Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061222a.jpg" width="353">
November personal income again rose a bit less than expectations with a 0.3% increase after a downwardly revised 0.3% increase in October.
The PCE chain price index was unchanged after an unrevised 0.2% decline in October. Prices less food &amp; energy also were unchanged for the first time since 2002. The three month change in core prices fell to 1.8% (AR) and the six month change fell to 2.1%, its lowest this year.
Disappointment in income continued as rental income fell 2.8% (-7.9% y/y) after a downwardly revised 4.7% skid in October. Proprietors&#39; income also rose just 0.1% (2.9% y/y) but October&#39;s increase was revised up to 0.6%.
Wage &amp; salary disbursements increased 0.3% (6.3% y/y) although the October increase was lessened a bit to 0.5%. Factory sector wages slipped marginally (+3.9% y/y) following a downwardly revised 0.4% gain while wages in the private service-producing industries rose a moderate 0.4% (6.8% y/y).
Interest income rose 0.4% (6.3% y/y) for the second month and dividend income surged 1.1% (11.7% y/y) for the third month.
Disposable personal income increased 0.3% (5.1% y/y) after a downwardly revised 0.2% October. Personal taxes increased 0.5% (11.8% y/y) after the 1.1% October jump.
Real disposable personal income rose 0.3% (3.2% y/y) last month and the three month growth in real income was 6.4% (AR). Real disposable income per capita rose 0.2% (2.2% y/y) and three month growth was 5.4% (AR).
Personal consumption surged 0.5% after the upwardly revised 0.3% gain during October. Expectations had been for a 0.6% increase. Real consumer spending rose 0.5%, the same as in October.
The personal savings rate was a more negative -1.0% last month and so far in 2006 has averaged -0.9%. Should the Decline in the Personal Saving Rate Be a Cause for Concern? from the Federal Reserve Bank of Kansas City is available <a href="http://www.kansascityfed.org/PUBLICAT/ECONREV/PDF/2Q06garn.pdf">here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E7/@E711/@E71102/@E71102.HTM">Disposition of Personal Income</a></th>
<th scope="col">November</th>
<th scope="col">October</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">Personal Income</td>
<td>0.3%</td>
<td>0.3%</td>
<td>5.9%</td>
<td>5.2%</td>
<td>6.2%</td>
<td>3.2%</td>
</tr>
<tr>
<td class="firstcol">Personal Consumption</td>
<td>0.5%</td>
<td>0.3%</td>
<td>5.7%</td>
<td>6.5%</td>
<td>6.6%</td>
<td>4.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">Savings Rate</td>
<td>-1.0%</td>
<td>-0.7%</td>
<td>-0.3% (Nov. &#39;05)</td>
<td>-0.4%</td>
<td>2.0%</td>
<td>2.1%</td>
</tr>
<tr>
<td class="firstcol">PCE Chain Price Index</td>
<td>0.0%</td>
<td>-0.2%</td>
<td>1.9%</td>
<td>2.9%</td>
<td>2.6%</td>
<td>2.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Less food &amp; energy</td>
<td>0.0%</td>
<td>0.2%</td>
<td>2.2%</td>
<td>2.1%</td>
<td>2.0%</td>
<td>1.4%</td>
</tr>
</tbody>
</table>
U.S. Durable Goods Orders Rebounded, But ... 
by <a href="/comment/Moeller.html">Tom Moeller</a> December 22, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061222b.jpg" width="353">
New orders for durable goods rose 1.9% last month, a gain after the offsetting volatility of the prior two months when orders fell 8.2% in October after an 8.7% September spike. Consensus expectations had been for a 1.5% rise n total orders during November.
During the last ten years there has been a 69% correlation between the y/y change in durable goods orders and the change in output of durable goods..
A 14.4% rise in total aircraft &amp; parts orders last month, however, still added volatility. In addition, orders for motor vehicles &amp; parts rose 0.2% (-3.9% y/y). Less transportation altogether, slipped 1.1%.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061222c.jpg" width="353">
And broad based order declines in other industries continued to raise questions about the health of the factory sector. Orders for nondefense capital goods less aircraft fell 1.4% reflecting a 1.5% (+5.2% y/y) slide in electrical equipment orders and an 8.9% (+3.8% y/y) drop in machinery. During the last ten years there has been an 86% correlation between the y/y change in capital goods orders less aircraft and the y/y change in business fixed investment in equipment &amp; software from the GDP accounts.
Primary metals orders fell 1.9% (+4.1% y/y), down for the third month in the last four. To the upside were orders for computer s &amp; electronic products which rose 7.5% (10.4% y/y).
Shipments of durable goods increased another slight 0.1% (2.7% y/y) after the downwardly revised 0.3% October uptick. Less the transportation sector shipments fell 0.1% (+4.6% y/y) for the second decline in the last three months. During the last ten years there has been an 82% correlation between the y/y change in durable goods shipments and the change in industrial production of durable goods.
Durable inventories rose just 0.3% (7.8% y/y), the weakest monthly increase since a decline in February. Less the transportation sector inventories also increased a modest 0.2% (8.4% y/y) and the inventory to shipments ratio outside of transportation rose to the highest level since July of last year.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED01/@ED0101/@ED0101.HTM">NAICS Classification</a></th>
<th scope="col">November</th>
<th scope="col">October</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">Durable Goods Orders</td>
<td>1.9%</td>
<td>-8.2%</td>
<td>-0.0%</td>
<td>9.0%</td>
<td>6.4%</td>
<td>-0.6%</td>
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<td class="firstcol">&nbsp;&nbsp;&nbsp; Excluding Transportation</td>
<td>-1.1%</td>
<td>-1.6%</td>
<td>3.4%</td>
<td>9.4%</td>
<td>7.6%</td>
<td>-1.7%</td>
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<tr class="odd">
<td class="firstcol">Nondefense Capital Goods</td>
<td>-0.2%</td>
<td>-14.8%</td>
<td>-8.4%</td>
<td>21.4%</td>
<td>5.6%</td>
<td>-3.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Excluding Aircraft</td>
<td>-1.4%</td>
<td>-3.9%</td>
<td>6.2%</td>
<td>12.3%</td>
<td>2.8%</td>
<td>-2.0%</td>
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</table>
U.S. Consumer Sentiment Recovered Some 
by <a href="/comment/Moeller.html">Tom Moeller</a> December 22, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061222d.jpg" width="353">
The University of Michigan&#39;s full month reading of consumer sentiment in December slipped 0.4% to 91.7, but that was less than the 2.1% drop in the preliminary report. Consensus expectations for a reading of 90.2.
During the last ten years there has been a 76% correlation between the level of consumer sentiment and the y/y change in real consumer spending and during those ten years sentiment has a 68% correlation with the change in nonfarm payrolls.
Consumer expectations for the economy improved from the preliminary read but they still fell 2.4% for the second consecutive monthly decline. Business conditions during the next twelve months fell 6.3% (+1.0% y/y) and long term expected business cosnditions were unchanged for the second month (+10.2% y/y). Expected personal finances slipped for the second consecutive month (-3.9% y/y).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061222e.jpg" width="353">
The reading of current economic conditions actually improved 2.0%, about the same as in the preliminary report. Perceived buying conditions for large household goods rose 3.2% (-1.8% y/y) but perceptions of current personal finances were unchanged (0.0s% y/y).
The reading of whether it&#39;s a good time to buy house fell m/m but remained up from the lows this past Summer.
Expected inflation during the next year increased to 3.5% but for the next five years expected inflation fell to 3.4%. Since 1980 there has been an inverse 63% correlation between the level of sentiment and expected inflation during the next year.
Consumers&#39; opinion about gov&#39;t economic policy slipped m/m to just 89 versus a midmonth read of 86.
The University of Michigan survey is not seasonally adjusted.The mid-month survey is based on telephone interviews with 250 households nationwide on personal finances and business and buying conditions. The survey is expanded to a total of 500 interviews at month end.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF14/@EF1402/@EF1402.HTM">University of Michigan</a></th>
<th scope="col">December (Final)</th>
<th scope="col">December (Prelim.</th>
<th scope="col">November</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
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<td class="firstcol">Consumer Sentiment</td>
<td>91.7</td>
<td>90.2</td>
<td>92.1</td>
<td>0.2%</td>
<td>87.2</td>
<td>88.6</td>
<td>95.2</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Current Conditions</td>
<td>108.1</td>
<td>108.2</td>
<td>106.0</td>
<td>-0.9%</td>
<td>105.1</td>
<td>105.9</td>
<td>105.6</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Expectations</td>
<td>81.2</td>
<td>78.6</td>
<td>83.2</td>
<td>1.2%</td>
<td>75.7</td>
<td>77.4</td>
<td>88.5</td>
</tr>
</tbody>
</table>
Business Enthusiasm Cools a Bit in France & Italy Amid Generally Constructive Climate 
by <a href="/comment/Stone.html">Carol Stone</a> December 22, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061222h.jpg" width="353">
Businesses in France and Italy, mostly manufacturers, reported some tapering down of confidence in December surveys. Conditions in general are much better than in the previous couple of years, but readings in these surveys have eased since the summer.
In France, the INSEE monthly survey was off 2 points in December to 106 from 108 in November. This put the average for all of 2006 at 107. The December value is up from 102 last December and the average of 101 for all of 2005. These indexes are a synthetic measure, scaled to average 100 over time. So businesses assess their conditions as 7% &quot;better than average&quot; this month.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061222i.jpg" width="353">
The mixed and skittish nature of business conditions is suggested, though, by the fact that the current assessment of industrial production dropped suddenly to -2 in December from +14 and +21 in November and October, respectively. These data are net balances, the percentage experiencing or expecting positive outcomes less the percentage on the negative side. Wide swings tend to appear in these French data, so it&#39;s hard to judge the significance of any single month. Order books also give an ambiguous picture. The net balance in December was -7, worse than recent readings, particularly the -3 that prevailed in July, August and September. However, such erosion is modest compared with the much bigger declines that characterized the last five years.
In Italy, the privately conducted ISAE survey showed flat business confidence in December at 96.7 on a base of 2000=100. The peak in this survey was 98.2 in June. All of 2006 averaged 95.8, a noticeable improvement from readings in the mid-to-high 80s that carried through from 2001 until this year. Near-term production forecasts eased to +17 from a peak of +23 in June, but again, lower expectations were the norm for much of the time since 2001. Order books at Italian companies are even clearer in this distinction: the December balance is +5, the highest number since November 2000, and in fact the non-negative readings since June are the first since December 2000.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061222j.jpg" width="353">
So industry in Italy and France is experiencing improved conditions, suggesting they have weathered the near-recession in 2000-2001 and the growing competition from Asian manufacturers. But we&#39;d guess that recent high energy and commodity prices, along with a strong euro, have slowed them down lately. Hopefully the let-up in oil and copper prices will help stabilize their activity, although other metals, especially tin, lead and nickel, are still strong.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol">Business Surveys, SA</th>
<th scope="col">Dec 2006</th>
<th scope="col">Nov 2006</th>
<th scope="col">Oct 2006</th>
<th scope="col">Year Ago</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
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</thead>
<tbody>
<tr class="odd">
<td class="firstcol">FRANCE: Business Climate Indicator</td>
<td>106</td>
<td>108</td>
<td>107</td>
<td>102</td>
<td>107</td>
<td>101</td>
<td>104</td>
</tr>
<tr>
<td class="firstcol">Industrial Production Trend, % Bal</td>
<td>-2</td>
<td>14</td>
<td>21</td>
<td>-4</td>
<td>5</td>
<td>-12</td>
<td>5</td>
</tr>
<tr class="odd">
<td class="firstcol">Order Books</td>
<td>-7</td>
<td>-4</td>
<td>-5</td>
<td>-15</td>
<td>-6</td>
<td>-17</td>
<td>-15</td>
</tr>
<tr>
<td class="firstcol">ITALY: ISAE Business Confidence Indicator, 2000=100</td>
<td>96.7</td>
<td>96.7</td>
<td>97.0</td>
<td>91.4</td>
<td>95.8</td>
<td>87.5</td>
<td>89.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Production Forecast, % Bal</td>
<td>17</td>
<td>19</td>
<td>20</td>
<td>15</td>
<td>19</td>
<td>12</td>
<td>15</td>
</tr>
<tr>
<td class="firstcol">Order Books</td>
<td>5</td>
<td>3</td>
<td>2</td>
<td>-10</td>
<td>-1</td>
<td>-18</td>
<td>-15</td>
</tr>
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</table>


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November personal income again rose a bit less than expectations with a 0.3% increase after a downwardly revised 0.3% increase in October. The PCE chain price index was unchanged after an unrevised 0.2% decline in October. Prices less [...]

U.S. Personal Income Again Light, Core Prices Ease

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/061221n.jpg" width="353">
We expressed concern just a few weeks ago here about the whether the Canadian economy might be entering a slowdown. Our discussion of Q3 GDP indicated just scattered evidence, but our edginess increased due to an outright contraction in the monthly GDP for September that Statistics Canada calculates from industry data.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221o.jpg" width="353">
In today&#39;s report, the September figure was revised lower, now showing a 0.4% decline instead of the 0.3% reported initially. Then in October, there was almost no movement at all. The total was down a minuscule C$160 million, a change of 0.01%. This was almost exactly divided between good-producing and service-producing sectors, which fell C$80 million and C$79 million, respectively. Among the goods-producing industries, manufacturing is undergoing an active contraction, with declines of 1.8% in September and 0.8% and October; its activity is running 4.2% below last October.
Services are seeing a kind of bifurcated performance, with weakness in those sectors related to the distribution of goods -- wholesale and retail trade, transportation, etc. -- and continuing growth in the purer service areas, such as finance and health care. The pattern in arts, recreation and travel-related has been interesting: those industries were weak back in the summer, but picked up nicely beginning in August. This was the time when gasoline prices turned down, and we wonder if the relief there gave a boost to late summer and autumn recreation.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221m.jpg" width="353">
Further, press reports today also highlighted a fall in retail sales. These were off 0.5% in October in real terms. In current C$, the total was off 0.7%, but some of this is due to a 2.5% decrease at gas stations, likely due to prices. Other store groups, again in current dollars, saw declines, but some of this is monthly volatility in sectors that had been strong in September, especially clothing and shoes. But there were also decreases in furniture, building materials, general merchandise and sporting goods. So consumer demand, which has heretofore held up well, is now showing some hesitation.
In any event, we seem last month to have been right, unfortunately, to be concerned about Canada&#39;s growth prospects and will continue to monitor this developing situation.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/G10/@G4/@G42/@G42.HTM">Canada</a><a href="http://www.haverselect.com/dlx/G10/@G4/@G42/@G42.HTM">: SA, Bil.Chn.97C$</a></th>
<th scope="col">Oct 2006</th>
<th scope="col">Sept 2006</th>
<th scope="col">Aug 2006</th>
<th scope="col">Oct 2005</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
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<tbody>
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<td class="firstcol">Total GDP</td>
<td>1089.7</td>
<td>1089.8</td>
<td>1094.5</td>
<td>1072.0</td>
<td>1063.0</td>
<td>1034.0</td>
<td>1002.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; % Change</td>
<td>-0.0</td>
<td>-0.4</td>
<td>0.3</td>
<td>1.6</td>
<td>2.8</td>
<td>3.1</td>
<td>2.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Goods-Producing Industries</td>
<td>-0.0</td>
<td>-1.3</td>
<td>0.1</td>
<td>-1.4</td>
<td>2.0</td>
<td>2.9</td>
<td>1.4</td>
</tr>
<tr>
<td class="firstcol">Service-Producing Industries</td>
<td>-0.0</td>
<td>-0.0</td>
<td>0.4</td>
<td>3.1</td>
<td>3.2</td>
<td>3.2</td>
<td>2.3</td>
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<tr class="odd">
<td class="firstcol">Retail Trade*</td>
<td>356.5</td>
<td>358.3</td>
<td>358.0</td>
<td>335.9</td>
<td>336.4</td>
<td>321.9</td>
<td>309.7</td>
</tr>
<tr>
<td class="firstcol">&nbsp; % Change</td>
<td>-0.5</td>
<td>0.1</td>
<td>0.8</td>
<td>6.1</td>
<td>4.5</td>
<td>3.9</td>
<td>2.6</td>
</tr>
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We expressed concern just a few weeks ago here about the whether the Canadian economy might be entering a slowdown. Our discussion of Q3 GDP indicated just scattered evidence, but our edginess increased due to an outright contraction [...]

Canadian Economy Stalls Out in October

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221k.jpg" width="353">
The Philadelphia Federal Reserve Bank&#39;s Index of General Business Conditions in the manufacturing sector fell and was negative for the third month in the last four. The December reading of -4.3 was the lowest since early 2003 and compared to Consensus expectations for just a slight decline to +3.5.
During the last ten years there has been a 65% correlation between the level of the Philadelphia Fed Business Conditions Index and three month growth in factory sector industrial production. There has been a 43% correlation with q/q growth in real GDP.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221l.jpg" width="353">
The sub indexes for unfilled orders, delivery times and inventories accounted for much of the total&#39;s decline. New orders improved to a less negative reading and shipments surged. The employment index also improved. During the last ten years there has been a 75% correlation between the employment index and the three month growth in factory payrolls.
The business conditions index reflects a separate survey question, not the sub indexes.
The prices paid index fell to the lowest level since March. During the last ten years there has been a 76% correlation between the prices paid index and the three month growth in the intermediate goods PPI. There has been an 85% correlation with the change in core intermediate goods prices.
The separate index of expected business conditions in six months nearly halved m/m and fell to the lowest level since August.
The latest Business Outlook survey from the Philadelphia Federal Reserve Bank can be found <a href="http://www.phil.frb.org/files/bos/bos1206.html">here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S504/@S504.HTM">Philadelphia Fed Business Outlook</a></th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">Dec. &#39;05</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
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<td class="firstcol">General Activity Index</td>
<td>-4.3</td>
<td>5.1</td>
<td>10.9</td>
<td>8.0</td>
<td>12.4</td>
<td>28.0</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index</td>
<td>20.6</td>
<td>26.7</td>
<td>47.1</td>
<td>36.6</td>
<td>43.5</td>
<td>51.2</td>
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The Philadelphia Federal Reserve Bank's Index of General Business Conditions in the manufacturing sector fell and was negative for the third month in the last four. The December reading of -4.3 was the lowest since early 2003 and [...]

Philadelphia Fed Index Fell Unexpectedly

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221i.jpg" width="353">
The number of mass layoff events rose 3.2% in November for the fifth increase in the last six months. That was enough to lift the number of layoff events to the highest level of 2006.
During the last ten years there has been a (negative) 85% correlation between the three month average level of layoff announcements and the y/y change in payroll employment.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221j.jpg" width="353">
The number of persons affected last month by mass layoffs surged 20.0% m/m, also to the highest level of the year. Nevertheless, the number of persons affected by mass layoffs during the first eleven months of this year fell 17.6% from the first eleven months of 2005.
Increased layoffs in construction (10.4% y/y) and manufacturing (15.6% y/y) accounted for much of the recent increase while the number of layoff events in retail (-11.5% y/y) and information (-4.8% y/y) fell.
The Mass Layoff Statistics (MLS) program collects reports on mass layoff actions that result in workers being separated from their jobs. Monthly mass layoff numbers are from establishments which have at least 50 initial claims for unemployment insurance (UI) filed against them during a 5-week period.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W5/@W507/@W507.HTM">Mass Layoffs</a></th>
<th scope="col">November</th>
<th scope="col">October</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">All US Industries (# Events, SA)</td>
<td>1,208</td>
<td>1,171</td>
<td>0.2%</td>
<td>15,699</td>
<td>15,926</td>
<td>19,220</td>
</tr>
<tr>
<td class="firstcol">Total (# Persons, SA)</td>
<td>135,415</td>
<td>113,724</td>
<td>12.9%</td>
<td>1,722,452</td>
<td>1,591,081</td>
<td>1,946,548</td>
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The number of mass layoff events rose 3.2% in November for the fifth increase in the last six months. That was enough to lift the number of layoff events to the highest level of 2006. During the last ten years there has been a [...]

Mass Layoffs Up

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221h.jpg" width="353">
The National Activity Index (CFNAI) from the Federal Reserve Bank of Chicago remained negative in November at -0.26. The figure was negative for the fifth month in the last seven. The three-month moving average of the CFNAI fell to -0.32, its lowest level since 2003.
A zero value of the CFNAI indicates that the economy is expanding at its historical trend rate of growth and during the last twenty years there has been a 68% correlation between the level of the CFNAI and q/q growth in real GDP.
The CFNAI is a weighted average of 85 indicators of economic activity. The indicators reflect activity in the following categories: production and income, the labor market, personal consumption and housing, manufacturing and trade sales, and inventories &amp; orders.
The complete CFNAI report is available <a href="http://www.chicagofed.org/economic_research_and_data/files/cfnai_November2006.pdf">here</a>.
The latest Survey of Professional Forecasters from the Federal Reserve Bank of Philadelphia is available <a href="http://www.philadelphiafed.org/files/spf/survq406.html">here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S503/@S503.HTM">Chicago Fed</a></th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">November &#39;05</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">CFNAI</td>
<td>-0.26</td>
<td>-0.30</td>
<td>0.88</td>
<td>0.21</td>
<td>0.30</td>
<td>-0.17</td>
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The National Activity Index (CFNAI) from the Federal Reserve Bank of Chicago remained negative in November at -0.26. The figure was negative for the fifth month in the last seven. The three-month moving average of the CFNAI fell to [...]

Chicago Fed Nat'l Activity Index Negative

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According to the Conference Board, the composite index of leading economic indicators edged up 0.1% last month, the same as during October which was downwardly revised. The increase in November marked the third consecutive monthly increase, the first string of three months gain since the Spring of 2005. Consensus expectations for November had been for no change.
During the last ten years there has been a 59% correlation between the y/y change in the leading indicators and the lagged change in real GDP.
The breadth of one month gain amongst the 10 components of the leading index reversed the prior month&#39;s improvement and fell to 40%, but over the last six months 55% of the component series rose.
A rising money supply, improved vendor performance and higher capital goods orders accounted for much of last month&#39;s gain in the leading index. That was offset by lower building permits, higher claims for jobless insurance and easier consumer expectations.
The method of calculating the contribution to the leading index from the spread between 10 year Treasury securities and the Fed funds rate has been revised. A negative contribution will now occur only when the spread inverts rather than when declining as in the past. More details can be found <a href="http://www.conference-board.org/pdf_free/economics/bci/lei0705.pdf">here</a>.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221f.jpg" width="353">
The leading index is based on eight previously reported economic data series. Two series, orders for consumer goods and orders for capital goods, are estimated.
The coincident indicators increased 0.2% after an upwardly revised 0.2% increase during October. Over the last ten years there has been a 91% correlation between the y/y change in the coincident indicators and real GDP growth.
The lagging indicators rose a solid 0.5%, the largest increase since June. The ratio of coincident to lagging indicators, which is a measure of actual economic performance versus excess, was unchanged. The ratio has been stuck at the current level since since July.
Visit the Conference Board&#39;s <a href="http://www.conference-board.org">site</a> for coverage of leading indicator series from around the world.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/BCI/BCI.HTM">Business Cycle Indicators</a></th>
<th scope="col">November</th>
<th scope="col">October</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">Leading</td>
<td>0.1%</td>
<td>0.1%</td>
<td>0.0%</td>
<td>2.3%</td>
<td>7.4%</td>
<td>5.0%</td>
</tr>
<tr>
<td class="firstcol">Coincident</td>
<td>0.2%</td>
<td>0.2%</td>
<td>2.3%</td>
<td>2.2%</td>
<td>2.5%</td>
<td>0.4%</td>
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According to the Conference Board, the composite index of leading economic indicators edged up 0.1% last month, the same as during October which was downwardly revised. The increase in November marked the third consecutive monthly [...]

U.S. Leading Economic Indicators Edged Up

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221d.jpg" width="353">
Initial unemployment insurance claims increased 9,000 last week to 315,000 and reversed half of the revised decline during the prior week. The increase matched Consensus expectations.
The latest figure covers the December survey period for nonfarm payrolls and claims fell 8,000 (-2.5%) from the November period.
During the last ten years there has been a (negative) 77% correlation between the level of initial claims and the m/m change in nonfarm payroll employment.
The four-week moving average of initial claims fell to 325,750 (+2.9% y/y).
Continuing claims for unemployment insurance rose 45,000 and reversed all of the prior week&#39;s decline.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221e.jpg" width="353">
The insured rate of unemployment remained at 1.9% for the seventh consecutive week and equaled the average rate since February.
Interest Rates, Carry Trades, and Exchange Rate Movements from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-31.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
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<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">12/16/06</th>
<th scope="col">12/09/06</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>315</td>
<td>306</td>
<td>1.0%</td>
<td>332</td>
<td>343</td>
<td>403</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Continuing Claims</td>
<td>--</td>
<td>2,520</td>
<td>-3.7%</td>
<td>2,662</td>
<td>2,924</td>
<td>3,532</td>
</tr>
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Initial unemployment insurance claims increased 9,000 last week to 315,000 and reversed half of the revised decline during the prior week. The increase matched Consensus expectations. The latest figure covers the December survey [...]

Initial Unemployment Insurance Claims Rose

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221a.jpg" width="353">
U.S. real GDP growth last quarter was revised down to 2.0% (AR). The estimate had started at 1.6% then was raised to 2.2% last month and compared to Consensus expectations for no change at 2.2%. The rise in GDP last quarter was the second slowest quarterly growth rate since 1Q 2003.
Expectations for growth this quarter call for further slowdown then improvement to 3.0% GDP growth next year. Economic forecasts from Macroeconomic Advisors are available in the Haver DLX database MA4CAST. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221b.jpg" width="353">
Growth in corporate profitability was revised slightly lower to still-firm 3.9% (30.6% y/y) from the 4.2% gain estimated initially. (The comparison versus last year is exaggerated by the losses suffered due to Hurricane Katrina.) The downward revision was due to a lowered figure for profits earned by US financial corporations which fell 1.9% (+60.4% y/y) and a deepened decline in profits earned by foreign entities which fell 2.2% (+5.0% y/y). U.S. nonfinancial corporate profitability was revised up slightly to 8.7% (26.4% y/y).
Less inventory accumulation contributed to the downward GDP revision for 3Q and it added 0.1 percentage points to GDP rather than the 0.2 point add estimated last month.
Overall growth in final sales to domestic purchasers was reduced slightly to 2.0%. Growth in personal consumption was reduced slightly to 2.8% (2.7% y/y) and nonresidential fixed investment growth was held steady at 10.0% (8.3% y/y). <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061221c.jpg" width="353">
Residential investment was even weaker than indicated earlier and the 3Q estimate was revised slightly down to -18.6% (AR, -8.1% y/y). It was the fourth consecutive decline, the largest since 1991 and pulled 1.2 percentage points from 3Q GDP growth. That subtraction was the largest by housing since 1981.
Deterioration in the net export deficit was left unchanged at a 0.2 percentage point subtraction from GDP growth. Export growth was upwardly revised slightly to 6.8% (9.1% y/y) and import growth also was revised up slightly to 5.6% (7.2% y/y).
The GDP chain price index was revised up slightly to 1.9%, its weakest quarterly advance in over three years. The PCE chain price index grew an unrevised 2.4% (2.8% y/y). Less food &amp; energy the PCE chain price index grew 2.3% (2.4% y/y).
Milton Freidman on Inflation from the Federal Reserve Bank of St. Louis is available <a href="http://research.stlouisfed.org/publications/mt/20070101/cover.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E7/@E701/@E701.HTM">Chained 2000$, % AR</a></th>
<th scope="col">3Q &#39;06 (Final)</th>
<th scope="col">3Q &#39;06 (Prelim.)</th>
<th scope="col">2Q &#39;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">GDP</td>
<td>2.0%</td>
<td>2.2%</td>
<td>2.6%</td>
<td>3.0%</td>
<td>3.2%</td>
<td>3.9%</td>
<td>2.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Inventory Effect</td>
<td>0.1%</td>
<td>0.2%</td>
<td>0.4%</td>
<td>0.7%</td>
<td>-0.3%</td>
<td>0.4%</td>
<td>0.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Final Sales</td>
<td>1.9%</td>
<td>2.1%</td>
<td>2.1%</td>
<td>2.3%</td>
<td>3.5%</td>
<td>3.5%</td>
<td>2.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Foreign Trade Effect</td>
<td>-0.2%</td>
<td>-0.2%</td>
<td>0.4%</td>
<td>-0.1%</td>
<td>-0.1%</td>
<td>-0.5%</td>
<td>-0.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Domestic Final Demand</td>
<td>2.0%</td>
<td>2.1%</td>
<td>1.6%</td>
<td>2.4%</td>
<td>3.6%</td>
<td>4.0%</td>
<td>2.8%</td>
</tr>
<tr>
<td class="firstcol">Chained GDP Price Index</td>
<td>1.9%</td>
<td>1.8%</td>
<td>3.3%</td>
<td>2.9%</td>
<td>3.0%</td>
<td>2.8%</td>
<td>2.1%</td>
</tr>
</tbody>
</table>


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U.S. real GDP growth last quarter was revised down to 2.0% (AR). The estimate had started at 1.6% then was raised to 2.2% last month and compared to Consensus expectations for no change at 2.2%. The rise in GDP last quarter was the [...]

US 3Q GDP Growth Revised Lower

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

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

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

Cost of transporting crude oil has soared to series high

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

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

Is recent drop in sentiment signaling softer growth ahead?

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

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

AI-related outperformance of IP in Advanced Asia ex Japan

Resilient US economy pushing up Blue Chip 2026 outlook

US and China big leaders in adoption of AI models

Robust US demand for advanced technology products

China's export growth rotating away from the US

More pronounced upward revisions in countries more exposed to AI investment

Stable job openings and hiring rates point to cautious hiring

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

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

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

Tighter US immigration enforcement adversely impacting labor force

Economic policy uncertainty, while still elevated, is declining

Gradual disinflation and easier monetary policies across advanced economies

Largest October layoffs since 2003, led by technology

Subdued global shipping costs not yet pointing to supply chain problems

PMIs show still-elevated but slowing US inflation

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Tian Yong Woon

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

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

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

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

260427T1.jpg

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

260427T2.jpg

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

260427T3.jpg

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

260427T4.jpg

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

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

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Asia

Economic Letter from Asia: Not Just About the Strait

Robert Brusca

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

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

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

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

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

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

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Germany

German Ifo Plunges Everywhere

Andrew Cates

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

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

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

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

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

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

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

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Charts of the Week: Risks Build, Markets Shrug

Sandy Batten

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

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

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

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

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

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

Chicago Fed National Activity Index Slipped in March

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance rose by 6,000 to 214,000 in the week ending April 18, from 208,000 in the week ending April 11, revised from 207,000. The four-week average rose 750 to 210,750 in the week ending April 18, from 210,000 the April 11 week, revised from 209,750. The Action Economics/Haver Analytics Survey looked for 210,000 claims to have been filed.

The total number of unemployment insurance beneficiaries—also known as “continuing claims”—rose by 12,000 to 1.821 million in the week ending April 11, from 1.809 million in the week ending April 4. The four-week moving average rose to 1.812 million in the latest week from 1.811 million in the March 28 week. The insured unemployment rate remained at 1.2% in the week of April 11. It has remained at that level since the week of November 29, 2025.

The insured unemployment rate varied greatly across individual states and territories. In the week ending April 4, the highest unemployment rates were in New Jersey (2.51%), Massachusetts (2.37%), Rhode Island (2.31%), Washington (2.25%), Minnesota (2.11%), and California (2.02%). The lowest rates were in Florida (0.30%), Louisiana (0.31%), Arkansas (0.35%), Alabama (0.36%), North Carolina (0.39%), Tennessee (0.46%), South Dakota (0.47%), Kansas and Virginia (both 0.49%). Rates in other notable states include New York (1.92%), Illinois (1.82%), Pennsylvania (1.52%), and Texas (1.04%). These state data are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor itself, not the Bureau of Labor Statistics. They begin in 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in **USECON**. Data for individual states are in **REGIONW** back to December 1986.

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- New claims rose by 6,000 to 214,000.
- Continuing claims rose by 12,000 to 1.821 million.
- The insured unemployment rate remained at 1.2%.
