">December</th>
<th scope="col">Jan. &#39;06 </th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Business Conditions (diffusion index)</td>
<td>9.13</td>
<td>22.19</td>
<td>20.28</td>
<td>20.33</td>
<td>15.62</td>
<td>28.70</td>
</tr>
</tbody>
</table>
UK December Inflation--3%:  The Cause of the BOE Rise in the Base Rate to 5.25% 
by <a href="/comment/Curley.html">Louise Curley</a> January 16, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070116c.jpg" width="353">
The UK inflation rate, based on the Harmonized Consumer Price Index (HCPI) rose to 3.0% in December from 2.7% in November. The rise was no surprise since the principal reason given for the Bank of England&#39;s increase in the base rate by 25 percentage points to 5.25% on January 11 was that the Bank had seen the December figure before its release to the public. The uncertainty since then lay in whether the December rise would be more than 1 percentage point above the inflation target of 2%. If that were the case, the Governor of the Bank of England would have had to write an open letter to the Chancellor of the Exchequer explaining why the inflation rate had risen by more than one percentage point above the 2% inflation target. Since the inflation rate was just short of the one percentage point, no letter will be required. Nevertheless, the increase in the inflation rate is a big one.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070116d.jpg" width="353">
The HCPI was adopted on December 10, 2003 to insure comparability with other members of the European Union. In the UK it is known as the CPI. Prior to that time, the measure of inflation in the UK was based on the Retail Price Index (RPI) or the Retail Price Index excluding mortgage interest payments (RPIX). Inflation measures based on the CPI and on the RPI are shown in the first chart. Since the middle of 2002, inflation based on the RPI has been greater than that based on the CPI except for early 2005 when they were almost equal. The office of National Statistics publishes data explaining the difference between the CPI and the RPI. In December, of the -1.46 difference between the CPI and the PRI, -0.91 was due to the exclusion of mortgage interest payment and other housing components from the CPI, +.23 due to other differences of coverage, -0.56 due to differences in the formulas used to calculate the totals and -0.22 due to other differences including weights.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070116e.jpg" width="353">
Among the factors contributing to the December rise in the CPI were the 11.38% increase in the prices of the Housing, Water, Electricity, Gas and Other Fuels component of the index and the 4.67% increase in the price of Food and Nonalcoholic Beverages component. The inflation in both of these rose sharply in the latter part of 2006, as can be seen in the second chart. Declines in the prices of Clothing and Footwear and Recreation and Culture components, shown in the third chart, helped to mitigate the overall rise in the index. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">INFLATION IN THE UNITED KINGDOM (%)</th>
<th scope="col">Dec&nbsp; 06</th>
<th scope="col">Nov 06</th>
<th scope="col">Oct 06</th>
<th scope="col">Sep 06</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">HCPI&nbsp;&nbsp;</td>
<td>2.97</td>
<td>2.68</td>
<td>2.48</td>
<td>2.39</td>
<td>2.33</td>
<td>2.05</td>
<td>1.34</td>
<td>1.36</td>
</tr>
<tr>
<td class="firstcol">RPI</td>
<td>4.43</td>
<td>3.87</td>
<td>3.67</td>
<td>3.63</td>
<td>3.19</td>
<td>2.83</td>
<td>2.96</td>
<td>2.91</td>
</tr>
<tr class="odd">
<td class="firstcol">RPIX</td>
<td>3.79</td>
<td>3.43</td>
<td>3.17</td>
<td>3.17</td>
<td>2.93</td>
<td>2.27</td>
<td>2.21</td>
<td>2.81</td>
</tr>
<tr>
<td class="firstcol"> Housing, water, elec, gas, etc </td>
<td>11.38</td>
<td>11.14</td>
<td>10.82</td>
<td>10.72</td>
<td>8.25</td>
<td>6.31</td>
<td>3.65</td>
<td>1.95</td>
</tr>
<tr class="odd">
<td class="firstcol">Food, non alcoholic beverages</td>
<td>4.67</td>
<td>5.00</td>
<td>4.72</td>
<td>3.81</td>
<td>2.50</td>
<td>1.51</td>
<td>0.66</td>
<td>1.18</td>
</tr>
<tr>
<td class="firstcol">Recreation and Culture</td>
<td>-0.30</td>
<td>-0.80</td>
<td>-1.10</td>
<td>-1.00</td>
<td>-1.20</td>
<td>-1.16</td>
<td>-1.56</td>
<td>-0.60</td>
</tr>
<tr class="odd">
<td class="firstcol">Clothing and footwear</td>
<td>-4.10</td>
<td>-3.28</td>
<td>-3.30</td>
<td>-3.50</td>
<td>-4.04</td>
<td>-2.0</td>
<td>-4.76</td>
<td>-3.82</td>
</tr>
</tbody>
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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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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.

260427T1.jpg

**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.

260427T2.jpg

**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.

260427T3.jpg

**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.

260427T4.jpg

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.

260427T5.jpg

**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.

260427T6.jpg

Asia

Economic Letter from Asia: Not Just About the Strait

Robert Brusca

260427E.jpg

**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.

260427.jpg

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.

United Kingdom

U.K. Retail Sales: Worse Than During Covid

260424E.jpg

The onset of the war in Iran appears to have hit the German economy extremely hard as the Ifo survey shows very substantial and broad-based decline across its survey in April. The Ifo survey features readings for five sectors as well as an aggregate reading, and it surveys them for climate, current conditions, and expectations. The decline in the Ifo survey is present for all three concepts and across all five sectors, marking the weakening in April as a highly significant and extremely disturbing development. Only manufacturing in the current conditions survey escapes a month-to-month decline.

**The Ifo sequences**: The **climate** reading fell both overall and across each of the five sectors. **Current conditions** declined for the overall and for four of the five sectors, with manufacturing the sole exception. **Expectations** declined for the overall and for all sectors. Several of the sector declines were for a very substantial magnitude, especially when compared to historic changes in these indexes.

**Monthly changes in readings—severe broad deterioration**
The month-to-month change in the climate reading has weakened more month-to-month 19% of the time. That overall result, however, is boosted by manufacturing where the monthly change has been weaker 35% of the time (on data back to 2011). However, all other sectors have seen climate weaker m/m only 2.3% to 6.3% of the time! The current situation readings weakened, with the headline weakening more m/m 11% of the time. This was boosted by manufacturing, the only sector that improved on the month; its ranking on change was in its 85th percentile—quite good and truly stand-alone good news. The other current changes by sector ranged from construction being weaker 1.7% of the time, to retailing that has been weaker about 30% of the time in terms of m/m changes. Expectation changes were uniformly terrible, with the headline drop weaker only 6.3% of the time and sector change month-to-month weaker between 9% and 1.7% of the time. The monthly weakening was uniform and substantial. I document it with these calculations, but you can also see it on the chart above.

**Climate**: The bottom line is that the all-sector index for climate fell to -20.3 in April from -18 in March, placing it at a 10.5 percentile standing on data since 1993. The sector ranking is the highest for construction with a 42.2 percentile standing and the weakness for services at a 1.1 percentile standing—weaker than the table reading nearly 99% of the time. In terms of percentile standing levels or monthly changes, conditions are closing in on grim.

**Current conditions**: Current conditions saw the all-sector index slip to -5.3 in April from -2.4 in March. The headline ranking stands at a 9.8 percentile mark, making it—like the climate reading—weaker than its current reading only about 10% of the time. The strongest reading under current conditions is for construction which has a 60.6 percentile standing; it is the only ranking in the table above its historic median. Manufacturing, the only sector in the survey that improved month-to-month, has a 22.5 percentile standing, while services record the weakest percentile standing under current conditions, at an 8.4 percentile standing.

**Expectations:** The all-sector index for expectations fell to -25.3 in April from -19.9 in March, placing it at a 6.3 percentile standing. The percentile standings across sectors range from a high of 9.5% for manufacturing to a low of 1.5% for retailing. Up until earlier this year, the Ifo was showing signs of improvement; however, all of that has simply collapsed in the last month. Weakness is across economic concepts and sectors, as documented above. For reference, the table also gives a separate set of rankings on where the various indexes stand since the invasion of Ukraine, since that was another marked event that drove the index, that had been improving after Covid, down to lower levels.  Ranked even on this reduced scale looking at conditions only since the invasion of Ukraine, when conditions have generally been weaker, the current rankings across the Ifo survey remained extremely weak. This is a very disturbing survey for the German economy.

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Germany

German Ifo Plunges Everywhere

Andrew Cates

**Energy shock lifts inflation, trims growth**
The IMF’s latest WEO revisions for 2026 broadly reflect the classic stagflationary impact of the recent Middle East energy shock, with growth downgraded and inflation revised higher across most major economies. Higher energy prices act as a tax on real incomes while simultaneously pushing up costs. That said, the picture is not uniform: a number of economies—notably the US, China and India—have seen growth upgrades, reflecting stronger-than-expected momentum so far in 2026. By contrast, the UK stands out at the stagflationary extreme, combining one of the largest growth downgrades with a relatively strong inflation uplift—consistent with its weaker underlying momentum, greater energy sensitivity and more persistent domestic inflation dynamics. More broadly, while the global revisions remain modest—pointing to resilience in activity—the message is that disinflation is no longer a smooth glide back to target but increasingly contingent on energy prices and geopolitical developments.

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**Markets largely shrug off rising economic pessimism**
Notwithstanding a more downbeat assessment from economists—including the IMF’s stagflationary tilt to the outlook—there has been remarkably little follow-through into financial markets. Measures of systemic stress in both the US and UK remain low by historical standards, suggesting that investors are, for now, largely looking through the Middle East conflict. There are several possible explanations: corporate profits remain resilient, the AI-driven investment narrative continues to dominate market thinking, and markets may be assuming that any energy shock will be temporary and contained. In effect, investors appear to be pricing a benign baseline in which geopolitical risks do not materially disrupt growth, inflation expectations or policy. The UK is a partial exception, with a somewhat more visible uptick in stress, which aligns more closely with the IMF’s more challenging growth-inflation trade-off and the economy’s greater sensitivity to energy prices.

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**Volatility falls despite deteriorating growth surprises**
Market optimism is also increasingly at odds with the incoming data flow. Typically, equity volatility declines when growth surprises are positive and inflation surprises are benign. However, the recent pattern has broken that relationship. Growth surprises across the G10 have turned increasingly negative (our series is inverted in the chart below), yet volatility has continued to fall. In other words, markets are becoming less sensitive to weakening macro data, continuing to price a benign outlook even as the data deteriorate. This divergence reinforces the broader theme: investors are, for now, looking through both geopolitical risks and softer economic momentum, placing greater weight on resilience in earnings, the AI-driven narrative and the assumption that policy will remain supportive.

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**Inflation Nowcasts Have Jumped**
Incoming data suggest that headline inflation has moved higher in recent weeks, broadly in line with expectations given the rise in energy prices following the Middle East shock. Nowcasts for CPI across the major economies show a clear rebound in March and April from the lows seen at the start of 2026, with the move occurring in a relatively synchronised fashion. This reinforces the view that the recent pickup in inflation is being driven primarily by a common external factor—energy.

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**Energy shock not yet feeding into underlying inflation**
However, the detailed breakdown of March inflation outcomes suggests that this remains, for now, a largely headline-driven phenomenon. While headline CPI prints were firm across most economies, core inflation—stripping out energy and food—was more subdued and in some cases weaker. This indicates that there has been very limited pass-through from higher energy prices into broader goods and services inflation at this early stage. In other words, the shock is still being absorbed rather than propagated. That distinction is critical for policy and markets alike: as long as second-round effects remain contained, central banks may be able to look through the near-term rise in inflation, even as headline rates move higher.

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**Inflation Expectations Rising as Growth Sentiment Falters**
It remains early days, and much will hinge on how inflation expectations evolve from here. The latest ZEW survey for Germany already conveys the hallmarks of a classic stagflationary shock, with macroeconomic expectations weakening even as inflation expectations have ratcheted sharply higher. This shift is important: while the recent rise in headline inflation has so far shown limited pass-through into core, a sustained increase in expectations would raise the risk of second-round effects and make the inflation process more persistent. In that sense, the ZEW data highlight the key fault line in the current environment—whether the energy-driven shock remains contained, or begins to embed itself more broadly through expectations and pricing behaviour.

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Financial markets have remained notably calm in recent weeks despite rising geopolitical tensions in the Middle East, a more downbeat macroeconomic narrative and elevated uncertainty. Measures of financial stress and volatility remain low, and equity markets continue to look through both the conflict and softer data. That resilience sits alongside a more nuanced macro backdrop. The IMF’s latest WEO revisions point to a classic stagflationary energy shock—growth downgraded and inflation revised higher—although the global impact remains modest and uneven, with some economies still benefiting from stronger momentum (chart 1). At the same time, market pricing appears increasingly detached from the data flow, with volatility declining even as growth surprises have turned more negative relative to inflation (charts 2 and 3). Incoming inflation data reinforce the idea of a largely headline-driven shock, with nowcasts rising in line with higher energy prices but only limited pass-through into core inflation so far (charts 4 and 5). However, it remains early days. Survey evidence, such as the latest ZEW release, suggests that inflation expectations may already be responding in a more concerning way, with a marked rise alongside weakening growth sentiment (chart 6). Taken together, the key question for markets is whether this remains a contained, energy-driven shock that can be looked through—or whether it begins to embed more persistently via expectations, forcing a reassessment of the currently benign outlook.

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Charts of the Week: Risks Build, Markets Shrug

Sandy Batten

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The National Activity Index published by the Federal Reserve Bank of Chicago (CFNAI) slipped to -0.20 in March from an upwardly revised +0.03 in February (previously (-0.11). This is the lowest monthly reading since last November. Smoothing out the monthly volatility, the index's three-month moving average (CFNAI-MA3) declined to -0.03 in March from an upwardly revised +0.03 in February (previously -0.01).

This index is expressed in standard deviation units from zero (with a value of zero defined as trend real GDP growth). Research at the FRB Chicago indicates that readings on the 3-month average of -0.70 or below are consistent with the economy being in a recession. Therefore, even though the March reading on the 3-month average was negative, it indicates that the US economy is still growing, just slightly slower than trend, and is well away from recessionary conditions. The 3-month average would be much deeper in negative territory if the economy was at risk of contracting.

The National Activity Index is a composite of 85 economic indicators, grouped into four major categories: production and income; employment, unemployment, and hours worked; personal consumption and housing; sales, orders, and inventories. Three of the four broad categories of indicators used to construct the index decreased from February, and three categories made negative contributions in March. Production-related indicators contributed –0.20 to the CFNAI in March, down from +0.13 in February. The sales, orders, and inventories category's contribution to the CFNAI was –0.01 in March, down from +0.05 in February. Employment-related indicators contributed +0.02 to the CFNAI in March, up from –0.15 in February. The personal consumption and housing category's contribution to the CFNAI was –0.01 in March, down from a neutral value in February.

The CFNAI Diffusion Index, which measures the breadth of the change in the component series and is also a three-month moving average, increased to –0.04 in March from –0.08 in February. This is the highest reading since February 2025. A reading of zero indicates that all of the indicators are growing at their long-term average. If all of the underlying indicators in a given month are below their long-run averages, the diffusion index will equal -1. If all of the indicators are above their long-run averages, it will equal +1. Thirty-four of the 85 individual indicators made positive contributions to the CFNAI in March, while 51 made negative contributions. Forty-three indicators improved from February to March, while 40 indicators deteriorated and two were unchanged. Of the indicators that improved, 16 made negative contributions.

These figures are available in Haver's **SURVEYS** database.

- The monthly reading fell to -0.20 in March from an upwardly revised +0.03 in February.
- The three-month average slipped from +0.03 to -0.03.
- Despite the slip in March, the index points to near-trend economic growth and is well above recession territory.

Economy in Brief

Jump to:

Total Housing Starts Rise, But Single-Family Units Fall Anew

Treasury TIC Data Show Sizable Foreign Investment in November, but Also Record US Investment Abroad

December Industrial Output Gained, But Vigor Questionable with Downward Revisions

PPI Still Quite Firm in December

PPI Still Quite Firm in December

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

Empire State Index Dropped Sharply

Empire State Index Dropped Sharply