Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060511d.jpg" width="353">
The 0.7% rise in total business inventories during March handily outpaced Consensus expectations for a 0.5% increase. It followed an upwardly revised 0.1% up tick during February and was the strongest rose so far this year.
Retail inventories gained 1.0% after a slight slip during February. Motor vehicle inventories rose 1.7% (1.8% y/y) while less autos, retail inventories rose 0.7%. Strength was led by a 1.9% (7.9% y/y) jump in building materials. Furniture inventories also rose a firm 0.6% (7.2% y/y) and apparel inventories jumped 1.3% (4.1% y/y). Inventories at general merchandise stores slipped for the third straight month (+0.6% y/y). <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060511c.jpg" width="353">
Wholesale inventories rose 0.2% though petroleum inventories fell 2.0%. Durables rose 0.6% (6.6% y/y). During the last ten years there has been a 67% correlation between the y/y change in wholesale inventories and the change in imports of nonpetroleum goods.
Factory sector inventories jumped 0.7% after a 0.4% decline during February.
The inventory to sales ratio for total business was an unrevised 1.26 during February.

<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/@ED/@ED06/@ED0601/@ED0601.HTM">Business Inventories</a></th>
<th scope="col">Mar</th>
<th scope="col">Feb</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 class="odd">
<td class="firstcol">Total</td>
<td>0.7%</td>
<td>0.1%</td>
<td>4.2%</td>
<td>4.5%</td>
<td>7.9%</td>
<td>1.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Retail</td>
<td>1.0%</td>
<td>-0.0%</td>
<td>3.4%</td>
<td>2.7%</td>
<td>6.7%</td>
<td>3.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Retail excl. Autos</td>
<td>0.7%</td>
<td>0.1%</td>
<td>4.2%</td>
<td>4.5%</td>
<td>7.1%</td>
<td>1.9%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wholesale</td>
<td>0.2%</td>
<td>0.9%</td>
<td>6.3%</td>
<td>7.1%</td>
<td>9.8%</td>
<td>1.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Manufacturing</td>
<td>0.7%</td>
<td>-0.4%</td>
<td>3.4%</td>
<td>4.4%</td>
<td>7.7%</td>
<td>-1.1%</td>
</tr>
</tbody>
</table>
</body>
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The 0.7% rise in total business inventories during March handily outpaced Consensus expectations for a 0.5% increase. It followed an upwardly revised 0.1% up tick during February and was the strongest rose so far this year. Retail [...]

U.S. Business Inventories Gain

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060511a.jpg" width="353">
The 0.5% rise in US retail sales during April was a bit short of Consensus expectations for a 0.7% gain. It followed an unrevised 0.6% rise the prior month. Despite the disappointment, retail sales during the first four months of this year rose at a 10.2% annual rate.
Also disappointing was the 0.7% increase in nonauto sales which followed an unrevised 0.4% March rise. Consensus expectations had been for a 0.9% increase. However, that disappointment must be labeled slight given that year to date nonauto sales surged 11.8% (AR) versus an 8.2% rise during all of last year.
Sales at gasoline stations jumped 4.6% (17.4% y/y) as retail gasoline prices rose 13.1% m/m to an April average of $2.74 per gallon.
During April, nonauto retail sales less gasoline rose just 0.2% (7.4% y/y) following an upwardly revised 0.6% March increase. Year to date nonauto retail sales less gasoline rose at a 10.0% annual rate versus a 6.7% increase during 2005.
Sales by motor vehicle &amp; parts dealers fell 0.4% (-0.3% y/y) and reflected a 0.9% m/m increase unit auto sales to 16.74M.
Sales of discretionary items rose moderately led by a 0.8% increase in general merchandise store sales (5.7% y/y). Apparel store sales rose 0.3% (4.5% y/y) but the prior month&#39;s modest decline was revised to a 0.4% gain. Sales of furniture, electronics &amp; appliances rose 0.2% (6.9% y/y) and matched an upwardly revised March up tick.
Building material sales retraced all of an upwardly revised 1.6% (+13.0% y/y) March increase while sales of nonstore retailers (internet &amp; catalogue) rose 0.5% (13.3% y/y) following jumps of 2.1% and 3.3% during the prior two months.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">&nbsp;</th>
<th scope="col">April</th>
<th scope="col">Mar</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"><a href="http://www.haverselect.com/dlx/usecon/@ED/@ED04/@ED0401/@ED0401.HTM">Retail Sales &amp; Food Services</a></td>
<td>0.5%</td>
<td>0.6%</td>
<td>6.6%</td>
<td>7.2%</td>
<td>6.2%</td>
<td>4.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Excluding Autos</td>
<td>0.7%</td>
<td>0.5%</td>
<td>8.6%</td>
<td>8.2%</td>
<td>7.2%</td>
<td>4.7%</td>
</tr>
</tbody>
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The 0.5% rise in US retail sales during April was a bit short of Consensus expectations for a 0.7% gain. It followed an unrevised 0.6% rise the prior month. Despite the disappointment, retail sales during the first four months of this [...]

U.S. Retail Sales Gain Light

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060511a.jpg" width="353">
The 0.5% rise in US retail sales during April was a bit short of Consensus expectations for a 0.7% gain. It followed an unrevised 0.6% rise the prior month. Despite the disappointment, retail sales during the first four months of this year rose at a 10.2% annual rate.
Also disappointing was the 0.7% increase in nonauto sales which followed an unrevised 0.4% March rise. Consensus expectations had been for a 0.9% increase. However, that disappointment must be labeled slight given that year to date nonauto sales surged 11.8% (AR) versus an 8.2% rise during all of last year.
Sales at gasoline stations jumped 4.6% (17.4% y/y) as retail gasoline prices rose 13.1% m/m to an April average of $2.74 per gallon.
During April, nonauto retail sales less gasoline rose just 0.2% (7.4% y/y) following an upwardly revised 0.6% March increase. Year to date nonauto retail sales less gasoline rose at a 10.0% annual rate versus a 6.7% increase during 2005.
Sales by motor vehicle &amp; parts dealers fell 0.4% (-0.3% y/y) and reflected a 0.9% m/m increase unit auto sales to 16.74M.
Sales of discretionary items rose moderately led by a 0.8% increase in general merchandise store sales (5.7% y/y). Apparel store sales rose 0.3% (4.5% y/y) but the prior month&#39;s modest decline was revised to a 0.4% gain. Sales of furniture, electronics &amp; appliances rose 0.2% (6.9% y/y) and matched an upwardly revised March up tick.
Building material sales retraced all of an upwardly revised 1.6% (+13.0% y/y) March increase while sales of nonstore retailers (internet &amp; catalogue) rose 0.5% (13.3% y/y) following jumps of 2.1% and 3.3% during the prior two months.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">&nbsp;</th>
<th scope="col">April</th>
<th scope="col">Mar</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"><a href="http://www.haverselect.com/dlx/usecon/@ED/@ED04/@ED0401/@ED0401.HTM">Retail Sales &amp; Food Services</a></td>
<td>0.5%</td>
<td>0.6%</td>
<td>6.6%</td>
<td>7.2%</td>
<td>6.2%</td>
<td>4.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Excluding Autos</td>
<td>0.7%</td>
<td>0.5%</td>
<td>8.6%</td>
<td>8.2%</td>
<td>7.2%</td>
<td>4.7%</td>
</tr>
</tbody>
</table>
U.S. Business Inventories Gain 
by <a href="/comment/Moeller.html">Tom Moeller</a> May 11, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060511d.jpg" width="353">
The 0.7% rise in total business inventories during March handily outpaced Consensus expectations for a 0.5% increase. It followed an upwardly revised 0.1% up tick during February and was the strongest rose so far this year.
Retail inventories gained 1.0% after a slight slip during February. Motor vehicle inventories rose 1.7% (1.8% y/y) while less autos, retail inventories rose 0.7%. Strength was led by a 1.9% (7.9% y/y) jump in building materials. Furniture inventories also rose a firm 0.6% (7.2% y/y) and apparel inventories jumped 1.3% (4.1% y/y). Inventories at general merchandise stores slipped for the third straight month (+0.6% y/y). <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060511c.jpg" width="353">
Wholesale inventories rose 0.2% though petroleum inventories fell 2.0%. Durables rose 0.6% (6.6% y/y). During the last ten years there has been a 67% correlation between the y/y change in wholesale inventories and the change in imports of nonpetroleum goods.
Factory sector inventories jumped 0.7% after a 0.4% decline during February.
The inventory to sales ratio for total business was an unrevised 1.26 during February.

<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/@ED/@ED06/@ED0601/@ED0601.HTM">Business Inventories</a></th>
<th scope="col">Mar</th>
<th scope="col">Feb</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 class="odd">
<td class="firstcol">Total</td>
<td>0.7%</td>
<td>0.1%</td>
<td>4.2%</td>
<td>4.5%</td>
<td>7.9%</td>
<td>1.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Retail</td>
<td>1.0%</td>
<td>-0.0%</td>
<td>3.4%</td>
<td>2.7%</td>
<td>6.7%</td>
<td>3.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Retail excl. Autos</td>
<td>0.7%</td>
<td>0.1%</td>
<td>4.2%</td>
<td>4.5%</td>
<td>7.1%</td>
<td>1.9%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wholesale</td>
<td>0.2%</td>
<td>0.9%</td>
<td>6.3%</td>
<td>7.1%</td>
<td>9.8%</td>
<td>1.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Manufacturing</td>
<td>0.7%</td>
<td>-0.4%</td>
<td>3.4%</td>
<td>4.4%</td>
<td>7.7%</td>
<td>-1.1%</td>
</tr>
</tbody>
</table>
Initial Claims for Jobless Insurance Rose Again 
by <a href="/comment/Moeller.html">Tom Moeller</a> May 11, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060511b.jpg" width="353">
Initial unemployment insurance claims fell 1,000 last week to 324,000 after an upwardly revised 9,000 increase during the prior week. Consensus expectations had been for 315,000 claims.
The four week moving average of initial claims rose to 317,250 (-3.9% y/y).
Continuing claims for unemployment insurance dropped a sharp 49,000 and followed a downwardly revised no change during the prior week.
The insured unemployment rate slipped to 1.8% from 1.9% where it&#39;s been since early February.

<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">05/06/06</th>
<th scope="col">04/29/06</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>324</td>
<td>325</td>
<td>-4.4%</td>
<td>332</td>
<td>343</td>
<td>403</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,392</td>
<td>-8.6%</td>
<td>2,663</td>
<td>2,923</td>
<td>3,530</td>
</tr>
</tbody>
</table>
First Q1 GDP Releases Show Signs of Life in Europe 
by <a href="/comment/Stone.html">Carol Stone</a> May 11, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060511e.jpg" width="353">
GDP growth picked up in the first quarter for the EuroZone and several individual countries.Eurostat reported this morning that GDP in the EuroZone grew 0.6% over Q4 following 0.3% in that period. The year/year gain was 2.0% from Q1 2005. This is the best since Q2 2004.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060511f.jpg" width="353">
No details are presented in this &quot;flash&quot; estimate, but totals for several constituent countries are available. Germany reported growth of 0.4% in Q1 after no change in Q4. Its yearly growth rate was 1.4%. The German Federal Statistics Office described that a rebound in consumption was the spur to Q1 growth, after its outright decline in Q4. The data for this and other components will be released May 23.
Similarly, Italy&#39;s growth bounced by 0.6% after its flat performance in Q4. This produced a 1.5% gain from Q1 2005, the largest increase since Q2 2001. In Spain, growth has been on a much firmer track generally, and it actually ticked down in Q1 to 0.8% from 0.9% in Q4. This still, however, maintained the recent 3.5% year/year pace.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060511g.jpg" width="353">
Growth slowed in the Netherlands, to 0.2% from 0.6% in Q4; however, the last three quarters were all at a moderately firm rate, yielding year-on-year growth of 2.1% in Q1, one of the strongest yearly increases since the late 1990s boom period.
The improvements in most of these growth rates seem to confirm the EC Commission&#39;s optimism in its latest forecast issued Monday and discussed here by Louise Curley. The Commission raised its outlook for the EuroZone12 by 0.2 percentage points to 2.3% for the year 2006. In the actual Q1 data reported today, perhaps the most important single factor is the gain in Germany; we await the specific figures for private consumption on May 23, but increased spending by the people of Europe&#39;s largest nation has to be a help to the entire region. It is all the more significant in light of the accelerating cost of energy.

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<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/G10/@GZ/@GZ2/@GZ2.HTM">GDP</a></th>
<th scope="col">Q1 2006</th>
<th scope="col">Q4 2005</th>
<th scope="col">Q3 2005</th>
<th scope="col">Q1 2005</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">EU - Flash</td>
<td>0.6</td>
<td>0.3</td>
<td>0.7</td>
<td>2.0</td>
<td>1.4</td>
<td>1.8</td>
<td>0.7</td>
</tr>
<tr>
<td class="firstcol">Germany</td>
<td>0.4</td>
<td>0.0</td>
<td>0.6</td>
<td>1.4</td>
<td>1.2</td>
<td>1.1</td>
<td>-0.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Italy</td>
<td>0.6</td>
<td>-0.0</td>
<td>0.3</td>
<td>1.5</td>
<td>0.1</td>
<td>0.9</td>
<td>0.1</td>
</tr>
<tr>
<td class="firstcol">Spain</td>
<td>0.8</td>
<td>0.9</td>
<td>0.9</td>
<td>3.5</td>
<td>3.4</td>
<td>3.1</td>
<td>3.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Netherlands</td>
<td>0.2</td>
<td>0.6</td>
<td>0.7</td>
<td>2.1</td>
<td>1.1</td>
<td>1.7</td>
<td>-0.1</td>
</tr>
</tbody>
</table>
</body>
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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/060510f.jpg" width="353">
UK trade flows are strong. In both directions. A quick glance at today&#39;s March report would likely draw the most attention to a widening tendency in monthly deficit. The March figure, &pound;3.84 billion, came down from February&#39;s &pound;5.38 billion, but the general run has been toward larger gaps. See the first chart.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060510g.jpg" width="353">
Nonetheless, the growth of exports as well as imports has been impressive. Exports are up13.7% from a year ago, with goods alone up 19.8%. Imports have risen 15.0%, with the goods portion up 18.9%. While some of this is a pick-up in prices, the volume indexes have also shown vigor: exports of goods are up 16.0% and imports, 13.3%.
Oil exports and imports are obviously up in value terms, and the trend may be shifting in the volume of oil exports. These are still below year ago amounts, but the one-month increase for March over February was a whopping 61.3%. Imports are quite erratic month-to-month, but for the first quarter as a whole, the amount of crude oil imported was 4.2% larger than in last year&#39;s first quarter. As seen in the table below, the overall &quot;fuel&quot; account recovered a bit in March from its recent unprecedented deficits. The recent high oil prices may be making it more economical for UK producers to raise the volume they pump, and indeed, the volume index for fuel, at 94 (2002=100) is the highest since last March, when it was 101.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060510h.jpg" width="353">
Non-oil trade has generally been on an upswing as well, and many countries are increasing their purchases from the UK. The ONS cautions that some of the apparent gains may be due to the results of VAT fraud investigations, but even so, their carefully worded text suggests that much of the gains are genuine. The ONS release is available <a href="http://www.statistics.gov.uk/pdfdir/trd0506.pdf">here</a>. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">UK Trade, SA, Bil.&pound;</th>
<th scope="col">Mar 2006</th>
<th scope="col">Feb 2006</th>
<th scope="col">Jan 2006</th>
<th scope="col">Mar 2005</th>
Monthly Averages
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2005</td>
<td>2004</td>
<td>2003</td>
</tr>
<tr>
<td class="firstcol">Trade Balance: Goods &amp; Services</td>
<td>-3.84</td>
<td>-5.38</td>
<td>-4.45</td>
<td>-3.04</td>
<td>-3.91</td>
<td>-3.25</td>
<td>-2.58</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Exports</td>
<td>29.29</td>
<td>28.81</td>
<td>28.68</td>
<td>25.76</td>
<td>26.33</td>
<td>24.49</td>
<td>23.52</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Imports</td>
<td>33.12</td>
<td>34.20</td>
<td>33.13</td>
<td>28.80</td>
<td>30.23</td>
<td>27.74</td>
<td>26.10</td>
</tr>
<tr class="odd">
<td class="firstcol">Goods</td>
<td>-5.46</td>
<td>-7.05</td>
<td>-6.14</td>
<td>-4.72</td>
<td>-5.47</td>
<td>-5.04</td>
<td>-3.99</td>
</tr>
<tr>
<td class="firstcol">Fuels</td>
<td>-0.28</td>
<td>-0.71</td>
<td>-0.81</td>
<td>0.35</td>
<td>-0.23</td>
<td>0.09</td>
<td>0.42</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Exports</td>
<td>2.34</td>
<td>1.86</td>
<td>2.01</td>
<td>1.90</td>
<td>1.80</td>
<td>1.49</td>
<td>1.38</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Imports</td>
<td>2.62</td>
<td>2.57</td>
<td>2.82</td>
<td>1.55</td>
<td>2.03</td>
<td>1.40</td>
<td>0.96</td>
</tr>
<tr class="odd">
<td class="firstcol">Services</td>
<td>1.62</td>
<td>1.66</td>
<td>1.96</td>
<td>1.68</td>
<td>1.56</td>
<td>1.79</td>
<td>1.41</td>
</tr>
</tbody>
</table>
</body>
</html>

UK trade flows are strong. In both directions. A quick glance at today's March report would likely draw the most attention to a widening tendency in monthly deficit. The March figure, £3.84 billion, came down from February's £5.38 [...]

UK Trade Flows Show Strengthening Trend; Deficit Narrows in March

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060510e.jpg" width="353">
The U.S. federal government ran a budget surplus in April of $118.9B that was more than double the surplus during the same month last year. The surplus improved the FY06 to-date budget deficit to $184.1B versus a deficit of $236.9B during the first seven months of FY05.
A quirky 21.5% m/m drop in U.S. net outlays helped minimize the government&#39;s red ink. As a result of the drop the y/y growth in FYTD outlays fell to 5.7% from 8.7% one month earlier. Lower spending during April was logged by most outlay categories. Defense spending (19% of total outlays) reversed all of the prior month&#39;s surge and fell 21.6% (-10.9% y/y) and for the first seven months of FY06 rose 5.7% from &#39;05.
Medicare spending (12% of total outlays) also reversed the March jump and fell by about half m/m. Still the FYTD growth in Medicare spending was strong at 7.9%, helped by the initiation of prescription drug coverage. Spending on social security (21% of total outlays) remained strong at 5.7%.
Net revenues nearly doubled m/m during April and that lifted growth to 11.2% during the first seven months of this fiscal year versus FY05. Individual income tax receipts (44% of total receipts) rose 13.8% from last April and that pulled FYTD growth to 9.9%. Corporate income taxes (10% of total receipts) similarly were strong and rose 28.0% y/y and rose 29.9% during fiscal year 06&#39;s first seven months.
The improved job market raised employment taxes (36% of total receipts) 7.4% y/y and estate &amp; gift taxes surged by 13.1% y/y.
Presidential Approval Ratings: How Low Can Bush Go? from the American Enterprise Institute (AEI) can be found <a href="http://www.aei.org/publications/pubID.24359,filter.all/pub_detail.asp">here</a>.
Also from AEI is Taking Stock of Congress: A Lot of Bad to Go Around and it is available <a href="http://www.aei.org/publications/filter.all,pubID.24357/pub_detail.asp">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/USECON/@E1/@E106/@E10602/@E10602.HTM">US Government Finance</a></th>
<th scope="col">April</th>
<th scope="col">Mar</th>
<th scope="col">Y/Y</th>
<th scope="col">FY 2005</th>
<th scope="col">FY 2004</th>
<th scope="col">FY 2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Budget Balance</td>
<td>$118.9B</td>
<td>$-85.5B</td>
<td>$57.7B (4/05)</td>
<td>$-318.3B</td>
<td>$-412.7B</td>
<td>$-377.6B</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Net Revenues</td>
<td>$315.1B</td>
<td>$164.6B</td>
<td>13.5%</td>
<td>14.5%</td>
<td>5.5%</td>
<td>-3.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Net Outlays</td>
<td>$196.2B</td>
<td>$250.0B</td>
<td>-10.8%</td>
<td>7.8%</td>
<td>6.2%</td>
<td>7.4%</td>
</tr>
</tbody>
</table>
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The U.S. federal government ran a budget surplus in April of $118.9B that was more than double the surplus during the same month last year. The surplus improved the FY06 to-date budget deficit to $184.1B versus a deficit of $236.9B [...]

U.S. Budget Surplus Doubled in April

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060510c.jpg" width="353">
The Federal Open Market Committee raised the target interest rate for Federal funds 25 basis points to 5.00% at today&#39;s meeting. This sixteenth 25 basis point increase since June of 2004 was the result of a unanimous decision and was widely expected by analysts.
The discount rate also was raised 25 basis points to 6.00%.
The Fed&#39;s rationale for raising the rate was succinct. &quot;Economic growth has been quite strong so far this year.&quot;
Future rate increases were perhaps suggested by the statement &quot;... further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information.&quot;<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060510d.jpg" width="353">
For the complete text of the Fed&#39;s latest press release please follow this <a href="http://www.federalreserve.gov/BoardDocs/press/monetary/2006/20060510/default.htm.">link</a>.
Is Price Stability Enough? by William R. White at the Bank for International Settlements can be found <a href="http://www.bis.org/publ/work205.htm">here</a>.
Transparency, Expectations and Forecasts from the Federal Reserve Bank of Atlanta is available <a href="http://www.frbatlanta.org/filelegacydocs/erq106_bauer.pdf">here</a>.
Enhancing Fed Credibility from the Federal Reserve Bank of San Francisco is found <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-05.pdf">here</a>.

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The Federal Open Market Committee raised the target interest rate for Federal funds 25 basis points to 5.00% at today's meeting. This sixteenth 25 basis point increase since June of 2004 was the result of a unanimous decision and was [...]

Fed Funds Rate Increased to 5.00%

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060510a.jpg" width="353">
The total number of mortgage applications fell another 5.8% last week. It was the fourth decline during the last five weeks and pulled the opening level in May 2.0% below April which fell 1.1% from the March average.
Purchase applications gave back 3.9% w/w of an 11.3% recovery at the end of April. Nevertheless, at the start of May purchase applications were 1.1% ahead of April which rose 1.1% versus March.
During the last ten years there has been a negative 80% correlation between the interest rate level on 30-year financing and purchase applications while during those years there has been a 54% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales.
An 8.8% w/w decline in applications to refinance lowered the level in early May 6.6% below the April average which fell 4.1% from March.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060510b.jpg" width="353">
The effective interest rate on a conventional 30-year mortgage rose again to 6.84% from 6.81% at the end of April. The rate on 15-year financing similarly increased to 6.51%, the highest level since early 2002. Interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities and during the last ten years there has been a (negative) 82% correlation between purchase applications and the effective rate on a 30-Year mortgage.
The Mortgage Bankers Association surveys between 20 to 35 of the top lenders in the U.S. housing industry to derive its refinance, purchase and market indexes. The weekly survey accounts for more than 40% of all applications processed each week by mortgage lenders. Visit the Mortgage Bankers Association site <a href="http://www.mbaa.org">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/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">05/05/06</th>
<th scope="col">04/28/06</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 class="odd">
<td class="firstcol">Total Market Index</td>
<td>562.1</td>
<td>596.8</td>
<td>-28.0%</td>
<td>708.6</td>
<td>735.1</td>
<td>1,067.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>416.5</td>
<td>433.3</td>
<td>-20.8%</td>
<td>470.9</td>
<td>454.5</td>
<td>395.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,427.4</td>
<td>1,565.6</td>
<td>-36.9%</td>
<td>2,092.3</td>
<td>2,366.8</td>
<td>4,981.8</td>
</tr>
</tbody>
</table>
</body>
</html>

The total number of mortgage applications fell another 5.8% last week. It was the fourth decline during the last five weeks and pulled the opening level in May 2.0% below April which fell 1.1% from the March average. Purchase [...]

Mortgage Applications Crimped By Higher Rates

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060510c.jpg" width="353">
The Federal Open Market Committee raised the target interest rate for Federal funds 25 basis points to 5.00% at today&#39;s meeting. This sixteenth 25 basis point increase since June of 2004 was the result of a unanimous decision and was widely expected by analysts.
The discount rate also was raised 25 basis points to 6.00%.
The Fed&#39;s rationale for raising the rate was succinct. &quot;Economic growth has been quite strong so far this year.&quot;
Future rate increases were perhaps suggested by the statement &quot;... further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information.&quot;<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060510d.jpg" width="353">
For the complete text of the Fed&#39;s latest press release please follow this <a href="http://www.federalreserve.gov/BoardDocs/press/monetary/2006/20060510/default.htm.">link</a>.
Is Price Stability Enough? by William R. White at the Bank for International Settlements can be found <a href="http://www.bis.org/publ/work205.htm">here</a>.
Transparency, Expectations and Forecasts from the Federal Reserve Bank of Atlanta is available <a href="http://www.frbatlanta.org/filelegacydocs/erq106_bauer.pdf">here</a>.
Enhancing Fed Credibility from the Federal Reserve Bank of San Francisco is found <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-05.pdf">here</a>.

U.S. Budget Surplus Doubled in April 
by <a href="/comment/Moeller.html">Tom Moeller</a> May 10, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060510e.jpg" width="353">
The U.S. federal government ran a budget surplus in April of $118.9B that was more than double the surplus during the same month last year. The surplus improved the FY06 to-date budget deficit to $184.1B versus a deficit of $236.9B during the first seven months of FY05.
A quirky 21.5% m/m drop in U.S. net outlays helped minimize the government&#39;s red ink. As a result of the drop the y/y growth in FYTD outlays fell to 5.7% from 8.7% one month earlier. Lower spending during April was logged by most outlay categories. Defense spending (19% of total outlays) reversed all of the prior month&#39;s surge and fell 21.6% (-10.9% y/y) and for the first seven months of FY06 rose 5.7% from &#39;05.
Medicare spending (12% of total outlays) also reversed the March jump and fell by about half m/m. Still the FYTD growth in Medicare spending was strong at 7.9%, helped by the initiation of prescription drug coverage. Spending on social security (21% of total outlays) remained strong at 5.7%.
Net revenues nearly doubled m/m during April and that lifted growth to 11.2% during the first seven months of this fiscal year versus FY05. Individual income tax receipts (44% of total receipts) rose 13.8% from last April and that pulled FYTD growth to 9.9%. Corporate income taxes (10% of total receipts) similarly were strong and rose 28.0% y/y and rose 29.9% during fiscal year 06&#39;s first seven months.
The improved job market raised employment taxes (36% of total receipts) 7.4% y/y and estate &amp; gift taxes surged by 13.1% y/y.
Presidential Approval Ratings: How Low Can Bush Go? from the American Enterprise Institute (AEI) can be found <a href="http://www.aei.org/publications/pubID.24359,filter.all/pub_detail.asp">here</a>.
Also from AEI is Taking Stock of Congress: A Lot of Bad to Go Around and it is available <a href="http://www.aei.org/publications/filter.all,pubID.24357/pub_detail.asp">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/USECON/@E1/@E106/@E10602/@E10602.HTM">US Government Finance</a></th>
<th scope="col">April</th>
<th scope="col">Mar</th>
<th scope="col">Y/Y</th>
<th scope="col">FY 2005</th>
<th scope="col">FY 2004</th>
<th scope="col">FY 2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Budget Balance</td>
<td>$118.9B</td>
<td>$-85.5B</td>
<td>$57.7B (4/05)</td>
<td>$-318.3B</td>
<td>$-412.7B</td>
<td>$-377.6B</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Net Revenues</td>
<td>$315.1B</td>
<td>$164.6B</td>
<td>13.5%</td>
<td>14.5%</td>
<td>5.5%</td>
<td>-3.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Net Outlays</td>
<td>$196.2B</td>
<td>$250.0B</td>
<td>-10.8%</td>
<td>7.8%</td>
<td>6.2%</td>
<td>7.4%</td>
</tr>
</tbody>
</table>
Mortgage Applications Crimped By Higher Rates 
by <a href="/comment/Moeller.html">Tom Moeller</a> May 10, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060510a.jpg" width="353">
The total number of mortgage applications fell another 5.8% last week. It was the fourth decline during the last five weeks and pulled the opening level in May 2.0% below April which fell 1.1% from the March average.
Purchase applications gave back 3.9% w/w of an 11.3% recovery at the end of April. Nevertheless, at the start of May purchase applications were 1.1% ahead of April which rose 1.1% versus March.
During the last ten years there has been a negative 80% correlation between the interest rate level on 30-year financing and purchase applications while during those years there has been a 54% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales.
An 8.8% w/w decline in applications to refinance lowered the level in early May 6.6% below the April average which fell 4.1% from March.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060510b.jpg" width="353">
The effective interest rate on a conventional 30-year mortgage rose again to 6.84% from 6.81% at the end of April. The rate on 15-year financing similarly increased to 6.51%, the highest level since early 2002. Interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities and during the last ten years there has been a (negative) 82% correlation between purchase applications and the effective rate on a 30-Year mortgage.
The Mortgage Bankers Association surveys between 20 to 35 of the top lenders in the U.S. housing industry to derive its refinance, purchase and market indexes. The weekly survey accounts for more than 40% of all applications processed each week by mortgage lenders. Visit the Mortgage Bankers Association site <a href="http://www.mbaa.org">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/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">05/05/06</th>
<th scope="col">04/28/06</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 class="odd">
<td class="firstcol">Total Market Index</td>
<td>562.1</td>
<td>596.8</td>
<td>-28.0%</td>
<td>708.6</td>
<td>735.1</td>
<td>1,067.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>416.5</td>
<td>433.3</td>
<td>-20.8%</td>
<td>470.9</td>
<td>454.5</td>
<td>395.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,427.4</td>
<td>1,565.6</td>
<td>-36.9%</td>
<td>2,092.3</td>
<td>2,366.8</td>
<td>4,981.8</td>
</tr>
</tbody>
</table>
UK Trade Flows Show Strengthening Trend; Deficit Narrows in March 
by <a href="/comment/Stone.html">Carol Stone</a> May 10, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060510f.jpg" width="353">
UK trade flows are strong. In both directions. A quick glance at today&#39;s March report would likely draw the most attention to a widening tendency in monthly deficit. The March figure, &pound;3.84 billion, came down from February&#39;s &pound;5.38 billion, but the general run has been toward larger gaps. See the first chart.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060510g.jpg" width="353">
Nonetheless, the growth of exports as well as imports has been impressive. Exports are up13.7% from a year ago, with goods alone up 19.8%. Imports have risen 15.0%, with the goods portion up 18.9%. While some of this is a pick-up in prices, the volume indexes have also shown vigor: exports of goods are up 16.0% and imports, 13.3%.
Oil exports and imports are obviously up in value terms, and the trend may be shifting in the volume of oil exports. These are still below year ago amounts, but the one-month increase for March over February was a whopping 61.3%. Imports are quite erratic month-to-month, but for the first quarter as a whole, the amount of crude oil imported was 4.2% larger than in last year&#39;s first quarter. As seen in the table below, the overall &quot;fuel&quot; account recovered a bit in March from its recent unprecedented deficits. The recent high oil prices may be making it more economical for UK producers to raise the volume they pump, and indeed, the volume index for fuel, at 94 (2002=100) is the highest since last March, when it was 101.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060510h.jpg" width="353">
Non-oil trade has generally been on an upswing as well, and many countries are increasing their purchases from the UK. The ONS cautions that some of the apparent gains may be due to the results of VAT fraud investigations, but even so, their carefully worded text suggests that much of the gains are genuine. The ONS release is available <a href="http://www.statistics.gov.uk/pdfdir/trd0506.pdf">here</a>. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">UK Trade, SA, Bil.&pound;</th>
<th scope="col">Mar 2006</th>
<th scope="col">Feb 2006</th>
<th scope="col">Jan 2006</th>
<th scope="col">Mar 2005</th>
Monthly Averages
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2005</td>
<td>2004</td>
<td>2003</td>
</tr>
<tr>
<td class="firstcol">Trade Balance: Goods &amp; Services</td>
<td>-3.84</td>
<td>-5.38</td>
<td>-4.45</td>
<td>-3.04</td>
<td>-3.91</td>
<td>-3.25</td>
<td>-2.58</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Exports</td>
<td>29.29</td>
<td>28.81</td>
<td>28.68</td>
<td>25.76</td>
<td>26.33</td>
<td>24.49</td>
<td>23.52</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Imports</td>
<td>33.12</td>
<td>34.20</td>
<td>33.13</td>
<td>28.80</td>
<td>30.23</td>
<td>27.74</td>
<td>26.10</td>
</tr>
<tr class="odd">
<td class="firstcol">Goods</td>
<td>-5.46</td>
<td>-7.05</td>
<td>-6.14</td>
<td>-4.72</td>
<td>-5.47</td>
<td>-5.04</td>
<td>-3.99</td>
</tr>
<tr>
<td class="firstcol">Fuels</td>
<td>-0.28</td>
<td>-0.71</td>
<td>-0.81</td>
<td>0.35</td>
<td>-0.23</td>
<td>0.09</td>
<td>0.42</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Exports</td>
<td>2.34</td>
<td>1.86</td>
<td>2.01</td>
<td>1.90</td>
<td>1.80</td>
<td>1.49</td>
<td>1.38</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Imports</td>
<td>2.62</td>
<td>2.57</td>
<td>2.82</td>
<td>1.55</td>
<td>2.03</td>
<td>1.40</td>
<td>0.96</td>
</tr>
<tr class="odd">
<td class="firstcol">Services</td>
<td>1.62</td>
<td>1.66</td>
<td>1.96</td>
<td>1.68</td>
<td>1.56</td>
<td>1.79</td>
<td>1.41</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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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.

250501Z5.jpg

**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.

250501Z6.jpg

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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Real GDP eased 0.3% SAAR (+2.1% y/y) during the first quarter of 2025 after increasing 2.4% in Q4’24 and 3.1% in Q3’24. A 0.4% increase had been expected in the Action Economics Forecast Survey. It was the first decline since Q1 2022.

Foreign trade subtracted 4.83 percentage points from growth last quarter as imports surged 41.3% (13.4% y/y) ahead of tariffs, which began to come into effect in the first quarter. The rise followed a 1.9% decline in Q4’24. Exports rose 1.8% (3.0% y/y) after easing 0.2% in Q4. Inventories added 2.25 percentage points to growth after subtracting 0.84 percentage point from Q4 growth.

Real final sales to domestic purchasers grew 2.3% (2.9% y/y) in Q1 after rising 3.0% in Q4. Personal consumption expenditures rose 1.8% (3.1% y/y) following a 4.0% gain. Durable goods spending fell 3.4% (+5.3% y/y) after surging 12.4% in Q4. Motor vehicle purchases declined 11.1% (+5.5% y/y) after strengthening 19.7% in Q4. Spending on home furnishings & appliances gained 1.5% (6.1% y/y) following a 5.4% rise. Recreational goods & vehicle outlays rose 2.5% (7.0% y/y) last quarter after a 13.9% Q4 increase.

Nondurable goods outlays rose 2.7% (3.0% y/y) following 3.1% growth in Q4. Apparel spending increased 6.7% (2.5% y/y) following a 5.0% rise. Food & beverage buying gained 2.5% (2.3% y/y) after a 1.8% increase. Gasoline & fuel oil purchases increased 4.6% (3.4% y/y) after falling 2.0% in Q4.

Spending on services increased 2.4% last quarter (2.7% y/y) after a 3.0% gain. Outlays on housing & utilities increased 3.4% (1.8% y/y) after rising 1.1% in Q4. Health care expenditures rose 4.0% (4.8% y/y) following a 4.7% strengthening. Transportation outlays increased 5.3% (4.6% y/y) after a 3.7% rise while recreation spending rose 4.7% (2.8% y/y) following a 4.5% rise. Restaurant & hotel expenditures declined 2.1% (+0.5% y/y) following a 2.8% rise. Financial services expenditures rose 1.9% (2.0% y/y) after a 3.1% Q4 increase.

Business fixed investment increased 9.8% (3.6% y/y) following a 3.0% decline in Q4. Expenditures on structures rose 0.4% (-0.4% y/y) after a 2.9% increase. Expenditures on producers’ durable equipment jumped 22.5% (8.0% y/y) after falling 8.7%.  Outlays on information processing equipment soared 69.3% (18.9% y/y) following a 7.3% decline. Industrial equipment investment fell 1.4% (-0.3% y/y) after easing 0.9%. Intellectual property product spending rose 4.1% (1.8% y/y) following a 0.5% decline. 

Residential structures investment increased 1.3% (-0.1% y/y) in Q1 after a 5.5% Q4 rise.

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Government spending fell 1.5% (+2.4% y/y) after a 3.1% Q4 rise. Federal government expenditures declined 5.1% (+2.9% y/y) after rising 4.0% in Q4. National defense expenditures declined 8.0% (+4.0% y/y) after increasing 4.8% in Q4. State & local government spending rose 0.8% (2.1% y/y) following a 2.5% rise.

The GDP price index rose 3.7% (2.6% y/y) after increasing 2.3% in Q4. It was the largest increase since Q4’22. A 2.4% increase had been expected. The PCE chain price index increased 3.6% (2.5% y/y) following a 2.4% rise. The PCE price index excluding food and energy rose 3.5% (2.8% y/y) after increasing 2.6% in Q4. The business fixed investment price index rose 0.4% (1.8% y/y) after 1.5% rise. The residential price index strengthened 3.9% (3.2% y/y) after a 1.9% rise while the government price index increased 4.7% (2.8% y/y) following a 2.1% rise.

The GDP data can be found in Haver’s **USECON** and **USNA** databases. **USNA** contains virtually all of the Bureau of Economic Analysis detail in the national accounts. The Action Economics consensus estimates can be found in **AS1REPNA**.

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- Decline in GDP is first in three years.
- Foreign trade subtracts substantially ahead of tariffs.
- Domestic final demand growth weakens.
- Price index strengthens with higher core PCE prices.

U.S. GDP Unexpectedly Declines in Q1’25; Prices Strengthen

Michael J. Moran

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High-side readings on the price indexes for personal consumption expenditures in January and February caused some concern about emerging price pressure, especially with some policies of the Trump administration possibly adding to the upward force. However, March brought notable relief, with the headline price index falling slightly (-0.04%). A marked decline in energy prices was helpful (-2.7%), but core prices also were subdued, increasing less than 0.1%.  Year-over-year changes were still above the Fed’s target of 2%, but only barely so for the headline measure (2.3%). The core index backed away from the reading of 3.0% in February, but the latest reading of 2.7% was in line with observations in the past year, and still uncomfortably above target.

Consumers roused from a winter slumber in March, with nominal outlays increasing 0.7%. With inflation restrained, real outlays also posted a gain of 0.7%. Spending on durable gods stood out, with real outlays advancing 3.2%. Real outlays for both nondurable goods and services rose 0.4%, a solid pace. Signs of life were certainly welcome after an average decline of 0.1% in January and February. The March rebound left growth of 1.8% (annual rate) in the first quarter.

The brisk increase in spending in March was supported by a solid gain in personal income (0.5% in both nominal and real terms). Growth in wage income was firm at 0.5%, while proprietors’ income was robust with a gain of 1.8% (not annualized!). The farm sector led the advance in proprietors’ income, but the nonfarm sector also was strong (0.6%).

The personal income and consumption figures are available in Haver’s **USECON** database with detail in the **USNA** database. The Action Economics forecasts are in **AS1REPNA**.

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- Price pressure eases.
- Spending rebounds after two soft months.

Personal Income, Consumption, and Prices in March

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The Pending Home Sales Index, a forward-looking home sales measure based on contract signings, from the National Association of Realtors rose 6.1% to 76.5 (-0.6% y/y) during March after rising a little-revised 2.1% in February. These changes followed a 4.6% January decline.

The rise in March sales occurred as the rate on a 30-year mortgage eased to an average 6.65% from 6.84% in February. This rate was well above a low of 2.68% averaged in December 2020.

Pending home sales were up in most regions of the country. Sales in the Midwest rose 4.9% (1.4% y/y) last month after rising 1.8% in February. Sales in the South increased 9.8% (-0.4% y/y) following a 5.8% February rise. Sales in the West improved 4.8% (-2.0% y/y) after falling 3.0% in February. Sales in the Northeast were off 0.5% (-3.0% y/y) in March after falling 0.9% in February.

The pending home sales index measures sales at the time the contract for the purchase of an existing home is signed, similar to the Census Bureau's new home sales data. In contrast, the National Association of Realtors' existing home sales data are recorded when the sale is closed, which is usually a couple of months after the sales contract has been signed. In developing the pending home sales index, the NAR found that the level of monthly sales contract activity leads the level of closed existing home sales by about two months.

The series dates back to 2001 and are available in Haver's **PREALTOR** database. Weekly mortgage interest rates from the Mortgage Bankers Association can be found in the **WEEKLY** database.

- Sales rise to highest level in four months.
- Strength is evident throughout most of country.

U.S. Pending Home Sales Surge in March

Sandy Batten

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The employment cost index (ECI) for civilian workers, arguably the most accurate measure of labor compensation in the United States, rose 0.9% q/q (3.6% y/y) in Q1, the same quarterly increase as in last year’s Q4, according to the Bureau of Labor Statistics. The quarterly gains have fluctuated between 0.8% and 1.0% for the past six quarters. The Action Economics Forecast Survey had expected a 0.9% q/q increase and a 3.5% y/y gain.

Wages and salaries for civilian workers rose 0.8% q/q (3.5% y/y) in Q1, down from 1.0% q/q in Q4. This tied the Q3 2024 quarterly rise as the smallest increase since Q2 2021. It was also the smallest y/y increase since Q2 2021. Benefits increased by an outsized 1.2% q/q (3.9% y/y) in Q1 versus 0.8% q/q in Q4. This is the largest quarterly gain since Q2 2022. In general, employment cost gains remain above the pace observed prior to the pandemic but are slowing gradually.

Private industry workers’ compensation rose 0.8% q/q (3.4% y/y) in Q1, down from 0.9% q/q (3.6% y/y) in Q4. Wages and salaries for private industry workers increased 0.8% q/q (3.4% y/y) in Q1 versus 0.8% q/q (3.7% y/y) in Q4. The quarterly gain in Q1 tied that in Q3 2024 as the smallest increase since Q4 2020. Benefits for private industry workers jumped 1.2% q/q (3.6% y/y). the largest quarterly gain since Q2 2022. The acceleration in benefits in Q1 was primarily in service-producing industries.

Compensation in private goods-producing industries increased 1.0% q/q (3.2% y/y) in Q1, the largest quarterly gain in five quarters, versus a 0.7% q/q increase in Q4. Compensation in construction jumped 1.3% q/q, its largest quarterly increase since Q2 2022, up from a 0.6% q/q gain in Q4. Manufacturing compensation growth slowed to 0.7% q/q, its slowest quarterly advance since Q4 2020, from 0.8% q/q in Q4. Compensation in private service-producing industries increased 0.8% q/q (3.5% y/y), down slightly from a 0.9% q/q gain in Q4. Compensation in education and health services jumped 1.3% q/q, its largest quarterly gain since Q3 2023. In contrast, compensation in other services edged up 0.1% q/q in Q1, its smallest quarterly advance since before the pandemic.

The employment cost index measures the change in the cost of labor, free from the influence of employment shifts across occupations and industries. It is provided by the Bureau of Labor Statistics and is available in Haver’s **USECON** database. Consensus estimates from the Action Economics Forecast Survey are in Haver’s **AS1REPNA** database.

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- Compensation grew 0.9 q/q in Q1, the same pace as in Q4.
- Wage growth slowed to 0.8% q/q while benefits surged 1.2% q/q, their largest quarterly increase since Q2 2022.

Economy in Brief

Jump to:

U.S. Business Inventories Gain

U.S. Retail Sales Gain Light

U.S. Retail Sales Gain Light

UK Trade Flows Show Strengthening Trend; Deficit Narrows in March

U.S. Budget Surplus Doubled in April

Fed Funds Rate Increased to 5.00%

Mortgage Applications Crimped By Higher Rates

Fed Funds Rate Increased to 5.00%