Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061017f.jpg" width="353">
The National Association of Home Builders&#39; (NAHB) October Composite Housing Market Index rose to 31 from 30 in September. It was the first m/m increase since last year. Regardless, the latest level remained down by more than one half from the levels of 2005. 
During the last twenty years there has been a 75% correlation between the y/y change in the Composite Index and the change in single family housing starts. 
The improvement was led a sharp gain in the sub-index covering prospective sales in the next six months (10.8% m/m, -43.8% y/y). The sub-index for current sales was unchanged m/m (-56.8% y/y). 
Traffic of prospective home buyers rose modestly from the extremely low levels of the prior two months. 
Only the housing market indexes for the Northeast (-50.7% y/y) and the Midwest (-55.6% y/y) improved m/m. In the South the index fell (-51.3%) as it did out West (-64.8% y/y). 
The NAHB index is a diffusion index based on a survey of builders. Readings above 50 signal that more builders view conditions good than poor. 
Visit the <a href="http://www.nahb.org">National Association of Home Builders</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S4/@S4.HTM">Nat&#39;l Association of Home Builders</a> </th>
<th scope="col">October</th>
<th scope="col">September</th>
<th scope="col">Oct. &#39;05 </th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
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</thead>
<tbody>
<tr>
<td class="firstcol">Composite Housing Market Index</td>
<td>31</td>
<td>30</td>
<td>68</td>
<td>67</td>
<td>68</td>
<td>64</td>
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The National Association of Home Builders' (NAHB) October Composite Housing Market Index rose to 31 from 30 in September. It was the first m/m increase since last year. Regardless, the latest level remained down by more than one half [...]

NAHB Housing Market Index Ticked Up

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061017e.jpg" width="353">
The International Council of Shopping Centers (ICSC)-UBS reported that chain store sales increased 0.6% last week on the heels of the prior week&#39;s 0.5% rise. The gains limited the decline in sales so far in October to 0.2% versus the September average .
The retail price for a gallon of regular unleaded gasoline fell for the tenth consecutive week. The four cent decline last week to an average $2.23 (-18.3% y/y) and was to the lowest level since December.
Last week&#39;s decline in spot market gasoline prices paused yesterday. The NY harbor price for regular unleaded gasoline rose to $1.54 per gallon versus an average $1.50 last week.
During the last ten years there has been a 47% correlation between the y/y change in chain store sales and the change in nonauto retail sales less gasoline.
The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.
The leading indicator of chain store sales from ICSC-UBS rose for the fifth week in the last six, by 0.1% (0.8% y/y).
The latest Short-Term Energy Outlook from the U.S. Energy Information Administration is available <a href="http://www.eia.doe.gov/emeu/steo/pub/contents.html">here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/surveyw/@S2/@S2.HTM">ICSC-UBS (SA, 1977=100)</a></th>
<th scope="col">10/14/06</th>
<th scope="col">10/07/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
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</thead>
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<td class="firstcol">Total Weekly Chain Store Sales</td>
<td>468.1</td>
<td>465.4</td>
<td>3.9%</td>
<td>3.6%</td>
<td>4.7%</td>
<td>2.9%</td>
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</tbody>
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The International Council of Shopping Centers (ICSC)-UBS reported that chain store sales increased 0.6% last week on the heels of the prior week's 0.5% rise. The gains limited the decline in sales so far in October to 0.2% versus the [...]

Lower Gasoline Prices Helped Spending at Chain Stores, Again

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061017c.jpg" width="353">
Total U.S. industrial output fell 0.6% last month. Though the decline followed an upwardly revised no change in August output, it again disappointed Consensus expectations which had been for just a 0.1% dip.
Factory sector output fell 0.3% and reversed all of the prior month&#39;s gain which was upwardly revised from no change. During the third quarter, factory output rose at a 4.2% annual rate versus 2Q which rose 5.1%.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061017d.jpg" width="353">
Production of durable consumer goods dropped 1.8% due to a 2.6% decline 9-7.7% y/y) in the output of automotive products. Output of appliances &amp; furniture also was weak and fell 2.4% (-5.0% y/y). Nondurable consumer goods output fell 0.6% (+2.2% y/y) but nonenergy nondurables output rose 0.1% (3.1% y/y), the increase solely due to higher output of foods &amp; tobacco (3.5% y/y).
Business equipment production slipped 0.2% after the upwardly revised 0.2% August gain. Output of information processing &amp; equipment jumped 0.8% (16.7% y/y).Factory output overall less the hi-tech industries fell 0.5% (+4.8% y/y).
Overall capacity utilization fell to 81.9%, the lowest level since May.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/output.htm">Production &amp; Capacity</a></th>
<th scope="col">September</th>
<th scope="col">August</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
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</thead>
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<td class="firstcol">Industrial Production</td>
<td>-0.6%</td>
<td>0.0%</td>
<td>5.5%</td>
<td>3.2%</td>
<td>4.1%</td>
<td>0.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Manufacturing (NAICS)</td>
<td>-0.3%</td>
<td>0.3%</td>
<td>6.2%</td>
<td>3.9%</td>
<td>4.8%</td>
<td>0.5%</td>
</tr>
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<td class="firstcol">&nbsp; Consumer Goods</td>
<td>-0.9%</td>
<td>0.4%</td>
<td>0.5%</td>
<td>2.1%</td>
<td>2.1%</td>
<td>1.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Business Equipment</td>
<td>-0.2%</td>
<td>0.2%</td>
<td>18.5%</td>
<td>9.1%</td>
<td>9.3%</td>
<td>0.0%</td>
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<tr class="odd">
<td class="firstcol">Capacity Utilization</td>
<td>81.9%</td>
<td>82.5%</td>
<td>79.1% (9/05)</td>
<td>80.1%</td>
<td>78.6%</td>
<td>75.7%</td>
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Total U.S. industrial output fell 0.6% last month. Though the decline followed an upwardly revised no change in August output, it again disappointed Consensus expectations which had been for just a 0.1% dip. Factory sector output fell [...]

Industrial Production Fell

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061017a.jpg" width="353">
The overall producer price index dropped 1.3% last month and by far exceeded Consensus expectations for a 0.3% decline. Lower energy prices pulled down the total but excluding food &amp; energy prices rose 0.6%, an increase that fully reversed the declines during the prior two months. Expectations had been for a 0.2% increase in the core PPI.
Finished energy goods prices dropped 8.4% (-1.6% y/y), led lower by a 22.2% m/m plunge in gasoline prices (-13.3% y/y) and an 18.5% (-0.1% y/y) decline in fuel oil prices. Residential electric power prices also fell 0.1% (+7.1% y/y) but natural gas prices increased 1.8% (-1.2% y/y). 
Finished consumer goods prices less food &amp; energy reversed the prior month&#39;s decline and rose 0.5% (1.1% y/y). The gain very much reflected a 2.8% (-3.6% y/y) increase in passenger car prices that reversed an August drop. Household furniture prices fell 0.1% (+3.4% y/y).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061017b.jpg" width="353">
Capital equipment prices also were firm and rose 0.6% (1.5% y/y) for the first gain in three months. Light truck prices reversed the August drop and rose 3.5% (-4.8% y/y) while prices of pumps, compressors &amp; equipment were strong again, rising 1.2% (4.3% y/y). 
Intermediate goods prices dropped 1.4%, the first m/m decline since February, and prices less food &amp; energy were similarly tame. The 0.1% increase was the smallest since August of last year. 
The crude materials PPI dropped 3.4% due to a 13.3% (NSA, +0.8% y/y) drop in crude petroleum and a 5.5% skid in natural gas (NSA, -35.0% y/y). Less food &amp; energy crude goods prices were, however, quite strong and rose 1.0% due to higher iron &amp; steel scrap prices (4.4% y/y), higher prices for aluminum base scrap (29.2% y/y) and copper scrap prices which are up 70.9% y/y.
Why Are Yield Curves So Flat and Long Rates So Low Globally?, remarks by Federal Reserve Board Governor Randall S. Kroszner are available <a href="http://www.federalreserve.gov/boarddocs/speeches/2006/20060615/default.htm">here</a>.

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<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">September</th>
<th scope="col">August</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
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</thead>
<tbody>
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<td class="firstcol">Finished Goods</td>
<td>-1.3%&nbsp;</td>
<td>0.1%</td>
<td>&nbsp; 0.9%&nbsp;</td>
<td>&nbsp;4.9%&nbsp;</td>
<td>3.6%&nbsp;</td>
<td>3.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.6%</td>
<td>-0.4%</td>
<td>&nbsp;1.3%</td>
<td>2.4%</td>
<td>1.5%</td>
<td>0.2%</td>
</tr>
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<td class="firstcol">Intermediate Goods</td>
<td>-1.4%</td>
<td>0.4%</td>
<td>4.7%</td>
<td>&nbsp;8.0%</td>
<td>6.6%</td>
<td>4.7%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.1%</td>
<td>0.4%</td>
<td>7.4%</td>
<td>&nbsp;5.5%</td>
<td>5.7%</td>
<td>2.0%</td>
</tr>
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<td class="firstcol">Crude Goods</td>
<td>&nbsp;-3.4%&nbsp;</td>
<td>2.2%</td>
<td>&nbsp;-7.8%</td>
<td>14.6%</td>
<td>&nbsp;17.5%</td>
<td>25.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>1.0%</td>
<td>-2.8%</td>
<td>&nbsp;19.7%</td>
<td>4.8%</td>
<td>&nbsp;26.5%</td>
<td>12.4%</td>
</tr>
</tbody>
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The overall producer price index dropped 1.3% last month and by far exceeded Consensus expectations for a 0.3% decline. Lower energy prices pulled down the total but excluding food & energy prices rose 0.6%, an increase that fully [...]

PPI Fell, Core Prices Firm

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061017a.jpg" width="353">
The overall producer price index dropped 1.3% last month and by far exceeded Consensus expectations for a 0.3% decline. Lower energy prices pulled down the total but excluding food &amp; energy prices rose 0.6%, an increase that fully reversed the declines during the prior two months. Expectations had been for a 0.2% increase in the core PPI.
Finished energy goods prices dropped 8.4% (-1.6% y/y), led lower by a 22.2% m/m plunge in gasoline prices (-13.3% y/y) and an 18.5% (-0.1% y/y) decline in fuel oil prices. Residential electric power prices also fell 0.1% (+7.1% y/y) but natural gas prices increased 1.8% (-1.2% y/y). 
Finished consumer goods prices less food &amp; energy reversed the prior month&#39;s decline and rose 0.5% (1.1% y/y). The gain very much reflected a 2.8% (-3.6% y/y) increase in passenger car prices that reversed an August drop. Household furniture prices fell 0.1% (+3.4% y/y).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061017b.jpg" width="353">
Capital equipment prices also were firm and rose 0.6% (1.5% y/y) for the first gain in three months. Light truck prices reversed the August drop and rose 3.5% (-4.8% y/y) while prices of pumps, compressors &amp; equipment were strong again, rising 1.2% (4.3% y/y). 
Intermediate goods prices dropped 1.4%, the first m/m decline since February, and prices less food &amp; energy were similarly tame. The 0.1% increase was the smallest since August of last year. 
The crude materials PPI dropped 3.4% due to a 13.3% (NSA, +0.8% y/y) drop in crude petroleum and a 5.5% skid in natural gas (NSA, -35.0% y/y). Less food &amp; energy crude goods prices were, however, quite strong and rose 1.0% due to higher iron &amp; steel scrap prices (4.4% y/y), higher prices for aluminum base scrap (29.2% y/y) and copper scrap prices which are up 70.9% y/y.
Why Are Yield Curves So Flat and Long Rates So Low Globally?, remarks by Federal Reserve Board Governor Randall S. Kroszner are available <a href="http://www.federalreserve.gov/boarddocs/speeches/2006/20060615/default.htm">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E802/@E80201/@E80201.HTM">Producer Price Index</a></th>
<th scope="col">September</th>
<th scope="col">August</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">Finished Goods</td>
<td>-1.3%&nbsp;</td>
<td>0.1%</td>
<td>&nbsp; 0.9%&nbsp;</td>
<td>&nbsp;4.9%&nbsp;</td>
<td>3.6%&nbsp;</td>
<td>3.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.6%</td>
<td>-0.4%</td>
<td>&nbsp;1.3%</td>
<td>2.4%</td>
<td>1.5%</td>
<td>0.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">Intermediate Goods</td>
<td>-1.4%</td>
<td>0.4%</td>
<td>4.7%</td>
<td>&nbsp;8.0%</td>
<td>6.6%</td>
<td>4.7%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.1%</td>
<td>0.4%</td>
<td>7.4%</td>
<td>&nbsp;5.5%</td>
<td>5.7%</td>
<td>2.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Crude Goods</td>
<td>&nbsp;-3.4%&nbsp;</td>
<td>2.2%</td>
<td>&nbsp;-7.8%</td>
<td>14.6%</td>
<td>&nbsp;17.5%</td>
<td>25.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>1.0%</td>
<td>-2.8%</td>
<td>&nbsp;19.7%</td>
<td>4.8%</td>
<td>&nbsp;26.5%</td>
<td>12.4%</td>
</tr>
</tbody>
</table>
Industrial Production Fell 
by <a href="/comment/Moeller.html">Tom Moeller</a> October 17, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061017c.jpg" width="353">
Total U.S. industrial output fell 0.6% last month. Though the decline followed an upwardly revised no change in August output, it again disappointed Consensus expectations which had been for just a 0.1% dip.
Factory sector output fell 0.3% and reversed all of the prior month&#39;s gain which was upwardly revised from no change. During the third quarter, factory output rose at a 4.2% annual rate versus 2Q which rose 5.1%.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061017d.jpg" width="353">
Production of durable consumer goods dropped 1.8% due to a 2.6% decline 9-7.7% y/y) in the output of automotive products. Output of appliances &amp; furniture also was weak and fell 2.4% (-5.0% y/y). Nondurable consumer goods output fell 0.6% (+2.2% y/y) but nonenergy nondurables output rose 0.1% (3.1% y/y), the increase solely due to higher output of foods &amp; tobacco (3.5% y/y).
Business equipment production slipped 0.2% after the upwardly revised 0.2% August gain. Output of information processing &amp; equipment jumped 0.8% (16.7% y/y).Factory output overall less the hi-tech industries fell 0.5% (+4.8% y/y).
Overall capacity utilization fell to 81.9%, the lowest level since May.

<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">September</th>
<th scope="col">August</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">Industrial Production</td>
<td>-0.6%</td>
<td>0.0%</td>
<td>5.5%</td>
<td>3.2%</td>
<td>4.1%</td>
<td>0.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Manufacturing (NAICS)</td>
<td>-0.3%</td>
<td>0.3%</td>
<td>6.2%</td>
<td>3.9%</td>
<td>4.8%</td>
<td>0.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Consumer Goods</td>
<td>-0.9%</td>
<td>0.4%</td>
<td>0.5%</td>
<td>2.1%</td>
<td>2.1%</td>
<td>1.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Business Equipment</td>
<td>-0.2%</td>
<td>0.2%</td>
<td>18.5%</td>
<td>9.1%</td>
<td>9.3%</td>
<td>0.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Capacity Utilization</td>
<td>81.9%</td>
<td>82.5%</td>
<td>79.1% (9/05)</td>
<td>80.1%</td>
<td>78.6%</td>
<td>75.7%</td>
</tr>
</tbody>
</table>
NAHB Housing Market Index Ticked Up 
by <a href="/comment/Moeller.html">Tom Moeller</a> October 17, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061017f.jpg" width="353">
The National Association of Home Builders&#39; (NAHB) October Composite Housing Market Index rose to 31 from 30 in September. It was the first m/m increase since last year. Regardless, the latest level remained down by more than one half from the levels of 2005. 
During the last twenty years there has been a 75% correlation between the y/y change in the Composite Index and the change in single family housing starts. 
The improvement was led a sharp gain in the sub-index covering prospective sales in the next six months (10.8% m/m, -43.8% y/y). The sub-index for current sales was unchanged m/m (-56.8% y/y). 
Traffic of prospective home buyers rose modestly from the extremely low levels of the prior two months. 
Only the housing market indexes for the Northeast (-50.7% y/y) and the Midwest (-55.6% y/y) improved m/m. In the South the index fell (-51.3%) as it did out West (-64.8% y/y). 
The NAHB index is a diffusion index based on a survey of builders. Readings above 50 signal that more builders view conditions good than poor. 
Visit the <a href="http://www.nahb.org">National Association of Home Builders</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/@S4/@S4.HTM">Nat&#39;l Association of Home Builders</a> </th>
<th scope="col">October</th>
<th scope="col">September</th>
<th scope="col">Oct. &#39;05 </th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Composite Housing Market Index</td>
<td>31</td>
<td>30</td>
<td>68</td>
<td>67</td>
<td>68</td>
<td>64</td>
</tr>
</tbody>
</table>
Lower Gasoline Prices Helped Spending at Chain Stores, Again 
by <a href="/comment/Moeller.html">Tom Moeller</a> October 17, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061017e.jpg" width="353">
The International Council of Shopping Centers (ICSC)-UBS reported that chain store sales increased 0.6% last week on the heels of the prior week&#39;s 0.5% rise. The gains limited the decline in sales so far in October to 0.2% versus the September average .
The retail price for a gallon of regular unleaded gasoline fell for the tenth consecutive week. The four cent decline last week to an average $2.23 (-18.3% y/y) and was to the lowest level since December.
Last week&#39;s decline in spot market gasoline prices paused yesterday. The NY harbor price for regular unleaded gasoline rose to $1.54 per gallon versus an average $1.50 last week.
During the last ten years there has been a 47% correlation between the y/y change in chain store sales and the change in nonauto retail sales less gasoline.
The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.
The leading indicator of chain store sales from ICSC-UBS rose for the fifth week in the last six, by 0.1% (0.8% y/y).
The latest Short-Term Energy Outlook from the U.S. Energy Information Administration is available <a href="http://www.eia.doe.gov/emeu/steo/pub/contents.html">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/@S2/@S2.HTM">ICSC-UBS (SA, 1977=100)</a></th>
<th scope="col">10/14/06</th>
<th scope="col">10/07/06</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">Total Weekly Chain Store Sales</td>
<td>468.1</td>
<td>465.4</td>
<td>3.9%</td>
<td>3.6%</td>
<td>4.7%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>
 The German Financial Community Is Growing More Cautious about Economic Conditions Six Month Ahead 
by <a href="/comment/Curley.html">Louise Curley</a>  October 17, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061017g.jpg" width="353">
The ZEW measure of economic sentiment among analysts and institutional investors regarding the economic outlook six months ahead fell from -22.2%in September to -27.4% in October, that is, the pessimists outweighed the optimists by 27.4%. This is the lowest value since March 1993. In October of last year, the optimists outweighed the pessimists by 39.4%.
At the same time, among the participants in the survey, those who appraised the current situation positively outweighed those who appraised it negatively by 42.9%, the highest value since October 2000. The October value was up from 38.9% in September and from -58.0% in October of 2005. The first chart compares the views of the ZEW participants on the current situation and the outlook six months ahead.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061017h.jpg" width="353">
The rapid and sustained rise in the appraisal of current conditions reflects the surprising strength of the German economy in the current year. The Economic Minister, Michael Glos, recently said that the ministry will raise its estimate of 2006 growth to 2.5% from 1.6% estimated last April. It is not surprising, therefore, that investors view the future with some caution. This is especially true given the inevitability of tax increases on January 1, 2007 that are likely to dampen consumer spending. The VAT (value added tax) is scheduled to rise from 16% to 19% and social security contributions will also increase.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061017i.jpg" width="353">
The other major indicator of sentiment in Germany is the IFO measure to be released October 25th. The ZEW measure is based on a small sample--some 300 participants--and represents the opinions of the financial community. The IFO measure is based on a much broader sample--some 7000 participants--and represents the opinions of businessmen engaged in manufacturing, construction, wholesale and retail trade. In the appraisal of the current situation, the two surveys reveal similar views, although the views of the financial community tend to be more volatile than those of the industrialists and trades people. The second chart compares the appraisal of the current situation by the two institutes. The correlation between the two series is fairly high .83.
In the appraisal of the outlook, there is less agreement in the views of the two sectors, represented by a lower correlation--.67--and again, the views of the financial community tend to be more volatile than those of the industrialists and trades people.The third chart compares the views on the outlook of both groups. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/GERMANY/@D8/@D8.HTM">GERMANY ZEW&nbsp; (Balance of Opinion)</a></th>
<th scope="col">Oct&nbsp; 06</th>
<th scope="col">Sep 06</th>
<th scope="col">Oct 05</th>
<th scope="col">M/M Dif</th>
<th scope="col">Y/Y Dif</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Current&nbsp;Situation</td>
<td>42.9</td>
<td>38.9</td>
<td>-58.0</td>
<td>4.0</td>
<td>100.9</td>
<td>-61.8</td>
<td>-67.7</td>
<td>-92.6</td>
</tr>
<tr>
<td class="firstcol">Outlook Six Months Ahead</td>
<td>-27.4</td>
<td>-22.2</td>
<td>39.4</td>
<td>-5.2</td>
<td>-66.8</td>
<td>34.8</td>
<td>44.6</td>
<td>38.4</td>
</tr>
</tbody>
</table>


</html>

Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061016h.jpg" width="353">
Growth in productivity together growth in the labor force largely determines a country&#39;s potential growth rate. Recent trends in German productivity, especially in industry, suggest that the recent increase in Germany&#39;s growth rate has solid underpinnings. Productivity in German Industry, as measured by output per employee, increased by 2.4% in August from July and was 8.0% above August, 2005. The comparable figures for productivity as measured by output per working hour are 2.5% and 11.6% respectively. The two measures differ from month to month but show the same general trends, as can be seen in the first chart. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061016i.jpg" width="353">
Germany also reports productivity data in more detail on a quarterly basis. Data are currently available only through the second quarter. Productivity for the total economy in the quarterly series is much lower than that of the productivity in industry in the monthly series, as can be seen in the second chart. Part of the difference in the two series is due to the fact that agriculture and public and personal service, both with low productivity are included in the quarterly series but not in the monthly series.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061016g.jpg" width="353">
The growth in productivity in the manufacturing industry in Germany is now above that of the United States, as can be seen in the third chart. Moreover, when both indexes are compared on a common base year--2000--the current level of the German index is higher than that of the U. S.--meaning that the level of manufacturing productivity in Germany has now risen more than that of the U. S. since 2000. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">PRODUCTIVITY&nbsp; (2000=100)</th>
<th scope="col">Q2 06</th>
<th scope="col">Q1 06</th>
<th scope="col">Q2 05</th>
<th scope="col">Q/Q %</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"> Manufacturing</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">&nbsp; Germany&nbsp;</td>
<td>131.25</td>
<td>117.29</td>
<td>123.94</td>
<td>11.94</td>
<td>5.93</td>
<td>5.47</td>
<td>3.59</td>
<td>3.58</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; United States&nbsp;</td>
<td>126.35</td>
<td>125.53</td>
<td>121.86</td>
<td>0.65</td>
<td>3.69</td>
<td>4.10</td>
<td>18.5</td>
<td>6.21</td>
</tr>
<tr>
<td class="firstcol">Total Economy&nbsp;</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Quarterly Series</td>
<td>108.55</td>
<td>107.80</td>
<td>106.52</td>
<td>0.66</td>
<td>1.91</td>
<td>1.32</td>
<td>0.69</td>
<td>1.21</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Monthly Series &nbsp; (Aggregated on a qtrly basis)</td>
<td>119.7</td>
<td>119.6</td>
<td>114.3</td>
<td>0.11</td>
<td>4.78</td>
<td>4.68</td>
<td>4.72</td>
<td>1.83</td>
</tr>
<tr class="odd">
<td class="firstcol">Monthly Series Total Economy</td>
<td>Aug 06</td>
<td>Jul 06</td>
<td>Aug 05</td>
<td>M/M %</td>
<td>Y/Y %</td>
<td>2005 %</td>
<td>2004 %</td>
<td>2003 %</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Output per employee</td>
<td>125.0</td>
<td>122.1</td>
<td>115.7</td>
<td>2.38</td>
<td>8.04</td>
<td>5.05</td>
<td>5.13</td>
<td>2.78</td>
</tr>
<tr class="odd">
<td class="firstcol"> &nbsp; Output per working hour</td>
<td>124.0</td>
<td>121.0</td>
<td>118.5</td>
<td>2.48</td>
<td>4.64</td>
<td>4.68</td>
<td>4.72</td>
<td>1.83</td>
</tr>
</tbody>
</table>
</body>
</html>

Growth in productivity together growth in the labor force largely determines a country's potential growth rate. Recent trends in German productivity, especially in industry, suggest that the recent increase in Germany's growth rate [...]

German Productivity Growth in Manufacturing Tops That of the United States

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061016d.jpg" width="353">
The U.S. federal government&#39;s budget deficit for FY 2006 fell to $247.7B following deficits near $300B during 2005 and $400B during 2004. The full year figure compared favorably to the August estimate from the Congressional Budget Office of a $260B deficit. CBO expects the FY 2007 deficit to total $286B.
As a percentage of GDP, the U.S. budget deficit fell to 1.9% from 2.6% in FY2005 but may return to 2.5% during the current year.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061016f.jpg" width="353">
Net revenues grew 11.8% during FY2006. Individual income tax receipts (44% of total receipts) registered 12.6% growth after a 14.6% surge the prior year. Withheld taxes rose 7.9% due to growth in employment, nearly double the 4.4% gain during the prior fiscal year, and that was up from 2.5% growth during FY2004. Non-withheld taxes (primarily on capital gains) surged 20.7%, slightly slower than the 31.9% gain during FY2005. Corporate income taxes (13% of total receipts) surged 27.2% as corporate profits grew. Estate &amp; gift taxes increased by 12.6% while higher employment levels raised social insurance &amp; retirement receipts by 5.5%.
As a percentage of GDP revenues rose to 18.1%, the highest level in five years.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061016e.jpg" width="353">
U.S. net outlays grew 7.4% last year versus 7.8% growth during FY2005. Defense spending (19% of total outlays) grew 6.8%, down from 8.6% growth during FY2005. Medicare expenditures (12% of outlays) advanced 10.5%, about stable with the prior year&#39;s growth, and social security spending (21% of outlays) rose a diminished 4.8%. Higher interest rates boosted the government&#39;s interest expense by 23.2% y/y.
As a percentage of GDP outlays rose to 19.9%, up more than one percentage point since 2000.
The Budget Results for Fiscal Year 2006 from the U.S. Treasury Department can be found <a href="http://www.treas.gov/press/releases/hp135.htm"> here</a>.
CBO&#39;s baseline projections of the U.S. budget are available <a href="http://www.cbo.gov/budget/08-17-budproj.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E1/@E106/@E10602/@E106021.HTM">US Government Finance</a> &nbsp;</th>
<th scope="col">September</th>
<th scope="col">August</th>
<th scope="col">Y/Y</th>
<th scope="col">FY 2006</th>
<th scope="col">FY 2005</th>
<th scope="col">FY 2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Budget Balance</td>
<td>$56.0B</td>
<td>-$64.9B</td>
<td>$35.2B (9/05)</td>
<td>-$247.7</td>
<td>-$318.7B</td>
<td>-$412.7B</td>
</tr>
<tr>
<td class="firstcol">Net Revenues</td>
<td>$283.3B</td>
<td>$153.9B</td>
<td>12.6%</td>
<td>11.8%</td>
<td>14.5%</td>
<td>5.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Net Outlays</td>
<td>$227.3B</td>
<td>$218.8B</td>
<td>5.0%</td>
<td>7.4%</td>
<td>7.8%</td>
<td>6.2%</td>
</tr>
</tbody>
</table>
</body>
</html>

The U.S. federal government's budget deficit for FY 2006 fell to $247.7B following deficits near $300B during 2005 and $400B during 2004. The full year figure compared favorably to the August estimate from the Congressional Budget [...]

Higher Receipts Lower U.S. Budget Deficit

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061016a.jpg" width="353">
Unexpectedly, the October index of manufacturing activity in New York State improved to its highest level since this past June. The Empire State Manufacturing Index of General Business Conditions rose 9.1 points to 22.92 versus Consensus expectations for a slight decline to 11.3. 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 employment, inventories and shipments led the improvement though new orders, unfilled orders and delivery times fell. The rise in the employment index was to the second highest level this year.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061016b.jpg" width="353">
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.
Pricing pressure continued to ease. The prices paid index fell ten points to its lowest level in over a year. 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.
Expectations, however, deteriorated. The Empire State index of expected business conditions in six months fell another five points to its lowest level since May reflecting declines in most sub-indexes, except employment. <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061016c.jpg" width="353">
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/empiresurvey_overview.html">here</a>.
The U.S. Treasury Yield Curve: 1961 to the Present from the Federal Reserve Board is available <a href="http://www.federalreserve.gov/pubs/feds/2006/200628/200628pap.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">October</th>
<th scope="col">September</th>
<th scope="col">Oct. &#39;05 </th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Business Conditions (diffusion index)</td>
<td>22.92</td>
<td>13.84</td>
<td>15.02</td>
<td>15.56</td>
<td>28.79</td>
<td>15.98</td>
</tr>
</tbody>
</table>
</body>
</html>

Unexpectedly, the October index of manufacturing activity in New York State improved to its highest level since this past June. The Empire State Manufacturing Index of General Business Conditions rose 9.1 points to 22.92 versus [...]

Empire State Index Highest Since June

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

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

Tighter US immigration enforcement adversely impacting labor force

Economic policy uncertainty, while still elevated, is declining

Gradual disinflation and easier monetary policies across advanced economies

Largest October layoffs since 2003, led by technology

Subdued global shipping costs not yet pointing to supply chain problems

PMIs show still-elevated but slowing US inflation

AI boosting US investment in data centers

US productivity growth has been significantly faster than in other major economies

Consumers' short-term US inflation expectations still elevated while longer-term expectations of financial markets are steady

US financial markets have gotten used to elevated policy uncertainty

FOMC now expects more rate cuts going forward than in June

China gaining ASEAN exports while US exports slump

Job openings less than the number unemployed in July for first time since 2021

Reaccelerating goods price inflation along with sticky services inflation clouds the outlook

Falling oil prices aren't pulling down inflation expectations, pointing to a boost from increased tariffs

Equity market exuberance outpacing macroeconomic data

Apart from Japan, Blue Chip forecasters expect further sizable monetary easing

US production rebounded in Q2, but demand continued to slow

US leader, Germany trailer for real GDP growth over past 3 years

Negative US inflation surprises leading G10 down

Deflation continues in China

Incoming data surprising on downside in US; positive surprises elsewhere

FOMC expects more inflation and less growth than in March

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Sandy Batten

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The Bureau of Labor Statistics released establishment survey data for both October and November today. With the government shutdown during the month of October, there was no household survey for that month. Today’s release contained only November data for households. Nonfarm payrolls (from the establishment survey) increased 64,000 in November but fell 105,000 in October. The 119,000 increase previously reported for September was revised down to a 108,000 rise. The Action Economics Forecast Survey had expected an 80,000 decrease in October and a 35,000 increase in November. The three-month average change in payrolls rebounded to 22,000 in November from -8,000 in October. However, this figure has trended down since early this year, pointing to a modest softening of labor-market conditions. 

This softening was reinforced by a 0.2%-point jump in the unemployment rate, measured in the household survey, to 4.6% in November from 4.4% in September. (As already noted, there was no household survey in October.) The unemployment rate, including employees working part-time for economic reasons plus all marginally attached workers, surged to 8.7% in November from 8.0% in September. For both series, these were the highest readings since September 2021.

Average hourly earnings (AHE), a key variable for the Federal Reserve, showed a further slowing in wage growth. AHE edged up 0.1% m/m in November after a 0.4% monthly jump in October. Importantly, the y/y rate slowed to 3.5%, the slowest since May 2021, from 3.7% in both September and October. The annual pace of the rise in service-producing wages slowed to 3.4% in November from 3.7% in both September and October while the annual growth of goods-producing wages was unchanged at 4.0%. Depending on your estimate of productivity growth, the current pace of total AHE growth is likely still a little too fast to be consistent with the Fed’s 2% inflation target. But clearly, it is moving in the desired direction.

In the **establishment survey**, much of the recent softening reflects declines in federal government employment. Federal government employment fell again in November (-6,000). This follows a sharp decline of 162,000 in October, as some federal employees who accepted a deferred resignation offer came off federal payrolls. Federal government employment is down by 271,000 since reaching a peak in January. (Note however that federal employees on furlough during the government shutdown were counted as employed in the establishment survey because they received pay, even if later than usual, for the pay period that included the 12th of the month. Employees on paid leave or receiving ongoing severance pay are counted as employed in the establishment survey.)

Private-sector employment rose 69,000 in November and 52,000 in October following an upwardly revised 104,000 increase in September (previously 97,000). Goods sector employment rebounded in November, rising 19,000 after a 9,000 fall in October. Construction jobs increased 28,000 in November, their largest monthly gain in more than a year, but slipped 1,000 in October. Manufacturing jobs continued to decline, falling 5,000 in November and 9,000 in October. They have now declined for seven consecutive months, not the result that the Trump Administration new tariff policy had intended.

Private-sector service-producing jobs gained 50,000 in November on top of a 61,000 increase in October and an 87,000 rise in September. A 46,000 increase in healthcare jobs on top of a 44,000 increase in October and an 18,000 gain in social assistance jobs in November after a 21,000 increase in October led the overall increases in the past two months. Other major sectors mostly experienced either job declines or minimal gains in October and November.

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The length of the workweek increased to 34.3 hours in November from 34.2 hours in August, September and October. The goods-producing workweek edged up to 39.8 hours in November from 39.6 hours in October while the private service-producing workweek was unchanged at 33.2 hours in November.

In the **household survey**, the unemployment rate jumped to 4.6% in November, the highest since September 2021 and up from a recent low of 3.4% in April 2023, from 4.4% in September (again, no data for October). The labor force increased 323,000 in November from September after a 470,000 monthly gain in September. The gain in employment slowed in November with the number of employed rising only 96,000 from September following a 251,000 monthly increase in September. The number of unemployed increased 228,000 in November from September following a 219,000 monthly increase in September. The labor force participation rate rose to 62.5% in November, its highest since April, from 62.4% in September. On a slightly brighter note, the average duration of unemployment slipped to 23.0 weeks in November from 24.1 weeks in September while the median duration of unemployment fell to 9.5 weeks, the lowest since May, from 10.0 weeks in September.

The employment/population ratio for all workers slipped to 59.6% in November from 59.7% in September. It remained below the recent peak reading of 61.1% in February 2020 just prior to the pandemic. For men, the rate slipped to 64.6% in November from 64.8% in September and 65.0% in August, and for women, the rate was unchanged at 54.8% in November.

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

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- Total payrolls rose 64k in November but fell 105k in October
- The October decline was more than accounted for by a 157k decline in government employment
- The unemployment rate jumped to 4.6% in November from 4.4% in September.
- There were no household survey data collected for October.

U.S. Employment and the Unemployment Rate Rose in November

Winnie Tapasanun

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Total retail sales were virtually unchanged m/m in October after downwardly revised increases of 0.1% in September (+0.2% initially) and 0.5% in August (+0.6% previously), data from the U.S. Census Bureau showed. The October flat reading followed four consecutive m/m rises and declines in May and April. A 0.1% m/m October increase had been expected in the Action Economics Forecast Survey. The year-on-year growth rate decelerated to 3.5% in October, the lowest since May, from 4.2% in September; this compared with 3.2% in October 2024 and remained far below a high of 17.1% in February 2022 and a peak of 51.8% in April 2021.

Excluding motor vehicles & parts, retail sales rose 0.4% (4.0% y/y) in October, the fifth straight m/m rise, after a 0.1% uptick in September (+0.3% initially). A 0.2% m/m October increase had been expected. Sales of motor vehicles & parts fell 1.6% (+1.2% y/y) following a 0.1% September downtick and three successive m/m increases; this compared to a 6.9% drop (-4.6% y/y) in unit light vehicle sales following no change in September.

Sales in the retail control group, which excludes autos, building materials, gasoline stations, and food services, rose 0.8% (5.1% y/y) in October, the fifth m/m rise in six months, following a 0.1% dip in September. These sales are used in the construction of personal consumption expenditures in NIPA accounts. Nonauto sales excluding gasoline & building materials advanced 0.6% (4.9% y/y), also up for the fifth time in six months, following a flat September reading.

Sales by category were mixed in October. To the upside, general merchandise store sales rose 0.5% (2.0% y/y), the fifth consecutive m/m rise, after a 0.1% uptick in September; within this grouping, department store sales surged 4.9% (4.6% y/y)—the third m/m increase in four months and the largest since February 2022—following a 0.3% September decline. Furniture & home furnishing store sales rebounded 2.3% (0.5% y/y), the first m/m gain since July, after a 2.4% September decrease. Sporting goods, hobby, book & music store sales climbed 1.9% (4.6% y/y), up for the third time in four months, reversing a 1.7% September decrease. Nonstore retail sales recovered 1.8% (9.0% y/y), the eighth m/m gain in nine months, after falling 0.4% in September. Miscellaneous store sales rose 1.5% (9.5% y/y) following a 2.2% September increase and two successive m/m decreases. Clothing & accessory store sales grew 0.9% (5.7% y/y), the seventh m/m rise in eight months, reversing a 0.9% September drop. Electronics & appliance store sales increased 0.7% (4.9% y/y) after holding steady in September.

To the downside, building materials & garden equipment store sales slid 0.9% (-4.5% y/y) in October, the third m/m slide in four months, after a 0.1% downtick in September. Gasoline station sales fell 0.8% (+1.9% y/y), the first m/m fall since May, after a 1.9% September advance.

In the nondiscretionary sales categories, health & personal care store sales fell 0.6% (+5.7% y/y) in October, down for the second month in three, following a 1.3% gain in September. Food & beverage store sales, however, rose 0.3% (2.2% y/y), the fourth m/m rise in five months, following a 0.1% September easing.

Consumers appeared to dine out less frequently in October amid still-high inflation (September CPI +0.3% m/m, +3.0% y/y; core CPI +0.2% m/m, +3.0% y/y). Restaurant & drinking place sales fell 0.4% (+4.1% y/y) in October, the first m/m fall since May, following a downwardly revised 0.2% increase in September (+0.7% initially).

Retail Sales data can be found in Haver's **USECON** database. The expectations figures are from the Action Economics Forecast Survey in **AS1REPNA**.

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- October total retail sales +0.03% (+3.5% y/y), w/ mixed results across categories.
- Ex-auto sales +0.4% (+4.0% y/y); auto sales -1.6% (+1.2% y/y).
- Sales rebound m/m in department stores (+4.9%) and furniture stores (+2.3%).
- Sales drop m/m in bldg. materials & garden equipt. stores (-0.9%) and gasoline stations (-0.8%).

U.S. Retail Sales Hold Steady in October Following Four Straight M/M Gains

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The Empire State Manufacturing Index of General Business Conditions dropped more than expected to -3.9 in December, down from 18.7 in November and 10.7 in October, according to the Empire State Manufacturing Survey released by the Federal Reserve Bank of New York. A reading of 10.7 for December had been expected in the Action Economics Forecast Survey. The December negative reading indicated that the business activity in New York State contracted for the first time since September; it was also down from 2.1 in December 2024 and a high of 20.2 in November 2024. The percentage of respondents reporting an increase in general business conditions was 31.8% in December, down from 38.7% in November; the percentage reporting a decrease was 35.7%, up from November’s 20.0%. The latest survey was conducted between December 2 and December 9.

The headline index reflects the answer to a single question concerning the state of economic activity and is not calculated from the components. Haver Analytics calculates a composite index from the five major components, which is comparable to the ISM manufacturing index. This calculated index fell to the neutral-level 50.0 in December—the lowest level since September—down from 55.4 in November, 52.7 in October, and 51.0 in December 2024 but up from a low of 42.5 in January 2024. The index is the average of five diffusion indexes: new orders, shipments, employment, supplier deliveries and inventories with equal weights (20% each).

In the latest survey, the new orders index fell to 0.0 in December after a 12.2-point gain to 15.9 in November, signaling steady orders this month and a marked improvement from a low of -35.0 in January 2024. The shipments index decreased to -5.7 in December, the lowest level in three months, following a 2.4-point increase to 16.8 in November, but it was up from a low of -22.7 in April 2024. The unfilled orders index dropped to -14.9 in December on top of a 1.9-point decrease to -5.8 in November, indicating unfilled orders contracted for the seventh straight month and to the weakest level since January 2024; the index reached a low of -24.2 in January 2024. The inventories index fell to 4.0 in December after a 7.7-point rise to 6.7 in November, suggesting that inventories expanded for two months following three consecutive months of contraction. Meanwhile, the delivery times index fell to -5.9 in December, the lowest reading since December 2024, from 7.7 in November, with 9.9% of respondents reporting higher delivery times and 15.8% reporting lower delivery times.

On the labor front, the number of employees index advanced to 7.3 in December after a 0.4-point increase to 6.6 in November, showing employment expanded for the sixth time in seven months and at the highest level since July. The index remained above a low of -9.7 in December 2023. A higher 16.2% of respondents reported an increase in employment in December while 8.9% reported a decline. The average workweek index slipped to 3.5 in December from 7.7 in November, remaining positive for a second month after two months in negative territory.

Inflation indicators eased this month but remained elevated. The prices paid index dropped to 37.6 in December, the lowest level since January, following a 3.4-point decrease to 49.0 in November. The index was up from a low of 21.1 in December 2024 and a low of 16.7 in December 2023 but significantly down from a high of 86.4 in April 2022. A 39.6% of respondents reported higher prices paid in December while only 2.0% reported lower prices paid. The prices received index fell to 19.8 in December, the lowest reading since February, following a 3.2-point decline to 24.0 in November. The index was up from a low of 4.2 in December 2024 and a low of 3.9 in July 2023 but well below a peak of 56.1 in March 2022. A 21.8% of respondents reported higher prices received in December while 2.0% reported lower prices received.

Firms grew more optimistic about the future business outlook in the latest survey. The index for future business conditions jumped to 35.7 in December, the strongest level since January, from 19.1 in November, with an increased 52.9% of respondents expecting business conditions to improve in the next six months. Future new orders rose to 38.0 in December, the highest figure since March 2022, from 23.3 in November and shipments rose to 33.3, the highest level since November 2024, from November’s 23.3. Growth in employment eased slightly to 8.8 in December from 11.9 in November but still showed continued employment expansion. Capital spending plans remained positive for the second successive month, with the future capital expenditures index at 6.9 in December compared with 11.5 in November. Expected prices paid fell to 55.4 in December, the lowest level since January, from 62.5 in November, while expected prices received rose to 46.5, the highest reading since April 2022, from November’s 41.3.

The indexes in this report are diffusion indexes and measure the percentage of respondents indicating an increase minus the percentage indicating a decrease with zero separating expansion from contraction.

The New York Fed survey data are contained in Haver’s **SURVEYS** database. The expectations series is in Haver’s **AS1REPNA** database.

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- December General Business Conditions Index down 22.6 pts. to -3.9.
- Unfilled orders (-14.9) and shipments (-5.7) negative; employment (7.3, highest since July) and inventories (4.0) positive; new orders flat (0.0).
- Prices paid at an 11-month-low 37.6 and prices received at a 10-month-low 19.8, still elevated.
- Firms optimistic: Future Business Conditions Index at an 11-month-high 35.7 and future prices paid at an 11-month-low 55.4.

U.S. Empire State Manufacturing Index Plunges in December to a Three-Month Low

Robert Brusca

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**Tankan overview:** Japan's Tankan report is an important quarterly assessment and outlook of the Japanese economy. Historically, the performance of manufacturers is considered to be the bellwether in this survey for performance of the economy. In the fourth quarter of 2025, the manufacturing index moved up to 15 from 14 in the third quarter. This compares to a value of 12 in the first quarter and a four-quarter average of 13.5. Since late-2006, the manufacturing index has averaged 5.3, marking the performance in 2025 as a substantial improvement from the long period where Japan struggled with deflation. On dated back to 2003, the manufacturing index has a standing in the queue of data in its 70.8 percentile, a reasonably firm reading. 

**Nonmanufacturers:** The index for nonmanufacturers logged a reading of 34 in the fourth quarter compared to 34 in the third quarter and a reading of 35 in the first quarter of 2025; the one-year average for nonmanufacturers is 34.3, marking that sector as little changed over the course of the year. Nonmanufacturing in the fourth quarter has an index standing at its 97.8 percentile, marking it as an extremely high standing on data back to late-2003. 

**Nonmanufacturing details:** Readings across the nonmanufacturing sector are above their respective one-year averages for all subsectors except transportation where the fourth quarter index backs down to 27 from an average of 30.5 and for restaurants & hotels that back down to a reading of 25 from an average of 39.3. The queue percentile standings for the subsectors show a good deal of strength with construction at a 98.9 percentile standing, services for businesses also at a 98.9 percentile standing, transportation - despite the back off from the average - is at a 94.4 percentile standing, and real estate and wholesaling are at 93.3 percentile standings on data back to 2003.  

**The Tankan outlook-** The survey also produces an outlook. For large manufacturers for the first quarter of 2026, the outlook metric moves up to 15 from what had been 12 for the fourth quarter of 2025. The outlook for nonmanufacturers is flat month-to-month at 28, the same as in the fourth quarter. The outlook for manufacturing has a queue standing in its 78.7 percentile on data back to 2003, while nonmanufacturing has a standing for the outlook reading at its 98.9 percentile marking these outlooks as quite good. 

**The BOJ is watching-** This is a survey the Bank of Japan will be looking at and assessing what policy should do and how strong the economy appears to be. On these data, the economy would appear to be firm, the outlook would appear to be solid, and if the Bank of Japan were to decide to pay more attention to inflation, the economy would seem to be in a position to absorb a rate hike without much difficulty.

**Other-sized enterprises-**
**Manufacturing:** The survey also produces results for medium-sized and small-sized firms, as well as outlooks for medium-sized and small-sized firms (that are not presented in the table). The fourth quarter assessments of performance, however, show improvements for manufacturing in both medium- and small-sized enterprises; they also show rankings of medium-sized firms in manufacturing in their 85th percentile, the same as for small sized enterprises. 

**Nonmanufacturing:** Nonmanufacturing for medium- and small-sized enterprises show improvements in the fourth quarter results and also demonstrates high rankings of those readings for those respective sectors.

**Summing up:**
On balance, it's a solid Tankan report for Japan's economy and should provide reassurance to the Bank of Japan and to the current government that the economy is on solid footing as each looks at the situation and tries to assess the best policy options. 

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Japan

Japan’s Tankan Ticks Higher for Large Manufacturers

Tian Yong Woon

This week, we assess Asia through a risk lens, given the recent flare-ups across the region. Japan–China tensions, following Japanese Prime Minister Takaichi’s recent remarks on Taiwan, have prompted some retaliatory measures from China, including travel advisories against visiting Japan. This raises the risk of a dent to Japan’s tourism income this year, given the significance of aggregate Chinese tourism expenditure (chart 1), although any such impact would come at a time when Japan is already grappling with the effects of overtourism. Beyond Japan–China relations, investors are also bracing for the Bank of Japan’s (BoJ) final scheduled policy decision of the year, where a rate hike is expected despite Takaichi’s pro-growth fiscal stance. This expectation reflects ongoing yen weakness (chart 2), alongside encouraging results from Japan’s Q3 Tankan survey, among other factors. While the anticipated hike is not, in itself, a risk, the associated increase in financing costs—coupled with the likelihood of higher government bond issuance to support growth objectives—adds to investor concerns.

Risks are also evident in China, particularly after the November data docket showed a continued deterioration in growth across multiple sectors (chart 3). While China’s 5% growth target for the year remains within reach, achieving it appears to hinge on a narrow set of growth drivers, notably trade. On this front, China has defied earlier investor concerns to record a substantial widening of its trade surplus this year, despite a worsening bilateral trade balance with the US (chart 4). However, while supportive of growth, this development risks drawing increased pushback from non-US trading partners that have been absorbing China’s excess capacity.

Elevated risks are also present elsewhere in Asia, particularly in Southeast Asia, where renewed military clashes between Thailand and Cambodia have once again pushed bilateral tensions to the fore (chart 5). Thailand additionally faces political uncertainty ahead of early elections, following Prime Minister Anutin’s dissolution of parliament last week. Lastly, we turn to semiconductor- and AI-related risks, which are especially pertinent to Asia given the dominance—and reliance—of Taiwan and South Korea in the sector. A key risk lies in the current extent of market optimism surrounding future AI-related earnings (chart 6), suggesting greater scope for disappointment than for further upside surprises.

**Japan-China tensions**
Geopolitics will likely remain front and centre in Asia heading into the new year,  with several flashpoints carrying the risk of broader regional spillovers. One such case is the recent flare-up in tensions between China and Japan, following new Japanese Prime Minister Takaichi’s parliamentary remarks on Taiwan. Since then, Chinese authorities have rolled out a series of measures — urging Chinese citizens to avoid travelling to or studying in Japan, reinstating an import ban on Japanese seafood, among others. While none of these steps are particularly substantial on their own, they underscore a rapidly deteriorating bilateral dynamic. The economic implications are not trivial. As shown in chart 1, spending by Chinese tourists has historically made up a significant share of Japan’s total inbound tourism receipts — roughly a quarter in recent quarters — with especially strong concentrations in certain regions such as Osaka. Although the absence of Mainland Chinese tourists has been keenly felt since tensions escalated, early indications suggest that increased arrivals from other countries have helped offset some of the shortfall. More recently, a series of close military encounters between China and Japan has further heightened concerns. The risk of miscalculation has grown, raising the possibility of an inadvertent escalation at a time when geopolitical sensitivities in the region are already elevated.


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**Japan**
Japan–China tensions aside, investors will also be focused on the Bank of Japan’s upcoming monetary policy meeting this week, the last of the year. After Governor Ueda’s recent remarks, markets are now expecting a 25 bps rate hike. This has been especially evident in the bond market, where yields have risen sharply in recent weeks (chart 2). The move partly reflects expectations of tighter policy, but also concerns Prime Minister Takaichi’s more expansionary fiscal stance. The recently submitted supplementary budget points to increased government bond issuance, adding supply pressure, weighing on bond prices, and pushing yields higher. The rise in yields also poses a risk when combined with increased bond issuance, as this implies higher financing costs for the government. A hike this month is still expected despite the government’s loose fiscal tilt, given yen weakness and recent readings of softer inflation. However, the outlook for any additional tightening beyond December remains uncertain. With the new year approaching and annual spring wage negotiations on the horizon, the BoJ will need further confirmation on wages and inflation before moving again. Meanwhile, the ongoing Japan–China frictions, while not yet generating major economic spillovers, remain a meaningful downside risk. Any material escalation could weigh on Japan’s outlook and complicate the case for further policy tightening.

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**China**
Moving to China, the latest monthly data point to a broad-based slowdown in growth in November. Year-on-year retail sales growth slowed to its weakest pace since 2022, while year-to-date year-on-year fixed asset investment growth fell to its lowest level since the outbreak of the COVID-19 pandemic in 2020 (chart 3). Industrial production growth also eased, albeit to a lesser extent. In addition, house price declines accelerated, reversing the easing trend seen in previous months. Overall, the latest data extend the pattern of deteriorating growth observed in recent months. That said, it remains to be seen whether the November readings will ultimately cause China to miss its 5% growth target for the year, given the substantial head start accumulated over the first three quarters. Moreover, China has enjoyed a bumper year in trade, which we discuss in the next section.

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Looking more closely at China’s trade performance, it has become clear that earlier fears of a trade-driven collapse in China’s growth have not materialised. Instead, China’s overall trade surplus has continued to widen, having topped $1 trillion this year, even as its bilateral surplus with the US has fallen sharply (chart 4). This suggests that China’s surplus expansion has been driven by other trading partners, which have effectively been absorbing China’s excess capacity. The stronger-than-expected trade outturn has also been a key factor behind the upward revisions to China’s GDP outlook for the year, with growth still on track to meet the 5% target barring any major setbacks. While this dynamic is not a direct risk in itself, surging exports to these partner economies could become problematic if domestic industries in the receiving countries are unable to absorb the inflow or begin to feel crowded out. Such pressures may eventually provoke a policy response. Still, it remains uncertain whether these countries — many of them smaller economies — would adopt measures similar to those taken by the US, given the asymmetric nature of their economic relationships with China.

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**Thailand-Cambodia tensions**
Moving beyond Japan and China, region-specific tensions elsewhere in Asia also warrant attention, though their broader impact remains limited. Notably, renewed military clashes between Thailand and Cambodia have resurfaced despite an earlier peace deal brokered by Malaysia and the US. While the likelihood of these clashes escalating into a wider regional conflict is low — given their primarily border-specific nature — external pressures on both countries remain a latent risk. The previous ceasefire appeared to have been secured only after US President Trump threatened to withhold trade deals unless fighting ceased, suggesting that a similar “carrot-and-stick” approach may be used again to encourage another ceasefire, although nothing is certain. Domestically, Thailand faces additional near-term uncertainties. Prime Minister Anutin must contend with a range of issues, including preparations for early elections following his dissolution of parliament just last week, adding another layer of unpredictability (chart 5). The Thai government’s popularity has also dipped recently, partly due to criticism over its handling of floods in southern Thailand.

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**Semiconductors and AI**
Lastly, we turn to semiconductor and AI-related risks in Asia. As in markets outside the region, this year’s tech rallies are increasingly seen as overextended (chart 6), with some arguing they have entered bubble territory. Many now believe that much of the upside in future earnings has already been priced in, leaving more room for disappointment than for positive surprises. Geopolitical and competitive considerations remain important too, as highlighted by the recent US approval to sell Nvidia’s high-end (though not top-tier) H200 chips to China. However, this approval may not generate the expected enthusiasm among Chinese consumers. If the reaction mirrors that seen after the earlier approval of Nvidia’s lower-end H20 chips, China may use these openings to promote domestic chipmakers such as Huawei. This could help local firms catch up to US peers and gradually reduce reliance on imported semiconductors. Also, if US chipmaker earnings disappoint due to a lukewarm reception of the H200 chips, while local Chinese chipmakers see increased upside potential, this could translate into a divergence in equity price trajectories between the sector’s stocks in the respective markets.

Economy in Brief

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