Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061116a.jpg" width="353">
The consumer price index (CPI-U) fell 0.5% during October for the second consecutive month and the decline outpaced expectations for a 0.3% drop. Together, the declines were the largest on record.
Energy prices about repeated the prior month&#39;s weakness and fell 7.0% as gasoline prices dropped 11.1% (-18.3% y/y) and fuel oil prices fell 6.1% (-7.7% y/y) for the second month. Gasoline prices have since fallen another 1.3% m/m so far in November to an average $2.22 per gallon. Natural gas prices were down as well by 7.7% (-24.0% y/y) &amp; electricity prices slipped 0.2% (+10.4% y/y).
The 0.1% rise in prices less food &amp; energy was the weakest since a like gain this past February and fell short of Consensus expectations for a 0.2% increase.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061116b.jpg" width="353">
Core goods prices fell 0.3%, down for the third month in the last four. New &amp; used motor vehicle prices fell 0.3% (-0.4% y/y) for the second consecutive month and apparel prices reversed all of their prior month&#39;s strength with a 0.7% (+0.6% y/y) decline. Household furnishings &amp; operation prices were unchanged (1,.1% y/y) as were medical care commodity prices (3.3% y/y). Tobacco prices rose 0.1% (2.3 y/y).
Core services prices rose 0.3% for the second month as did shelter prices (4.0% y/y). The rental equivalence measure of owners&#39; primary residences rose 0.4% (4.2% y/y) and rents rose 0.4% (3.9% y/y) for the fifth consecutive month. Public transportation costs fell 1.0% (+1.9% y/y) after a 0.7% September decline but education costs surged 0.6% (6.2% y/y). Medical care services prices rose 0.4% (4.2% y/y) for the third consecutive month.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061116c.jpg" width="353">
Food &amp; beverage prices rose 0.3% led by a 0.7% jump in dairy prices (-0.3% y/y). Prices for meats, poultry, fish &amp; eggs rose 0.2% (1.9% y/y).
The chained CPI, which adjusts for shifts in the mix of consumer purchases, fell 0.3% for the second month but less food &amp; energy prices rose 0.3% for the second month.
The Minutes to the Latest Meeting of the Federal Open Market Committee can be found <a href="http://www.federalreserve.gov/FOMC/MINUTES/20061025.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/@E801/@E80101/@E80101.HTM">Consumer Price Index</a> </th>
<th scope="col">October</th>
<th scope="col">September</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total&nbsp;</td>
<td>-0.5%</td>
<td>-0.5%</td>
<td>1.3%</td>
<td>3.4%</td>
<td>2.7%</td>
<td>2.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>0.1%</td>
<td>0.2%</td>
<td>2.8%</td>
<td>2.2%</td>
<td>1.8%</td>
<td>1.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Goods less Food &amp; Energy</td>
<td>-0.3%</td>
<td>0.1%</td>
<td>0.2%</td>
<td>0.5%</td>
<td>-0.9%</td>
<td>-2.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Services less Energy</td>
<td>0.3%</td>
<td>0.3%</td>
<td>3.8%</td>
<td>2.8%</td>
<td>2.8%</td>
<td>2.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Energy</td>
<td>-7.0%</td>
<td>-7.2%</td>
<td>-11.2%</td>
<td>16.9%</td>
<td>10.8%</td>
<td>12.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Food &amp; Beverages</td>
<td>0.3%</td>
<td>0.4%</td>
<td>2.6%</td>
<td>2.4%</td>
<td>3.4%</td>
<td>2.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80113/@E80113.HTM">Chained CPI: Total (NSA)</a> </td>
<td>-0.3%</td>
<td>-0.3%</td>
<td>1.6%</td>
<td>2.9%</td>
<td>2.5%</td>
<td>2.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>0.3%</td>
<td>0.3%</td>
<td>2.5%</td>
<td>1.9%</td>
<td>1.7%</td>
<td>1.1%</td>
</tr>
</tbody>
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The consumer price index (CPI-U) fell 0.5% during October for the second consecutive month and the decline outpaced expectations for a 0.3% drop. Together, the declines were the largest on record. Energy prices about repeated the [...]

CPI Again Fell 0.5%, Core Increase Lightest Since February

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/061115f.jpg" width="353">
Employment in the UK fell 29,000 in the August period, reversing more than half of July&#39;s 51,000 increase. This move accompanied a 0.1% uptick in the unemployment rate to 5.6% from 5.5%. Both figures are three-month centered moving averages, so they cover July, August and September. Compared with three months before, the style of comparison that the UK&#39;s Office of National Statistics (ONS) generally emphasizes, the August number was up 56,000 from May, which in turn had been up 43,000 from February. So their longer horizon still highlights gains in the late spring/early summer.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061115g.jpg" width="353">
By demographic category, employment among men continued to increase modestly, while women&#39;s employment fell 39,000 from the July period to August. Interestingly, the increase in the unemployment rate occurred among men, from 5.9% to 6.0%, while the rate for women remained steady at 5.1%. A sizable rise in the number of women deciding to leave the labor force -- becoming &quot;economically inactive&quot; in the ONS terminology -- to maintain their homes kept their unemployment rate from going up. Even so, the overall 5.6% unemployment rate is the highest since the April period in 2000.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061115h.jpg" width="353">
Another sign of softness in the UK labor situation came in the average earnings index, or AEI. This is an index of average earnings over the last three months relative to the same period a year ago. It slowed to 3.9% in the latest three-month period from 4.2% the period before. This effectively closed off a firming trend that had been running since February. This measure is seen in the UK as a major determinant of inflation pressure, and it is watched closely by financial markets and the Bank of England. Indeed, press reports highlighted the slowdown this morning. Additionally, the so-called claimant count rose in the month of October, reaching 961,300, up almost 10,000 from just two months ago and 70,000 from a year ago (7.9%). Two months ago here, we took note of politicians&#39; pleasure in a &quot;welcome fall&quot; in claimants for unemployment benefits, but the mild reduction back in the summer has been more than counterbalanced. In contrast, a more favorable labor market development is a gain of 30,000 in the number of reported job vacancies, which reached 620,600, the highest in 17 months.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/UK/@U7/@U7.HTM">UK Labor Force Survey &amp; Related Labor Data</a></th>
<th scope="col">Oct 2006</th>
<th scope="col">Sept 2006</th>
<th scope="col">Aug 2006</th>
<th scope="col">July 2006</th>
<th scope="col">Year Ago</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">Employment &nbsp; (3Mo Avg, SA, Thous)</td>
<td>--</td>
<td>--</td>
<td>28,986</td>
<td>29,015</td>
<td>28,794</td>
<td>28,730</td>
<td>28,465</td>
<td>28,183</td>
</tr>
<tr>
<td class="firstcol">Chg from 1 &amp; 3 Months Ago</td>
<td>--</td>
<td>--</td>
<td>-29/56</td>
<td>51/120</td>
<td>+16(MoAvg)</td>
<td>0.9%</td>
<td>1.0%</td>
<td>1.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Unemployment Rate &nbsp; (3Mo Avg, SA, %)</td>
<td>--</td>
<td>--</td>
<td>5.6%</td>
<td>5.5%</td>
<td>4.8%</td>
<td>4.8%</td>
<td>4.8%</td>
<td>5.0%</td>
</tr>
<tr>
<td class="firstcol">Claimant Count &nbsp; (Monthly, Thous)</td>
<td>963.1</td>
<td>960.1</td>
<td>951.8</td>
<td>954.0</td>
<td>891.2</td>
<td>874.4</td>
<td>866.1</td>
<td>945.9</td>
</tr>
<tr class="odd">
<td class="firstcol">Vacancies (Monthly, Thous)</td>
<td>620.6</td>
<td>590.0</td>
<td>600.7</td>
<td>617.6</td>
<td>588.4</td>
<td>619.0</td>
<td>631.9</td>
<td>582.0</td>
</tr>
<tr>
<td class="firstcol">Average Earnings Index inc Bonus (Headline Rate*)</td>
<td>--</td>
<td>3.9%</td>
<td>4.2%</td>
<td>4.4%</td>
<td>4.2%</td>
<td>4.0%</td>
<td>4.5%</td>
<td>3.4%</td>
</tr>
</tbody>
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Employment in the UK fell 29,000 in the August period, reversing more than half of July's 51,000 increase. This move accompanied a 0.1% uptick in the unemployment rate to 5.6% from 5.5%. Both figures are three-month centered moving [...]

UK Labor Market Stalls; Unemployment Rate Highest since Spring 2000

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061115d.jpg" width="353">
Total business inventories rose just 0.4% in September following an unrevised 0.6% rise during August. Consensus expectations had been for a 0.5% increase but together the increases during the last three months which averaged 0.6% were the slowest since April and the one month gain was the slowest since February.
During the last ten years there has been a 57% correlation between the y/y change in business inventories and the change in factory sector industrial production. Using quarterly figures, there has been an 84% correlation between the change in real private nonfarm inventories and production.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061115e.jpg" width="353">
Business sales fell 2.0% (+4.9% y/y) due to the 3.5% m/m slide in factory shipments. In addition, retail sales fell 0.8% (+5.2% y/y) and wholesale sales fell 1.2% (+8.1% y/y). As a result the inventory to sales ratio surged to 1.30, the highest since March 2003. 
Retail inventories fell 0.1% but excluding autos they rose 0.1%. That latter gain compared to monthly increases between 0.2% and 0.7% since March. General merchandise inventories increased 0.3% (0.9% y/y) after a 0.7% gain but accumulation of clothing store inventories accelerated to 0.7% (6.2% y/y). Furniture inventories rose 0.2% (4.9% y/y) after a 0.3% August decline.
Production and Inventory Behavior of Capital from the Federal Reserve Bank of St. Louis is available <a href="http://research.stlouisfed.org/wp/2005/2005-044.pdf"> here</a>.

<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/USECON/@ED/@ED06/@ED0601/@ED0601.HTM">Business Inventories</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">Total</td>
<td>0.4%</td>
<td>0.6%</td>
<td>7.6%</td>
<td>4.4%</td>
<td>7.6%</td>
<td>-1.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Retail</td>
<td>-0.1%</td>
<td>0.3%</td>
<td>6.1%</td>
<td>2.7%</td>
<td>6.7%</td>
<td>3.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Retail excl. Autos</td>
<td>0.1%</td>
<td>0.6%</td>
<td>4.3%</td>
<td>4.5%</td>
<td>7.1%</td>
<td>1.9%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wholesale</td>
<td>0.8%</td>
<td>1.2%</td>
<td>9.9%</td>
<td>7.1%</td>
<td>9.8%</td>
<td>1.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Manufacturing</td>
<td>0.6%</td>
<td>0.6%</td>
<td>7.4%</td>
<td>4.0%</td>
<td>6.9%</td>
<td>-7.4%</td>
</tr>
</tbody>
</table>
</body>
</html>

Total business inventories rose just 0.4% in September following an unrevised 0.6% rise during August. Consensus expectations had been for a 0.5% increase but together the increases during the last three months which averaged 0.6% [...]

Slower U.S. Sales Require Slower Inventory Accumulation

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061115a.jpg" width="353">
The total number of mortgage applications surged another 4.3% last week on the heels of the 8.8% recovery at the beginning of November, according to the Mortgage Bankers Association. The gains lifted total applications this month 8.2% above the October average which fell 0.6% from September.
Applications to refinance increased 6.5% after the prior week&#39;s 11.0% jump to the highest level in over one year and are up 10.2% from the October average which rose 3.5% from September.
Purchase applications also rose a firm 2.7% after the prior week&#39;s 7.1% lift. The increase to the highest level since July raised November purchase applications 6.8% ahead of the October average level. Purchase applications fell 3.6% last month from September on average.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061115b.jpg" width="353">
During the last ten years there has been a 58% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales.
The effective interest rate on a conventional 30-year mortgage fell eleven basis points w/w to 6.35% and was down from a high last month of 6.57%. The peak for 30 year financing was 7.08% late in June. The rate for 15-year financing fell ten points to 6.10%. The peak for 15 year financing was 6.75% during June. Interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities.
During the last ten years there has been a (negative) 79% correlation between the level of applications for purchase and the effective interest rate on a 30-year mortgage.
The Mortgage Bankers Association surveys between 20 to 35 of the top lenders in the U.S. housing industry to derive its refinance, purchase and market indexes. The weekly survey accounts for more than 40% of all applications processed each week by mortgage lenders. Visit the Mortgage Bankers Association site <a href="http://www.mbaa.org">here</a>.
U.S. Labor Input in Coming Years is yesterday&#39;s speech by St. Louis Fed President William Poole and it is available <a href="http://www.stlouisfed.org/news/speeches/2006/11_14_06.html"> 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/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">11/10/06</th>
<th scope="col">11/03/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>647.5</td>
<td>620.9</td>
<td>-1.5%</td>
<td>708.6</td>
<td>735.1</td>
<td>1,067.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>412.9</td>
<td>402.2</td>
<td>-13.6%</td>
<td>470.9</td>
<td>454.5</td>
<td>395.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>2,022.2</td>
<td>1,897.9</td>
<td>18.8%</td>
<td>2,092.3</td>
<td>2,366.8</td>
<td>4,981.8</td>
</tr>
</tbody>
</table>
</body>
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The total number of mortgage applications surged another 4.3% last week on the heels of the 8.8% recovery at the beginning of November, according to the Mortgage Bankers Association. The gains lifted total applications this month 8.2% [...]

Mortgage Applications Surged Again

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061115c.jpg" width="353">
The November index of manufacturing activity in New York State firmed again. The Index of General Business Conditions rose 3.74 points to 26.66 on top of the nearly twelve point advance during the prior two months. Consensus expectations for the Empire State index had been for a decline to 15.0. The figures are reported by the Federal Reserve Bank of New York.
Since the series&#39; inception in 2001 there has been a 75% correlation between the index level and the three month change in U.S. factory sector industrial production.
The indexes for new orders, employment and shipments led the m/m improvement. Each of the other component series rose as well with the exception of work hours which fell for the second month.
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 also improved moderately. The 4.07 rise in the prices paid index came after a ten point decline during October. Since 2001 there has been an 88% correlation between the index of prices paid and the three month change in the core intermediate materials PPI.
The Empire State index of expected business conditions in six months made up for all of the weakness in recent months with a 7.59 point rise.
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>.
What Are the Risks to the United States of a Current Account Reversal? from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-29.pdf"> here</a>

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<thead>
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<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">November</th>
<th scope="col">October</th>
<th scope="col">Nov. &#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>26.66</td>
<td>22.92</td>
<td>21.88</td>
<td>15.56</td>
<td>28.79</td>
<td>15.98</td>
</tr>
</tbody>
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</body>
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The November index of manufacturing activity in New York State firmed again. The Index of General Business Conditions rose 3.74 points to 26.66 on top of the nearly twelve point advance during the prior two months. Consensus [...]

Empire State Index Unexpectedly Firm

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061115c.jpg" width="353">
The November index of manufacturing activity in New York State firmed again. The Index of General Business Conditions rose 3.74 points to 26.66 on top of the nearly twelve point advance during the prior two months. Consensus expectations for the Empire State index had been for a decline to 15.0. The figures are reported by the Federal Reserve Bank of New York.
Since the series&#39; inception in 2001 there has been a 75% correlation between the index level and the three month change in U.S. factory sector industrial production.
The indexes for new orders, employment and shipments led the m/m improvement. Each of the other component series rose as well with the exception of work hours which fell for the second month.
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 also improved moderately. The 4.07 rise in the prices paid index came after a ten point decline during October. Since 2001 there has been an 88% correlation between the index of prices paid and the three month change in the core intermediate materials PPI.
The Empire State index of expected business conditions in six months made up for all of the weakness in recent months with a 7.59 point rise.
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>.
What Are the Risks to the United States of a Current Account Reversal? from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-29.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">November</th>
<th scope="col">October</th>
<th scope="col">Nov. &#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>26.66</td>
<td>22.92</td>
<td>21.88</td>
<td>15.56</td>
<td>28.79</td>
<td>15.98</td>
</tr>
</tbody>
</table>
Slower U.S. Sales Require Slower Inventory Accumulation 
by <a href="/comment/Moeller.html">Tom Moeller</a> November 15, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061115d.jpg" width="353">
Total business inventories rose just 0.4% in September following an unrevised 0.6% rise during August. Consensus expectations had been for a 0.5% increase but together the increases during the last three months which averaged 0.6% were the slowest since April and the one month gain was the slowest since February.
During the last ten years there has been a 57% correlation between the y/y change in business inventories and the change in factory sector industrial production. Using quarterly figures, there has been an 84% correlation between the change in real private nonfarm inventories and production.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061115e.jpg" width="353">
Business sales fell 2.0% (+4.9% y/y) due to the 3.5% m/m slide in factory shipments. In addition, retail sales fell 0.8% (+5.2% y/y) and wholesale sales fell 1.2% (+8.1% y/y). As a result the inventory to sales ratio surged to 1.30, the highest since March 2003. 
Retail inventories fell 0.1% but excluding autos they rose 0.1%. That latter gain compared to monthly increases between 0.2% and 0.7% since March. General merchandise inventories increased 0.3% (0.9% y/y) after a 0.7% gain but accumulation of clothing store inventories accelerated to 0.7% (6.2% y/y). Furniture inventories rose 0.2% (4.9% y/y) after a 0.3% August decline.
Production and Inventory Behavior of Capital from the Federal Reserve Bank of St. Louis is available <a href="http://research.stlouisfed.org/wp/2005/2005-044.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/@ED/@ED06/@ED0601/@ED0601.HTM">Business Inventories</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">Total</td>
<td>0.4%</td>
<td>0.6%</td>
<td>7.6%</td>
<td>4.4%</td>
<td>7.6%</td>
<td>-1.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Retail</td>
<td>-0.1%</td>
<td>0.3%</td>
<td>6.1%</td>
<td>2.7%</td>
<td>6.7%</td>
<td>3.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Retail excl. Autos</td>
<td>0.1%</td>
<td>0.6%</td>
<td>4.3%</td>
<td>4.5%</td>
<td>7.1%</td>
<td>1.9%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wholesale</td>
<td>0.8%</td>
<td>1.2%</td>
<td>9.9%</td>
<td>7.1%</td>
<td>9.8%</td>
<td>1.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Manufacturing</td>
<td>0.6%</td>
<td>0.6%</td>
<td>7.4%</td>
<td>4.0%</td>
<td>6.9%</td>
<td>-7.4%</td>
</tr>
</tbody>
</table>
Mortgage Applications Surged Again 
by <a href="/comment/Moeller.html">Tom Moeller</a> November 15, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061115a.jpg" width="353">
The total number of mortgage applications surged another 4.3% last week on the heels of the 8.8% recovery at the beginning of November, according to the Mortgage Bankers Association. The gains lifted total applications this month 8.2% above the October average which fell 0.6% from September.
Applications to refinance increased 6.5% after the prior week&#39;s 11.0% jump to the highest level in over one year and are up 10.2% from the October average which rose 3.5% from September.
Purchase applications also rose a firm 2.7% after the prior week&#39;s 7.1% lift. The increase to the highest level since July raised November purchase applications 6.8% ahead of the October average level. Purchase applications fell 3.6% last month from September on average.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061115b.jpg" width="353">
During the last ten years there has been a 58% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales.
The effective interest rate on a conventional 30-year mortgage fell eleven basis points w/w to 6.35% and was down from a high last month of 6.57%. The peak for 30 year financing was 7.08% late in June. The rate for 15-year financing fell ten points to 6.10%. The peak for 15 year financing was 6.75% during June. Interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities.
During the last ten years there has been a (negative) 79% correlation between the level of applications for purchase and the effective interest rate on a 30-year mortgage.
The Mortgage Bankers Association surveys between 20 to 35 of the top lenders in the U.S. housing industry to derive its refinance, purchase and market indexes. The weekly survey accounts for more than 40% of all applications processed each week by mortgage lenders. Visit the Mortgage Bankers Association site <a href="http://www.mbaa.org">here</a>.
U.S. Labor Input in Coming Years is yesterday&#39;s speech by St. Louis Fed President William Poole and it is available <a href="http://www.stlouisfed.org/news/speeches/2006/11_14_06.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/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">11/10/06</th>
<th scope="col">11/03/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>647.5</td>
<td>620.9</td>
<td>-1.5%</td>
<td>708.6</td>
<td>735.1</td>
<td>1,067.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>412.9</td>
<td>402.2</td>
<td>-13.6%</td>
<td>470.9</td>
<td>454.5</td>
<td>395.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>2,022.2</td>
<td>1,897.9</td>
<td>18.8%</td>
<td>2,092.3</td>
<td>2,366.8</td>
<td>4,981.8</td>
</tr>
</tbody>
</table>
UK Labor Market Stalls; Unemployment Rate Highest since Spring 2000 
by <a href="/comment/Stone.html">Carol Stone</a> November 15, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061115f.jpg" width="353">
Employment in the UK fell 29,000 in the August period, reversing more than half of July&#39;s 51,000 increase. This move accompanied a 0.1% uptick in the unemployment rate to 5.6% from 5.5%. Both figures are three-month centered moving averages, so they cover July, August and September. Compared with three months before, the style of comparison that the UK&#39;s Office of National Statistics (ONS) generally emphasizes, the August number was up 56,000 from May, which in turn had been up 43,000 from February. So their longer horizon still highlights gains in the late spring/early summer.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061115g.jpg" width="353">
By demographic category, employment among men continued to increase modestly, while women&#39;s employment fell 39,000 from the July period to August. Interestingly, the increase in the unemployment rate occurred among men, from 5.9% to 6.0%, while the rate for women remained steady at 5.1%. A sizable rise in the number of women deciding to leave the labor force -- becoming &quot;economically inactive&quot; in the ONS terminology -- to maintain their homes kept their unemployment rate from going up. Even so, the overall 5.6% unemployment rate is the highest since the April period in 2000.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061115h.jpg" width="353">
Another sign of softness in the UK labor situation came in the average earnings index, or AEI. This is an index of average earnings over the last three months relative to the same period a year ago. It slowed to 3.9% in the latest three-month period from 4.2% the period before. This effectively closed off a firming trend that had been running since February. This measure is seen in the UK as a major determinant of inflation pressure, and it is watched closely by financial markets and the Bank of England. Indeed, press reports highlighted the slowdown this morning. Additionally, the so-called claimant count rose in the month of October, reaching 961,300, up almost 10,000 from just two months ago and 70,000 from a year ago (7.9%). Two months ago here, we took note of politicians&#39; pleasure in a &quot;welcome fall&quot; in claimants for unemployment benefits, but the mild reduction back in the summer has been more than counterbalanced. In contrast, a more favorable labor market development is a gain of 30,000 in the number of reported job vacancies, which reached 620,600, the highest in 17 months.

<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/UK/@U7/@U7.HTM">UK Labor Force Survey &amp; Related Labor Data</a></th>
<th scope="col">Oct 2006</th>
<th scope="col">Sept 2006</th>
<th scope="col">Aug 2006</th>
<th scope="col">July 2006</th>
<th scope="col">Year Ago</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">Employment &nbsp; (3Mo Avg, SA, Thous)</td>
<td>--</td>
<td>--</td>
<td>28,986</td>
<td>29,015</td>
<td>28,794</td>
<td>28,730</td>
<td>28,465</td>
<td>28,183</td>
</tr>
<tr>
<td class="firstcol">Chg from 1 &amp; 3 Months Ago</td>
<td>--</td>
<td>--</td>
<td>-29/56</td>
<td>51/120</td>
<td>+16(MoAvg)</td>
<td>0.9%</td>
<td>1.0%</td>
<td>1.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Unemployment Rate &nbsp; (3Mo Avg, SA, %)</td>
<td>--</td>
<td>--</td>
<td>5.6%</td>
<td>5.5%</td>
<td>4.8%</td>
<td>4.8%</td>
<td>4.8%</td>
<td>5.0%</td>
</tr>
<tr>
<td class="firstcol">Claimant Count &nbsp; (Monthly, Thous)</td>
<td>963.1</td>
<td>960.1</td>
<td>951.8</td>
<td>954.0</td>
<td>891.2</td>
<td>874.4</td>
<td>866.1</td>
<td>945.9</td>
</tr>
<tr class="odd">
<td class="firstcol">Vacancies (Monthly, Thous)</td>
<td>620.6</td>
<td>590.0</td>
<td>600.7</td>
<td>617.6</td>
<td>588.4</td>
<td>619.0</td>
<td>631.9</td>
<td>582.0</td>
</tr>
<tr>
<td class="firstcol">Average Earnings Index inc Bonus (Headline Rate*)</td>
<td>--</td>
<td>3.9%</td>
<td>4.2%</td>
<td>4.4%</td>
<td>4.2%</td>
<td>4.0%</td>
<td>4.5%</td>
<td>3.4%</td>
</tr>
</tbody>
</table>
</body>
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Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061114f.jpg" width="353">
The third quarter preliminary estimate of Gross Domestic Product for Japan was twice as high as consensus expectations. On a seasonally adjusted annual rate, Japan&#39;s GDP rose 2.03% while the expected increase was 1.0%. The rise took place in spite of a 2.98% decline in consumer expenditures. This decline was, however, outweighed by a 2.92% increase in business fixed investment, an 11.18% increase in exports, a 0.57% decline in imports and a 2.0 trillion 2000 chained yen increase in inventories, the result, in part perhaps, of the decline in consumer spending.
For the Euro Zone as a whole, the preliminary 3rd quarter GDP rose 0.5% from the second quarter, slightly below the expectation of a 0.6% rise. On a seasonally adjusted annual rate basis, the rise was 2.1%, slightly higher than the rise in Japan. The first chart compares the annual rates of changes in GDP in Japan and the Euro Zone. (In the United States GDP rose 1.6% at an annual rate, in the third quarter.)<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061114h.jpg" width="353">
The performance among the Euro Zone countries was mixed. France, which reported its flash estimate earlier, showed no change in the third quarter after a 4.9% annual rate increase in the second quarter. Part of the poor performance was explained by working day effects. Apparently, INSEE over estimated the effects of a newly introduced June public holiday in the second quarter. Since not all workers took advantage of the holiday, the second quarter estimate was probably overstated and the third quarter understated.
Of the other Euro Zone countries reporting, Italy, the Netherlands, Spain and Germany, GDP growth decelerated in the third quarter. The deceleration was most marked in the Netherlands, Italy and Germany. The growth rate in the Netherlands fell to 2.57% in the third quarter from 5.15%in the second quarter. Comparable figures for Italy were 1.31% and 2.58%. and for Germany, 2.57% and 4.35%. The least deceleration was in Spain where the rise in the third quarter was 3.49% compared with 3.79% in the second quarter. The second chart compares the annual rates of change in GDP in Spain and the Netherlands. The relative stability in growth Spain contrasts with the more volatile growth in the Netherlands.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061114g.jpg" width="353">
The German ZEW survey of institutional investors and financial analysts for November was released today. The participants continue to be pleased with the current situation. The excess of optimists over pessimists regarding the current situation rose to 53% in November, the highest percent balance in the history of the survey which was begun in December 1991. But the pessimists continue to dominate the expectations six months ahead. In November the excess of pessimists over optimists increased slightly to 28.5% from 27.4% in October. One has to go back to 1991 and 1993 to find larger excesses of pessimists. The third chart shows the opinions of the participants regarding the current situation and the expectations for six months ahead during the entire history of the ZEW survey.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">GROSS DOMESTIC PRODUCT (Percent change Q/Q AR)</th>
<th scope="col">Q3 06</th>
<th scope="col">Q2 06</th>
<th scope="col">Q1 06</th>
<th scope="col">Q4 05</th>
<th scope="col">Q3 05</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">&nbsp; Japan</td>
<td>2.03</td>
<td>1.51</td>
<td>3.17</td>
<td>4.09</td>
<td>2.03</td>
<td>2.69</td>
<td>2.13</td>
<td>1.96</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Euro Zone</td>
<td>2.10</td>
<td>3.78</td>
<td>3.13</td>
<td>1.51</td>
<td>2.52</td>
<td>1.48</td>
<td>1.69</td>
<td>0.79</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;United States</td>
<td>1.58</td>
<td>2.56</td>
<td>5.55</td>
<td>1.76</td>
<td>4.18</td>
<td>3.22</td>
<td>3.91</td>
<td>2.51</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Germany</td>
<td>2.57</td>
<td>4.35</td>
<td>3.24</td>
<td>1.09</td>
<td>2.08</td>
<td>1.10</td>
<td>0.77</td>
<td>-0.20</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; France</td>
<td>0.00</td>
<td>4.91</td>
<td>1.79</td>
<td>1.11</td>
<td>2.78</td>
<td>1.19</td>
<td>2.03</td>
<td>1.19</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Italy</td>
<td>1.31</td>
<td>2.58</td>
<td>3.13</td>
<td>-0.07</td>
<td>1.28</td>
<td>0.11</td>
<td>0.88</td>
<td>0.11</td>
</tr>
<tr class="odd">
<td class="firstcol"> &nbsp; Netherlands</td>
<td>2.57</td>
<td>5.15</td>
<td>1.23</td>
<td>2.51</td>
<td>3.11</td>
<td>1.53</td>
<td>1.95</td>
<td>0.34</td>
</tr>
<tr>
<td class="firstcol"> &nbsp; Spain</td>
<td>3.49</td>
<td>3.79</td>
<td>3.86</td>
<td>3.90</td>
<td>3.36</td>
<td>3.53</td>
<td>3.45</td>
<td>2.96</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;GERMANY ZEW INDICATOR &nbsp;(% BALANCE)</td>
<td>Nov 06</td>
<td>Oct&nbsp; 06</td>
<td>Sep 06</td>
<td>Aug 05</td>
<td>Jul 05</td>
<td>2005 %</td>
<td>2004 %</td>
<td>2003 %&nbsp;</td>
</tr>
<tr>
<td class="firstcol"> &nbsp;Current Conditions</td>
<td>53.0</td>
<td>42.9</td>
<td>38.9</td>
<td>33.6</td>
<td>23.3</td>
<td>-61.8</td>
<td>-67.7</td>
<td>-93.6</td>
</tr>
<tr class="odd">
<td class="firstcol"> &nbsp;Expectations 6 Months&nbsp; Ahead</td>
<td>-28.5</td>
<td>-27.4</td>
<td>-22.2</td>
<td>-5.6</td>
<td>15.1</td>
<td>34.8</td>
<td>44.6</td>
<td>38.4</td>
</tr>
</tbody>
</table>
</body>
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The third quarter preliminary estimate of Gross Domestic Product for Japan was twice as high as consensus expectations. On a seasonally adjusted annual rate, Japan's GDP rose 2.03% while the expected increase was 1.0%. The rise took [...]

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Michael J. Moran

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The US current account balance, which consists of international trade and income flows, deteriorated slightly in the first quarter, moving to a deficit of $226.8 billion versus a shortfall of $221.1 billion in the fourth quarter of last year. Trade flows moved slightly in favor of the US, as the deficit narrowed by $11.6 billion to $165.8 billion, with trade in both goods and services contributing to the improvement. The latest reading on the trade deficit was among the best of the post-pandemic period.

The improvement in trade was more than offset by softening in both primary income and secondary income. Primary income consists of net receipts of both investment income and employee compensation, with net flows defined as receipts of US residents from abroad less US payments to residents in foreign countries. Net investment income is by far the larger of the two components, and it accounted for nearly all of the slippage in primary income, dropping $17.0 billion to -$7.8 billion. The shift pushed net investment income back into negative territory after a quarter in the plus column (chart, lower left). Employee compensation rose, but the change was less than 0.1%.

Secondary income consists largely of transfer payments (payments made without receiving something of economic value in return). Examples include personal remittances (foreign workers sending funds to families in their home country), charitable donations, taxes, fines, and penalties. Payments made by US residents easily exceed payments received, leaving a regular deficit in secondary income. This component of the current account was essentially unchanged in Q1.

Annual revisions to the current account were notable, as both the trade balance and the balance on primary income were revised to show deeper deficits. The trade deficit for all of 2025 now totals $294.3 billion versus a previous estimate of $279.0 billion. Primary income now shows a deficit of $11.9 billion versus a surplus of $3.2 billion.

The shift to a deficit position in primary income is not shocking, as positive readings on average in 2025 (and prior years) were surprising in light of the international investment position of the US. Foreign investors hold far larger amounts of US assets than US investors hold of foreign assets (chart, lower right). That is, the US has a deficit in investment holdings. However, despite the differential in asset holdings, US investors typically earned higher rates of return on their foreign investments than foreigners earned on their US investments. Although the gap in asset holdings has been large, higher returns earned by US investors left net positive investment income. Revised data now suggest that the net international investment position of the US has slipped to such a degree that higher rates of return will no longer offset the differential in asset holdings. Positive quarters might be apparent at times (such as 2025-Q4), but net investment income (and primary income in total) will probably be negative in quarters ahead.

Balance of Payments data are in Haver’s **USINT** database, with summaries available in **USECON**. The expectations figure is in the **AS1REPNA** database.

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- Improvement in the trade balance offset by weaker net investment income.
- Annual revision showed wider deficit in 2025.


Q1 Current Account: Modest Slippage in Early 2026

Robert Brusca

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**PMIs in June mark some progress**
The PMI report from S&P shows modest firming in conditions in June, even with the Middle East situation unresolved.

**Monthly:** The median reading for the 8 reporting countries or regions rose to 50.8 in June from 50.1 in May. Manufacturing improved to 52.7 from 52.4, while the services reading rose to 50.3 from 49.6, leaving a month of mild contraction behind.

**Most show June improvement:** Most countries or regions improved in June; the exceptions were Germany, the United Kingdom, and India, which were weaker. India was dragged down by a weaker service sector reading in June; the U.K. and Germany showed weakening conditions across the board for the composite index, the manufacturing sector, and services. On the other side of the coin, France, Japan, Australia, and the U.S. all showed improvement in each of three sectors: the composite, manufacturing, and services, in June compared to May.

**Sequentially still mixed:** The broader sequential readings show ongoing weakness, but these are derived from hard data and lag the monthly observations in the table that include preliminary flash estimates. All the composite readings weakened based on three-month averages except for India. However, seven of eight reporting areas showed improvement in manufacturing over three months compared to six months; the exception was Australia. Over six months, conditions are mixed, with four composite readings weaker compared to 12 months and with four stronger. However, over six months, all eight manufacturing sectors improved compared to 12 months. The 12-month readings are consistently stronger than their readings of 12 months ago. The only composite that's weaker is the U.S., while the services sectors in the monetary union, Germany, France, and the U.S. are weaker than they were 12 months ago.

**Standings are weak:** The queue percentile standings evaluate the current diffusion index in June compared to where it has been since January 2022, a period of about 4½ years. The queue standings show weakness up and down the line, with the exception of the manufacturing sector; that has the standing above its historic median in the monetary union, Germany, France, the U.K., the U.S., and Japan. Only Australia and India show manufacturing sectors whose current monthly standings are below their medians of the last 4½ years. In addition, Japan has a strong composite reading at its 81st percentile. Overall, the services sectors are weak and below their 50% standing every place, and below that mark by a large margin, except for Japan, where the services sector has a 47th percentile standing, only a few ticks below its median.

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**Summing up: A glimmer of hope but still a lot of weakness**
Manufacturing is stronger sequentially over three months, six months, and 12 months for every reporter except for Australia over three months. The rest of the report is not very impressive. There is some rebound in June, but here we're talking about volatile monthly data. The services sectors still show sequential weakness over 12 months, six months, and three months in the European Monetary Union, Germany, France, and the U.S. The U.K. and Japan showed three-month and six-month weakness as well. That’s too much weakness in the key job creation sector to think that this report is a positive signal.

S&P PMIs in June Firm

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Danish consumer confidence rose to -14 in June from -19.8 in May, a small pickup for a still-negative net reading. In June, the reading has a standing at its 7.9 percentile on data back to 1995. So, this confidence headline still has a lower 8% reading overall.

On the month, all seven component readings improved compared to May, although the environmental assessments were little changed across four components. As for the environment, the most changed reading is the improved favorability of the time to save, a metric that is not always a positive category.

As for the seven categories, the readings on the financial situation, general economy and the unemployment rate all improved month-to-month, while the inflation metrics both backed down sharply.

These changes show the financial situation and general economy gauges all at rankings in the lower 20th percentiles, with the outlook for the next 12 months having a standing in their lower 10th percentiles and lower for both the financial situation and the general economy.

Consumer prices, despite a strong monthly step-back, have a 90.2 percentile standing for prices over the past 12 months and a 94.3 percentile standing for the CPI over the next 12 months. Despite some let-up in concerns about unemployment, the unemployment gauge has an 85.1 percentile standing, still substantially elevated.

The environmental readings are less negative, starting with the ‘favorability of the time to purchase,’ a bit weaker month-to-month but improved on balance over two months. The June reading is slightly better than its 12-month average but still has a ranking only in its 21st percentile. The favorability of the time to purchase over the next 12 months is a tick weaker month-to-month and about a point worse than its 12-month average. Its June ranking is in its lower 10th percentile of its historic queue. The favorability of the time to save has a stronger ranking, but this is a more equivocal category. It is improved month-to-month and only slightly stronger over two months The June reading is stronger than its 12-month average, with a ranking in its 47.6 percentile—improved compared to previous categories but still worse than its historic median since 1995 (the median occurs at a ranking of 50%). The ‘general financial situation of households now’ ticked lower in June from May but is stronger on balance over two months. The June reading is above its 12-month average and has a 59.2 percentile standing—above its median.

On balance, Denmark shows improving confidence, progressing slowly but on the right path. There is a sharp downward adjustment in inflation, especially over the next 12 months, despite global conditions. Still, the ranking of the confidence metrics are uniformly weak.

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Denmark

Danish Confidence Improves As Inflation Expectations Pull Back Sharply

Andrew Cates

**US Outperformance Holds; Europe and China Continue to Disappoint**
One of the most persistent features of the global macro landscape in 2026 has been the widening divergence between growth outcomes in the United States and those in Europe and China. Citigroup’s global growth surprise indices—which measure the gap between actual economic releases and consensus expectations—capture this divergence with unusual clarity. US data have continued to surprise on the upside, supported by resilient consumer spending, a stronger-than-expected labour market and the ongoing AI-driven capital spending boom. The picture elsewhere is less encouraging. Growth surprises have turned negative across the euro area, reflecting the cumulative toll of elevated energy costs, weak industrial activity and subdued business confidence. And China's growth surprise index has also fallen sharply in recent weeks, with weaker-than-expected retail sales and fixed asset investment data for May this week reinforcing concerns that domestic demand remains fragile and that policy support is yet to gain meaningful traction.

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**The Oil Risk Premium in the UK Has Been Fading**
One of the more notable features of UK markets this year has been the close relationship between oil prices and two-year gilt yields. The link is not mechanical, but in an economy heavily exposed to imported energy, swings in oil prices can materially alter the inflation outlook and, by extension, expectations for Bank of England policy. That relationship was on display again this week. A softer-than-expected UK CPI reading for May—helped in part by easing energy price pressures—led investors to scale back expectations that inflation would remain persistently above target, pushing two-year gilt yields to their lowest level in six weeks. The question now is whether this marks the start of a more sustained easing in inflation pressures or merely a temporary reprieve. Much will depend on whether the recent decline in oil prices following the US-Iran ceasefire agreement proves durable.

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**The AI Investment Boom Is Rewriting the Rule Book for the Chip Industry**
If the divergence in global growth surprises noted above tells a story of a world economy under strain, the semiconductor sales data tell a very different one — of a technology-driven investment cycle that is accelerating almost regardless of the broader macro environment. Global semiconductor sales have surged to record levels over the past twelve months, driven primarily by insatiable demand for the chips that underpin AI infrastructure: graphics processing units, high-bandwidth memory, and advanced logic chips. Data centre capital expenditure from the hyperscalers continues to exceed even the most optimistic forecasts from a year ago, and the investment pipeline shows no sign of moderating. The gains are concentrated in AI-adjacent products; legacy chips for consumer electronics and industrial applications remain relatively soft.

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**Copper Holds Firm As Oil Retreats**
The commodity markets are telling two quite different stories this week, and the contrast is instructive. Oil has moved sharply lower on the US-Iran MoU news as investors trim the conflict risk premium that has been embedded in energy markets since March — a welcome development for inflation and central bank optionality alike. But the three commodities shown in this chart tell a different story. Copper, one of the most reliable proxies for global electricity infrastructure investment, remains near multi-year highs, reflecting the extraordinary volume of data centre construction, grid expansion and electrification spending flowing through the global economy. Aluminium — energy-intensive to produce and increasingly in demand for the structural components of both data centres and electric vehicles — has, until quite recently, held its ground. Lithium hydroxide, the battery-grade refining product that sits at the heart of the energy storage supply chain, has seen some cyclical softness but remains structurally underpinned by the scale of demand being projected for grid-scale storage and electric mobility over the next decade.

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**Is Energy Availability a Binding Constraint on Growth?**
This next chart is a scatter plot that maps electricity generation per capita against GDP growth per capita across a broad sample of countries over the past five years. The positive relationship is striking. Economies with higher electricity generation per capita, including the United States, have generally delivered stronger GDP growth, while those with more constrained electricity systems have tended to lag. The obvious objection is reverse causality: richer economies generate more electricity because they have more to power. That is partly true. But the broader evidence is difficult to dismiss. The US shale revolution delivered an abundance of cheap energy that supported a sustained period of industrial outperformance relative to many advanced economies. Mainstream commentary often attributed this advantage to factors such as labour market flexibility or technological innovation, but energy costs were arguably at least as important.

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**Corporate America Is Investing from a Position of Unusual Financial Strength**
The surge in US corporate investment—particularly in AI infrastructure, data centres and semiconductors—has inevitably drawn comparisons with the late-1990s dot-com boom. Yet the financial balance data suggest an important difference. During the dot-com era, US non-financial corporates moved into a financial deficit approaching 4% of GDP, relying heavily on external financing to fund investment. Today, despite another ambitious investment cycle, the sector remains in surplus, currently around 1.8% of GDP. Corporate America is investing aggressively, but it is still generating more cash than it is spending. The boom is being financed largely through profits rather than debt. Risks remain—not least the growing fiscal burden on the federal government—but the balance-sheet fragilities that turned previous investment booms into systemic crises appear far less pronounced. If a major constraint emerges in the years ahead, it may be energy and resources rather than leverage.

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The signing of a Memorandum of Understanding (MoU) between the United States and Iran earlier this week has offered financial markets their most significant moment of geopolitical relief since the Middle East conflict escalated in early March. Oil prices fell sharply on the news, short-dated bond yields moved lower across several major economies, and risk assets recovered ground. But relief, as investors have learnt repeatedly over the past three months, is arguably not the same as resolution. The MoU sets a framework for negotiations rather than a final settlement, and the history of US-Iran diplomacy is not one that encourages complacency. Meanwhile, the Federal Reserve — concluding its June meeting yesterday under new chair Kevin Warsh — held rates steady but delivered a distinctly hawkish dot plot that shifted the median year-end projection from a cut to a hike, a reminder that the easing cycle the market had been pricing is no longer the base case. Against this backdrop, this week's charts take stock of where the global economy presently stands — and what the underlying data, beneath the geopolitical noise, are telling us. The picture that emerges is one of divergence. The United States continues to outperform consensus growth expectations while Europe and China disappoint (chart 1). UK short-dated yields have tracked oil prices with unusual consistency this year, and today's softer-than-expected CPI print for May — arriving just as the MoU has knocked crude lower — potentially changes the policy calculus for the Bank of England (chart 2). Global semiconductor sales, meanwhile, are storming ahead regardless of the geopolitical noise, powered by AI infrastructure spending that shows no sign of fatigue (chart 3). A cross-section of commodity prices tells two stories simultaneously: the geopolitical risk premium is draining out of oil, but the metals and materials the AI economy actually needs — copper, uranium, critical minerals — are holding firm (chart 4). Meanwhile a cross-country scatter of electricity generation and GDP growth over the past five years raises a question that deserves more attention than it typically gets: is energy availability a constraint on growth, or merely a consequence of it? The evidence, we would argue, points firmly in one direction (chart 5). And finally, for all the comparisons being drawn between the current investment boom and the late 1990s, the financial balance of the US corporate sector tells a rather different story — one that matters for how any correction might unfold (chart 6).

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Charts of the Week: Between Relief and Reality

Winnie Tapasanun

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The current general activity diffusion index rebounded to a slightly stronger-than-expected 10.3 in June following a 27.1-point drop to -0.4 in May, the latest Manufacturing Business Outlook Survey (MBOS) from the Federal Reserve Bank of Philadelphia showed, indicating a return to expansion in manufacturing activity in the Third Federal Reserve District this month. A reading of 10.0 for June had been expected by the Action Economics Forecast Survey. June marked the fifth m/m increase in six months, showing a sharp improvement from -1.4 in June 2025. In June, 32.1% of firms reported increases in current general activity (up from 22.5% in May), while 21.9% reported decreases (down from 22.9%); 45.4% reported no change (down from 54.6%). Survey responses were collected from June 8 to June 15.

Haver Analytics calculates an ISM-adjusted current activity diffusion index from five key components using the methodology along the lines of the national ISM index. The index rose to 53.1 in June after a 4.8-point decline to a contraction-level 49.7 in May, indicating manufacturing activity expanded for the third time in four months; it was slightly above 51.0 in June 2025.

In the latest survey, the new orders index surged to 27.3 in June following a 34.7-point plunge to -1.7 in May, signaling new orders expanded for the sixth time in seven months. The shipments index rebounded to 14.9 this month from 4.9 in May, registering the seventh consecutive expansion. The unfilled orders index advanced to 10.5 from -2.5, indicating expansion for the first time since July 2025 and the highest level since January 2025. In contrast, the inventories index dropped to -8.5 in June from 6.6 in May, showing inventories contracted for the second time in three months and at the lowest level since July 2024. Meanwhile, the delivery times index increased to -2.6 this month from -10.4 in May (the lowest reading since March 2024).

On the labor front, the number of employees index climbed to 7.9 in June from -2.8 in May, indicating employment expanded for the first time in three months and at the highest level since January. In June, a higher 17.0% of respondents reported increases in employment, while 9.2% reported declines; 73.8% reported no change in employment levels. The average employee workweek index fell to -6.5 this month, the first negative reading and lowest since February, from 1.2 in May.

Inflation indicators were mixed in June. The prices paid index rose to 53.2 this month following an 11.4-point drop to 47.9 in May. A higher 53.5% of respondents reported increases in input prices in June, while only 0.4% reported decreases. The prices received index fell to 20.3, a four-month low, after a 7.2-point May decline to 26.3. In June, 20.3% of respondents reported increases in prices received, while 0.0% reported decreases.

The future indexes remained in positive territory, signaling continued overall growth over the next six months, with most future indicators rising. The future general activity diffusion index edged down to 50.2 in June from 53.2 in May, staying positive since February 2024. Future indexes for new orders (60.8 vs. 53.5) and shipments (60.3 vs. 45.7) increased in June (vs. May) and remained positive. Notably, the future capital expenditures index rose to 41.2 this month, the highest level since June 2021, from 30.9 in May. The following future indexes slipped in June (vs. May) but stayed in positive territory: employment (30.8 vs. 31.7), unfilled orders (17.3 vs. 19.2), and inventories (10.0 vs. 11.8). Prices continued to increase, with the future prices paid index easing to a still-elevated 63.2 in June from 70.0 in May and the future prices received index rising to 67.2, the highest level since August 2021, from 60.5.

The Manufacturing Business Outlook Survey (MBOS), conducted by the Federal Reserve Bank of Philadelphia, is a monthly survey of manufacturers in the Third Federal Reserve District. Participants indicate the direction of change in overall business activity and in the various measures of activity at their plants. The diffusion indexes in the MBOS represent the percentage of respondents indicating an increase minus the percentage indicating a decrease. The indexes range from -100 to +100 with positive values indicating an increase in activity. The series from the survey dating back to May 1968 can be found in Haver’s **SURVEYS** database. The expectations forecast figures are from the Action Economics Forecast Survey in **AS1REPNA**.

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- Current General Activity Index up 10.7 pts. to 10.3 in June; fifth rise in six months.
- New Orders (27.3), sixth expansion in seven mths.; Shipments (14.9), seventh straight expansion; Unfilled Orders (10.5), first expansion since July ’25.
- Employment (7.9), a five-month high after two mths. of contraction.
- Inflation indicators: Prices Paid up (53.2); Prices Received down (20.3, a four-month low).
- Future General Activity Index down to a still-expansion-level 50.2; most subindexes up and positive; future price indexes remaining above long-run avgs.

Economy in Brief

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CPI Again Fell 0.5%, Core Increase Lightest Since February

CPI Again Fell 0.5%, Core Increase Lightest Since February

UK Labor Market Stalls; Unemployment Rate Highest since Spring 2000

Slower U.S. Sales Require Slower Inventory Accumulation

Mortgage Applications Surged Again

Empire State Index Unexpectedly Firm

Empire State Index Unexpectedly Firm

3rd Q GDP: Japan Surprises, Europe Disappoints Germany's ZEW Survey: More Cautious Expectations